Education Realty Trust Inc.Q2 2008 Earnings Call Transcript

Education Realty Trust Inc. (EDR)

Q2 2008 Earnings Call

July 29, 2008 10:00 am ET

Executives

Bartley Parker - IR

Paul Bower - Chairman, President, CEO

Randy Brown - CFO

Craig Cardwell - President, Allen & O'Hara Education Services

Tom Trubiana - Chief Investment Officer

Analysts

Karin Ford - KeyBanc Capital Markets

David Tody - Citigroup

Anthony Paolone - JPMorgan

Nap Overton - Morgan Keegan

Alex Goldfarb - UBS

Paula Poskon - Robert W. Baird & Company

Steve Swett - KBW

Alan Calderon - European Investors Incorporated

Presentation

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Education Realty Trust Second Quarter Conference Call. During today’s presentation all parties will be in a listen-only-mode. Following the presentation, the conference will be open for questions. (Operator Instructions). This conference is being recorded today, Tuesday, July 29, 2008. I would now like to turn the conference over to Bartley Parker with Investor Relations. Please go ahead, sir.

Bartley Parker

Thank you. Good morning, everyone. 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, uncertainties, and other factors that could cause the actual results to differ materially from future results expressed or implied by these statements. Risk factors relating to the Company's results and Management's 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 speak only of expectations as of the date on which they are made. Education Realty Trust 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 Mr. Paul Bower, Chairman, President, and CEO. Paul?

Paul O. Bower

Thank you, Bartley, and good morning everyone. Joining me on the call today is Randy Brown, our Chief Financial Officer. Also present today to answer any questions you may have about operations is Craig Cardwell, President of our management subsidiary ,Allen & O'Hara Education Services, and to answer any questions on the acquisition and development front, Tom Trubiana, Chief Investment Officer.

First, I'd like to provide an overview of the quarter. I will then ask Randy to provide some additional details and discuss our updated guidance for 2008.

Our FFO for the second quarter of 2008 was $0.36 per share, up from $0.23 in the second quarter of 2007. As noted in our earnings release, FFO for the second quarter of 2008 includes a gain of $0.17 per share from the receipt of the termination payment on the Place Properties lease.

Operationally, we earned $0.19 per share. The difference between $0.23 last year and $0.19 this year for the second quarter is mostly accounted for by the loss of rental revenue under the former Place lease. As we have shared with you in the past, we believe we have an excellent plan for operating the 13 Place Properties going forward, although we expect that the tangible financial improvements will not become fully evident until the 2010-2011 school year. The remainder of the difference in second quarter FFO on a year-over-year comparison is a result of lower operating margin in our core same-store portfolio.

As you can see on Page 10 of the supplemental analyst package, the operating margin was 53.1% and 55.6% for 2008 and 2007 respectively. Randy will provide further detail about certain revenue and expense categories that impacted the operating margin.

We had a successful quarter with our third-party fee revenue businesses. In May we announced the signing of a multi-year management agreement for a 770-bed apartment complex at California University of Pennsylvania. Out third-party management revenue also benefited from the solid work we did signing new contracts in 2007 and earning increases in fees on existing contracts.

In total, third-party management revenues climbed a very respectable 15%, year over year for the second quarter. We continue to be active in the process of negotiating for new management contracts when and where the opportunity occurs.

As we demonstrated during the quarter, we are signing new third-party development contracts, as well. The growth in business helped our third-party development fees for the second quarter increase a solid 19% compared to the same quarter one year ago. Last week we announced a new contract with Colorado State University at Pueblo, Colorado. This contract is a new relationship for us and one that validates our excellent reputation in the marketplace. We believe we can continue to grow our third party development business and look forward to updating investors on several exciting new projects in the very near future.

Regarding development for our own account, the Reserve at Saluki Point at Southern Illinois University in Carbondale will open this fall with 528 beds, 100 percent preleased at favorable rents. The success to date with this project has led us to start the second phase which will have 240 beds and open in August 2009.

With that overview on our performance for the second quarter and an update on our key business initiatives, let me now turn it over to Randy to provide some additional detail on our reported financial results and our updated guidance for the year.

