Education Realty Trust's (EDR) CEO Randy Churchey on Q2 2016 Results - Earnings Call Transcript

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EdR (NYSE:EDR)

Q2 2016 Earnings Conference Call

August 1, 2016 10:00 AM ET

Executives

Drew Koester - SVP of Capital Markets and Investor Relations

Randy Churchey - CEO

Christine Richards - EVP and COO

Thomas Trubiana - President

Bill Brewer - EVP and CFO

Analysts

Austin Wurschmidt - KeyBanc Capital Markets

Drew Babin - Robert W. Baird & Co.

Ryan Meliker - Cannacord Genuity

Alexander Goldfarb - Sandler O'Neill

Ryan Burke - Green Street Advisors

Wesley Golladay - RBC Capital Markets

David Corak - FBR Capital Markets & Co.

Carol Kemple - Hilliard Lyons

Operator

Greetings and welcome to EdR Second Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded.

I’d now like to turn the conference over to your host, Drew Koester, Senior Vice President of Capital Markets and Investor Relations. Thank you. Mr. Koester, you may begin.

Drew Koester

Thank you and good morning. We'd like to remind you that during today's call, management's prepared remarks and answers to your question may contain forward-looking statements. These statements are based upon current views and expectation. Such statements are subject to risks, uncertainties and other factors that may cause the actual results to differ materially from those discussed today. Examples of forward-looking statement may include those related to revenue, operating income, and financial guidance, as well as non-GAAP financial measures. Risk factors relating to the Company's results and management statement are detailed in the Company's annual report on Form 10-K for the year ended December 31, 2015 and other filings with the Securities and Exchange Commission that are available on our Web site.

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, Chairman and Chief Executive Officer. Randy?

Randy Churchey

Good morning. Thank you for joining us for the EdR second quarter 2016 earnings call. It's been a great first half of 2016 for EdR. Year-to-date same same-community operating results were superb. We’ve made nice progress on two previously announced ONE Plan development, and we just announced two additional off-campus developments and a new acquisition building upon the exceptional external growth announced in the first quarter.

Our development platform both on and off-campus is a compelling part of our growth strategy. It is the strongest value creator for our shareholders and we continue to see ample opportunities.

First, let me discuss internal growth. Our same-community portfolio is performing well, with year-to-date NOI growth as adjusted of 4.5%. With the '16, '17 leasing cycle entering its last few weeks, Chris' team is focused on closing the 120 basis points pre-leasing gap to the prior year.

We continue to see strong fundamentals in the student housing industry. First, the National Center for Education Statistics forecast national enrollments to grow an average of 1.4% yearly through 2023. And recently, AXIO metrics forecast that annual effective rent growth for the student housing industry will increase on average 3.3% yearly through 2021. These favorable trends bodes well for continued EdR internal growth.

Today we announced projected new supply. Nationwide AXIO metrics forecast that new supply in 2017 will decline 8% from 2016 levels. In our markets, after three consecutive years of declining new supply, we currently anticipate the volume of 2017 new supply to be more than that of 2016.

However, even with more beds entering our markets, the rate of new supply is projected to exceed enrollment growth by only 40 basis points. This difference is consistent with what we’ve experienced in the last four years during which time EdR achieved industry-leading leasing results, averaging a 4% increase in same-community revenue. These results speak both of the quality of our newer well located portfolio communities, as well as the modernization that continues to occur in the industry.

Our portfolio of communities boasts the following characteristics. 87% of our NOI is from pedestrian to campus and on-campus assets. 30% of our NOI is from on-campus assets, reflecting our enduring strength in the on-campus development marketplace. Median distance from campus one-tenth of a mile. Average enrollment of universities served is nearly 28,000. The average age of our communities is seven years and the average monthly rental rate is $797 per bed.

We believe the combination of favorable industry fundamentals are best-in-class portfolio of on and off-campus student housing assets, and our outstanding property operations team will continue to produce consistent internal NOI growth.

Next to external growth. We're making nice progress with our anticipated ONE Plan on-campus development at Cornell and I'm pleased with the speed at which we’ve progressed on our ONE Plan development at northern Michigan University.

We were awarded the Northern Michigan project in the first quarter of 2016, and we were able to finalize documents and start construction in July with part of the phase development being delivered in 2017. This is a testament to the partnerships we build with our University clients, and the focus that we place on our common goals.

In total, we’ve significant embedded external growth in our announced pipeline of '16, '17, and '18 on developments, as well as pending acquisitions, representing a 44% increase in our collegiate housing assets. Importantly, 47% of our new developments are located on-campus and 82% are on-campus or pedestrian to campus. Our opportunities for additional external growth, both on and off-campus have never been greater.

