EDR Education Realty Trust Inc's CEO Discusses Q2 2013 Results - Earnings Call Transcript

| About: EdR (EDR)

Education Realty Trust Inc (NYSE:EDR)

Q2 2013 Earnings Conference Call

July 29, 2013 / 10:00 a.m. ET

Executives

Brad Cohen – IR, ICR, LLC

Randy Churchey – President and CEO

Chris Richards – SVP of Property Operations

Tom Trubiana – SVP and Chief Investment Officer

Randy Brown – EVP, CFO, Treasurer and Secretary

Analyst

Jana Galan – Merrill Lynch

Alexander Goldfarb – Sandler O'Neill & Partners

Karin Ford – KeyBanc Capital Markets

Paula Poskon – Robert W. Baird

Ryan Meliker – MLV & Co.

Dave Bragg – Green Street Advisors

Operator

Greetings and welcome to the EdR Incorporated second-quarter 2013 earnings conference call.

At this time, all participants are in a listen-only mode. A brief 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, Mr. Cohen. 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's 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 2013 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 2013 leasing. Tom Trubiana, our Chief Investment Officer, will discuss acquisition and development activity. And Randy Brown, our Chief Financial Officer, will review the quarter's performance.

Overall, we've made nice progress on many of our initiatives during the first half of the year. Fall 2013 pre-leasing has remained strong. And if we are able to maintain our current pacing, we will produce same-community revenue growth of 3% to 5%.

Additionally, 2013 NOI, being delivered by our non-same-store communities from 2012 and 2013 developments and our previous year acquisitions, in the aggregate, are achieving their expected underwriting yields.

Our external growth initiatives continue to produce new opportunities. In addition to the $192 million of developments that are opening this month and next, we will announce $258 million of 2014 developments, $101 million of 2015 developments, and $100 million of pre-sale and option opportunities, for an aggregate of $651 million in new assets.

These new assets, representing a 41% growth in our portfolio, will continue to improve our portfolio metrics with higher revenue per bed, higher profit margins, and communities being located closer to their respective campuses.

In addition to these signed deals, we continue to work on a variety of other exciting development and acquisition opportunities that will also drive value.

For EdR, the most exciting external growth opportunity is on campus developments under our On-Campus Equity or ONE Plan. By the end of 2014, our portfolio will include $340 million of these on-campus assets or about 20% of our current portfolio on a gross asset basis, with more to come.

We believe this segment of investing will continue to expand as more universities understand the benefits of these successful partnerships.

Most state universities face many of the same challenges, such as reduced support from constrained state budgets, older on-campus housing, and demands on institutional funds for academic and support services initiatives.

These external factors provide great prospects for companies, such as ours, and we are well-positioned to take advantage of 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 university mandates, is very limited. These EdR strengths, which are impediments to most student housing providers, currently provide a strong barrier to entry in this market.

Overall, our outlook for the student housing industry remains quite positive. And we believe that our pre-leasing velocity and rate growth for this fall, which has been strong and steady, supports this opinion.

As I mentioned on the first quarter earnings call, increases in new supply seems to be matching projected increases in new demand for 2014, which bodes well for next year's leasing cycle. It is too early to forecast 2015 new supply but, so far, we think macro supply in 2015 will approximate 2014 levels, which we believe is manageable.

The opportunities for EdR to create shareholder value from both internal and external growth opportunities are outstanding. We have the team, along with the financial capacity, to seize upon these opportunities to continue growing the Company in the years to come.

Now, Chris will discuss property operations.

Chris Richards

Thank you, Randy. This quarter we continued our focused and strategic leasing programs for this fall, and our same-store portfolio is 180 basis points ahead of the prior year with 86.6% of our beds leased for the fall. Our tier 1 communities, which were the assets that achieved less than 95% last year, are trending 5.3% ahead of prior year. We have strengthened the occupancy of these assets, while maintaining a nominal rate increase by utilizing leasing information from our PILOT system, our proprietary management information system.

The significant pre-leasing gain on the two assets in tier 2, those which achieved 95% to 97.9% last year, has narrowed significantly since our last update.

Although, these communities reached a combined 96% occupancy last year, they got off to a slow start. This created a large year-over-year leasing gain early in this leasing cycle. We've previously communicated this gap would normalize, and combined we anticipate the two communities to open 3% to 4% higher than the prior year.