Randy Brown

Thank you, Paul, and good morning, everyone. Let me start with some detail on our same community revenue. Referring to page 6 of the supplemental package, combined revenue for our apartment community portfolio and university towers increased $344,000 or 1.6% quarter-over-quarter. Revenue for our apartment communities increased $505,000 or 2.5% for the quarter, primarily due to rate growth of 2.9%, offset by 60-basis point drop in occupancy. For university towers, revenue was down $161,000 or 18.4%, primarily due to less summer conference and group business.

Again referring to page 6 of the supplemental, combined same community expenses increased $751,000 or 8% on a quarter-over-quarter basis. Most of this growth occurred at our apartment communities with several expense items in particular contributing to the increase. First, we took advantage of the occupancy level in certain communities to get an early start on turnover, which increased turn expenses by approximately $96,000. Second, we increased our marketing efforts by $110,000 in select markets where we felt extra promotion and advertising was needed to drive preleasing activities for the upcoming school year.

Third, we encountered higher G&A payroll of $91,000 due to less employee turnover than in the prior second quarter of last year. Fourth, maintenance and repair was higher for the quarter with approximately $94,000 more in building repair and $55,000 more in HVAC expense. And finally, we incurred approximately $43,000 more in bad debt expense for the quarter as the result of lower occupancies, primarily at three properties.

The combined impact of higher same community expenses negatively influenced our operating margins resulting in a 3.5% decline in the same community NOI. Obviously we recognize the need for sound operating margin management and continue to look for ways to minimize operating expenses. However, the run rate of some of these expenses, are somewhat unpredictable and will ebb and flow from quarter-to-quarter and year-to-year.

Looking at the Place portfolio, revenue for the quarter was $5.4 million. Operating expenses was $2.9 million, resulting in an NOI of $2.5 million. As we expected, this NOI contribution was approximately $929,000 less than the $3.4 we received in base rent payments from the Place properties in the second quarter of last year, which in turn translates into approximately $0.03 less per share of FFO this quarter.

Now turning to our second quarter corporate expenses, G&A expense for the period, it was $3.9 million, which is consistent with our first quarter 2008 run rate and inline with our guidance expectations. Non-operating expenses for the second quarter were $6.2 million compared to $7.3 million for the same period last year, an improvement of 14%, primarily due to lower debt levels and a favorable interest rate environment.

In regards to our potential capital needs, our balance sheet continues to be favorable relative to our plans. We had total debt of approximately $459 million, or approximately 52% of gross assets, at June 30, 2008. Of this, $34.7 million was outstanding on our credit line. Attractive mortgage financing continues to be available for student housing assets, as evidenced by our closing of $25 million Freddie Mac loan earlier this month. The proceeds of this loan were used to reduce our outstanding credit line balance. With the pay down of our line of credit and the ability to access the equity in our 13 unencumbered properties for additional financing as needed, we believe we have ample resources to fund our growth.

Regarding the $285 million in debt we have due in 2009, approximately $187 million comes due in July of ‘09. The remaining portion is due in December of ‘09; therefore, we have nearly 12 months to finalize the many available financing strategies currently being reviewed with our bankers and financial advisors in order to provide the most cost effective structure for our shareholders.

Now turning to our overall earnings guidance for the year, based on our current estimates for final lease-up for the upcoming school year, as mentioned in our press release, and in which Paul will elaborate on in a moment, and given our performance to date, we are revising our FFO for the full year ending December 31, 2008, to be $1.00 to $1.02 per share. While we continue to work on growing our business and creating value for shareholders, in an effort to be conservative, our guidance does not include the assumption of any additional NOI from future acquisitions and developments.

Now let me turn the call back over to Paul for some closing thoughts.

Paul Bower

Thank you, Randy. Regarding the lease-up for the 2008-2009 school year, let me provide some additional detail pursuant to what we published in our press release. We continue to press hard for all the rentals we can obtain in the last two to four weeks remaining in the lease-up season. As of July 27th, 91% for the beds in our core portfolio are leased for the upcoming year, which is right where we were last year on this date. However, we are expecting the final occupancy for the core group to be in the range of 94% to 95%, slightly behind fall 2007 at 96%. The rental rate increase this group should come in at 3.5%, which is consistent with our prior communication.

