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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Greetings and welcome to EdR's First Quarter 2018 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 Drew Koester, Vice President of Capital Markets and Investor Relations.
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 including statements related to our future performance, future leasing, and the impact of certain financing activities. While these statements are based upon our current views and expectations, we can provide no assurances that our currently views are correct or that the expectations will be met. The matters that these statements describe are subject to known and unknown risks and uncertainties and other factors that may cause our actual results to differ materially from the expectations discussed today.
Risk factors relating to the company’s results and management statement are detailed in the company’s annual report on Form 10-K for the year ended December 31, 2017 and other filings with the Securities and Exchange Commission that are available on our Web site. Forward-looking statements refer only to expectations as of the date on which they are made, EdR assumes no obligation to update or revise such statements as a result of new information, future developments or otherwise.
We will also discuss certain non-GAAP financial measures including, but not limited to FFO, NOI and adjusted EBITDA. Definitions of these non-GAAP measures as well as reconciliations to the most comparable GAAP measures are included in the quarterly earnings release, which is available on our Web site.
It is now my pleasure to turn the call over to Randy Churchey, Chairman and Chief Executive Officer, Randy?
Good morning. Thank you for joining us today. On our call, Chris will cover operations, market dynamics, and fall leasing; Tom will discuss our development pipeline and dispositions; and Bill will provide an update on our capital structure and 2018 financial guidance.
First, let me provide some information on internal growth and industry dynamics. The biggest question currently facing the student housing industry is the impact of cumulative supply on future internal growth. We’ve not seen any meaningful movement in the supply demand dynamics since we updated you in our fourth quarter earnings call.
Supply in our markets for 2018 is still projected outpace enrollment growth by 60 basis points. This is consistent with the last seven years, during which our operations team produced same-community revenue NOI, compounded annual growth rates of 3.3% and 3.4%, respectively.
While our full-year internal growth expectations for 2018 fall short of this historical trend, our same-community revenue guidance for the '18, '19 fall leasing cycle is growth of 2% to 4%. We feel that over the long-term student housing will generate average community revenue, same-community revenue and NOI growth of 3%, consistent with historical averages.
We believe our best-in-class portfolio of on and off campus student housing assets, the stronger markets in which we operate, and our outstanding property operations team best positions us to navigate the current environment to meet our goal of producing consistent internal NOI growth.
Our portfolio of communities post the following characteristics. 91% of our NOI is from pedestrian to campus and on-campus assets. 34% of NOI is from on-campus assets reflecting our enduring strength in the on-campus developed marketplace. Medium distance from campus is 1/10 of a mile, average enrollment of universities served over 27,000, average age of our communities seven years, and our average monthly rental rate is $833 per bed.
A further note about our portfolio, including our active developments 83% of our one plan assets and 77% of our total portfolio serve universities in the Ivy League and Power Five conferences, an impressive and enviable on-campus and total portfolio of owned assets.
Next external growth. Our external growth profile, which is the main driver of our growth in core FFO is still compelling. Our current prefunded development pipeline represents a 32% increase in our collegian housing assets over December 31, 2017, and importantly 29% of our new developments are located on-campus and 96% are either on-campus or pedestrian-to-campus.
Furthermore, the P3 market continue to be robust. EdR has won seven on-campus development deals in the last 12 months, and while these and other projects have been awarded, there are around 30 other opportunities we are actively pursuing, a clear indication of the on-campus market is robust and EdR is positioned to win our fair share.
Finally, I’d like to address our valuation and cost of capital. EdR is in the wonderful position of having substantial embedded external growth that is already funded without the need for additional equity. We continually monitor the capital markets and public and private market valuations and assess their impact on our cost-of-capital and capital allocation decisions.
Today, there is a substantial discount between public and private market valuations, with EdR trading at an implied cap rate of around 6.5%, which doesn't include the value for our platform. While the private market is valuing similar assets at cap rates of 5% or less. In early January of this year, over $1 billion of student housing assets trade at these cap rates. And American Campus Communities disclosed last week that there are selling a minority interest and approval of Tier 1 assets that is expected to generate approximately $400 million in sale proceeds at a mid 4 cap rate.
Furthermore, we consummated sales of five lower quality assets this year at a 6% economic cap rate, a better cap rate than the implied cap rate for which our entire company is trading. These data points give no evidence of the private market valuations are changing at this time.
A few things we are doing to narrow the public-private valuation gap. One, we're communicating recent student housing transactions that demonstrate the 5% or less cap rate trades for assets similar in quality through our off campus portfolio. Two, we still intend to sell additional asset or two in a third quarter further demonstrating private market values. We may choose to decide to sell additional asset if this NAV gap persist.
