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Education Realty Trust, Inc. (NYSE:EDR)

Q2 2014 Results Earnings Conference Call

July 28, 2014 10:00 a.m. ET

Executives

Brad Cohen - ICR

Randy Churchey - President and Chief Executive Officer

Christine Richards - Senior Vice President and Chief Operating Officer

Tom Trubiana - Executive Vice President and Chief Investment Officer

Drew Koester - Senior Vice President and Chief Accounting Officer

Analysts

Karin Ford - KeyBanc Capital Markets

Jana Galan - Bank of America Merrill Lynch

Ryan Meliker - MLV

Alexander Goldfarb - Sandler O’Neill

Dave Bragg - Green Street Advisors

Nick Yulico - UBS

Carol Kemple - Hilliard Lyons

Operator

Greetings and welcome to the EdR Incorporated Second Quarter 2014 Earnings Conference Call. At this time all participants are in a listen only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Brad Cohen of ICR. Thank you. You may begin.

Brad Cohen

Thank you. Good morning. During today’s call, management may make forward-looking statements. These statements are based upon current views and expectations. Such statements are subject to risks and uncertainties and other factors that could cause the actual results to differ materially from future results. Risk factors relating to the company’s results and management statements are detailed in the company’s Annual Report on Form 10-K and other filings with the Securities and Exchange Commission. Forward-looking statements refer only to expectations as of the date on which they are made. EdR assumes no obligation to update or revise such statements as a result of new information, future developments or otherwise.

It is now my pleasure to turn the call over to Randy Churchey, President and Chief Executive Officer. Randy?

Randy Churchey

Good morning. Thank you for joining us for the EdR second quarter 2014 earnings call. For today's call, I will make a few brief comments. Chris Richards, our Senior Vice President and Chief Operating Officer will review property performance in fall 2014 leasing. Tom Trubiana, our Chief Investment Officer will discuss acquisition, disposition and development activity and Drew Koester, our Senior Vice President and Chief Accounting Officer will review the quarter’s performance.

Overall, I am very pleased with the progress we made during the first half of the year. First quarter and year-to-date Core FFO per share increased 15% due to successful execution of our internal and external growth plans. Looking forward, fall 2014 preleasing has remained strong and we anticipate solid internal growth for the balance of this year and into 2015 based on a 3% to 4% increase in same community revenues. This growth is on top of the great leasing season last year.

Similarly, our new community portfolio is 95% preleased for fall 2014 as rental rate is consistent with initial underwriting. Next month, we will open the doors to more than 6,000 new beds in 12 buildings at eight universities, representing and EdR record for new development openings. In addition to the $304 million of owned developments opening in 2014, we have announced an aggregate $292 million of development deliveries for 2015 and '16, which will increase gross assets by 15%. It has been prefunded through our appropriately capitalized balance sheet. This embedded growth is among the highest as a percent of total enterprise value of any REIT.

Importantly, 54% of these new developments are on campus and 93% are pedestrian to campus. These developments are at well-known tier 1 schools, such as the Universities of Kentucky, Colorado, Connecticut, Minnesota and Georgia. We continue to evaluate additional development opportunities both on and off campus for 2016 and beyond.

Next, new student housing supply. As shown in the earnings supplemental, new supply growth in our market has slowed by 9% for next year's leasing cycle. New supply is slightly off pacing projected enrollment growth but as we experienced in the last two leasing cycles, the new supply as a percentage of enrollment was even higher. This new supply is being absorbed by the modernization taking place in the industry.

Approximately 50% of housing serves in university markets in which we have assets. Our non-purpose built student housing accommodation, typical older duplexes, passive single-family homes and the like. The robust same community increases we produced in the last two leasing cycles in the face of small excess amount of supply over enrollment, are attributed to our best in class portfolio of assets and outstanding property operations teams and systems.

This along with the ongoing modernization of student housing taking place across the country provides a great environment for our business. And last, our competitive advantages for on-campus developments under the ONE plan. For EdR, this is the most exciting growth opportunity. By the end of 2016, our portfolio of ONE plan assets will exceed $0.5 billion, with more to come.