In closing, during a time of market volatility and uncertainty regarding economic conditions, the recession resistant defensive nature of student housing stands out. Over the last 11 years, the student housing industry has produced 46 consecutive quarters of same-community revenue growth averaging 3.1%. This steady operating characteristic along with our conservative balance sheet provides a nice shelter in these uncertain times.

The outlook for the student housing industry and our Company remains very positive. Annual enrollment growth averaging 1.4% per year through 2023, manageable near-term new supply and the modernization of student housing taking place across the country provides a favorable macro environment.

The opportunities for EdR to create meaningful shareholder value from both internal and external growth are outstanding. We’ve 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. Adjusted for the additional property tax assessment in the first quarter of 2015, year-to-date NOI is at 4.5% over the prior year and a 4.1% increase in revenue, and a 3.4% increase in operating expenses.

Today, our same-community portfolio has performed generally in line with our projection, and we reaffirm our original full-year same-community NOI growth guidance of 3.5% to 4.5%. The same-community leasing portfolio occupancy is currently 120 basis points behind prior year with 95.1% of the beds preleased for the fall. The 120 basis points shortfall in leasing velocity represents 352 beds.

Two of our communities alone, The Reserve at Columbia serving the University of Missouri, and the Reserve at Stinson serving the University of Oklahoma are 363 beds behind prior year and account for the leasing gap.

As we’ve previously discussed and most are aware, the University of Missouri experienced racial strife in 2015, which is expected to cause their '16, '17 full-time enrollment to decline 13%. As a result, The Reserve at Columbia is currently 76% preleased compared to a 100% a year-ago and we've not been able to make up as much ground as we had hoped. However, we remain confident in the long-term prospects of this market.

The Reserve at Stinson, which opened the '15, '15 lease year at 88% occupied, is currently 52% leased, compared to 84% at this time last year. Heading into this leasing cycle, we made an adjustment to our rate structure at this community to overcome a common objection of prospective residents that we did not include utilities in the rent. Although we’ve used this similar adjustment in other markets with great success, the new rates, which included utilities, were not accepted by the market, impacting renewals and new lease velocity.

We recently and belatedly readjusted the rates and have gained velocity, but will struggle to close the shortfall to prior year. It is late in the leasing cycle and we’re pessimistic that we will be able to approach last year's final leasing occupancy at either of these communities.

The remainder of the same-community portfolio continues to perform as expected, and is currently 96.6% preleased for the fall compared to 96.5% a year-ago. With these two communities putting pressure on our leasing results, we anticipate opening occupancies to be flat to down 50 basis point versus our prior year opening occupancy of 97.8%.

We are still projecting rate growth of approximately 3.4%. As a result, we are trending to the lower end of our previous guidance of 3% to 3.5% same-community rental revenue growth for the '16, '17 lease term.

Our new communities, which include our '16 developments at the University of Mississippi, the University of Kentucky, and at Virginia Tech, as well at our '15 and '16 acquisitions are meeting our expectations with 85% of the beds leased for the fall.

In conclusion, with continued focus on completing the leasing cycle, and closing the occupancy gap in Missouri and Oklahoma as much as possible, our operations team is prepared for the very busy and labor-intensive turn season. Move outs have begun at nearly all of our communities and I'm confident our on-site team will once again do a wonderful job preparing our communities for our new and returning residents, and will finish the leasing season strong.

I will now pass the call to Tom.

Thomas Trubiana

Thank you, Chris. Good morning. First, I’d like to give an update on our development pipeline. Please refer to Page 16 of the supplemental. All of our 2016 and '17 developments are proceeding as planned, on budget, and on pace for their intended openings.

Our team in conjunction with the University has made significant progress on the recently awarded ONE Plan project on the campus of Northern Michigan University. Final agreements have been executed and construction of the $75.4 million 1,200 bed development began in July. This development is expected to be delivered in multiple phases with approximately 800 beds being delivered in summer and December 2017, and the remaining 400 beds being delivered in summer of 2018.

A quick update on our project at Cornell University. The planning and development activities continue on the 850 bed, $80 million on-campus development towards a late 2016 groundbreaking. The 850 bed community is replacing existing graduate housing and is expected to be delivered in the summer of 2018.

Today we announced two new developments, comprising $122 million in EdR investment. The first is a new community adjacent to the University of Pittsburgh and the second a redevelopment at Florida State University, both are targeted to open in summer 2018. And finally, progress continues on the landmark public-private partnership at the University of Kentucky, which is systematically replacing outdated residence halls with modern state-of-the-art live/learn communities.