Three, we're not a participant in the acquisitions market and have also restrained our off-campus development pipeline. We are assuming that any new capital commitment will be funded through recycling of assets. Being low leveraged is a virtue especially in this type of market. And lastly, we're focused on better communication and execution, trying to minimize any noise from our operations and development activities. Hopefully the public market discount to private market valuations will narrow in the near future.
In closing, the embedded growth from our development pipeline and our low leveraged balance sheet allows us to be patient during this current market dislocation. Furthermore, the P3 on-campus market remains very active and we're very well positioned to seize these opportunities.
Now Chris will discuss property operations.
Thank you, Randy. Overall, our same-community results for the first quarter met expectations with same-community revenue growth for the quarter of 40 basis points comprised of a 2.4% increase in rental rates, and a 20 basis point growth in other income offset by a 2.2% decline in occupancy.
Operating expense rose to 4.1% for the quarter was driven by an increase in real estate taxes, facilities, and a planned acceleration of marketing initiatives. In total, NOI for the first quarter was down 1.5% or $700,000.
Turning to market dynamics in 2018, '19 leasing. The supply and demand dynamics in our market have not changed since the update on our fourth quarter earnings call. In total, we are still projecting that new supply will outpace enrollment growth by 60 basis points this fall which is in line with the average over the past five years.
As we’ve previously stated, we established our marketing and rate plans at the beginning of the leasing season to maximize our results in each and every market. And those plans are updated as often as necessary based on market and velocity data from our pilot leasing system.
To date, we’ve not seen any market shift that have required dramatic changes to our original leasing approach. However, on Page 7 of our supplement, you can see an increase in our marketing spend in the first quarter over the previous year. This is anticipated in our original guidance in order to accelerate leasing initiatives and implement the new marketing program.
A few comments on some of our more challenging markets in the portfolio. As you can see in our supplement, we’ve six communities facing supply growth that exceeds 5% of enrollment. They include Florida state, Northern Michigan University, University of Mississippi, Arizona State - Tempe, East Carolina, and Syracuse University.
In three of these markets, Florida state, Arizona State - Tempe, and Northern Michigan University, EdR is developing communities that are contributing to the supply numbers and we’re comfortable with the long-term viability of these markets to absorb this new supply.
The University of Mississippi market continues to be a struggle with new supply delivering in 2018 and no enrollment growth anticipated. The pressure in this market is similar to what we saw at Texas Tech last season. At Ole Miss, EdR reached 87% occupancy in last year when the overall market reached 81%. These communities which represented 2% of our total NOI are holding their own, but are expected to be down compared to prior year.
Syracuse University does not intend to grow enrollment and new supply is being added for the second year in a row. We’ve two communities serving SU, one designed for graduate students and one designed for undergraduate students. The University released a master plan to essentially relocate housing away from the site of campus where our undergraduate community is located. We're working with the Syracuse Department of Housing and Residence Life to formulate a solution for the EdR communities in this tough market.
In summary, while our 2018, '19 leasing guidance reflects solid growth for the portfolio, it includes lower expectations for the markets that are facing the most challenging supply in 2018 or cumulative supply over the last couple of years.
Turning to the University of Kentucky. First, I want to follow-up on our discussion regarding higher attrition at the University of Kentucky. In years past, a larger number of students were living in U.K owned building and many of those students opted to move from University owned facilities to EdR bed when students in EdR beds left campus in the spring.
With the 1,100 beds we delivered this past fall, EdR now owns and operate 90% of the bed leaving a lower number of U.K occupied beds to backfill in the spring -- backfill the spring attrition. This represents a transition in the dynamic at U.K and as such we would not expect a significant year-over-year change in attrition rates going forward.
In regards to leasing for the '18, '19 academic year, we previously discussed the efforts of University of Kentucky to make returning to on-campus housing more appealing and desirable for upperclassmen in order to attract and retain more sophomores and juniors. Based on current trends, these efforts are working as applications are showing an increase year-over-year. Remember that the opened at fall 2017, 95% occupied.
Based on our leasing velocity to date and our expectations for the remainder of the leasing season, we’ve reiterated our guidance for the '18, '19 lease up. We expect to open the lease term with revenue growth for our same leasing communities, those where we’ve managed to lease up for the last two years of between 2% and 4%. This includes growth of 1.5% to 3% from our communities that are reported at same for the '18 financial reporting purposes and stronger growth from our '17 development and acquisition.
Leasing of our 2018 development deliveries is progressing as you would expect. Early velocity in markets that little purpose -- little existing purpose built student housing is slower as we educate the market in our first leasing season, while velocity in other markets is consistent with our existing portfolio. While we're confident in our leasing guidance, please keep in mind that it's April 30 and we still have leasing left to do.