We believe this area of investment will continue to grow as more universities see the benefits of these successful partnerships. Most universities face many of the same challenges. Reduced support from constrained state budgets, older on-campus housing and demands on institutional funds for academic and support service initiatives. The monetization of on-campus housing focused on student retention and success and live-learn communities represents a significant investment opportunity for EdR, and we are well positioned to win these opportunities.

Currently, the number of companies that have the proven on-campus development and management expertise, size, transparency and financial strength necessary to successfully compete for these universities mandates, is very very limited. These requirements are EdR's strengths and they provide a strong barrier to entry in this market.

In closing, the collegiate housing industry is performing well and EdR due to the execution of our business strategies and best-in-class portfolio of assets, remains positioned to outperform. The opportunities for EdR to create meaningful shareholder value from both internal and external growth prospects are outstanding. We have the team along with the financial resources to seize upon industry opportunities to continue growing the company in the years ahead.

Now Chris will discuss property operations.

Christine Richards

Thank you, Randy. We continue the execution of our strategic leasing programs during this quarter and our same community portfolio is 360 basis points ahead of the prior year with 91% of our beds leased for the fall. This is on top of EdR's 5% increase in same community revenue in last year's cycle. This year's growth, against a difficult comparison, is quite an achievement. Although the leasing season isn't over, I want to recognize the accomplishments of the EdR community team members and support staff. They have truly done a phenomenal job.

Based on our current leasing status and trends, our same community rates are projected to increase 2% over the prior year. During the second quarter, we did see limited competitive pressure in the form of rate decreases and specials in select markets. The good news is, as those pressures emerged, our pilot system continued to provide accurate and timely information that has helped us navigate through those tougher markets and maintain our leasing velocity and rate strength. In summary, we are confident we will product same community fall revenue growth of 3% to 4%.

Turning to our new communities. In the aggregate, these communities will achieve our underwriting expectations. We are pleased with the results we have reached with 95% prelease to-date. The teams are moving into their offices, final touches are being put on the units and grand opening celebrations are being held. We will welcome 6,000 students this fall into these new communities.

EdR beds at the University of Kentucky received over 5,300 applications for nearly 3,000 beds. The power of our new state-of-the-art, live learn communities is apparent. Two additional important points. First, over 1,600 returning residents are choosing to live on campus. Second, the EdR owned housing which carries a 50% to 70% higher rate was hugely oversubscribed versus UK-owned university housing which is 59% applied. These trends bode well for future year's occupancy.

With move-in preparation happening in the next few weeks, the labor intensive churn period is now upon us and I know the EDR teams will be working hard to prepare first rate room for our '14-'15 residents. We look forward to a strong finish to this leasing season over the next 45 days. Although this cycle is not quite over, the team is already finalizing the marketing plans that will position us for a solid beginning to the '15-'16 lease term. With the decreased level of new supply, enrollment growth and further modernization, we are excited about the '15-'16 leasing cycle.

I will now pass the call to Tom.

Tom Trubiana

Thank you, Chris. Good morning. During the past four years, a major focus of EdR's business plan has been to reposition our portfolio by divesting assets that are further from campus but that serve secondary or tertiary campuses and then to redeploy the proceeds to acquire developed communities either on-campus or pedestrian to tier 1 universities. In doing so, we believe this improved portfolio of assets will provide a better and more consistent return on investment.

In other words, our goal has been to create a best-in-class portfolio that would deliver long-term value to shareholders. With the sale of the two assets during the second quarter, we have now sold 21 communities, representing slightly over 50% of the assets EdR owned prior to January 2010. The two older, non-pedestrian communities sold during the second quarter were sold for a combined price of $29.9 million, which represents a looking-forward weighted average economic cap rate of 6.9%.

We are currently marketing four additional properties for potential sale. At this time, there is no assurance that we will receive our targeted acceptable prices. We are currently in the process of accepting offers and therefore we will not be providing any additional color on these potential dispositions.

During the second quarter, we entered into contracts for the acquisition of The District on Apache at Arizona State University and two new developments. The next phase of Storrs Center at the University of Connecticut and The Retreat at the University of Louisville.