We’re delivering over 1,100 beds this year, and with the addition of Lewis Hall and University Flats in 2017, the total number of U.K beds delivered, under construction, or currently in development, is 6,850. While we do not anticipate any additional deliveries on the U.K campus in 2018, we are exploring opportunities with U.K for possible deliveries in 2019.

In total, EdR has 635 million of active development projects, which represent a 31% increase in collegiate housing assets over December 31, 2015. The stabilized economic development yield for all of these developments ranges between 6.5% and 7%.

Focusing on opportunities in the on-campus market, we continue to see growth in the number of universities interested in P3 financing to solve their housing needs as more universities see the benefits of these successful partnerships. The need to replace older on-campus housing and demands on institutional funds for academic and support service initiatives, combined with the decline in state support for our education is driving this increase in P3s.

Preserving limited debt capacity for academic and research initiatives is the primary motive for universities seeking equity financing for their housing needs. EdR is currently actively working a pipeline of 17 University procurements. The depth of the on-campus developed market has never been greater.

In the off-campus market, we’re in various stages of pursuit on numerous developments for 2018 and beyond. Our Company has worked hard over the years to establish a reputation as a good partner and as evidenced by the multiple joint venture developments we've added to our pipeline in the last seven months, this reputation has paid off.

What we continue to build on our internal capabilities to source development opportunities, we value our partnerships, such as the ones we recently cultivated with core campus and more recently with Park 7, who is our partner on the Pittsburgh development. We hope to do additional JV developments with both of these firms in the future.

Over the last six to eight months, the industry has seen a significant tightening in the construction lending market that we think bodes well for EdR's opportunity for off-campus development joint ventures, as well as for future levels of new supply. This tightening trend, which includes tighter loan to cost limits, 50 to 100 basis points increases in interest rates, and higher cash equity requirements is making construction lending harder to obtain by merchant developers.

Although this is not expected to impact the permanent financing markets or our ability to borrow, we anticipate that the tighter construction lending market may result in lower levels of new supply in coming years, as well as an increase in EdR's joint venture opportunities with developers that cannot obtain favorable financing on their own.

We've made significant progress on our third-party development projects. We closed financing and began construction on three of the four previously announced third-party on-campus developments at Texas A&M Commerce, Shepherd University, and East Stroudsburg University, all targeting 2017 deliveries. We anticipate earnings of $3.6 million in fees over the term of these projects.

Turning to acquisitions and dispositions. Both CBRE and HFS have reported record levels of student housing acquisition transactions for 2015 and the first half of 2016. Last year's record volume was $5.6 billion and already through the first half of 2016 there's been over $5.3 billion of closed transactions. This increase in volume is being driven by increased interest in the student housing sector by domestic institutional investors, as well as new foreign investors. According to CBRE, the current cap rate for core product adjacent to Tier 1 universities is in the 5 cap range.

During the quarter, we closed on the previously announced acquisition of The Hub at Madison at the University of Wisconsin and purchasing the remaining interest in the Retreat at Louisville from our development partner. We have three previously announced pending acquisitions, one at the University of Arizona and two community serving Colorado State University, that are expected to close in the third quarter of 2016.

Additionally, in July, we entered into an agreement to acquire a 700 bed community at a Tier 1 University for approximately $80 million. This adjacent to campus community is currently under development for a fall 2016 opening. Closing is subject to normal due diligence and is targeted for October 2016. Subject to final due diligence, these four announced acquisitions for the remainder of 2016 total $154 million of additional investment.

On the disposition front, we closed the previously announced dispositions of two of our older assets, The Reserve at Athens and the Commons at Tallahassee for a combined net proceeds of $42 million.

In closing, allow me to provide EdR's external growth priorities. Deliver all developments on time and on budget with operating performance in keeping with our underwriting, win more on-campus ONE Plan development opportunities, create a meaningful pipeline of off-campus developments for 2018 and beyond, and the disciplined monitoring and selective purchasing of assets and the acquisition market.

With that report, allow me to turn the call over to our Chief Financial Officer, Bill Brewer.

Bill Brewer

Thank you, Tom, and good morning, everyone. Core FFO in the second quarter of 2016 increased $6.4 million or 32% to $26.4 million and core FFO per share was down $0.02 or 5% to $0.39 a share.

The strong growth in core FFO was mainly the result of a $4.7 million increase in total community NOI and a $1.8 million reduction in interest expense. And the $0.02 decline in core FFO per share for the quarter was primarily due to a 40% increase in weighted average shares related to the deleveraging equity transactions in late 2015 and early 2016.

Please refer to Pages 6 and 7 of our supplement for additional details on our community operating results and same-community expenses.