Our on-campus communities which represent 34% of our NOI will not finalize the assignment process until late summer and we’ve several late leasing markets that will not be finalized until late summer as well. In addition to our sales and marketing efforts and our focus on customer service, our communities already have their plans in place for the annual churn in August.
I will now pass the call to Tom.
Thank you, Chris. Good morning. Before providing an update on EdR's external growth efforts, I'd like to provide a summary of some of the more salient findings in the 2017 student housing year-end report as provided by 4-point student housing investments.
2017 was a defining year for the student housing industry. Although the sales volume fell short of last year's all-time high, the $9.7 billion in sales volume and 158 transaction -- transactions is a clear indication of the new norm in sales activity for the industry. Cap rates for all classes of properties remain low despite rising interest rates with significant cap rate compression in Class A product pedestrian to campus.
As for current buyers and seller profiles, much like 2016, there's been an increasing number of aggressive foreign capital sources entering the student housing market through the purchase of large portfolios. While the REITs have remained largely inactive on the acquisition front, top operators with institutional capital sources continue to aggregate product to create economies of scale in the space. Bottom line to their report, there's a large disparity between the REITs stock valuation and net asset value in the open private marketplace.
And now on to EdR's external growth. During the quarter, we broke ground on two of our newest ONE Plan projects on the campuses of Lehigh University and Mississippi State University. SouthSide Commons is our 428-bed, $48.3 million development on the campus of Lehigh. This community will be the first apartment community offered on-campus and has been extremely well received by the students who participated in our design charrettes.
College View is our 656-bed, $69.2 million mixed-use development at Mississippi State's campus that will feature recreational amenities, outdoor entertainment zones, retail and commercial space and has the opportunity to be a multiphase development. Both these developments are targeting delivery in June 2019 and keeping with our efforts to reduce any potential late delivery risk.
The ONE Plan development at California State University, Sacramento is progressing towards a targeted summer 2021 delivery of 1,094-beds at an estimated total development cost of approximately $154 million. Predevelopment agreements have been executed for replacement ballfields in the housing community. The project is in schematic design with predevelopment studies underway.
For ONE Plan development at Cornell University, East Hill Village has also advanced. A predevelopment agreement has been executed with Cornell and design charrettes were recently conducted with all stakeholders. The current anticipated delivery of this mixed-use development at one of the gateways to Cornell University is summer of 2020.
As evidenced by our current on-campus awards, and our total of seven wins in the last 12 months, we continue to see growth in the number of universities interested in P3 financing to solve the University housing needs as more universities see the benefits of these successful partnerships. The need to replace older on-campus housing and demands of institutional funds for academic and support service initiatives combined with the decline in state support for higher education is driving this increase in P3s.
Preserving limited debt capacity for academic and research unit initiatives continues to be the primary motive of universities seeking equity financing for their housing needs. EdR is currently involved in 12 active RFPs or RFQs, of which 10 are potential ONE Plans. Some of which have moved beyond the initial RFP stage and have shortlisted candidates. In addition, we're working with over 16 universities that have expressed serious interest in P3s to solve their housing needs.
Please refer to Page 14 of the supplement. Our active development pipeline is progressing as expected. The 2018 deliveries including 6,380 beds at 10 universities and representing a total development cost of %783 million are in the aggregate on budget and on pace for delivery for this falls academic school year. Please note, that we are now confident that the Oklahoma State property will be completed this summer.
While we are beyond the point where we will be adding any future developments to our pipeline for 2019, our team is working on a number of opportunities both on and off campus for delivery in 2020 and beyond. Our $901 million active development pipeline for 2018 and '19 deliveries represents a 32% increase in collegian housing assets over December 31, 2017.
With stabilized first year economic yields of 6.25 to 6.75 that represent an approximate 25% to 30% premium, the current market valuations for student housing assets pedestrian for Tier 1 universities our development pipeline is creating real value for EdR and its shareholders.
Turning to dispositions. Our guidance for 2018 includes the disposition of 6 to 7 communities for proceeds of $150 million to $225 million. Through April, we have closed five of the anticipated dispositions for total proceeds to EdR of $125 million. While these assets were in the lower tier of our asset quality, they were sold for a combined economic cap rate of 6%, which reflects the continued strength in the private transaction market.
In April, we also sold our 25% interest in University Village, a community serving the University of North Carolina, Greensboro. EdR developed this community with our joint venture partners and also managed the community since it opened in 2007. We're part of the successful relationship we built with our partners and over the last 11 years and -- we expect to recognize a gain now for the sale of this asset in the second quarter. Please keep in mind that while additional dispositions are being contemplated and are included in our annual guidance, there's no insurance that they will be completed.