Due to the significant early gain in the leasing of the tier 2 assets, we believe that looking at tier 2 on its own and focusing on tier 1 and tier 3 combined, provides a more accurate picture of our leasing results.

If you refer to page nine of the financial supplement, you will see that the combined results of these two tiers have improved over our last two leasing updates.

At the end of April, when we released our first-quarter earnings, these tiers were 110 basis points ahead in occupancy. At the beginning of June, when we released pre-leasing results prior to NAREIT, they were 100 basis points ahead. And now, they are 120 basis points ahead in occupancy; an improvement of 20 basis points.

Based on our current leasing status and trends, our same-community rates are projected to increase 2% over the prior year. In the first quarter, we acknowledged competitive pressures in the form of rate decreases and specials in select markets.

And while those pressures persisted in the second quarter, our PILOT system provided accurate and timely information that helped us navigate through those tougher markets and maintain our leasing velocity with only a nominal 20 basis point decline in our projected rate growth. In summary, we are confident we will produce same community revenue growth of 3% to 5%.

Turning to our new communities, in the aggregate, these communities will achieve our underwriting expectations, and we are pleased with the results these assets have achieved to date.

Grand opening celebrations are being held at our 2013 development deliveries and the buildings are ready for the students to move in. We are excited that our inaugural building at the University of Kentucky will welcome 601 Wildcats to their new home on August 21.

With move-in in the next few weeks, the labor-intensive turn period is now upon us, and I know the EdR teams in the field will once again be preparing first-rate rooms for our 2013-2014 residents. We look forward to a strong finish to this leasing season over the next 45 days that will position us for a solid opening for the 2013-2014 lease terms.

I will now pass the call to Tom.

Tom Trubiana

Thank you, Chris. EdR's investment focus is on receiving the highest risk-adjusted returns, where we have the greatest potential for success. Today, we believe those opportunities are for on-campus developments under our On-Campus Equity program, or ONE Plan.

The level of interest in The ONE Plan continues to increase. We believe that EdR is uniquely positioned to capture a significant portion of this market because of our past successful track record with public/private partnerships, our financial strength, knowledge of res life, and positive references from university partners.

Last week, we announced the addition of Julie Skolnicki to the EdR senior management team, as Senior Vice President of University Partnerships.

Julie's addition to our development team will greatly enhance our ability to grow this important segment of our business, as we leverage her expertise, in student housing planning, design, and team management.

As for recent investment activity, EdR recently notified Landmark that we will be exercising our option to purchase the retreat at the State College for $56.2 million. This is a 138-unit, 587-bed cottage community located approximately 1 mile from Penn State University.

Last summer, EdR funded a $3 million mezz loan that earns 10% interest on this project. Our agreement with Landmark provided us with the option to purchase the property upon completion and successful lease-up.

Closing of this acquisition is scheduled for the end of the third quarter. The forecasted first-year unlevered economic yield on this investment is 6.25%.

The pre-sale agreement for the purchase of the 542-bed property at Florida International for $43.5 million is now well under construction for a summer 2014 opening. The purchase price of this acquisition is set with closing-only subject to on-time completion of the project. EdR has structured this deal where we are taking lease-up risk. And, therefore, the purchase price was set to provide an anticipated first-year economic yield in the mid-7% range, which is much more in keeping with first year development yields.

We are currently in various stages of underwriting several acquisitions that meet our stringent criteria. While our pipeline of acquisition opportunity is quite robust, we intend to stay disciplined.

As for development activity, I'd like to refer you to page 11 of our supplemental. All five 2013 deliveries, totaling $192 million of EdR development investment, which includes the two on-campus projects at UT Austin and the University of Kentucky, plus three off-campus projects at UConn, Ole Miss, and Arizona State downtown Phoenix, all were delivered on schedule. The Texas, Kentucky, Yukon, and Ole Miss projects will all open at 100% occupancy.

As previously discussed, leasing of the ASU downtown property has underperformed our first year expectations. But we remain confident that the property will be a long-term success. The eight 2014 development deliveries, totaling $258 million of investment, are also progressing very well for their summer 2014 opening.