EdR has agreed to purchase The District on Apache, a 900-bed community located one block from the core of the ASU campus for approximately $92 million. The community opened this fall -- sorry, for the fall 2013 at 100% occupancy and is currently 98% leased for the upcoming 2014 school year. We are on track for a mid-September close with a targeted first year unlevered economic yield of 6.25%. we have recently started construction on the fourth phase of Storrs Center, the highly successful development adjacent to the University of Connecticut.

The $45 million residential component of this development, The Oaks on the Square, will deliver 204 additional rental units or 390 beds, and a mix of studio, one, two and three bedroom units. The new development is adjacent to the first three phases of Storrs Center, which are once again 100% preleased.

Our second recently announced development is our joint venture with Landmark Properties to develop, own and manage a 656 bed cottage style community adjacent to the University of Louisville. The Retreat at Louisville will be the only cottage product at the University and is the first total cottage product that will be truly pedestrian to a major university. EdR is the 75% owner and will manage the community. This 2015 development delivery has an aggregate cost of $45 million with EdR's of the cost being $33.8 million. Both the Storrs Center and University of Louisville recently announced developments are targeted to produce per share unlevered economic yields in the mid-7% range.

Please refer to the supplemental for a listing of active developments and pre-sale projects. The 2014 deliveries at the universities of Colorado, Kentucky and Minnesota, Duke University, The University of Connecticut and the pre-sale of Florida International University are all proceeding as planned. On time and on budget.

We are reaffirming our targeted first year unlevered economic yield in the mid-7% range for these developments including the pre-sale at Florida International University. The 2015 and '16 deliveries are also proceeding as planned. Also in the supplemental, you will find our third party development summary. The Westchester and Wichita State projects are progressing on schedule and within budget for an opening next month. The Clarion University project has recently closed on the financing and began construction for summer 2015 delivery. The East Stroudsburg project is no longer pending a real estate tax appeal by the University. The University has prevailed. Construction is expected to begin in the spring of 2015 with completion scheduled for summer 2016.

We are pleased to announce that the award-winning Johns Hopkins Medical Institute project was recently successfully refinanced. The creative financing that was used for initial funding of the project, the ONE Plan plus, eliminated $1.4 million per year in annual real estate taxes which made this project financially feasible. EdR was the guarantor on the construction loan and funded an $18 million mezz loan that earned and paid 10% interest. At closing of the refinancing, EdR received a previously agreed upon $3 million guarantee fee, payment in full of our mezz loan and we entered into a new 15-year management agreement with first year fees of $270,000.

This has truly been a win-win, win transaction. EdR has been appropriately financially rewarded for its creativity and commitment to the partnership. Johns Hopkins Medical Institute now has the premier housing they so desired and the students of Johns Hopkins medicine have a state-of-the-art apartment community fitting of such a prestigious institution.

As publicly announced by the University System of Georgia Board of Regents, EdR has been selected as one of the three finalists to submit a proposal for the acquisition, refinance and development of approximately 9,000 beds of on-campus housing. The selection of finalists was made from a request for qualifications process. We were certainly pleased that we were selected as one of the finalists in this first phase of the selection process.

Our team is in the process of reviewing the request for proposal and additional information recently received by the Board of Regents. With a deeper understanding of this important housing initiative, we can more thoroughly assess the Georgia systems needs and evaluate how EdR might just provide a solution to meet those needs.

Lastly, our external growth priorities remain as follows. Deliver all 12 2014 developments on time and within budget. Win more on campus ONE plans. Strengthen the EdR portfolio by divesting of assets with less future upside to fund targeted higher yielding developments or acquisitions. Create a meaningful pipeline of wholly-owned and JV off-campus developments for 2016 and beyond, and to monitor the acquisition market for investment opportunities such as The District on Apache, that will increase shareholder value.

With that report, allow me to turn the call over to our Chief Accounting Officer, Drew Koester.