In closing, EdR's external growth priorities continue to be deliver all developments on-time and on budget with operating performance and keeping with our underwriting, win more on-campus ONE Plan development opportunities, create a meaningful pipeline of off-campus developments for 2020 and beyond, the selective disposition of assets to fund our accretive development pipeline and the disciplined monitoring of assets in the acquisition market.
With that report, allow me to turn the call over to our Chief Financial Officer, Bill Brewer.
Thank you, Tom, and good morning, everyone. For the first quarter of 2018, core FFO declined $3.3 million less than 1% to $43.7 million and core FFO per share declined 3% to $0.57 a share. The decline in core FFO dollars versus 2017 was driven by a reduction in third-party development fee, increases in net interest expense and income tax expense. These were essentially offset by an increase in total community NOI.
The decline in core FFO per share of 5% is primarily due to the increase in weighted-average shares units outstanding for the quarter versus 2017. Please refer to our financial supplement for additional details on our community operating results and same-community expenses.
Turning to our capital structure. Our balance sheet strategy is to maintain conservative current and future leverage metrics when factoring in our development pipeline in any acquisition commitment. As previously communicated, our debt to gross assets leverage target is 25% to 30%. We feel this leverage target puts the company in the best position to not only fund its current development commitment, but more importantly to take advantage of additional external growth opportunities as they present themselves.
As of March 31, 2018, our debt to gross assets was 28%. And when taking into account our $188 million of sold but not yet settled ATM forward equity shares, our net debt to gross assets would be 22%. We did not settle any ATM forward shares in the first quarter. Please refer to the financial supplement as I discuss sources and uses of capital.
At March 31, 2018, our 2018 and 2019 announced capital commitment totaled $901 million with $375 million remaining to be funded, of which $319 million will be funded in '18 and $56 million in 2019. We currently anticipate funding the remaining development commitments with existing cash, anticipated disposition proceeds, and settling our existing ATM forward equity shares.
As you can see with our low leverage and unsettled ATM forward equity shares, if we were to find our 2018 and 2019 development commitments without selling additional equity, our debt to gross assets would be approximately 26% at the end of 2018 and 28% at the end of 2019, well within management's targeted leverage range of 25% to 30%.
Turning to 2018 guidance. Based on our current estimates and expectations, we are reaffirming our full-year core FFO per share guidance range of $1.81 to a $1.91. Please note that while we are reaffirming our full-year core FFO per share guidance, we have increased our GAAP earnings per share guidance by $0.55 as a result of gains realized from asset sales. All of these gains were excluded from our previous guidance. Please refer to our financial supplement for the detailed guidance metrics.
With that overview, operator, please open-up the line for questions.
Thank you. [Operator Instructions] Our first question is from Austin Wurschmidt with KeyBanc Capital Markets. Please proceed.
Hi. Good morning. Just wanted to touch on asset sales. You mentioned, you may consider selling some additional assets later this year beyond the one or two, I think still embedded in your guidance. And I’m just curious if we should expect that you'd consider selling -- continued to sell lower tier assets, or if you might consider selling something higher-quality that maybe has a little bit of a different future return expectation based on either enrollment trends or new supply? I know you touched on the University of Mississippi as being a market that got some supply challenges.
Yes. So, Austin, we view our portfolio actually monthly and I think the right answer is both. We will continue to study the markets, but we clearly realized that to be able to sell some of our better assets at a lower cap rate today in the mid-4s would be more accretive relative to our development. And so, we will actually look at both going forward.
Appreciate that. And then how should we think about -- would this be used to pre-fund 2020 development, or are you considering -- or would you consider share repurchases given the valuation spread that you’ve talked about between the public and private market valuations?
Well, Austin as you know we sold something like 80% of the assets that were in existence when this new management team took over. So, we’re kind of out of those lower quality assets as you mentioned. Remember, our -- my prepared remarks said that if this NAV gap persists, and I pointed to the third later this year, then we may sell additional assets. So right now, it's all speculative. On the last earnings call, I guess in response to a question, what we said was if this NAV gap continues to persist, someone asked whether we could be buying back stock. And our response was well, we could do that, but I think the math was that if bought $400 million of shares back at the current price which we really couldn't do, that’s about 15% of the float, you would only -- with that you'd only -- with that you'd only increase NAV and FFO per share by 5%, and if you did it with asset -- proceeds from asset sales, its only 2% to 3%. So, at this particular time we're not an advocate of buying back shares.
I appreciate that. And then, just wanted to get an update on NC State. Anything -- what’s kind of the latest with that asset? I know you are in conversations with the University, can you just give us an update there?
Sure. We continue to be in conversations. Documents have gone back and forth for a leasing for the next year, but nothing is executed as we speak on the phone today. So, while we remain optimistic because we're having that dialogue until the ink is dry, it's not done. Additionally, it's important to note that the University is also looking to potentially work something out long-term which clearly is we’d love to see happen to that property. So we’re having dialogue, but nothing executed as of today.
