EDR
#Greetings, and welcome to the EdR third-quarter 2015 earnings conference call.
At this time, all participants are in a listen-only mode.
A question-and-answer session will follow the formal presentation.
(Operator Instructions) As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, Mr.
<UNK> <UNK>, Senior Vice President of Capital Markets and Investor Relations.
Thank you, Mr.
<UNK>.
You may now begin.
Thank you and good morning.
We would like to remind you that during today's call, Management's prepared remarks and answers to you 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 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 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.
Before we begin the call, you may have seen our announcement this morning regarding the launch of a proposed common stock offering.
I'm sure you'll understand that in light of the pending offering process, Management cannot make any further comments regarding the offering and its impact during the call this morning.
As such, request that you refrain from asking any questions on the topic, and we appreciate your understanding.
It is now my pleasure to turn the call over to <UNK> <UNK>, Chairman and Chief Executive Officer.
<UNK>.
Thank you, <UNK>.
What a wonderful leasing season once again.
Our same-community portfolio opened the 2015-2016 lease term 97% leased, which is a record opening occupancy for the EdR portfolio, and is a 40-basis-point improvement over the prior year.
In addition, we were able to increase rental rates by 3.4%, for an industry-leading increase in total rental revenue of 3.8%.
Our operations team was able to produce rate growth at all but one of the 69 owned and managed same communities, and 64% of these communities opened the 2015-2016 lease term with occupancy greater than 99% ---+ what a spectacular job across the whole portfolio.
Our new community portfolio, which includes the six new communities we delivered in August at the universities of Connecticut, Kentucky, Georgia, and Louisville, along with the District on Apache, which we acquired after the 14 leasing cycles, and our 2015 acquisition opened the 2015 2016 lease term 95.5% leased.
Our on-site staff has a challenging task managing new supply, providing outstanding customer service, addressing resident, parent, and university needs, as well as navigating other market conditions, which is why I am so extremely proud of our community, staff, and operations team for producing industry-leading leasing results for the third year in a row.
Turning to supply and demand dynamics in our market for 2016, which you can see on pages 14 through 16 of the financial supplement, you will see that based on market data from our community managers, as well as Axiometrics, we anticipate the volume of new supply being added in EdR markets for fall of 2016, to be down 20% from the 2015 level.
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.
The 20% decline in new supply for 2016 is a lower decline in the volume of new supply than the 47% we reported in the second quarter.
Several projects previously in the planning phase, which we assessed as unlikely to be delivered in summer of 2016 have now started construction and should deliver in 2016.
Also, a couple of projects previously expected to deliver in 2015 were pushed to 2016.
This added 11 additional projects across our 38 markets, and increased new beds expected in our market for 2016 from 9,000, as previously reported, to 14,000.
In conclusion, the 2016 supply and demand data provides a nice backdrop while we begin the 2016-2017 leasing cycle, with the economic environment in our markets characterized by a reduction in the rate of new supply, a steady increase in enrollment growth, and further modernization.
These trends bode well for revenue growth in the 2016 leasing cycle and beyond.
Our on-site teams finished a labor-intensive and very successful term during the third quarter, and are now full steam ahead on renewal campaigns and early leasing.
I want to thank them for their dedication and effort, and recognize their success with a big thank you.
I will now pass the call to <UNK>.
Thank you <UNK>, and good morning, everyone.
Core FFO in the third quarter of 2015 declined $300,000, 2%, to $14.5 million, and core FFO per share was down $0.01 to $0.30.
The decline in FFO was due to the non-recurring $3 million John Hopkins guarantee fee recognized in the third quarter of 2014 that equated to $0.06 of FFO per share.
Without the impact of the guaranteed fee, core FFO increased 23%, and core FFO per share was up 20% over the prior year.
2015 year-to-date core FFO increased 14% to $58.9 million versus 2014 year-to-date core FFO.
Excluding the non-recurring $3-million John Hopkins guarantee fee recognized in 2014, year-to-date core FFO grew $10.4 million, 22% over the prior year.
On a same-community basis, third-quarter revenue was up 5.2%, and operating expenses were up 3.9%, resulting in a 6.9% improvement in NOI.
Year-to-date revenue was up 6.1%, and operating expenses were up 5.2%, resulting in a 6.8% improvement in NOI.
Year-to-date same-community gross margin increased to 54.1% from 53.7%.