Turning to our capital structure. Our balance sheet strategy is to maintain conservative current and future leverage metrics when factoring in our development pipeline and any acquisition commitments. As previously communicated. We’ve reset our current debt to gross assets leverage target to 25% to 30%, compared to our prior target range of 35% to 40%. We feel the lower leverage target puts the Company in the best position to not only fund its current development commitments, but more importantly to take advantage of additional external growth opportunities as they present themselves.

ATM activity. We raised approximately $300 million for May through July, selling approximately 7 million shares at a weighted average net price of $42.51. In addition to meeting the $100 million to $150 million of capital funding needs that were included in our guidance, the proceeds will be used to fund the newly announced additions to our acquisition and development pipeline.

As of June 30, 2016, we had cash and equivalents totaling $230 million and our debt to gross assets was 20%. A more reflective measure of our leverage considering the significant cash on our balance sheet is net debt to gross assets, which was 12%. Our variable-rate debt was 19% of total debt. Our weighted average debt maturity was just under six years, and we had $500 million in capacity under our existing revolver.

Please refer to Page 17 of the financial supplement as I discuss our capital commitments and funding plan. As of June 30, 2016, we had capital commitments totaling $571 million, which included $417 million remaining to be funded on our $635 million of active 2016, '17 and '18 developments along with a $154 million to be funded on our announced acquisitions that are yet to be closed.

Even though these capital commitments will be funded over the next 27 months, we could fund them today through cash on hand, July ATM proceeds, and borrowings under our line of credit, after which our debt to gross assets would only be 27%. What a great position to be in.

Turning to 2016 guidance. Based on our current estimates, we are reaffirming our 2016 core FFO per share guidance of a $1.73 to a $1.79. Since our first quarter earnings update, we’ve raised more equity than included in our guidance in order to fund capital commitments on the newly announced developments and acquisition, and we raise the equity more quickly than anticipated.

Although core FFO per share is unchanged, our estimates for full-year third-party development fees, interest expense, and weighted average shares are being updated as follows. Third-party development fees are increased by $1.5 million to $2 million to a range of $2.5 million to $3.5 million, reflecting the new project starts at Texas A&M Commerce, East Stroudsburg University, and Shepherd University.

Interest expense net of capitalized interest and including the amortization of deferred financing cost is reduced by $1.8 million to $2.1 million to a range of $16.9 million to $18.2 million, reflecting lower debt balances and interest rates, as well as higher capitalized interest from additional assets under development.

Full-year weighted average shares and units are increased to 69.6 million, reflecting actual shares sold to date and the assumption of no new equity raised for the remainder of 2016.

With that overview, operator, please open the line for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Jordan Sadler from KeyBanc Capital Markets. Please proceed with your question.

Austin Wurschmidt

Hi. Good morning. It's Austin Wurschmidt here with Jordan. Bill, you mentioned that there was a little bit of a difference between the timing of the equity and when some of these investments will hit. So, I was just curious if you could talk a little bit about what the impact would be to the bottom line on a per share basis to your 2017 outlook that you provided at your Investor Day?

Bill Brewer

Hey, Austin. Good morning. As a reminder, we provided guidance in the May Investor Presentation update. Based on a lengthy set of assumptions of $1.95 to $2.05 and we're still comfortable with that range.

Austin Wurschmidt

Great. Thanks for that. And then, just switching over to the redevelopment at Florida State, just curious what your targeted return was on that project, and how are you thinking about the cost or carrier opportunity cost from the in place NOI?

Thomas Trubiana

Yes, Austin. This is Tom. Indeed, the existing property at Players Club is some 336 beds and without bed/bath parody and many of the amenities that students want today, the new development has bed/bath parody town houses 592 beds, and while our incremental additional spend is about $37 million and our investment analysis we looked at the opportunity cost, because the alternative would have been to sell the property to someone. So that clearly was in our analysis and we did indeed achieve or believe we will achieve our target of economic first-year yield between 6.5 and 7, but did indeed put the opportunity cost in our investment analysis.

Austin Wurschmidt

Great, thank you. And then, I think Jordan has a follow-up.

Jordan Sadler

Thanks. It's Jordan Sadler. I just had one on the cap rate on the acquisition that was put under contract in July.

Thomas Trubiana

Yes. Actually in the low 5s.

Jordan Sadler

Okay. Low 5s. And then, is this the new market or University for you guys?

Thomas Trubiana

It is not.

Jordan Sadler

Okay. And then, lastly, I noticed the change in the expected yields, Tom, that you referenced. I think, last quarter we were talking about low 7s. And now it's under construction in the pipeline 6.5 to 7, which seems pretty much in line with your peers in the space. But what’s driving the tweak?