Great. Thanks for the update.
You’re welcome.
Our next question is from Juan Sanabria with Bank of America Merrill Lynch. Please proceed.
Hi. Just hoping you could speak a little bit about your expectations for the summer leasing and any vacancies that are associated with some of the shorter lease? And if you expect the year-over-year occupancy decline to hold firm, whatnot or contract versus the first quarter levels and kind of what's assumed in guidance for that specifically?
Juan, I will start with the summer leasing stock back. So our on-campus projects are typically those that have the nine months leases. And so what we do for the summer in the on-campus projects is work with universities on summer conference revenue. So we don’t necessarily backfill in on-campus nine months lease where there summer vacancy with residents because it really is dependent on their robustness of the summer school program, but we generate other income from summer conference business.
Juan, as you know on our revenue guidance we said, when we gave guidance in the last call is that we did not specifically breakdown changes in occupancy rate rather just gave a total revenue range of .8 to 1.8.
Okay. Okay. And then I guess a question on Oklahoma State. I believe you weren't factoring in any NOI into the '18 guidance. It that still the case? I know you have more certainty now assuming a summer delivery and its now …?
You’re right. We have nothing in the guidance for Oklahoma State as we spoke of last time. The certainty that it opens continues as Tom mentioned in his remarks, but however at this point we're not going to make any changes to guidance because it's still going to be a difficult leasing environment for Chris and her team certainly because it didn't open last year and it may -- we may be in kind of a show me state on that particular asset until it gets opened. So at this point, we've not modeled anything different.
Okay, great. And then just last question, I wanted to go back to I think a comment Randy made at the start about dispositions and maybe lower development. I mean, it still seems like you can fund pretty accretive based on cap rates today on a development pipeline, but I guess you -- are you looking at the development pipeline as any differently just where we are in the cycle given the cumulative supply you kind of reiterated at that point at the beginning of the call, we’ve seen other sectors kind of cut back on some -- on developments at this point in the cycle. Are you trying to say that or is it just cost of capital funding issue that is making a little bit more cautious on developments?
Juan, really it is a combination of the two. When you look at our development pipeline over the years, I think we've done a pretty good job of increasing or decreasing the pipeline for whatever the current circumstances are. So if you look at our pipeline over the years, I think our average is just under $300 million a year over the last six years. But in that we delivered a low of about $150 million in 2016 and a high this year of around $650 million. And the primary factor was cost of capital, but looking forward it's more cost of capital and the comments that you just made about where we are in the cycle. You see our 2019 pipeline its somewhat restrained, it's only $120 million plus or minus. And importantly it's all on-campus. So, I think it's appropriate for everyone to pretty much conclude that our 2020 pipeline, if things persist, is going to be more waited till on-campus and less waited to off-campus as Tom said in his prepared remarks.
Thank you.
Thank you.
Our next question is from Nick Joseph with Citigroup. Please proceed.
Thanks. Randy, why not become more aggressive now given the disconnect between the strong private market and your current valuation? And I know you talked about potentially selling additional assets if that disconnect persists and that share repurchases won't have a large impact on per share results. But if you look 1Q earnings are down 5% year-over-year, expect it to be down for full-year and there seems to be an opportunity to be proactive today in repurchasing shares, no matter how many is accretive use of proceed with minimal risk.
Now, Nick, that’s a fair point. I guess, I've always been in the camp, if you’re not throwing off excess cash flow, do you really want to lever up or sell assets to buy back shares. And I’ve pretty much in the camp that we don't want to do that in, but things change. In my tenure of 8.5 years here, we've that share price dislocation not to this extent, but we had it twice, and then each time it lasted between six months and a year and we're about six or eight months into this current malaise. As we’re trying alluded to in our prepared remarks, we may be more aggressive in the fall if this persist. Realize one impact to the timing of the sale of assets is -- the second quarter is typically the quarter where asset trades don't happen as often, because you're in the middle of a lease up and people want to see the final lease up etcetera. So that's more of a data point than a great reason why we haven't been more aggressive today. But it's a topic that we have for discussion at our Board meeting. Again, if this persist, we may be a little more aggressive come to third quarter, but we're not ready to do that yet.
Thanks.
Thank you, Nick.
Our next question is from Alexander Goldfarb with Sandler O'Neill. Please proceed.
Hey, good morning. Good morning to everyone. Just a few quick questions. First, I didn’t -- maybe you said it, but I didn’t get it, on the developments that you’re delivering for this upcoming season, how are they trending as far as the lease up timing? We had heard, just speaking to people, had heard that, that a few maybe be -- may be behind, but obviously want to hear what the latest is from you guys?