Total community revenue in NOI were up 15% and 27% respectively for the quarter, and 17% and 25% year to date, reflecting the strong growth in our same-community portfolio, as well as the impact of adding the 2014 and 2015 developments and acquisitions.
These results are directly attributable to our best-in-class portfolio of communities, and the hard work of <UNK> and her team to produce industry-leading same-community revenue growth.
Please refer to pages 6 and 7 of our financial supplement for additional details on our community operating results and same-community expenses.
Turning to our capital structure, our balance sheet strategy continues to be one that maintains reasonable current and future metrics when factoring in our development pipeline.
During the past three years, our debt-to-gross assets has ranged from the low 20%s to the low 40%s, but has averaged 35% throughout the period, all while delivering over $700 million in new developments.
As you know, we have delivered core FFO growth at a 13% CAGR during the same three-year period, and 9% if you use the mid-point of updated guidance range.
As of September 30, 2015 our debt to gross assets was 40%, our variable rate debt was 35% of total debt, our weighted average debt maturity was just under five years, and we had approximately $279 million in capacity under our existing revolver.
Our active development pipeline includes $299 million of active developments, of which $242 million remains to be funded as of the end of the third quarter.
We anticipate funding our development pipeline now, and in the future, with a combination of cash from operations, debt proceeds from asset sales, and capital market activities.
We have demonstrated discipline in our capital funding decisions in the past, and will continue to do so.
Turning to 2015 guidance, based on our current estimates, Management has increased its guidance for core FFO per share $0.0,6 or 3%, to a range of $1.82 to $1.85, compared to the original guidance of $1.74 to $1.82.
This updated guidance includes the estimated impact of the follow-on equity offering the Company announced concurrently with this release.
The net increase in guidance is related to better-than-anticipated same-community NOI growth, new community NOI from the 2015 acquisitions, higher-than-anticipated third-party development fees, and lower interest costs due to interest rates remaining low throughout 2015, offset by an increase in weighted average shares outstanding.
With this overview, operator please open up the line for questions.
Hey, <UNK>, good morning.
Thanks for the comment.
The Company's historically said our debt-to-gross-assets target is 35%; variable rate debt is 35% of debt; and debt to EBITDA under 7%, and interest coverage around [4 times], depending on the math.
And we continue to be comfortable with those levels.
I don't think we're changing our leverage profile.
We've increased our disclosure around how we think about the funding of the development pipeline.
I don't think there's any change to how we're thinking.
We're just trying to be a little clearer with our messaging.
Well, we ---+ that obviously is ---+ I think those types of questions also relate to the equity offering that we're doing today, so I think we can't say a whole lot.
But when you look at what we've done over the last two years, we've only purchased about $150 million of assets, and we've been a net seller.
Granted, that's just asset sales and asset acquisitions.
As you know, we've also developed and delivered about $250 million a year in development deliveries.
So, to me, you've got to look at all three together.
All three together would suggest that we will be a net asset addition.
But if you look at just the asset acquisitions and asset sales, my guess is that would be somewhat neutral.
Yes, the market ---+ there's new institutional players coming to the market, Starwood being maybe the most noteworthy.
Interestingly, we're seeing compression on cap rates, with some people targeting true pedestrian tier 1 campuses core assets.
Most trades today are in the very low 5%s for that type of asset on acquisition, but we're also seeing interest for value add that's a little further from campus.
Those cap rates now are in the low 6%s.
Clearly there's a lot of institutional interest in this segment of the market.
Thanks, <UNK>.
Primarily ---+ this is just repeating some of our prepared statements and all ---+ but the assets that we currently have listed for sale are very much in keeping with what we sold in 2014, which are basically non-core assets that are typically further from campus.
<UNK>, I'll just add one thing.
It's our view ---+ but that's what makes markets ---+ it's our view that the spread between those assets that we have been selling, versus the core assets that we've been developing and acquiring a little bit of, we think that spread is not wide enough.
That's the reason why we've been selling these types of assets over the last few years.
I think that's right.
If you look at our history over the last four years ---+ I don't have the numbers in front of me, but we've developed something like $750 million of assets, and only acquired something less than that.
We've always said that we believe that the 100- to 150-basis-point spread that you get in first-year yield on development versus an acquisition of the like kind, that that overcompensates us for the risk.
That's why our focus has primarily been on the development side.
Yes, as you know, that does get towards the essence of the equity offering, so we can't say a lot.
