EDR
#Greetings and welcome to the EdR fourth quarter 2015 earnings conference call.
(Operator Instructions) As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, <UNK> <UNK>, Senior Vice President of Capital Markets and Investor Relations.
Thank you, sir.
You may begin.
Thank you and good morning.
We would like to remind you that during today's call, management's prepared remarks and answers to your questions may contain forward-looking statements.
These statements are based upon current views and expectations.
Such statements are subject to risks and uncertainties and other factors that may cause the actual results to differ materially from those discussed today.
Examples of forward-looking statements may include those related to revenue, operating income, financial guidance, as well as non-GAAP financial measures.
Risk factors relating to the Company's results and management's statements are detailed in the Company's annual report on form 10-K for the year ended December 31, 2014 and other filings with the Securities and Exchange Commission that are available on our website.
Forward-looking statements refer only to expectations as of the date in 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 <UNK> <UNK>, Chairman and Chief Executive Officer.
<UNK>.
Thank you, <UNK>.
I'm proud of the operation team's performance in 2015.
We produced strong same-community NOI growth for the year at 5.8%, delivered another year of industry-leading leasing results, began the 2015, 2016 lease term 97% occupied with estimated revenue growth of 3.8%, and opened over 2,900 new beds at the 6 communities we delivered in August.
While we are proud of the 2015 accomplishments, the team shifted its focus to the 2016, 2017 leasing cycle before the dust even settled.
We are well into the sales season and leasing velocity at our same communities is strong.
We are currently 58.4% preleased for the fall, which is 490 bips ahead of this time last year.
Our continued focus on customer service and resident satisfaction, along with our detailed marketing programs and the visibility to market information through our pilot system, have put us in a great position to take advantage of market conditions and maximize leasing results.
Please keep in mind that as we have discussed in the past, our same-community portfolio opened last fall near our maximized occupancy of 97%.
As such, we expect to see the favorable leasing velocity to prior year of 490 bps to dissipate over the remainder of the leasing cycle.
Based on our current progress and market conditions, we anticipate opening the 2016, 2017 lease term with revenue growth in the range of 2.5% to 3.5% with occupancy consistent to prior year.
Note, our beds at the University of Kentucky, including 4,600 same-community beds and 1,140 new community beds delivering in 2016, have again been excluded from the same-community preleasing analysis in the financial supplement since the on-campus assignment process will not be completed until May.
Currently we're 88% applied for the fall, on target with the prior year, and our beds are clearly the choice of the UK students.
In addition, the university application velocity, as reported by enrollment management, is up 11% over prior year, which speaks volumes for demand.
Our new communities, which include our 16 developments at the University of Mississippi and at Virginia Tech, as well as our 15 acquisitions at University of Colorado, Boulder, and the University of Tennessee are meeting our expectations with 58.2% of the beds leased for fall.
Turning to supply, as we reported in our third quarter earnings call, the volume of new supply being added to EdR markets for fall 2016 is down over 20% from the 2015 levels.
This is a significant trend and the second consecutive year our markets have seen a decline in new supply.
In addition, the majority of new supply will be further from campus than our communities.
In conclusion, our dedicated operations teams are hard at work to produce yet another year of market-leading leasing results, a steady increase in demand, a decreasing volume of supply over prior year, an increased velocity in leasing trends and early strength in rate growth provides a nice backdrop for the 2016, 2017 leasing cycle.
I will now pass the call to <UNK>.
Thank you, <UNK>.
Core FFO in the fourth quarter of 2015 increased $4 million, or 13%, to $33 million while core FFO per share increased 2%.
The improvement in core FFO was mainly due to growth in community NOI.
Core FFO per share growth was muted due to the November 2015 follow-on equity raise that increased shares outstanding and reduced debt to gross assets to 28% at year-end from 35% the prior year.
Full-year 2015 core FFO increased 14% from 2014 to $92 million.
The growth in core FFO mainly reflects $25 million of additional NOI from new communities and a 5.8% growth in same-community NOI that was partially offset by a reduction in NOI from communities sold in 2014, higher ground lease expense, corporate G&A and interest expense.
Core FFO per share for the year declined 2%, which reflects a dilution from the capital market transactions in June 2014 and November of 2015.
While the capital transactions significantly increased shares outstanding, more importantly, they reduced debt to gross assets from 43% at the end of the first quarter of 2014 to 28% at the end of 2015, strengthening our balance sheet and adding additional capacity to fund our development pipeline and other investment opportunities.