We have experienced a supply/demand imbalance at three locations; Kalamazoo, Michigan; Gainesville, Florida; and Oxford, Mississippi. Significant new supply has been added to those markets, while enrollment at each school is flat or declining. We expect those markets to rebound, although it may take somewhat longer in Michigan due to other economic factors. Our focus is to ensure that these properties are well maintained and sufficiently differentiated from competitors in order to achieve optimum occupancy while the oversupply is absorbed. Excluding these three properties from the figures I mentioned, we expect to achieve an average occupancy of 96% with a rental rate increase of 4% to 5% for the upcoming year.

The leasing activity for the 13 Place properties is on track with our expectations at 78% preleased for the 2008-2009 academic year as of July 27, compared to 74% for this time last year. We expect to end the lease-up at 90% to 92% for the portfolio or approximately 400 basis points higher occupancy than last year and with an average rental rate increase of 4.7%. While the operating margin for these properties is below our portfolio average, primarily because of occupancy and rental rate differences, the changes we have put in place will drive a very solid internal growth in the coming years.

Let me close with a few thoughts. We recognize that the market has created new challenges for us to overcome but that our long and rich history of operating in this business, combined with a deep and experienced management team, is expected to help us thrive in this environment. There continues to be strong interest in the industry. Some of you may have seen the article in last week’s Wall Street Journal highlighting the on-campus development opportunities.

Despite the credit crunch, there is also ready financing. The recently announced Freddie Mac student housing mortgage program is an excellent example of the attractive financing available. This program provides financing for the acquisition or refinancing of student-oriented, multi-family properties at favorable terms. Importantly, our properties generally meet the criteria for eligibility. We believe this property type and our diverse portfolio of solidly yielding assets will produce value for shareholders for years to come.

We thank you for your interest and attention, and now we welcome the opportunity to answer any questions you may have.

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions). And our first question comes from Karin Ford with KeyBanc Capital Markets. Go ahead, please.

Karin Ford - KeyBanc Capital Markets

Hi, good morning, guys. First question just relates to your comments on the increase in bad debt. Can you give us what percentage of revenues bad debt was in the quarter and a comparison to where it was in 2Q '07 and 1Q '08?

Craig Cardwell

Absolutely, Karin. This is Craig Cardwell. It's 0.03 of a percent presently. A year ago, it was 0.01 of a percent. On an annualized basis last year, it was for the total 12 months it was 0.06 of a percent, which we think is really excellent, and we don't see any reason for it to trend any higher than that on a full year basis. So, does that answer the question?

Karin Ford - KeyBanc Capital Markets

It does. You mentioned you thought it was a product of the decline in occupancy. Do you think it has anything to do with students reneging on leases due to losing their student loans?

Craig Cardwell

No.

Karin Ford - KeyBanc Capital Markets

Or any type of enrollment decline?

Craig Cardwell

No. No. No, not at all. Actually, it's a function of what happened at basically two properties where we had to do a little bit of internal management cleanup, and we didn't really quite have the right resident profile there. And it was from this last academic year, which is now being completed, so we actually evicted some people that needed to probably be evicted before they were. That affected the occupancy side, and then obviously they hadn’t paid, so then it created a little bad debt. But that cleanout part is being finished or perfected, so going forward we feel very good about the couple of markets where that happened. So, we don't see this as part of a student loan crisis or any kind of challenged economy.

Karin Ford - KeyBanc Capital Markets

Okay, fair enough. The three properties that had some supply and enrollment issues; can you just talk about why you think enrollment is flat or declining at those colleges?

Craig Cardwell

Okay, well, two of the three there is really not an enrollment issue. It's all supply.

Karin Ford - KeyBanc Capital Markets

Okay.

Craig Cardwell

And those are Western Michigan University, the University of Florida, and the University of Mississippi, and we think this is probably the end of what we think has been a overdevelopment cycle, because we think going forward a lot of these developers are not going to have the cash to do the things that they've done. We think they started some last product developments that they got going before what we see as a credit crunch has now emerged and put some new property that will open this fall in some of those markets.

So, at the University of Mississippi and in Florida, there is no real enrollment story. I mean, there is a little fluctuation year to year, but the schools are big enough to support us and support other worthy competitors in those markets. It was clearly as it was clearly a case of that you have a school that's 44,000 - 45,000 like the University of Florida and you add 3,000 beds, the competition is not going to be able to absorb all of that in any one year period. So, it's going to move around a little bit until all that product gets reabsorbed or turned over to some other use.