Drew Koester

Thanks, Tom, and good morning. EdR delivered another quarter of strong performance which culminated in Core FFO for the second quarter improving $2.7 million to $17.3 million and Core FFO per share increasing 15% to $0.15. Total community revenue was up 24% for the quarter, driving a 30% or $5.8 million increase in total community NOI, which reflects the impact for a strong development pipeline and consistent internal growth.

Our same community portfolio had a solid quarter, producing a 2.6% increase in NOI on revenue growth of 2.5% and a 2.4% increase in operating expenses. While continuing to focus on leasing and maintaining our strong leasing velocity for the fall, our onsite management teams are doing a great job of controlling cost again this year.

Excluding the growth in real estate taxes which we budgeted to increase around 12% in 2014, operating expenses were up a slight 0.4% for the second quarter and only 1.4% year-to-date. Based on this outstanding expense control year-to-date, we feel comfortable with our original full year 2014 guidance of 3% to 4% expense growth for the same community portfolio.

Turning to recent capital transactions and our capital structure. In the middle of June, we executed a well received follow-on equity offering. Strong demand by investors allowed us to upsize the offering, selling 24.5 million shares and raising over $239 million in net proceeds. The net proceeds were used to pay down a revolving credit facility and as a result the facility had an outstanding balance of only $56 million at quarter end.

In addition to delevering the balance sheet, the offering pre-funded two new developments and the pending acquisition of Arizona State University that we announced during the offering and that Tom discussed earlier. The Core FFO dilution of the upsized offering and related transactions is approximately $0.05 per share for 2014. As a result of the efficiently executed offering, we ended the quarter with our balance sheet in a strong position that will enable us to fund additional investment opportunities as they arise.

At June 30, our interest coverage ratio was 4.4 times. Our net debt to EBITDA adjusted was 5.6 times and our debt to gross assets was 32%. In addition, 69% of EdR's 2014 NOI is unencumbered and our variable rate debt is 33% of our total debt and we have over $400 million of availability on our unsecured revolving credit facility. We continue to assess our balance sheet capacity and capital allocation decisions by projecting the company's leverage and interest coverage metrics, assuming all the announced developments and acquisitions are funded by debt.

Under this scenario, which includes funding the remaining capital requirements for all announced developments through 2016 as shown in our financial supplement, as well as funding our pre-sale acquisition of Florida International and the pending acquisition at ASU this fall, we estimate our debt to gross assets will be maximum of 42%, and our interest coverage ratio would be about 4.4 times throughout the next three years. These metrics are within comfortable ranges.

Earlier this month, we were pleased to announce a 9% increase in our quarterly dividend to $0.12 per share. This increase which takes effect for the August dividend represents the fourth straight year of dividend increases approved by our board of directors. Based on the strength of our business, we have increased our dividend to a total of 140% over the past four years. And this new dividend represents an annual yield of approximately 4.3% based on our recent stock price.

And finally turning to 2014 guidance. As discussed earlier, the June follow-on equity offering related transaction which included two asset sales, one pending acquisition and delevering of the balance sheet, reduced our original Core FFO per share guidance by $0.05 to a range of $0.57 to $0.63. Based on our current estimates and expected market condition, management is increasing this post follow-on equity offering and related transactions low and high-end Core FFO guidance by 7% and 2% respectively, to a range of $0.61 to $0.64 per share/unit for the year ended December 31, 2014 which represents an 11% to 16% growth rate over 2013.

This guidance increase is mainly attributable to better than expected net operating income from all communities, drive from our successful leasing efforts for the fall 2014-2015 leasing cycle and the successful refinancing of the Johns Hopkins development which was not included in our previous low-end guidance range. Consistent with company policy, guidance does not include the impact of any unannounced third party development or management contracts; acquisitions including pre-sale agreements or purchase options; dispositions, ONE Plan developments or capital transactions.

With this overview, operator, please open up the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is coming from the line of Karin Ford with KeyBanc Capital Markets. Please proceed with your question.

Karin Ford - KeyBanc Capital Markets

My first question is for Chris. You mentioned in your remarks that you're excited as you are looking ahead to 2015-2016 kicking off here in a few months. Given that you guys are starting from probably what looks like a higher occupancy level this year, as well as you are seeing supply decline, two questions. Do you think you will be able to push occupancy any further from where you end up probably this year, and/or do you think you will be able to push rent harder next year and what is sort of the magnitude of where you think potentially you could push rents harder?