All contracts and agreements for the 2015 delivery of Woodland Glens III, IV, and V at the University of Kentucky have been executed. Construction of this 1610-bed freshman live-learn community will commence later this fall.

We were awarded the University of Kentucky partnership in December 2011. Just 19 months later, we are under development on a total of over 4592 beds of primarily replacement housing. Our development team is now working in earnest with the UK staff on replacement housing on their north campus for a potential 2016 opening.

As for third-party developments, please refer to page 12 of the supplemental.

The projects at Mansfield, Westchester, and Wichita State are all under construction at this time. The East Stroudsburg project is on hold temporarily, pending a decision on taxation, and the Clarion project is scheduled to be under construction in the first quarter of 2014.

In closing, we want to reiterate that our pipeline of investment opportunities remains robust for future acquisitions and developments, both on and off campus.

With that update, allow me to turn our call over to our CFO, Randy Brown.

Randy Brown

Thank you, Tom, and good morning, everyone. As reported this morning, EdR's core FFO for the second quarter of 2013 was $14.5 million, a 25% increase over last year's $11.6 million. Core FFO per share was $0.13, an increase of 8% over the comparable period last year.

Total community revenue increased to $38.3 million for the quarter or 31% over the second quarter of 2012 and consistent with first quarter 2013 run rate.

Year-to-date total community revenue was $78.7 million compared to $60 million for the same period last year.

The total portfolio contributed $20 million in NOI for the second quarter, a 28% increase over 2012, and year to date NOI was also up 28% to $42.3 million versus $33.2 million last year. The growth in both total community revenue and NOI is a result of the financial impact of our six new acquisitions and three new development communities placed in service since the fall of last year.

On a same-community basis, second-quarter revenue was $28.4 million and essentially flat to 2012. Net operating income was $15.1 million compared to $15.6 million, a decline of 3% from the prior year. The reduction in NOI was primarily caused by a 2.6% increase in operating expenses over last year.

The expense increases were in line with our budgeted expectations and we continue to project an annual growth of same-community expenses in the range of 2.5% and – to 3.5%. From a capital structure perspective, EdR's balance sheet is solid and well positioned to take advantage of growth opportunities.

For the trailing 12 months, as of June 30, our interest coverage ratio was 4.6 times, And net debt to adjusted EBITDA was 7.2 times. EdR's debt to gross assets was 34% and net debt to enterprise value was a mere 31%.

With the exception of net debt to adjusted EBITDA, which is somewhat skewed by construction debt related to assets not yet opened, these metrics continued to run at historic lows for the Company.

We have nearly $265 million of borrowing capacity left on our low-cost $375 million credit facility and we have the ability to increase the facility by an additional $125 million via an accordion feature, which would give us nearly $400 million of capacity to support our accretive growth.

At current leverage levels, our facility has a low 145 basis point spread over LIBOR, and including the available extension option, doesn't mature for nearly 4.5 years.

In addition to our facility, EdR's unencumbered community gross asset value is nearly $650 million, or approximately 49% of our total owned community portfolio.

So combined with our low leverage balance sheet, EdR continues to have a great deal of financial flexibility to support our ongoing growth initiatives over the next several years, and provides us with the confidence to accretively grow EdR while maintaining debt metrics at or below current multifamily sector averages.

Now turning to 2013 guidance, based on our current expectations of market conditions and operating results, we reaffirm our expected full-year 2013 core FFO per-share range of $0.53 to $0.57, which represents a 17% increase over last year's core FFO per share at the midpoint of the range. And, although our guidance does not include any unannounced acquisitions, dispositions, or capital transactions, it does include approximately $0.01 of reduced FFO from the sale of our MTSU property, a 1% pick up in FFO from the anticipated fall acquisition of the Retreat at Penn State, and a slight negative impact to FFO from year to date ATM sales.

Now, with this overview, Operator, please open up the line for questions.

Question-and-Answer Session

Operator

Okay. We will now have the question-and-answer session. (Operator Instructions). One moment please while we pull for questions.

Thank you. Our first question is from the line of Jana Galan of Bank of America. Please, proceed with your question.

Jana Galan – Bank of America

Thank you. Good morning. I was curious, are you noticing any slowdown in leasing or rent growth in university markets where you have overlap with ACC, given their greater marketing and lower rates in the last month?

Chris Richards

We have had some – this is Chris, Jana. I'm sorry.