For the full year, same-community revenue was up 5.4% and operating expenses were up 5%, resulting in a 5.8% improvement in NOI.
Expense growth for the year outpaced expectations, mainly due to an $800,000 real estate tax charge that we incurred in the first quarter of 2015, related to the settlement of an assessment dispute brought by a local school board that covered several prior assessment years.
Excluding this, operating expenses increased 3.9%, which was within the Company's original guidance range of 3% to 4%.
Same-community gross margins for the year increased slightly over prior year to 56.1%.
Total community revenue and NOI were up 17% and 23% respectively for the full year, reflecting the strong growth in our same-community portfolio as well as the impact of external growth from our 2014 and 2015 developments and acquisitions, which were partially offset by a decline in NOI due to dispositions in 2014 and 2015.
The double-digit growth in community NOI and core FFO is reflective of the continued value creation from the outstanding new communities delivered by <UNK> and his development team and the hard work of <UNK> and her team to fill the new developments as well as produce industry-leading same-community revenue growth.
Please refer to pages 6 and 7 of our financial supplemental for additional details in our community operating results and same-community expenses.
Turning to our capital structure, our balance sheet strategy is to maintain reasonable current and future leverage metrics when factoring in our development pipeline.
However, please note that we have reset our current debt-to-gross asset leverage target to 25% to 30% compared to our prior target range of 35% to 40%.
We believe 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.
In transitioning to the new debt-to-gross asset targets, we completed a follow-on equity offering in November 2015, selling 8.1 million shares and raising net proceeds of $270 million.
The Company also raised $16 million during the fourth quarter, selling just over 400,000 shares of stock under its ATM.
The proceeds we used to pay off $261 million of debt, including the remaining balance on our revolving credit facility, reducing our debt to gross assets from 40% at September 30, 2015 to 28% at the end of the year.
In addition, at 12/31/15, our variable rate debt was 17% of total debt, our weighted average debt maturity was just over 5 (inaudible - multiple speakers) and we had approximately $500 million in capacity under our existing revolver.
Subsequent to year end, the Company announced two new development commitments totalling over $100 million and completed a second follow-on equity offering selling 6.3 million shares and raising net proceeds of $215 million.
$108 million of the proceeds were used to pay off $98 million of fixed rate mortgage debt with an average effective interest rate of 5.4% and $10 million of prepayment penalties associated with the early extinguishment of the debt.
The remaining proceeds will primarily be used to fund the Company's development pipeline, which includes $404 million of active developments, of which $97 million was already funded at the end of 2015.
The remaining $307 million will be funded through a [combination] operating cash, proceeds from the following ---+ follow-on equity offerings, debt and property sales and capital market activities as necessary.
Although dilutive on a short-term basis to [2016] core FFO per share, transacting these equity raises at reasonable pricing relative to net asset value estimates repositions the balance sheet to fund our current commitments and take advantage of additional external growth opportunities, which will drive long-term growth for shareholders.
Turning to 2016 guidance, based on the Company's current estimates, management reaffirms the initial 2016 core FFO per share guidance it released on February 2, 2016 of $1.70 to $1.76.
This includes core FFO per share before potential capital transactions of $1.77 to $1.84, less the impact from potential capital transactions of $0.07 to $0.08 per share.
Please note that the midpoint of our 2016 guidance, after a potential capital transactions, represents a five-year compounded annual growth rate in core FFO per share of approximately 6%.
This solid performance will be achieved during a period when, including the 2016 estimates, the Company would have delivered approximately $900 million in developments, sold over $550 million in assets and reduced debt-to-gross assets from an average of 34% in 2011 to an estimated 25% by the end of 2016 ---+ a fantastic five-year accomplishment.
Please refer to our February 2, 2016 press release for more details on our guidance assumptions.
With this overview, operator, please open the line for questions.
Yes.
As we said previously, given where cap rates are today ---+ I mean, our focus is either on campus or truly pedestrian to campus.
And where cap rates are today in the very low 5%s and some reported below 5% cap rates, we're monitoring the acquisition market.
We are aware of what is all trading but it needs to make sense in order to make the acquisition.
So things do change.
And we always study the dynamics of an individual marketplace because all real estate is eventually is really local.
I think you'll see the external growth from our Company, the more on the on-campus development and developments that are pedestrian to campus until such time that cap rates on acquisitions on assets that we're targeting has moved north.