Christine Richards

Good morning, Karin. Well, I don’t know at this moment where I am going to end up in occupancy. So unclear about whether or not we can push occupancy any higher. Kind of depends on where we get to at the end of this leasing season. And on rents here, we already told you, we are always looking for the right mix of rate and occupancy. So there will be rate growth at particular properties, significant rate growth at particular properties based on where their occupancy has fallen out. But at this time, we are not prepared really to give any guidance for the '15-'16 year. But I can tell you that marketing plans are being finalized and I have got assets that will start leasing September 1. So we are ready to go with all of our programs and plans for the next cycle.

Karin Ford - KeyBanc Capital Markets

Okay. And then next question is just on the yield for the 2014 completions. I know, Tom, you said that, in the aggregate they are going to end up in line with your expectations. Were there some winners and some losers? Was there a wide range within that group even though I know they ended up in the aggregate right where you thought they would be?

Tom Trubiana

Yes. We do indeed have a couple or properties that right now are slightly behind what we had forecasted but that has been offset equally or greater by those that are surpassing what we had thought we would get in either occupancy or rate. And so for the couple of properties that are trailing our expectations, there is aggressive leasing going on at this point in time. But in the aggregate, indeed, we are still reaffirming that we will be mid-7s.

Karin Ford - KeyBanc Capital Markets

And which were the properties that ended up a little bit behind?

Tom Trubiana

Duke which is -- it's graduate students and we knew that would be a rate market. And so velocity has really picked up as graduate students now know that they are attending Duke University. So hopefully we will close the gap. But that’s probably the most significant project.

Karin Ford - KeyBanc Capital Markets

Thanks. And then my last question is just for Randy. I know you definitely discussed that the equity offering was going to be dilutive at the time. Did you guys ever officially reduce guidance from $0.62 to $0.68 down to $0.57 to $0.63?

Randy Churchey

I guess I am not sure about officially. Almost everything that was written about the company did the math for the $0.05 dilution. I guess upon reflection we did not issue a press release and so doing even though the math was very clearly laid out.

Karin Ford - KeyBanc Capital Markets

Okay, thanks. It was a little bit confusing in the press release just given that but I appreciate the color. Thank you.

Operator

Thank you. The next question is coming from the line of Jana Galan with Bank of America Merrill Lynch. Please proceed with your question.

Jana Galan - Bank of America Merrill Lynch

Tom, can you comment on the size of the 2016 shadow pipeline or any kind of color you could provide there?

Tom Trubiana

Sure. If you look at the supplemental and you will see that deliveries for 2016 is only some $84 million, that that is the known project in Kentucky. I guess, let me kind of dwell, we currently in the middle of procurement processes, either with RFQs and RFPs. 14 processes involving some 22 schools because Georgia is nine schools. And then additionally, whether it be company self-developed or joint-venture, we have numerous sites that we actually under option or control that we are investigating at this point in time. And as is always the case with our company, we don’t announce things to the Street until there is absolute certainty that it's going forward. But do know that we do have the robust pipeline, opportunities on campus and then additionally of campus in keeping with our business strategy of tier one institutions primarily pedestrian to campus. So I think the expectation, but I won't give numbers, you can expect those numbers to grow for 2016 and beyond.

Jana Galan - Bank of America Merrill Lynch

Thank you. And would you mind just commenting on the transaction environment and kind of the quality and what type of assets you are seeing marketed right now?

Tom Trubiana

Yes. Probably the best source, CB Richard Ellis recently had a midyear market review. And during the first six months of the year, there were some 52 transactions, a little over 900 million, and that’s pretty comparable to a year ago. And as I think we all know, historically because of just the annual cycle of student housing, the vast majority of trades actually happen in third and fourth quarters. And so I think the broker community is predicting somewhere in the range of $2 billion of transactions that will happen in the second half of the year. And it's a mixed bag. Clearly there are a fair number of assets that are coming to market that meet our criteria. But we are going to stay disciplined with our business plans. So it's fun to be back into the selective acquisition market.