The case of Western Michigan is different, because Michigan itself is generally challenged. And at Western Michigan it is a case of too much supply and too few students. And so we think that it will take a little bit longer to get the situation there corrected, maybe a couple of years, but at the other two places, we think that we'll emerge fine for the fall of 2009.

Karin Ford - KeyBanc Capital Markets

Great. A question on the third-party side, can you just quantify what the impact is going to be for the management contract that was added and the management contract that was lost?

Craig Cardwell

None. There's basically two phases were added at California Pennsylvania, and we had a property sale elsewhere. And so there's really no real impact

Karin Ford - KeyBanc Capital Markets

No impact.

Craig Cardwell

On a year-over-year basis.

Karin Ford - KeyBanc Capital Markets

Okay. Can you give us the size of the Carbondale Phase II development and your expected yield on that?

Tom Trubiana

Sure enough. Phase II will be, , this is Tom Trubiana, an additional 240 beds, primarily two twos and three threes, so we have a better unit mix. And because a lot of the inner structure is already there, we will not be adding an additional community center, if you would or clubhouse. You can expect that it’ll have a project yield that’ll be north of 9%.

Karin Ford - KeyBanc Capital Markets

Okay. And is it about roughly the same size spend? Is it, like, $25 million?

Tom Trubiana

No, actually the cost of it, because it's fewer beds, we are looking at a cost of about $12 million

Karin Ford - KeyBanc Capital Markets

$12 million.

Tom Trubiana

Or close to $50,000 a bed.

Karin Ford - KeyBanc Capital Markets

Okay. Finally, we had seen some press reports about you guys being chosen by Syracuse University, potentially for an on-campus owned development project. Can you just give us some update on that? Is that something the company is still considering?

Tom Trubiana

At this point in time the company has not released any information related to that. I think it's fair to say that we have been working with Syracuse but we think it prudent to wait until all the T's are crossed and the I's are dotted before we go public with what we hope may happen there.

Karin Ford - KeyBanc Capital Markets

Okay, it's still progressing though.

Tom Trubiana

Still progressing.

Karin Ford - KeyBanc Capital Markets

Okay, thanks very much.

Operator

Okay, thank you, and our next question comes from Mike Bilerman with City. Go ahead, please.

David Tody - Citigroup

Hi, this is David Tody here with Michael. Can you guys provide a little bit more detail on any plans you have for asset sales and potential joint ventures in light of the debt maturity schedules, refinancing needs for next year?

Paul Bower

Well, we continue to consider opportunities to do both, but at this point in time we really have nothing that we're willing to release.

David Tody - Citigroup

Okay, thank you. And then secondly, in terms of your third-party fee and development fee expectations, can we look at the current quarter's growth rates as a relative run rate for the remainder of the year?

Randy Brown

This is Randy. You know, we have provided guidance in the past for development and management fees of between $8.5 and $9.5 million. We believe that range is probably a little low now. So based on what we're seeing, we believe that range ought to go up by at least $0.5 million. As far as the current run rate, you just have to look and see how we've done year-to-date and kind of take those comments into consideration.

Operator

Okay, thank you. And our next question comes from Anthony Paolone with JP Morgan. Go ahead, please.

Anthony Paolone - JPMorgan

Thank you, and good morning, everyone.

Randy Brown

Good morning.

Anthony Paolone - JPMorgan

You mentioned your preleasing for the '08 - '09 school year being same as it was last year at about this time but yet the expectation is for occupancy to be down. Is that purely, as it relates to your expectations on those three assets, or do you see things outside of those three in the market that makes you a little more conservative looking out into the last few weeks of leasing here?

Craig Cardwell

Great question, Tony. This is Craig. It's so totally related to those three assets. Most of the rest of the properties are full or about full, and it's just those three. We don't think there is enough gas in the tank in those markets to get us where we've been in the past occupancy-wise, so it's totally related to those three locations and no others.

Anthony Paolone - JPMorgan

Okay, and as you even look out maybe a little bit further over even to the '09-2010 school year, are there any other either regions or particular schools where you worry about supply-demand imbalances given what you are seeing on the construction side?

Craig Cardwell

No. In fact, I think that we're probably going to come out of a phase of where there's been a little bit too much over supply, because I think that a lot of the developers are becoming increasingly constrained if they're just pretty much merchant developers and merchant builders. If they're really experienced like us or a couple of other of our worthy competitors in this business, they'll be fine, because the underwriting is going to be fine, and the development is going to be very selective. But a lot of the quickie development that's happened during this last couple of years we think is going to go away.