Hey, Alex, this is Chris. Well in our -- I guess, it kind of combine supply and then as contributing to supply into market, right? So you’ve got -- and one of our new development is Florida State and that is in one of our market that has the over 5% of new supply as a percentage of enrollment with 2,700 beds, delivering five new developments actually delivering at Florida State. We’ve been in that Florida State market for over 20 years, and this particular project is a redevelopment, right? So it's on a site -- a well-known site. When we went into that particular project at SSU, one we knew they were going to be for other new developments delivering at the same time, but it was the right thing for us to do. So with that we strategically put together a package at that property where we'd be able to offer essentially the bells and whistles that the other new developments were offering that we'd do it more at a more moderate price range for a new development. So if you’re looking in the market -- so we are [indiscernible] it's Florida State, and you -- and with the bells and whistles that are comparative to the other new supply, you pick us. I don’t want to say were the value plays at new developments, so we strategically priced it appropriately for the new dev. So I think any market absorbing 2,700 beds of new supply is going to be a challenge and don’t give me wrong, it is a challenge. We are all marketing on top of each other in that market. I hope that it will meet our expectations for year one. I think this could be a 2-year stabilization but the Florida State market is a summer leasing market. Like I said, it's been there a long time and it has robust leasing in the summer, so I’m hopeful. Arizona State is another one and I think it has some concerns. There are little over 2,500 beds delivering in that market this summer. Now 1,600 of them are off campus, we are half of that. And then the other 950 are on-campus beds. So this particular projects has a fantastic location. I mean it is absolutely right at the heart where everybody wants to be. With retail on the first floor and I guess I could announce it now because Starbucks actually signed the lease last week, but the corner kind of retail primo spot there will be a Starbucks. So that project is built in two towers. I've got one tower that is studios and one bed room that was -- that are unfurnished that were specifically designed really to hit kind of the bulk of the industry that fits around that location. So you got GoDaddy and State Farm and, of course, Arizona State, faculty and employees, Amazon, Microsoft. So we kind of built one tower to really kind of entice that demographic. And then the second tower, the larger units that are furnished. So three bedroom and four bedroom units in the other tower. So we could kind of go down to track and that’s what we’ve been doing in our leasing strategy, two different track, two different kind of marketing strategies where we hit kind of those demographic. And that particular market, it can be -- has been on a slowdown as new supplies kind of been layered year-after-year, that market for the last three years has slowed down. At the end of the day, we’re all getting there, we are all getting to 100%, but with more to research, more to review the students are kind of slowing down. So, though, I’m optimistic about this fantastic project and location, I do believe that I’m not exactly where I like to be in this particular market and I think it could be a -- for off campus it could be a 2-year stabilization.
So Chris, is it just those two that are the only ones on your sort of watch list, but the other developments are fine?
Yes, well, I mean, I’ve got -- I think I’ve got a new which is an on-campus project and a new development. Billy just talked about Oklahoma State and kind of -- we started leasing there February 12, so I’m -- we are actually leasing. Children are signing leases and we’re getting some sales that I can't predict where it's going to end up. Cornell Maplewood is an on-campus graduate project and it is doing extremely well. Hale Mahana, my Hawaii asset, Alex, it's interesting. It is truly an island time from all thoughts of the word, friend. The University desk in the last couple of weeks started their renewal for on-campus housing. So students are just not thinking that yet. Bill's handed me a list to make sure -- what I’ve forgotten? Colorado State, there is a lot of new supply delivering at Colorado State. I’ve four assets there. Two of my assets are 100% and the other two ones which is a new development and one was just a local, which sits right next to it, a little high-rate product with studios and one bedroom in it. Leasing it a little bit later, but no major concerns. Iowa state, although we took some reduction in rate there, which was actually published by AXIO that, that was one of the markets across the country that was struggling in rate. Ames is doing extremely well. Did I miss any Bill? I think Pittsburgh. Anything else that I can tell you about Pittsburgh, Alex, would be we’re really retraining that -- or training that market on what purpose built student housing is. And so similar to kind of what we did at Florida International, you spend the first six months of your lease up really educating the market on who you’re and what you’re doing and then the rest of the time kind of leasing up. So that one is a little behind where I was like to be. Although it is kicking up some velocity and it could be a two year stabilization.
Okay. And then just separately, the second question, on Syracuse, you guys made two investments there. And I got to believe that University sort of move slowly, so what change as far as your underwriting? Was the fact that they’re reorienting the campus, did this not come across previously? I would just think that schools are pretty slow and that before the prior two investments in '09 and '12 that there may have been inkling that the university was reorienting?