But we do see outstanding external growth opportunities, and we want to make sure that we have the financial resources to take advantage of them.
For some context, the last three years, we've averaged $235 million, $240 million of development deliveries.
We've only announced $150 million for 2017, and $0 for 2018.
There's plenty of time still to add to the 2017 development pipeline, and of course, there's plenty of time for the 2018 pipeline, as well.
We're working on a bunch of opportunities.
If we had others to announce, we would announce them; but we're working on a lot of opportunities.
Good morning.
Why don't you go to question two as our guys flip some pages.
Do you have a question two, <UNK>.
<UNK>, you broke up a bit there, but I think you're asking one-offs versus portfolios.
We've not been successful in the past on bidding on portfolios.
Others have been willing to pay more than we have.
My guess would be that if we achieve acquisitions, they would be more one-off.
I think we have the answer to your first question.
<UNK>, say the first question again.
I want to make sure I'm answering the right question.
Hey, this is <UNK>.
A couple of years ago we did put an initiative in place to work on our other income and our expense reductions, ultimately margins.
We put a full-time person in place a couple of years ago to start working on ---+ working with partners that could contribute to our success in other income.
We are now at two full-time people working that same initiative, and we're starting to see the fruits of our labor showing up in other income.
It's typically partners that obviously can relate to the college-age customer that we have access to.
We do have some initiatives in place for both other income and expense reduction, and we'll continue to see the fruits of that labor.
Hey, <UNK>, it's <UNK>.
No, I don't think there's anything one-time.
I think that the margin will continue.
We think the answer to that is yes, but somebody's flipping pages.
Hey, <UNK>.
It looks like the same community margin last year was 62%, from page 5 of our supplement.
That's probably a reasonable target.
No, we don't provide by property.
You got that in front of you.
The easy math for you to do is we've said that our yields are in the low 7%s.
If you would ---+ and we have delivered that kind of return, so ---+ .
Half of August.
It's the same.
I admit that's the first time I've ever received a statement of cash flows question on an earnings call.
<UNK> is analyzing it right now.
You got a next question.
Yes, there was nothing unusual, <UNK>, in the quarter or from an interim.
It may just have to do with timing of dispositions and acquisitions.
But the change in operating assets and liabilities net of acquisitions, there's nothing unusual in the change in that working capital group.
[That's all cash].
(multiple speakers)
No, I mean, obviously, we do straight-line rents for GAAP and concessions and other things that would've occurred for the start of the leasing season, but nothing is any different from the prior period.
<UNK>, are you looking at net cash provided by operating activity.
The 2014 numbers, as you can see ---+ and I don't have a calculator in front of me, but there's three big items that impacted that 2014 number ---+ the gain on sale of collegiate housing properties, the gain on insurance settlement, and the loss of impairment.
We don't have the answer for you on this call, but I'm sure we can figure it out.
Yes.
Thank you.
No.
This is <UNK>.
My two best performers in rate growth were at Arizona State and the University of Arizona.
They were the highest performers in my same-store.
The market with the least ---+ we had one asset that had negative rate growth, and actually that was a program that was as designed.
We had some occupancy struggles last year.
It's an older asset ---+ a little farther from campus.
We put a strategy in place this year to reduce rates in order to gain occupancy, which we did successfully.
We gained 7.5%, and brought it up into the mid-90%s, or high-90%s actually.
Our plan worked.
My most robust rate growth was at Arizona State and University of Arizona, and my least, clearly, with a negative, was at Florida State ---+ although I do have two assets at Florida State, and the other one performed in target with the rest of the portfolio.
The only other kind of down is my property at the University of California Riverside.
We only had a 27 bps rate growth there; so, not negative, not flat, but minimal positivity.
We don't disclose by property, but I did actually have strong growth this year.
I couldn't ask for a better location.
That property abuts campus on two sides.
It's a fabulous location, so we actually had a lot of success at the Berk.
Thanks.
Yes.
Hey, this is <UNK>.
I just want to respond to <UNK>'s question on the cash flows.
The $5 million difference in cash flows from operating activities where 2015 was lower than 2014 was because in 2015 we collected a very large receivable payment from one of our large university partners in very early October, versus last year it was in late September.
That accounts for probably greater than 100% of the difference that you're talking about there.
Sorry I didn't have that the first time, <UNK>, but that's what it is.
No more questions.
Thank you for your time, and we look forward to seeing many of you next month at NAREIT.
Thanks, you all.