In some of the market that we compete with ACC, obviously, we have noticed the rate reduction trends. And in those markets with the PILOT system, it instructs us, essentially, to reduce our rents as well; that's what we have done.

In other markets, where we compete with them, but our leasing velocity is going fine and our rates seem to be in line; we're not reducing our rents.

Jana Galan – Bank of America

Thank you, Chris. And then, maybe just a follow up, again, on those communities. With prior year occupancies over 98% and above, those seem to kind of be lagging in momentum than most? I just was wondering if there were unique situations or new supply in those markets.

Chris Richards

I have some markets with some new supply. I have a couple of markets that I think may not actually get back up to 98% this year.

But in total, my applications are very healthy. I have had some great rate growth in those markets and I feel confident that that tier will do fine.

Jana Galan – Bank of America

Thanks, Chris.

Operator

Thank you. Our next question is from the line of Alexander Goldfarb with Sandler O'Neill. Please, proceed with your question.

Mr. O' Neill, I'm sorry. Alexander Goldfarb, your line is open for a question.

And your next question is coming from the line of Karin Ford with KeyBanc Capital Markets. Please, proceed with your question.

Karin Ford – KeyBanc Capital Markets

Hi. Good morning. I wanted to ask about the expense side of the equation. I know you are up a little over 4% year to date on the same store, and you reaffirmed your year-to-date guidance of 2.5% to 3.5% growth for the year.

Just talk about how you think you'll get back into the range, given the year to date growth, and whether you're planning to continue the increased marketing spending that you guys have been doing a little bit this year into the leasing for next year.

Randy Brown

Hi, Karen. This is Randy Brown. First of all, let me go back to my earlier remarks.

I think I incorrectly said that our contribution from the purchase of the retreat at Penn State was going to contribute an additional 1% increase in FFO. That should be $0.01 in FFO. So, let me get that out of the way first.

Your question about operating expense growth – you know, we have been pretty active in managing the bottom line, as it relates to expense growth. But as we saw last quarter and this quarter, we've got two line items that we do have some pickup in.

One is the marketing expense side of things. We budgeted for those marketing expenses, as we mentioned last quarter, and we continue to see benefits from spending those marketing dollars, and then, also, in the real estate tax area, that is up as well.

We do believe that we're going to be able to – once we get through the pre-leasing side of things, pullback on the marketing spent side of things. And Chris has probably got a little more detail on that.

On the real estate tax side of things, of course, we always know that they are lumpy; they always will be because we don't get our tax bills until the third and fourth quarter and we're aggressively reviewing those and, in some cases, contesting those. So, even though we are running a bit ahead of where we were last year, we anticipate there being some pullback in that.

So when you add all that together, and then you add all the other really well-managed other line items in the operating expense section of the same-store P&L, we feel very comfortable that we're going to hit the 2.5% to 3.5% guidance range that we provided.

Chris, do you have some details on the marketing?

Chris Richards

Hey, Karin. I will add a little bit to marketing expense.

Over the last two leasing cycles, our average marketing expense has been right at $100 a bed. I don't foresee any – anything to make that change at the end of this year, so it looks like we'll be at $100 a bed for the last two years. We just kind of have moved some of the marketing dollars around in different quarters to make the most impact on our sales.

Karin Ford – KeyBanc Capital Markets

That's helpful. Thank you.

Next question, just on the change in rent growth. You know through the majority of the leasing season, you guys have held it to 2.2%, did anything change to make you decide to lower the average rent down 20 basis points? Did anything change in the environment that you saw, or was at the competition, or was it just simply your revenue management system telling you to keep the occupancy you needed to just give back a little bit?

Chris Richards

So, Karin, the – what the – what our occupancy – or revenue occupancy and occupancy system tells us is, when there's a move in the market by any of our competitors, it tells us that we need to make a move as well, if that is deemed necessary. And so, with the movement by our competitors in some of our markets, it created some movement necessary for us as well. So, really moving that 20 basis points was a reaction to what was happening in the market to maintain our leasing velocity.

Randy Churchey

Yes, let's please realize, since the first quarter earnings release in April, our tier 1 and tier 3 occupancy has been remarkably – or pre-leasing occupancy has been remarkably the same, right – up 1.1%, up 1% at NAREIT.