Thomas Trubiana

The Continued increase in land costs and construction costs relative to the increases in revenues, and -- but importantly, we believe that there -- the premium that you need for the added risk of developments over acquisitions needs to be 150 basis points and so with acquisitions that for true pedestrian to campus Tier 1 institutions being approximately 5, we think we’re still being properly rewarded for the added risk of development.

Jordan Sadler

Thank you.

Thomas Trubiana

You’re welcome.

Operator

Our next question comes from the line of Drew Babin from Robert W. Baird. Please proceed with your question.

Drew Babin

Good morning, all.

Thomas Trubiana

Good morning.

Christine Richards

Good morning.

Drew Babin

First question on the pre-leasing. The variance between potentially being down 50 bps year-over-year versus being flat, is that entirely related to the two universities that you mentioned at Missouri and Oklahoma, or does that incorporate the potential upside at some of the other properties that are stronger?

Christine Richards

Probably both. I mean, yes, it does incorporate Oklahoma and Missouri netted out by some upside at some of our other communities.

Drew Babin

Okay. And then, a question on the new community leasing, 85%. I was just wondering how you could -- if you could explain that relative to your expectations, as well as what the year one yield may look like on some of those projects?

Christine Richards

Well, in our new development in the past we averaged approximately 94% occupancy in all of our first years on all new development. So it doesn’t equate to the same-store kind of norms. Sometimes it's because there is the lower occupancy is driven by apprehension of completion in a market where maybe another deal hasn’t completed on time. You’ve also got the missing renewal base, which is kind of the first piece of everybody's leasing season, you don’t have anybody to renew to, so that takes away from some of it. And we don't -- depending on the market, we don’t necessarily underwrite year one to same-store level.

Drew Babin

Okay. And lastly just on the property tax increase for the quarter, obviously that’s fairly lumpy. But just wondering going forward whether we should expect property taxes to maybe run at a higher overall run rate going forward just based on assessments, things like that or was this truly just kind of a one quarter lumpiness result?

Bill Brewer

Drew, as Chris noted in her comments, right, our same-community portfolio is performing in line with expectations. We reaffirmed the full year NOI growth guidance of 3.5% to 4.5%. So overall obviously that means that it's performing in line with expectations. I mean you’re right, full year real estate taxes are only -- are up less than 4% in line with our budget expectations. The six month number is in line with the full year run rate. So you’re exactly right that quarterly can be lumpy depending on timing of receipt of assessments from various taxing authorities. And finally when we look at it, as we think about it for a portfolio as a whole, we’re modeling somewhere in the 5% to 6% increase of real estate taxes year-over-year on a same store basis.

Drew Babin

Okay. That's helpful. Thank you.

Operator

Our next question comes from the line of Ryan Meliker from Cannacord Genuity. Please proceed with your question.

Ryan Meliker

Thanks for taking my question. I just -- well, I had a couple of questions and Bill, this one is probably more for you. I just wanted to walk through the choice to use the ATM. I don’t understand the idea of wanting to make sure that you’ve got all your developments covered, but it seems like you’re tapping the ATM awfully early in terms of the need for the proceeds. Can you give us some color on kind of why you chose to do it now as opposed to waiting a few more months as you need those proceeds more and more frequently?

Bill Brewer

Sure. I mean, as you know, Ryan, when we look at our ’18 pipeline if you include Cornell and it goes up to $230 million from a $115 million. We have until March of ’17 to add more properties to the ’18 pipeline, that's another nine months. Our average and guidance in May was $250 million a year just on average developments for ’18. It's likely we will exceed that given our new debt to gross asset targets of 25% to 30% that's inclusive of everything we’ve announced. As you can see in the supplement we’re just under 27%. So we’re still solidly in the line of the guidance range we gave.

Ryan Meliker

Sure, now it makes sense. I understand. And then as we think about it going forward, is it your desire to continue to tap the ATM markets rather than doing a more traditional secondary offering to help maintain your leverage and fund your development growth?

Bill Brewer

Yes, I think it just depends on the specific facts and circumstances, Ryan. I mean, obviously the ATM is the cheapest form of raising equity versus the spot or an overnight offering. As you can see we renewed our ATM program again at $300 million authorization from the board. So again, it's facts and circumstances specific.

Ryan Meliker

Okay. That's helpful. And then just one last one and maybe this is more for, Tom. In terms of PPP opportunities, if I recall at the Investor Day you guys had mentioned you had 18 or 19 that you were looking at, and that sounds like it dropped down to 17. Was there something that has already been awarded or did university decide to not move forward with those. Can you give us some understanding of how, I know it's only one or two that changed, but what actually happened?