Anthony Paolone - JPMorgan

Okay, and then on the expense side as you look out say 12 months, is there anything systemic that you think is going to continue to put pressure, such as whether it's energy costs or re-staffing or just anything out there in the market that you worry about more so than say six months ago?

Craig Cardwell

Not really. Even though the expenses still appear to be up a good bit and are in fact up a good bit, in the summer you have more air conditioning expenses. We are not going to have those in November and February and March. The bad debt expense on, if you look at the whole year basis and how we are running the portfolio, we think we are going to be fine there. It would be fair to say that on the payroll side, one of the things that we've seen in past times that are more economically challenged, you still have a certain amount of staff turnover, but you don't have the vacancy in those positions as long. People are more likely to cling to jobs or take a job as opposed to in kind of fatter economic times folks will wait or they'll push out or they'll try something new. So, what it means is we maybe don't have more or less turnover, but we have less position vacancy. And we expect that to probably go on through this kind of challenged economic time, so the payroll side will probably be pressured up a little bit in terms of total cost, not the rate of pay. On a full year basis, we're still looking to come in at around say 3.2% cost increase for the year, even though it's not trending that way right now.

Anthony Paolone - JPMorgan

Okay, and then, Randy, I think the press release mentioned some turn costs that got accelerated into the second quarter. Can you give us a sense as to what that was that we might not see in 3Q because you moved it into 2Q?

Randy Brown

Well, as I mentioned Tony, those costs were about $96,000 higher than what they had been previously or the second quarter of 2007. So, we are not anticipating our turn costs overall to be above what we had budgeted. We just, as you said, accelerated or incurred about $96,000 more in the second quarter than we would have incurred in the third quarter.

Anthony Paolone - JPMorgan

Okay, so that's the number. And then last question, can you comment on the development side when you are looking at on balance sheet developments, whether it's off campus or an on-campus equity deal, where your hurdle rates are penciling out at the moment and kind of what kind of going-in yields you'd like to get to?

Tom Trubiana

Sure, allow me to do that. In fact, I would say that our primary focus from an investment standpoint is indeed on the development business, and related to that, it'll lead this paradigm shift towards more and more schools looking to, if you would, partnering with companies like ours with an equity model. We are actively pursuing that with the number of schools at this point in time. Nothing to announce at this point in time, but it's clearly something that fits our niche with the success that we have had. It's just a different financing vehicle than what was traditional done with tax-exempt financing. And I'll come back to what kind of yields we would look for there.

And off-campus development, which obviously the next the Carbondale Phase I opens this fall, Phase II next fall. We currently have some five sites that are tied up, but they are under review, so it's not an announcement that they're all developments but potential developments for not 2009 but 2010. And because of the increased construction risk and lease-up risk, basically on off-campus developments, we're looking for a targeted first year project yield which we defined as net income after reserves divided by total development cost at, our target is 8% or greater with un-leveraged 10-year IRRs of 10% or greater. And so far to date, those that we've done, we've been able to achieve that.

I would suggest to you that if it's an on campus equity deal on a long-term ground lease, there's less lease-up risk, because it's on the university's campus and they support you. And so if need be, we'd probably be willing to move forward with something that was more in the 7.5% to 7.75% project yield on an on-campus equity deal. And then, of course, acquisitions themselves is a whole other arena, and we do indeed and are selectively looking at acquisitions that could be accretive to our shareholders. So, hope that answers the question.

Anthony Paolone - JPMorgan

Yeah, it does. Thank you.

Operator

Okay, thank you. And our next question comes from Nap Overton with Morgan Keegan. Go ahead, please. Mr. Overton, if you have your phone on mute, please take it off, please.

Nap Overton - Morgan Keegan

Can you hear me now?

Tom Trubiana

We can.

Paul Bower

Yes, we hear you, Nap.

Nap Overton - Morgan Keegan

Just a couple of things, on the 150-basis point expected decline in occupancy for the '08-'09 school year, that excludes the Place portfolio. Correct?

Tom Trubiana

Correct.

Nap Overton - Morgan Keegan

Okay, and then what would be the expense growth assumption in the second half of '08 for your revised guidance?