Now, up 1.2%. And, similarly, our rate – you know we said it was a 2.2% increase in rate back in April and now we are at 2.0%.

So – while I'll say technically it was a 20 basis points reduction. But, let's be clear. Our numbers have been remarkably steady the entire year.

Karin Ford – KeyBanc Capital Markets

I appreciate the color. My last question is just on acquisitions and investments. I heard your comments about remaining disciplined. It sounds like there is going to be a lot of product coming to the market in the coming months.

Can you just talk about does that discipline include a change in your required returns on investment, given recent increases in your cost of capital?

Tom Trubiana

Actually, that's what I am referring to – when I talk about discipline. There have been a few what I'll call "outliers" on the acquisition side, where property has been purchased in the mid-5%s. It would have to be a very unique situation with a lot of upside to see EdR purchasing assets in the mid-5%s.

So generally speaking, on the acquisition side, indeed we are looking at tier one institutions, true pedestrian to campus, and all of our acquisitions have been at essentially 6% or slightly above. And the name of the game is accretion to shareholder value.

And so, while we are not going to chase deals that lower cap rates for, is really what I'm referring to. And with interest rates starting to rise, if things run in cycles, you would expect cap rates in the future to increase slightly also.

Karin Ford – KeyBanc Capital Markets

So, am I hearing your correctly, it's roughly 50 to 75 basis point move up in required yield in the last three to six months?

Tom Trubiana

No, not at all. We've consistently said that acquisitions at tier one institutions, pedestrian to campus, and high 5%s or low 6%s.

Karin Ford – KeyBanc Capital Markets

Okay.

Tom Trubiana

And we believe that still should be the case.

Karin Ford – KeyBanc Capital Markets

Okay. Thank you.

Tom Trubiana

You're welcome.

Operator

Our next question comes from the line of Paula Poskon of Robert W. Baird. Please, proceed with your question.

Paula Poskon – Robert W. Baird

Thank you. Good morning, everyone.

Chris Richards

Hi.

Paula Poskon – Robert W. Baird

Chris, what would – let me back up. Can you talk a little bit about the market dynamics at UC Riverside and Berkeley? And what would be average rate increase have been were it not for the double-digit rate cuts at those properties?

Chris Richards

At UC Berkeley – UC Berkeley, we had priced ourselves last year above campus and we are essentially a freshman building, where we have double occupancy, twin beds, shared situations. And pricing ourselves above campus, while essentially offering the same product, although our location is actually a block closer to campus than the University's housing; really put us at a disadvantage this year. So we made adjustments to overcome that.

UC Riverside entire market has been very weak there. And last year, in particular, it hit all of us, myself and our competitors, obviously, with a very low occupancy.

So, we came in early this year, reduced the rates to what we felt we needed to be at in order to get a good base in this asset, and it has worked.

Now, unfortunately, for me, I can't pick and choose what assets I have. They are all in my communities.

But if I were to remove those two UC properties, it would be about 1.5% in occupancy or rates, excuse me.

Paula Poskon – Robert W. Baird

Great. Okay.

Chris Richards

Right.

Paula Poskon – Robert W. Baird

Thanks. And then, what is going on at Notre Dame?

Chris Richards

Notre Dame is – you know, we acquired that asset in the last couple of years. And it is probably the – it is the anomaly in leasing cycles of all the communities that I operate. It is actually a two-year out leasing cycle, which we were not aware of.

And, therefore, we kind of missed the early leasers, which means, to date, right now, Paula, I am 26% leased for the 2014-2015 school year. Those students will live on campus for a couple of years and then they will come in to lease for the year after next to make sure they secure their spot.

So, I missed that early leasing piece, not clearly understanding the dynamics of that market. Couple that with an additional 700 beds that have come into the market in student housing, and I have taken a hit.

Paula Poskon – Robert W. Baird

Okay. And, I'm sorry, Chris, could you just repeat what you said, that you're already leasing that asset for the next academic year at what level?

Chris Richards

Yes, 26% for...

Paula Poskon – Robert W. Baird

26.

Chris Richards

Yes. For 2014-2015.

Paula Poskon – Robert W. Baird

Okay. Thank you...

(CROSSTALKING)

Chris Richards

Two years ago, I'd be where I needed to be today; just clearly didn't understand the cycle.