Thomas Trubiana

Yes, and very specifically in one case the university has decided to not move forward considering potentially doing the housing by themselves. In another case preliminarily another team was selected for a third party deal. I do -- when we talk about 17 I do, so those are kind of what I would call active pursuits where we’re engaged with universities. But we have -- there’s an additional 15 universities that at various conferences etc have, that what I would call in the exploratory stages. And so, we have team members that are in the early stages with those universities as well. Clearly I’ve been doing this a long time, this is by far the most active we’ve ever seen P3s.

Ryan Meliker

Okay. Now that sounds really good. So, total of over 30 potential opportunities down the road. Great, that's it for me. Thanks.

Thomas Trubiana

You are welcome.

Operator

Our next question comes from the line of Alexander Goldfarb from Sandler O'Neill. Please proceed with your question.

Alexander Goldfarb

Good morning, down there. Just a few questions. First off, on the Pittsburgh deal, 146 a door. Can you just provide a bit more color on this project, and how much of that relates to structured parking versus the actual residential tower itself?

Randy Churchey

Sure, Alex. So this project is one block north of campus. It's in between Carnegie Mellon and Pitt. The number of parking spaces that we’re going to have, I’m looking at my right up. Well, I can’t seem to find that. There is structured parking beneath, actually I can’t find it, 400 parking spaces. What we really liked about the market is, there is no purpose built student housing in the market. There is one smaller project that's delivering this year 400 beds, and then there’s another one that's delivering and I think 18 of another 400 beds. But with a fulltime enrolment of 25,000 essentially or none but a very, very small number of purpose built student housing. We think this market is right for this development.

Alexander Goldfarb

And then, Randy, the yields that you expect are what? Are they, commensurate with normal or that lowered just because of the cost?

Randy Churchey

No, they’re right in our -- right in the span that Tom, mentioned earlier.

Alexander Goldfarb

Okay. And then in your opening comments, you mentioned that supply you expect to increase in your market, but decreased overall. I thought before when AXIOMetrics was measuring stuff, they had it that supply was coming down in the markets where you guys and ACC were. So just curious, have there been a bunch of deals that suddenly came on line, and then more to the point, as the new lending standards kick in, do you anticipate that to fall not this coming school year, but the following school year will start to see supply in all markets decline and be less than enrolment growth?

Randy Churchey

The 2017 new supply projections are, I’ll say new. AXIOMetrics just came out with them. I think it was two weeks ago and of course we just released ours today. Look, we were a little bit surprised frankly, that's new supply and our market’s was going to be up a little bit. But realize what we’ve done, and I think AXIOMetrics is similar is, its new supply that is out of the ground, but we also included our numbers, stuff that we think has a reasonable shot at coming out of the ground. Now, as we all know it's August 1, and so if you’re not out of the ground now it maybe a little difficult to get done in time. So with all that said, I think the span for AXIOMetrics was supply being down 8%, but if none of the planned stuff gets done, it's down 30%. For us, we think it's up a little, but is it possible it could be better than that for us? Sure it's possible depending on if things get out of the ground. But we think our analysis is or the numbers that we’ve shown here is, I’ll say worst case. And the great thing about that is worse case is essentially the same gap that we’ve seen in the past where we had good leasing. Moving on to your question about 2018 supply, we’re seeing in our joint venture program a lot of activities from merchant developers that are not liking the first indications that they’re getting from banks on construction lending. As you know it doesn’t impact us, but it does impact them. So, it's too early to tell about 2018 supply, but that marker is a favorable, possible indication.

Alexander Goldfarb

Okay. And then just finally, Chris, on the Oklahoma, I understand it's just one property. But can you just give a little bit more color. It sounds like the students wanted a sort of all in pricing. You guys have done this elsewhere, and then suddenly they didn’t like the pricing. So, can you just give a little bit more color on what happened? Like, were they just surprised how much utilities cost or was this the way the marketing materials came across that it turned people off?

Christine Richards

Well, in that market Alex, there’s two kind of separate sets of communities. So there’s a lower-end set with a lower price point, and then there’s the higher-end, the new developments that have come out of the ground, and there’s quite a bit of gap between the two. And so we -- this property is over 10 years old and although close to campus it sits on a dead-end street. So it's not new, like the new ones with the new bells and whistles. So we had always kind of favored the lower-end of the price point, and that didn’t include utilities. One of the objections that we continued to get coming in the door was; why are utilities not included like everybody else’s? I think it's hard for the students to comp it. So we decided that -- we did it in two other markets, Orlando and Athens in the past and had great results there. And so we decided to do that here this year. And what it left us with was rates kind of in a mid-range and I don’t want to -- there was no comp for us. So we were lower than the new developments that we weren’t new, and we were much higher than the lower price point kind of comp, and so we kind of -- we didn’t fit. So I don’t think it was the case of -- it wasn’t the case of marketing materials or not getting the word out. But as we discussed in the past, renewals start early and renewals are a big component to how well your same store portfolio does. And when we came out with a higher price point we left some of the renewals. We did react and we just reacted later than we should have. Even in the last 30 days we picked up over 15% or almost 15% in leasing. So it was truly a judgment call on whether or not this action would work, and it didn’t.