Operator

Thank you. Our next question is coming from the line of Ryan Meliker with MLV. Please proceed with your question.

Ryan Meliker - MLV

Just a couple of quick questions. First of all, with regards to guidance. If I recall, last quarter and the one before you guys had indicated that you were targeting or you were expecting same-store revenue growth for the upcoming school year of 3% to 4%, which is in line with where you are now. And on your 4Q earnings call, you mentioned that your guidance did include the $3 million debt guarantee penalty from a fee with regards to the Johns Hopkins development. So I'm trying to figure out how your guidance has really changed since those two points that you outlined with regards to your Core FFO guidance moving higher by $0.04 after the dilution. Is it just the acquisitions that you announced, Arizona State, etcetera, or is there something else going on that I am missing?

Randy Churchey

Remember our original guidance was fairly wide. And the reason why it was fairly wide is that the Johns Hopkins refinancing was just in the high end of the guidance. So therefore when you read the details of our guidance update this quarter, you see the low end actually increase to 7% while the high end increases only 2%. So the differential between the high and the low end guidance change is Hopkins being added to the bottom, if you will.

So then once you get over that, I will call noise, then there is a 2% increase in the guidance overall. And that's seriously just a little bit of increases really for all aspects of our business. A little bit from the strong leasing results that Chris and her team are putting together. Very nice expense control over the last -- over the second quarter versus the first quarter we had the utility issue. And also in our third party area we had a little bit of pick up. So it's really just a little bit in a variety of areas.

Ryan Meliker - MLV

Okay, that's helpful. And then another question I had was, at your Investor Day a few months back, you talked about the University of Georgia RFP as something that you would look at but a lot of the schools didn't really appeal that highly to you guys. What's changed? I understand that you guys can sometimes come up with creative solutions that work for everybody involved, but out of the nine schools that are listed, none of them seem like target institutions for EdR. So help us understand why you guys are engaged?

Randy Churchey

Yes. Let me start and then Tom will add color to it. You know it's a competitive process, so we really don’t want to say a whole lot. But in Tom's prepared remarks, what he did say was that we are looking at this opportunity to develop, acquire and/or refinance assets. So surely that description is one where all options are on the table, which includes some ownership by EdR and then maybe assets that are owned by EdR.

Tom Trubiana

Yes, I would just add. Keep in mind that this initial process was qualifications and just recently, literally within the last eight to ten days the three finalists received financial information and major due diligence. And so our staff is pouring through it and while indeed these are primarily, with the exception of Georgia State which has 31,000 students, they are primarily secondary and in some cases tertiary markets. So we felt that it was prudent to take a deep dive and see if there is something that makes sense because these are on campus student housing, primarily freshman. Where there is a requirement for the freshmen, for freshmen and sophomores to live on campus. So we are in the evaluative process but felt that it was important to at least get pre-qualified so that we could do the deeper delve to figure it out.

Ryan Meliker - MLV

So if I understand correctly, it sounds like you guys would be receptive to a lot of these schools or at least these types of schools, if you got the right opportunity on campus where you had students that were required to live in your housing. Is that correct?

Tom Trubiana

We are doing an analysis now and I really think it inappropriate for us to go any further given the fact that we are in the middle of the competitive process.

Ryan Meliker - MLV

Okay. What about just these types of schools as opposed to the specific schools?

Randy Churchey

Ryan (indiscernible)...

Ryan Meliker - MLV

I am just trying to understand...

Randy Churchey

We are not going to say anything more about...

Ryan Meliker - MLV

I am just trying to understand -- okay. Well, without talking about Georgia, I'm just finding it odd that you guys are looking at secondary market schools like these. So it seems different from what you've talked about with your stated strategy in the past. So help me reconcile how the two pencil out?

Randy Churchey

Ryan, as I mentioned earlier, what we said in our prepared remarks was acquisition, development and refinancing. Refinancing means that EdR equity would not be involved. I am not saying which campuses would be or wouldn’t be but that is part of the prepared remarks. So we built what we think is a best-in-class portfolio of assets. We are not going to change that and we really don’t have anything else to say on this topic.