Paula Poskon – Robert W. Baird

Okay. Thanks very much.

Chris Richards

Welcome.

Operator

Thank you. (Operator Instructions). The next question comes from the line of Alexander Goldfarb with Sandler O'Neill. Please, proceed with your question.

Alexander Goldfarb – Sandler O'Neill & Partners

Good morning. Hopefully, this is working this time.

(CROSSTALKING)

Chris Richards

Good morning.

Alexander Goldfarb – Sandler O'Neill & Partners

Hey. How are you? I figured maybe I got flunked in the question...

(LAUGHTER)

Randy Churchey

We're not picking on you, Alex; I promise.

Alexander Goldfarb – Sandler O'Neill & Partners

No, (inaudible), you wouldn't be the first ones to flunk me either.

(LAUGHTER)

Alexander Goldfarb – Sandler O'Neill & Partners

Just a few quick questions here.

Christine, maybe you mentioned it earlier – will the ASU shortfall in the pre-leasing, just some more color on that.

Chris Richards

Yes. You know, we have said all along that that particular asset may be a year or two early.

In 2014, the law school is actually moving downtown right near our location, and the biomedical campus has a great master plan that will continue to grow over the next couple of years. So, we are in the right place – it's the right asset in the right place. We just might be a year or so early.

Now, we have partnered – there is an additional law school downtown called the Phoenix School of Law, and we partnered with them to provide exclusive housing for their students. And, at this point, I am sold out of all my three and four bedroom units, which is very positive for me because that leaves studios, ones, and twos, and we are also serving about that family population downtown.

And so, we will continue to lease throughout the third quarter and the fourth quarter and on. I have the right product kind of left for the multifamily market. And then, next year I foresee a significant increase or improvement.

Alexander Goldfarb – Sandler O'Neill & Partners

Okay. And then, Mr. Brown, on the rent side, when you guys do gift cards, is that counted as a reduction in rent or is that counted in marketing expense?

Randy Brown

No, Alex. It is counted for as a reduction in rent re-amortized over the lease term.

Alexander Goldfarb – Sandler O'Neill & Partners

Okay. Okay. Okay. That's good. And then a final question is also for you.

As you guys have your upcoming deliveries for developments both this year and next, it seems like you would be in a good spot to go down the unsecured route as far as you are going to have – you know, the spend for those is slow, so you can use a line of credit but then you're going to be getting NOI that then you can use to support unsecured debt. Presumably, it's going to be more private placement than index eligible, just given the size. Is that something that we should expect over the next two years as you guys have this NOI that delivers, that we should start seeing commensurate unsecured debt issued against it?

Randy Brown

Well, Alex, you know, our line is unsecured. So, we have unsecured debt right now but I think you are talking about incrementally but...

Alexander Goldfarb – Sandler O'Neill & Partners

That's what I was referring – right.

(CROSSTALKING)

Randy Brown

Yes.

Alexander Goldfarb – Sandler O'Neill & Partners

Right. So, you recharged – so, you bring the line down to zero and you put it long-term and that way you can use the line to fund more development.

Randy Brown

Yes, that's certainly an option and one of the options of the capital stack. Because as I mentioned earlier in my remarks, we have nearly $400 million of availability under our revolver still. So, we still have capacity there and then we've got plenty of unencumbered NOI from our asset pool.

So, we have plenty of capacity to fund all our announced acquisitions and still keep our debt metrics well in line of what the multifamily REITs are right now. And if you were just to assume that we do go the unsecured route that you mentioned, and we use debt to fund all the remaining $328 million of development that we have on our page 11 of our supplemental, and the $100 million of presale acquisitions listed there to, our total debt to gross assets at the end of this year would only be 39% and only be in the mid 40%'s through 2014 and 2015. And then, of course, our interest coverage ratios would be at 3.3 times or better, too.

So, to your point, we definitely have the ability to look at that. We talked over the past couple of quarters about looking at investment grade, and that is certainly an option down the road in our capital stack structure as well. So we'll see.

Alexander Goldfarb – Sandler O'Neill & Partners

Okay. Yes, it just seems like you have plenty of NOI that would support – good quality NOI that would support unsecured...

(CROSSTALKING)

Randy Brown

You're absolutely correct that...