Randy Brown

Well, I think, as Craig mentioned, we are looking at about little over 3% for the total year, so Nap, just look at what has happened through the first half knowing that we're anticipating about a 3.2% overall growth

Nap Overton - Morgan Keegan

Okay.

Randy Brown

For the same store.

Nap Overton - Morgan Keegan

Okay, all right. And then so the Phase II at Saluki Point, that is a planned opening for the, prior to the '09-2010 school year. Is that correct?

Tom Trubiana

That is correct.

Nap Overton - Morgan Keegan

Okay, and would that be, in all likelihood at this point in time, the only on-balance sheet development project that would impact the 2009-2010 school year?

Tom Trubiana

It is conceivable that there might be one addition.

Nap Overton - Morgan Keegan

There could be still one additional, okay. And then I'm just curious about the outlook overall given what you're saying about what we're seeing about development overall in real estate and also in your segment. Is the outlook for the kind of joint venture development, third-party development fee income stream, kind of would you say that it's not looking as good over the next 18 months as it has over the past 18 months?

Tom Trubiana

No, I would suggest that it's very, very strong and greater. The question is, more and more schools are looking towards the equity model because of the positions that Moody's and Standard & Poor's have taken, but we're not seeing any reduction in the number of schools looking for, if you would, the tax-exempt model. So there is quite a pipeline of activity where we are pursuing RFPs, both for the equity model and also third party development fees.

Nap Overton - Morgan Keegan

Okay, so you're as optimistic or more optimistic about that development fee income stream as you have been?

Tom Trubiana

I am as optimistic or more so.

Nap Overton - Morgan Keegan

Okay, all right. And then any comments you have about capitalization rates for existing properties, recent transactions, or prospective transactions?

Tom Trubiana

I would just say that on the acquisition side, it's been our experience there may be a little bit of a disconnect between what buyers are willing to pay and what sellers are willing to sell for. There have been a number of assets that come to market that we have actually put offers on only to find out that none of the offers of any of the companies have been accepted. And so I mean that will eventually reach some kind of equilibrium, but there seems to be a little bit of a disconnect between sellers' expectations and buyers' willingness to pay.

Nap Overton - Morgan Keegan

Notwithstanding that, would you care to speculate about a prevailing market capitalization rate for student housing right now?

Tom Trubiana

My sense of it is top-tier assets in close locations; there has been very little movement in cap rate. Further out, tier-two, I would think that there is a slight upward increase. But for me to speculate, that's exactly what I would be doing at this point in time.

Nap Overton - Morgan Keegan

Okay, thanks.

Operator

Okay, thank you. And our next question comes from Alex Goldfarb with UBS. Go ahead, please.

Alex Goldfarb - UBS

Good morning.

Craig Cardwell

Good morning, Alex.

Alex Goldfarb - UBS

Just going to the increased equity deal activity. As you guys are getting more active in that arena, do you feel comfortable with your current capital base, your current equity base, to do those deals? Or do you think that you're going to have to raise more equity to provide a good base to do more of those on-campus equity development deals?

Randy Brown

This is Randy. As I mentioned in my opening remarks, I think our balance sheet and capital structure is such that we can accommodate any of our growth plans that we have in the near term both through the internal cash that we have, through the availability on our credit line, through the availability of the 13 unencumbered properties. So, we have the wherewithal to accommodate our growth plan.

Alex Goldfarb - UBS

So how much on equity deals could you guys fund with your existing capital structure before you'd have to go out and raise more equity? Could you do like $50 million, $100 million, $200 million?

Randy Brown

Alex, I really couldn’t comment on that. That would be way too premature for me to comment on that right now, because obviously we haven't announced any.

Alex Goldfarb - UBS

Okay, and then just switching to the expenses. When did these, like the payroll and the vacant positions, did this just happen in the second quarter, or did you notice a trend starting earlier than second quarter?

Craig Cardwell

Well, Alex, this is Craig. It started to trend a little bit that way in the first quarter, but you don't know if that's going to continue quarter-over-quarter. You just kind of observe over time that, whereas a year ago or two years ago we might have had a maintenance tech position that might be vacant for a month or six weeks or two months before you could get it filled with the right candidate. This year when the positions turned over, we have been able to fill it within a week or two weeks. So and I think that that goes to a time that when you have a more challenged economy, it seems that the positions do start to fill earlier or quicker or refill earlier. So, we can't say how long that's going to last. It all depends on what each of our employees decides to do with their lives and with their careers. We hope they stay with us and don't turn.