Alexander Goldfarb

Okay. Thank you, Chris.

Christine Richards

Welcome.

Operator

Our next question comes from the line of Ryan Burke with Green Street Advisors. Please proceed with your question.

Ryan Burke

Thank you. The question for, Randy. The reasons why Northern Michigan University might be an attractive ONE Plan development, [indiscernible] is obvious at least on paper as the University of Kentucky. Can you provide some insight on why it was attractive? And then more broadly, what are some of the other things that you look for that would make ONE Plan development some of these smaller, lower ranked schools attractive as you move forward?

Randy Churchey

Sure. On the surface Northern Michigan is not equal to the stature of our other ONE Plan assets at Kentucky, Texas, TCU, Syracuse, Boise State. But we found a lot of positives up at Northern Michigan. One, the enrolment is about 9,000, so the enrolment is not too small. And it does cater to a certain demographic that is attracted to that university in that Upper Peninsula. But what we’re also able to do is working with the university, university provide us with a variety of items that help in case there’s some difficulties from occupancy. For instance, they’ve agreed essentially to shutdown or close other beds on campus if for some reason there’s difficulty. So the way we looked at it is; are we creating value? And so, both the pricing of our yields there and the enhancements that we received from the university, in our opinion equated to our usual spread between what we think the development yield is going to be, and what we think the asset would trade for it for sale. But as you know, we’ve never sold an on-campus asset and don’t intent to. But that's part of our analysis.

Ryan Burke

Okay. So is it fair to say that you negotiated some extra items into that contract that otherwise would not have been there?

Randy Churchey

That's fair.

Ryan Burke

Okay. Separate question for, Chris. Appreciate your comments on the University of Missouri for the upcoming year and your optimistic outlook for the long-term. But what do you expect for the 2017, 2018 year is what presumably will be a much smaller freshman class for this upcoming year rolls through as sophomores?

Christine Richards

Right. Well, as we said the big driver for the freshman in this market is enrolment. And what we’ve learned from universities over the years in particular land grant institutions is that, universities have a kind of toolkit full of levers that they can pull when they have enrolment pressure. And what we believe will happen is that Missouri will start pulling these levers to increase their enrolment over the next several years. So unfortunately it impacts some of the other schools right in the State of Missouri because it pulls from some of the lower tier institutions that I believe that pull will happen.

Ryan Burke

Okay. But the property does serve primarily sophomores and juniors at that campus, is that correct?

Christine Richards

Last year that was 50% freshman and a little over 10% graduates, and then sophomore junior, senior kind of fell in the middle.

Ryan Burke

Okay. Got it. Interesting. And Randy, as you think about your exposure to the University of Kentucky or to really outsize the exposure to any school in general, does the experience at Missouri, not that you could have predicted it, change that view in any way?

Randy Churchey

I don’t think it changes at any. But realize what Missouri has done for their on-campus portfolio. And I assume you’re asking about on-campus University of Kentucky exposure versus off. On-campus it’s different. What the University of Missouri has done is they’ve closed two different dorms that had 890 beds or -- I’m sorry, four dorms, that had 890 beds. And as you can imagine the dorms that they closed were not the newest and best, they were the oldest and worst. So when you’re looking at our exposure at any university, I think that's very important to consider is, how many beds do we not own on campus, and whether that provides enough cushion for an event like this. At Kentucky for instance today we do not own 650 beds and it does not appear that we will own those at any time in the future.

Ryan Burke

Okay. And then quick one for, Tom. The cap rate that you quoted on the acquisition, was that forward nominal [ph]?

Thomas Trubiana

Economic forward.

Ryan Burke

Economic forward. And what’s the CapEx per bed assumed on that?

Thomas Trubiana

$200 a bed.

Ryan Burke

Okay. And then, apologies if you provided it, but can you give us the cap rates on the disposition?

Thomas Trubiana

Yes, the dispositions of the two assets we sold, keep in mind these were older products about 1.9 miles from campus, pretty much in keeping with some of the dispositions we did early in the year which is in the low sixes.

Ryan Burke

Okay, low six is the economic?

Thomas Trubiana

Yes.

Ryan Burke

Okay. Thank you.

Thomas Trubiana

You are welcome.

Operator

Our next question comes from the line of Wes Golladay from RBC Capital Markets. Please proceed with your question.