(CROSSTALKING)

Alexander Goldfarb – Sandler O'Neill & Partners

Yes. In that way, it obviously precludes the need to go to the equity markets. You can become more sustainable, especially if it sounds like you are doing a little bit less on the acquisition front and you are focusing m ore on the development front.

Randy Brown

I think you're absolutely correct, Alex.

Alexander Goldfarb – Sandler O'Neill & Partners

Okay. Thank you.

Randy Brown

Thank you.

Operator

Our next question comes from Ryan Meliker of MLV. Please, proceed with your question.

Ryan Meliker – MLV & Co.

Hey. Good morning, guys. Just two quick ones; I was hoping you might be able to answer for me. I'm sorry if I missed either one of these already on the call.

But first of all, could you give us some color on what you believe the cap rate is going to be or how you valued the Retreat at Penn State?

And then second was, it looked like Phase II at Storrs went up by about $2.6 million in development costs. If I recall correctly, that had been prefunded prior, so I am wondering what the change was and if you are seeing any trends towards rising development costs across the states. Thanks.

Tom Trubiana

Yes, Ryan. This is Tom. For the first question related to the Retreat, we had an option price subject to the delivery on time and based on achieving a particular income level. The project will be completed on time and, indeed, the income level that we had targeted has been obtained.

So, we are purchasing that asset for – the total was $56.2 million and that's basically based on an economic first year yield of 6.25%...

Ryan Meliker – MLV & Co.

Great. That's helpful.

(CROSSTALKING)

Tom Trubiana

I'm sorry?

Ryan Meliker – MLV & Co.

Okay. That's helpful. Thank you.

Tom Trubiana

Yes. And the second question, related to our project at UConn, this is the second phase – the Oaks on the Square. And after we were under development and funding the second phase, we learned that the greatest amount of demand was for studio units.

And so, we incurred additional cost. The vast majority of that $2.5 million, $2.6 million increase was by converting two-bedroom units to studios, the additional furnishings, the additional construction costs.

But, indeed, we were correct in doing that because the added revenue that we were able to see still puts that project to where we have economic yield – actually, in this case, approaching 8%. So, it made a lot of sense to do that.

Ryan Meliker – MLV & Co.

Sure. That makes sense. And then, across the board, obviously, it sounds like there were good ranges reasons for the change to the rising development costs in stores. But are you seeing trends where costs are going up materially more than you've been expecting?

Tom Trubiana

Yes. Definitely construction costs are going up. Some of the things we read and see is maybe as much as 5% to 6% per year.

But that's not impacting the developments that you see before you on page 11 because all of those have signed contracts with GMPs with contractors. But indeed, there is upward pressure on future development...

Ryan Meliker – MLV & Co.

Great.

(CROSSTALKING)

Tom Trubiana

As far as pricing.

Ryan Meliker – MLV & Co.

Well, thanks. That's really helpful.

Tom Trubiana

You're welcome.

Operator

Our next question comes from the line of Dave Bragg of Green Street Advisors. Please, proceed with your question.

Dave Bragg – Green Street Advisors

Yes. Good morning.

Can you please walk us through your thought process on the sale at Middle Tennessee State and provide the cap rate on that deal?

Tom Trubiana

Sure. I think, as you're aware, we have – this is Tom – repositioned our assets to get closer to campus, newer age product. And with each and every asset, there are reasons that sellers sell and buyers buy, and it's their view of the future.

And so, we felt as though the college growth property, as we look down the road, and the dynamics in that market on a going forward basis, that it was prudent for us to get out of that marketplace.

And, based on 2013 actual/forecast, the purchase price really equates to basically an economic cap rate in the mid 7%s.

Dave Bragg – Green Street Advisors

All right. That's helpful. Thank you. And just back to this topic of construction costs, one other project that seems to have seen a significant increase was Wichita State in the third party development page. Can you talk about that deal?

Tom Trubiana

Yes. Part of that – early on, the University was going to undertake many of the infrastructure costs themselves. And then, subsequently, they decided that they would instead rather have it be a project cost and funded as general obligation bonds of the University. And so, essentially that's the primary difference there.

Once again, in that particular case, we are just a third-party provider. But that's the primary reason for the increase in cost at Wichita State.

Dave Bragg – Green Street Advisors

Okay. Understood. Thank you.