Alex Goldfarb - UBS

So as you guys are thinking about the upcoming year and the margins, are you expecting margins to stay at this elevated level? Or you think they'll trend back to where they were historically?

Randy Brown

When you refer to margins are you talking about the growth rate of our same-store expenses?

Alex Goldfarb - UBS

Well, I mean, if expenses are up more than revenues, then the margins have come down.

Randy Brown

Right.

Alex Goldfarb - UBS

As you go forward into the next school year, are you guys thinking that the margins are going to be narrower next year than they have been historically?

Randy Brown

No, I think what we are saying is that we incurred some unusually high operating expenses for the second quarter and even in the first quarter, and we don't envision that run rate to continue for the second half as much as it has for the second -- first half.

Alex Goldfarb - UBS

Okay, so you think -- so expenses will come down to get you back to where your margins were historically. Is that what you're saying?

Randy Brown

That's what we are saying.

Alex Goldfarb - UBS

Okay, thank you.

Operator

Okay, thank you. And our next question comes from Paula Poskon with Robert W. Baird & Company. Go ahead, please.

Paula Poskon - Robert W. Baird & Company

Thank you. To follow up tangentially to Karin Ford's earlier question, are you hearing anything from the universities about changes in the trends of applications and enrollments related to student loan financing or some other impacts?

Craig Cardwell

There's none. I mean, it's not to say that there is not an admissions officer that hasn't had a challenge here or there, but on any kind of global basis, there has been no change and no significant impact. And as a matter of fact, in many cases, enrollments would be up except that admissions officers that have been able to become somewhat more selective at a lot of the schools. That, frankly, pushes up those that are more economically enabled to attend a campus than before. So, we're not seeing that pressure at this time.

Paula Poskon - Robert W. Baird & Company

Okay, and what are you seeing in terms of your utilities expenses and insurance expenses, and are you able to pass through any increases that you may be seeing?

Craig Cardwell

Well, the way our leases are constructed for the students, there's a cap, and the cap is generally somewhere between $25 and $40 per bed. And any expense above that, particularly on the electric side, is passed through to the student when we get the bill, and then the student pays it, and we move on. And so any increases have been passed on to the students. Overall, year over year, our electric trend is up about 4.7%, which we think is pretty solid. That's not giant, and that's not what you hear in terms of the costs of crude oil and general utility costs. So, we think we are managing in that area extremely well.

Paula Poskon - Robert W. Baird & Company

And are you getting any pushback from tenants or any complaints?

Craig Cardwell

No.

Paula Poskon - Robert W. Baird & Company

Okay, and then on the insurance side, what are you seeing?

Paul Bower

We had a fairly nice reduction in insurance premiums this year. A lot of that is based on what happens with hurricanes and tornadoes and all of those sorts of things across the country. So, it's hard to predict next year, but we have no indication that there'll be any dramatic increase in insurance costs.

Paula Poskon - Robert W. Baird & Company

Okay, and then finally getting to the supply picture and your thoughts of the developers maybe cutting back given the credit crisis. Are you getting any inbound calls from developers that are starting to float a little bit? And how do you feel about your ability to take advantage of those opportunities should they come your way?

Tom Trubiana

We clearly are receiving calls from developers and folks that are looking for someone to partner with or if we would, figure out how to make their deal work, and we are selectively going through those to see where there may be opportunities to use our expertise to deliver value to the shareholders. But, yeah, we're definitely seeing that.

Paula Poskon - Robert W. Baird & Company

Would you say the pace is greater now than a year ago?

Tom Trubiana

Yes.

Paula Poskon - Robert W. Baird & Company

Okay. Thanks very much.

Craig Cardwell

Thank you.

Operator

Thank you, and our next question comes from Steve Swett with KBW. Go ahead, please.

Steve Swett - KBW

Hi, good morning.

Craig Cardwell

Good morning.

Steve Swett - KBW

Just a little bit more of a follow up on the operating environment. Anything in the traffic or the demand to suggest that potential residents are more interested in more economical beds, three or four-bedroom, as opposed to two-bedroom or anything that they are more price sensitive in that way?