Wesley Golladay

Good morning, everyone. Looking at the other income for occupied bed that was up pretty sharply this quarter around 19%. I know you guys have a lot of ancillary projects that you’re working on at the -- ancillary revenue stream at the community. Is this something that can grow double digits next year?

Christine Richards

I would not assume that it will grow as significantly next year as it has this year. There are a lot of programs in place to bolster this. In addition there is a pickup in other income this year with EDR assuming the responsibility of the summer conference housing at the University of Kentucky which falls in the other income line. We did not manage the marketing and the profits last year, we do this year which has been part of the pickup.

Wesley Golladay

Okay. Thanks for the clarification there. And then looking at the new communities, last year they were about 94% leased, somewhere to the same store portfolio. This year you sort of adjust the 85% leasing what’s going on there, but why was last year so strong and what’s going on this year that's different, it's the mix community?

Christine Richards

UK -- UK actually made up a large percentage of the new beds last year than it does this year and those were all at a 100% as of May 10 or something. That's the difference.

Wesley Golladay

Okay. Got you. And then what the good normal expectation for this -- you said you’re going to achieve your goals. What are we looking at, maybe high 80’s, low 90’s?

Christine Richards

Well in the past our achievement has been 94%. Our average has been 94%.

Wesley Golladay

Okay. Thank you.

Operator

Our next question comes from the line of David Corak from FBR Capital Markets. Please proceed with your question.

David Corak

Hi, guys. Tom, going back to your comments on P3s, you have a couple of ONE Plan’s in place for ’18 and Cornell is now officially a ONE Plan. It seems like Cornell was not necessarily a university that is struggling with its budget or endowment, and yet they still went with an equity deal. And to me that kind of speaks to the power of P3s, but can you talk a little bit about what the driver was for them and schools like them to choose the ONE Plan, schools that aren’t necessarily financially constraint? And then maybe touch on if there is any new competition you’re seeing for on-campus equity deals if at all?

Thomas Trubiana

Yes, so -- totally agree. Obviously Cornell has a very large endowment, but at the end of the day and talking to their Chief Financial Officer, they want to preserve their debt capacity for other purposes of the university. So it is the same thought process that we see with somewhat lesser universities. There are other companies that are trying to explore and to venture into; I’ll call it the inequity model. But at this point in time, the only two companies that have been awarded any are us and that other company down in Austin, Texas, which is our second competitor. But look, people are taking notice. At recent conferences the merchant developers I think very much are shying away from the P3 process. It is a time consuming process, sometimes decisions take a year to a year and a half. And those that have played in this segment of the business and have a positive track record have a distinct competitive advantage. So I do think we’ll see more companies try to find outside sources of capital, but we and ACC have a real competitive advantage.

David Corak

So if you look two years out from now, are you two still the only two players?

Thomas Trubiana

Good question. I guess, time will tell.

David Corak

Okay, great. And then, given all the new deal announcements, any change to your thinking on dispositions, potentially putting those three assets back on the market or do other sources of capital make more sense though?

Thomas Trubiana

Not at this time.

David Corak

Okay.

Thomas Trubiana

But no plans to put them back on the market.

David Corak

All right. Thanks guys.

Operator

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

Carol Kemple

Good morning.

Randy Churchey

Good morning.

Christine Richards

Good morning.

Carol Kemple

I have a question on your Northern Michigan project. It looks like it could open either summer or next year or December of 2017. I would assume if that opens in December occupancy would probably be zero for summer of 2018. Is that uncertainty just related to weather conditions for development in that market? And then what can you do to make sure it's open in time for summer?

Randy Churchey

Yes. So, allow me to explain that, first of all this is replacement housing. And so the university will house students and as new beds are made available, old beds will be taken out of service. So it gives us flexibility relative to potential weather conditions and all. We’re targeting 400 beds to open in the summer of 2017, and then additional 400 beds in January, but actually ultimately be completed in December and then the final 400 beds summer of 2018. But it is a wonderful situation to have the existing beds available so that if, because of weather conditions the schedule stretch or whatever, the project will be full. We won't be sitting and looking with any vacancies. The students will actually transfer out of the older housing into the new housing.

Carol Kemple

Will they actually transfer if you open the 400 in January, will they transfer in between semesters or will they wait till next year?

Randy Churchey

No, the intent is to have them transferred at the end of the first semester or second semester.

Carol Kemple

Okay. Thanks.

Randy Churchey

You are welcome.

Operator

[Operator Instructions] It appears there are no other questions in the queue. I’d like to hand the call back over to Randy Churchey for closing comments.

Randy Churchey

Thank you for your time today, and for the people in the field, thanks for your efforts in the first half of the year and I know you’ll do an outstanding job welcoming my new and returning residence in the days ahead. Thank you everyone.

Operator

Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.

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