Operator

Thank you. The next question is coming from the line of Alexander Goldfarb with Sandler O’Neill. Please proceed with your question.

Alexander Goldfarb - Sandler O’Neill

Chris, just going back to your earlier comments on the competitive environment and you sort of left -- well, you did, you left [exceeding] (ph) occupancy open ended. You weren't going to comment. But if you guys are 360 basis points ahead, which is up from first quarter when you were like 300 basis points ahead, so you have acceleration. You commented that in some markets, you have seen some increased competition on the rental rate side. But, overall, it seems like you guys should be meaningfully ahead on occupancy. You are not wanting to comment, is that more just basically conservatism or you genuinely are expecting things to suddenly trail off here?

Christine Richards

Alex, our guidance is our guidance for this cycle. But based on our experience, there is always a natural kind of trail off and the gap will compress as we get close to this cycle. We have still got 35-40 days left in this cycle but I still stand with our guidance of 1% to 2%. And we did see some [concessions] (ph) in some markets. Georgia Southern is a great example. We saw significant rate reductions kind of hit that market, a few other markets as well. So we reacted to that. So I think that, like I said guidance is what it is and the gap will compress as we finish the cycle.

Alexander Goldfarb - Sandler O’Neill

Okay. And then continuing that, if we look in your buckets, your occupancy bucket portfolio. The below 90% has shown a big increase. Do you expect this bucket to again make even more progress next year or are there certain structural or market challenges where these are properties that would be future disposition candidates?

Christine Richards

Well, thank you for asking about tier 1's bucket because I am proud of the accomplishments that we have made in that tier. If you remember, last year we talked a lot about our Roosevelt Point property which is in downtown Phoenix. And that was a struggle, that project opened at 60% last year. And kind of what we believe and what is true is that we were about a year or two early on delivering that asset. So opening at 60% last year. And that asset is in tier 1 and right now it's leased at in the low 90s and I have still got another month to go. So a lot of that tick up is attributed to that particular asset.

Alexander Goldfarb - Sandler O’Neill

Okay. And just finally for, I guess no longer do I need to say Mr. Churchey, there's only one Randy in the room. The CFO timing, are you expecting still an announcement for the beginning of the school year or is the search taking longer than you anticipated?

Randy Churchey

Well, Spencer Stuart is assisting us in evaluation of internal and external candidates. But we are very delighted with the number and the quality of candidates that are interested and we think we will conclude the search during August.

Operator

Thank you. (Operator Instructions) Our next question is coming from the line of Dave Bragg with Green Street Advisors. Please proceed with your question.

Dave Bragg - Green Street Advisors

There is always a big focus on preleasing updates as lease-up progress goes on but it gets a little tougher for us to compare and track your progress as assets are removed from the pool as we go. So can you talk about the impact of the removal of the sales in Auburn and South Carolina on your preleasing?

Tom Trubiana

Dave, they really had no real impact.

Dave Bragg - Green Street Advisors

Okay. That surprises us because, when I look at page ten, and I look at the Southeast, I see more than 1000 beds pulled out of there and your preleasing spread improved by more than 500 basis points from the first quarter to the second quarter. Are you really seeing that big of a pickup in the rest of your assets that Auburn and South Carolina weren't pulling that down earlier?

Christine Richards

Hey, this is Chris. Florida was in that Southeast region. And, yes, we have had a lot of growth and pickup in our Florida assets.

Dave Bragg - Green Street Advisors

Another question on the longer term outlook, page 11. Randy, I know when multi-year outlooks are provided, we always like to check in to see if the expectations are still retained, and I notice that you took out the 3.5% revenue growth for 2015 at your Investor Day. What can we take away from that omission?

Randy Churchey

Really nothing rather than we shouldn’t be giving guidance for 2015 while we are in the middle of the year of 2014. You know what we have said is that with the decrease in the level of supply going forward and the assets that we have built that we think next year's leasing cycle looks very very good. So we are not backing away from our expectations of 2015 but to give guidance for '15 during '14 doesn’t seem to make a whole lot of sense.