Craig Cardwell

This is Craig. We haven't seen that thus far, and a lot of our communities we have one, two, three, and four bedrooms. And there is a market slice for each of those groups. I do think it's somewhat fair to say that while we are priced fairly aggressively in most of the markets, we're not priced at the very top in each market, and I think that's actually helped us leasing-wise this year, because we're priced a little under the peak that some others are at. And I think that's actually helped our leasing and reduced our likelihood of having to have concessions and extra marketing costs. So, we haven't seen any strain or stress from that.

Steve Swett - KBW

Okay, thanks. And, Randy, did you say what the rate was on the new Freddie debt?

Randy Brown

It's 5.99% interest only.

Steve Swett - KBW

And then last question. I'm not sure who said the comment that the Place portfolio was sort of slated to be restored to its potential by 2010, 2011. Is that where you would see it reaching the prior income that was achieved through the lease payment? Is that sort of the measure of when it returns to, I guess, its potential?

Paul Bower

Well, we would hope long term that it will exceed what we are receiving in rental income. This year is obviously sort of the turnaround year. We'd expect to probably get close to the rental revenue in 2009-2010 and beyond in 2010-2011.

Steve Swett - KBW

Okay, thanks.

Operator

Thank you. And we have a follow up question from Michael Bilerman. Go ahead, please.

David Tody - Citigroup

Hi, it's David Tody again, here with Michael. Just a couple of questions around the Fannie and Freddie financing. Are you still comfortable with the rates that you've mentioned in the past around 5%, 5.7%?

Randy Brown

I'm sorry, David. You dropped off there at the end. What did you say?

David Tody - Citigroup

Are you still comfortable with the rates that you've quoted in the past around 5.7%?

Randy Brown

Well, I think that's been the rate that maybe we've had on some historical debt. I think the current rate that we've got of 5.99% is probably indicative of where we are today. Now, where that rate's going to be 12 months from now when the actual refinancing happens is anyone's guess.

David Tody - Citigroup

Yes. Are you still comfortable with 10-year LOCs?

Randy Brown

Ten-year LOCs you mean ten-year --

David Tody - Citigroup

Ten-year term.

Randy Brown

-- maturity?

Randy Brown

When we go about restructuring that debt that comes due in July, we're going to structure it such that we have it staggered and have the maturity staggered rather than having it all hit at one time. So I would assume that some of that debt will be five years, some would be seven, some would be ten, some may even be paid off.

David Tody - Citigroup

Okay, and then just one last question. Have you seen any changes to their underwriting expectations in the past six months or so?

Randy Brown

No, I haven't. The spreads are obviously different. As I said, they're still offering attractive terms to those borrowers that are fairly low leveraged. The underwriting terms may be different for say someone that wants an 80% loan, which we don't obviously want. But based on the criteria that we saw when we just closed on the latest Freddie Mac loan, I don't see anything that appeared unusual or out of market per se.

David Tody - Citigroup

Okay, and then I thought that was my last question, but actually I have one more. You mentioned that your assets generally fit their financing criteria. Could you assign a percentage just on a general basis of what percentage of your portfolio would fit their criteria?

Randy Brown

Would fit?

David Tody - Citigroup

Would fit.

Randy Brown

Oh, I would say, yes, nearly 100%. There may be one or two properties that for whatever odd and reason would not fit within those established guidelines.

David Tody - Citigroup

Okay, great.

Randy Brown

But I would think for the most part that essentially all of them would.

David Tody - Citigroup

Great. Thank you very much.

Randy Brown

Okay.

Operator

Okay, thank you, and our next question comes from Alan Calderon with European Investors Incorporated. Go ahead, please.

Alan Calderon - European Investors Incorporated

How are you doing, guys? A quick question, are you seeing any correlation between distance from campus and traffic with demand on preleasing?

Craig Cardwell

None.

Alan Calderon - European Investors Incorporated

You're seeing no correlation. Okay, thank you for your time.

Paul Bower

Thank you.

Operator

Okay, thank you, and that concludes our question-and-answer session for the conference. And I'd like to turn it back over to management for any closing statements.

Paul Bower

Well, thank you again for your participation here today. If additional questions come up, don't hesitate to give us a call. We look forward to communicating with you again in the near future, and have a great day.

Operator

Ladies and gentlemen, this concludes the Education Realty Trust second quarter conference call. If you'd like to listen to a replay of today's' conference, please dial 800-405-2236 or 303-590-3000 with the pass code 11116547. ACT would like to thank you for your participation, and you may now disconnect.

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