Not at all. This is Tom. Actually it's been a change in the administration with the new chancellor and the new CFO and -- I actually think that that is our struggle because the previous administration understood our partnership and did everything they need to do to make sure that we were totally leased. So we’re meeting with the new administration. It's part of their new plan to move away from the Colvin campus where they currently have several thousand beds and we have no knowledge at all, that's actually a relative recent event in the last probably 12, 14 months.
Okay. Thank you. Thank you, Tom.
You're welcome.
[Operator Instructions] Our next question is from Drew Babin with Robert W. Baird & Company. Please proceed.
Hey, good morning. A question on the topic of attrition, I know that there was some -- late in the year into the first quarter, I think Kentucky was one of the schools where it was occurring. I was hoping you could talk about sort of how that backfill efforts gone so far this year as well as anything that you may or may not be able to control kind of going forward at certain universities in terms of managing around that or trying to limit the impact?
Hey, Drew, this is Chris. So the way attrition works, right, is it kind of comes in two ways, starting -- in fall you have a small amount of attrition. Students just don’t -- they will make it at school, they get homesick, they have medical reasons, didn't take the right school. So your larger attrition kind of comes in the spring. Overall, it's a portfolio we average -- spring -- fall to spring attrition anywhere from 1% to 3% in occupancy. That’s kind of what we lose on an annual basis. And we didn’t see changes in the overall portfolio. So there have been a couple of years where we’ve had much stronger spring leasing and really I can't pinpoint why in a particular that might happen, but on a cadence that does happen. But overall, that’s what kind of the average is. The difference this year really for us was the U.K. attrition, which I kind of discussed in our prepared remarks. With the addition of the 1,100 beds at Kentucky, the housing is now kind of all the new developments, all the new builds at Kentucky that EdR owns and then a small amount of the -- the other 10% is U.K housing. So in that U.K housing on-campus now is kind of specialty housing. So it's Greek, it's special houses, it's athletics, English-language houses, that sort of thing. So what really happened when it comes to backfill it's in the past ,we had seasons in the U.K bed which are the older beds on campus. So when we had some spring vacancy in the EdR beds, because we all share the same policy which is kind of the policy of reciprocity, they can move into our buildings from U.K buildings with no penalties and that’s what we saw over the past several years. This is the first year with the delivery of the new supply that we need to have that ability. We didn’t have the seasons in the U.K beds potentially backfill. So I think as I said in my prepared remarks, we’re kind of at a stabilized place at Kentucky now. So as far as backfilling on campus in the spring once you get past January and what I’ve discussed, there is an opportunity.
Okay. Thanks. That’s helpful. And quickly just on ASU again on -- maybe more your existing assets there rather than developments. I know it's dangerous to talk about pre-leasing numbers kind of this early in the game, but I guess just anecdotally, how do you feel about your overall portfolio and how it position there? And I guess, if you could follow on and talk about Texas Tech as well. It seems like a market that had all the supply last year, nothing this year and it is kind of positioned to be directionally better, not worse, it kind of has to be. And I guess is anything surprised you there and how are things kind of coming together qualitatively?
Well, I will start with ASU. So I have one other asset at -- on the ASU campus and we’ve had a four or five year or so. So the trend in that market has been there's one asset that is -- one off campus asset that’s affiliated with campus -- has an affiliation agreement with campus. They always fill first in the market and I always fill second. And that has been the pattern over the last four years, the trend of what's desirable for those students essentially. So I’m not seeing -- we’ve not seen any difference in that trend based on kind of feel first in the market. So what we’re seeing over the past three years, there's a slowdown. I don’t have the numbers in front of me right now, but the example was three years ago in January we were 77% leased and two years ago in January we were 57% leased and this year in January we were 37% leased. Although at the end of the day by August, the market essentially gets 200% full. So being the same -- essentially the same pattern this year when you look at myself, my performance and my comps, we’re all performing essentially in the same manner just at a lower velocity. Texas Tech, they’ve -- there is no new supply this year. What we are really looking for there's enrollment. Yes, that will be the way that market rebound. So we are not seeing a huge kind of -- we are not seeing large -- additional large concessions this year. The baseline got dropped last year with that market only if you think 81% overall, although the EdR property has achieved 87%. So there were a lot of kind of rate reductions than last year in the market that’s kind of reset it, so we’re just on the rebound.
Okay. That’s helpful. Thank you.
[Operator Instructions] Our next question is from John Pawlowski with Green Street Advisors. Please proceed.
Thanks. Good morning. Bill or Chris, could you remind us what your budgeting for total concessions in 2018 in both rent reduction and gift cards? How that compares to last year with marketing costs were up fairly sizable amount in 1Q. So just want to understand how aggressive you’re defending occupancy this year?
Remember the gift cards and all of that information are all that goes into the rate versus into the marketing budgets, so our guidance of 2 to 4 increase for pre-leasing revenue that includes gift cards and all that other stuff. Chris?