Dave Bragg - Green Street Advisors

Okay. So no change to your thoughts but a change to your disclosure strategy there?

Randy Churchey

Sure.

Dave Bragg - Green Street Advisors

And the last question relates to the '16 development pipeline outlook. Thanks for the color on different ways that you could fill that. But just directionally, Randy, do you want to stay in the $250 million to $300 million range?

Randy Churchey

Given where our balance sheet is and other capital allocation, inputs in the capital allocation decisions being the same, yes, we would like to be in that range.

Operator

Thank you. The next question is coming from the line of Nick Yulico with UBS. Please proceed with your question.

Nick Yulico - UBS

Just looking at the assets held for sale and the impairment charges, I just want to be clear. When I look at the balance sheet and see the assets held for sale, is that the four that are being marketed, two of which you took an impairment on?

Drew Koester

No, those assets out for sale are the two that closed in July. That does not relate to the four that we are marketing.

Nick Yulico - UBS

Okay. So the impairments were not on the ones that closed, it was on -- sorry?

Drew Koester

Correct. The impairments were related to two out of the four that we are in the process of marketing.

Randy Churchey

Yes. Let me add just a little bit to that because it is a bit confusing. So the $9 million gain that we recorded in the first quarter is on the sales of our assets at Purdue and Kansas. So that's $9 million of gain in the first quarter. Then the July sales that Drew just mentioned, at Auburn and South Carolina, there is an $8 million gain for those that will be recognized in the third quarter. And then now we are marketing four other assets for sale. Two of those assets, if we achieve the pricing that we are thinking, will have a loss. And two of the assets will have a gain. Unfortunately for GAAP accounting purposes, the two that you may have a loss on you have to book now but the gains you can't book until later. So that’s kind of the ins and outs of the gains and losses on sales.

Just one final note. As I have mentioned before, we are done with the heavy lifting on asset sales. These four potential sales are more fine tuning the portfolio than the heavy duty recycling that we did over the past three years.

Nick Yulico - UBS

Okay. And so the two where you expect a loss, can you just talk a little bit about, were these assets you built? What's the story? Why are they doing a loss?

Randy Churchey

Well, these assets are assets that we haven't sold yet. So I really don’t want to go into any details about it at this standpoint. I can they were assets that were in the company's portfolio January 1, 2010 when this management team took over.

Nick Yulico - UBS

Okay. And then just going back to the -- you know talk about what you guys put out at your Investor Day versus what you are saying now basically, I just want to be clear. So is the idea here that the roadblock you gave for FFO in 2015 preliminary that we should all just not pay attention to that now since you have done the equity deal, you have done some other investment announcements and it sounds like you are just not -- you don't want to be talking about 2015 anymore?

Randy Churchey

Well, we are not going to give guidance for 2015. As we said in the Investor Day when we were gathered in April, here is the map of the company as the portfolio and the balance sheet stands today. And obviously any changes in the portfolio or the balance sheet would have to revise those numbers. So I think it's fair, that come early next year when we give our office guidance for 2015, I think it's fair to ask for information of how the number we gave in April changed to the number that we are going to give in early '15?

Nick Yulico - UBS

Okay. And was this change in strategy, was this at all related to the departure of your CFO?

Randy Churchey

What change in strategy?

Nick Yulico - UBS

Of talking about 2015 and giving preliminary guidance at the Investor Day and not doing so now?

Randy Churchey

No.

Operator

Our final question of the day comes from the line of Carol Kemple with Hilliard Lyons. Please proceed with your question.

Carol Kemple - Hilliard Lyons

On page seven of the supplement where you have the design bed, does that include the two properties sold in July?

Tom Trubiana

No, it does not.

Operator

Thank you. It appears there are no further questions at this time. I would like to turn the floor back over to Mr. Churchey for any additional or concluding comments.

Randy Churchey

Thank you for your time and to the team out in the field. Let's finish strong with both the construction and our final leasing. Thank you.

Operator

Thank you. Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation and you may disconnect your lines at this time.

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