Tom Trubiana

You're welcome.

Operator

Our next question – our next question is from the line of Paula Poskon with Robert W. Baird. Please, proceed with your question.

Paula Poskon – Robert W. Baird

Thanks. So, Christine, we're getting, in the last weeks of the leasing cycle here, what are you most concerned about as we go to the end of the leasing cycle?

Chris Richards

You know, I am always concerned. I mean, I'm concerned every day in our business.

But last year, we said it a million times – we were too aggressive in pushing rents, even though we got a little over 5% rate growth last year. But we have stayed tried and true to our PILOT system, adhered to the recommendations, and the current year results have been solid. And I feel really confident that things are going to go our way.

So am I worried? Always, every day, about everything that happens.

But am I confident we are going to get there? Absolutely.

Paula Poskon – Robert W. Baird

Thanks, Christine. And, Mr. Churchey, I just wanted to follow-up on your comments about longer-term supply and demand trends that the 2014-2015 year is looking good, just as new supply is pretty much matching demand increases. In what markets do you feel best and worst about for next year in terms of new supply?

Randy Churchey

You know, Paula, I haven't really focused on individual markets recently, from a new supply standpoint. I know that Florida State has a lot of new supply this year and next. Georgia Southern is this year with some next year. UCF in Orlando has new supply issues next year.

You know, what is strange and – well, I guess it's not strange. What's interesting is, macro economically, we feel fine with new supply in 2014 and 2015. But there are individual markets that are having problems like the three I just mentioned. But vastly, for the vast apart part of our portfolio, new supply is okay.

And that's what leads us to conclude that next year's leasing cycle should be pretty good.

Paula Poskon – Robert W. Baird

Thanks. And how – are you seeing any increase of inbound inquiries or RFPs being put out or even RFIs, regarding your ONE Plan product and just public/private partnerships in general – the temperature of universities these days?

Randy Churchey

It's growing more every day. I continue to say on each and every earnings call that the activity is higher than it was in previous quarter, and that continues to be.

You have not seen a whole lot of announcements yet by the competitors in this arena. It just takes the universities a great deal of time to work it through their pipeline.

But the more times that we can point to Syracuses and Texases and the Kentuckys of the world, to university partners – and they are able to call their peers at those universities to find out how it's working, the easier and easier it is for us to make inroads. So, the activity is as high as ever, and one reason why we have hired Julie to help us in those efforts.

Paula Poskon – Robert W. Baird

Thanks. And just one final question. How are you thinking about the third-party development and management business these days? Are you thinking more of trying to focus with universities or in markets that you would ultimately want to be in? Or is it you are still strictly kind of thinking about it as a fee-for-service and you're done?

Randy Churchey

Yes. Tom will expand on this a little bit.

But typically the first cut that we make on deciding upon these third-party deals is can it possibly turn into a ONE Plan deal and/or can it possibly increase our resume, if you will, when we are trying to pitch additional ONE Plan deals.

That's the first gate. Tom?

Tom Trubiana

Yes. And you know most of the RFPs – we're actually seeing RFPs and RFQs, where they are solely interested in the Equity Plan.

So that is happening. It's just, as Randy said, it takes time. But there is probably at least 50% of them where the University is saying, "Look. Help us figure out what is in our own best interest." And so, and probably 40%, 50% of the RFPs were actually running alternatives and it could be tax exempt."

So, I mean, Wichita State is one that I would point to. We proposed and showed the pros and cons of tax exempt versus The ONE Plan, because, in that particular case, the school felt like it had adequate debt capacity. They weren't concerned about their bond rating.

They chose to go ahead and have that project be actually – it's going to be bonds that will be general revenue bonds of the University because it gave them the lowest cost of capital.

So, each and every transaction is different. No one size fits all universities, but clearly there is a growth in interest in the equity plans.

Thanks very much for the additional color. That's all I have.

Operator

Thank you. At this time, we have reached the end of our question-and-answer session for today's conference. I'll now turn the floor back to management for closing comments.

Randy Churchey

Well, thank you for your time and interest. And I'd like to reiterate, we've had a solid and steady pre-leasing throughout the year and we expect it to continue; a lot of hard work ahead, both turn and final leasing, and I know our team is up for the task. Thank you for your time.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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