Sure.
We have a number of potential developments that if things come together within the next 60 to 90 days maximum ---+ and that typically is getting appropriate GNP pricing.
I mean, as a policy, we don't announce until we're relatively certain a project is going forward.
So clearly within the next 90 days maximum, we'll know whether we're adding additional developments for 2017 or not.
And I'm sorry, the second part of your question.
Yes.
That low 7%s is a drop from mid 7%s about 1.5 years ago, primarily because of construction prices going up and then for off-campus, land values and all.
Currently, everything that we're targeting is in the low 7%s.
Let us get back to you on that while we figure that out.
Good morning, <UNK>, it's <UNK>.
No.
Was I surprised by the pickup.
No, because we're in the middle of heavy leasing season.
So not surprised ---+ pleased by the results.
And we are continually pushing rate on every asset across the portfolio.
And if you remember, last year we delivered our portfolio with all assets having rate growth with the exception of one.
So we are definitely pushing rate to its maximum.
Yes, it's getting pushed.
Alex, I think ---+ it was primarily the opportunities that are presenting themselves.
As you know, right before that second equity offering, we announced the possibility of the ---+ or the award of the Cornell deal and the possibility that, that might be a ONE Plan deal.
So that opportunity, plus just other things that we're seeing in the pipeline, is what drove us to go ahead and issue equity the second time.
As <UNK> mentioned just a couple minutes ago, it's possible that we add more than one new development to 2017.
Now, likewise, it's possible that none of them get added to 2017 and they move to 2018.
But we saw an increasing number of both on and on-campus opportunities that we think we're in good position for.
So we thought it would be a good idea to take equity funding essentially off the table all the way through 2017.
Alex, I think we would have to look at it at the time.
But we have, as you can see from our metrics, significant capacity on our revolver.
Well preleasing is very strong overall across the portfolio.
But in the Midwest, there's only four assets included in the Midwest.
And if you remember last year, at the University of Missouri there was a very public kind of issue with the departure of the president.
And temporarily it has hurt enrollment.
And with the temporary hurt on enrollment, it has impacted us this year.
We expect, as the university does, recovery in the next year.
But that is what has slowed down the midwest.
Thank you.
Well, I'll jump in real quick.
Our guidance is our guidance.
So there is a little bit of tail wind given ---+ I guess it was 150 basis points of the non-same-store last year.
But realize our same-store hit [97%] last year.
We've said forever that we believe [97%] is the optimal occupancy for our portfolio.
Can we do a little bit better.
Sure.
But each and every year there is something new that comes up that's possibly negative, like Missouri, like <UNK> just mentioned.
So our guidance is our guidance.
We hope to do better.
Good morning.
I'll address the first part and let <UNK> do the second.
On the on-campus assets, as you know, we have the on-campus assets at Kentucky, which achieved a 3% increase in revenue growth last year.
Then the other on-campus assets are at TCU, Texas, Syracuse.
Those assets, I'll say, were kind of all over the board.
The Texas asset was up in the high single digits.
Syracuse, I think, was mid single digits.
And TCU, I think, was closer to the 3% to 4%.
So I would like to say there is a blanket conclusion you can draw.
I don't think you can.
The blanket conclusion that we draw going forward is that we know those assets because of their location and that the universities they serve are going to be much more stable in revenue growth than any other set of assets in case there is some downturn or something.
And then this year for Kentucky ---+
Out of the 5,700 beds, we have 88% of them leased, which is in line with where we were last year.
I think the other key ---+ we filled those beds to 100% last year.
And I think the other key is that enrollment management is reporting that applications to the university itself are up 11%.
The dynamics are very strong for another very successful year at UK.
I know on the real estate tax growth, we're probably in the 5% to 6% range on just a recurring basis for that.
Repair and maintenance is probably in the 3% to 4% range.
Getting back to the question that somebody had on the tiers of the assets that we're currently marketing, there is one asset in Tier 1, three assets in Tier 2 and two assets in Tier 3.
We typically are pro forming 96% occupancy.
Five of the assets are one contract.
The other is an individual contract.
In all cases, they have not yet gone hard.
So they are in various stages of due diligence.
Which could include financing.
That's typically not the issue today with the people that are buying our assets.
They are able to get their financing.
Thank you for your time, everyone.
And we look forward to communicating our progress again on our first quarter earnings call in April.
Thank you.