On the marketing expense, I figured I would get a question on that. I know 29% is a significant increase in marketing expense, but remember marketing is only 4% of our total operating expenses. When we came out of last year's leasing season, we made some adjustments to our leasing strategy and one of those adjustments was we enhanced in our budget some of our marketing spend and we shifted kind of when that marketing spend would occur. So based on our budget, although the 29% or $9 per bed increase was with significant on paper, we actually budgeted $6 of that to be spent in Q1, just based on the way our strategy was playing out. Earlier what we’re finding and I think it's kind of an industry trend is the earlier that you can get out right, the more renewals you can capture in the stronger kind of rate caps that you have. So, we put plans in place. Overall, the kind of overspend in marketing that was in plan with $75,000 and those were few initiatives that we picked up in a couple of markets to make them quick changes.
Okay. But can you share total concessions dollars in 2018 plan versus 2017?
No, John. We typically not provided that level of detail.
Okay. And then back to the University of Kentucky, as you work through the attrition problems, as you’re monitoring the supply versus demand balance, did it ever come up in conversations, internal discussions to bring down your concentration to the U.K by selling assets?
Yes, we’ve -- look, we went into the U.K developments with our eyes wide open, realized today that on-campus U.K badge represent I think 17% of NOI. And if you factor in the development portfolio that delivers this year, the number goes to I think 13% or 14%. So it is higher than what we expected, frankly, when we did the investments which started in 2012 or '13. Our expectation was that the denominator, gross assets for the total company would increase and therefore we’d be below 10%, but that's not where we are. We are a little bit higher. From our standpoint, the on-campus assets or the best risk adjusted asset, risk-adjusted return assets that we have for all the reasons we spoke about in the past. So the direct question, John, have we considered selling assets at the University of Kentucky? We've had debates, but we've overwhelmingly each time, came back to -- we’re not planning to sell any on-campus assets at all, including the ones of University of Kentucky. And while we wish we weren't quite this high in a concentration, we think it is a good investment for the company and are willing to continue to roll with it.
This is Tom. I would like to just add one more piece of color about Kentucky. We relatively recently had a meeting with the administration at the University and in fact State funding from the State of Kentucky is largely predicated on student success in making sure that there is greater retention. And so clearly there is an alignment of interest, the rent this University get is tied to the revenue generated, but for the University even more important than that, their state funding is tied to it. So they’ve signed various teams and while we have something that we can report they are clearly focused on trying to reduce the amount of attrition that they have on a go forward basis. And that’s -- that alignment of interest is one of the reasons that we like the on-campus business.
Okay. Thank you.
You’re welcome.
And our final question is from Anthony Paolone with JP Morgan. Please proceed.
Yes, thanks. You kind of answer my question, but have you -- putting aside your interest in signing something on-campus, U.K, have you seen any other on-campus assets trade in the private market, given all the activity just generally we’ve seen in the private market?
No, Tony, we haven't now realized that the huge and overwhelming majority of owned assets from outside the university is owned by the two public company, American Campus, our peer and us. So we've gone on record essentially saying that we don't plan on selling any on-campus communities and I think American Campus has as well. So the overwhelming majority is with us to -- and either seem to have a plan to sell on-campus asset.
Is it possible to bring in a joint venture partner? Like could you bring anyone of the sovereigns you talked about being pretty aggressive in the market to do a joint venture with U.K to bring the exposure down where you still keep control or is that not something that would be attractive?
Look, all of our agreements with all of our universities allows us to sell an on-campus asset in whole or in part. So we have carte blanche to do what we would like -- what we choose to do. But the reasons I said earlier we've just chosen not to sell any on-campus assets, I still believe it's our best risk-adjusted return. And if you go to Kentucky specifically while we should talk about the University of Kentucky investment each quarter because it is significant. Our results have been great. Our results are better than our cumulative and our 2018 based on budget results are better than our underwriting. So as Tom said, Kentucky has been a tremendous partner. They do many things like providing scholarships not only to students who have great grade, but great grades and if you stay in university housing, they've been a tremendous partner and our investment there has been -- again, it has been better than our underwriting. So there has been noise, but you would expect that given the total number of beds that we have. But we're -- we as a Board are not interested in reducing the Kentucky concentration through sale. We would love to be able to reduce it through growing the denominator.
Got it. Thank you.
Thank you, Tony.
Ladies and gentlemen, we’ve reached the end of our question-and-answer session. I’d like to turn the call back to management for closing remarks.
Thank you for your interest in EdR and your time and attention. We look forward to seeing most of you at NAREIT in a month or so. Thank you.
Thank you. This concludes today’s conference. You may disconnect your lines at this time and thank you for your participation.