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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
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 Fourth Quarter 2017 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.
It is now my pleasure to introduce your host Drew Koester, Senior Vice President of Capital Markets and Investor Relations. Thank you, Mr. Koester, 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 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, they can provide no assurances that our currently views are correct or that our 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, 2016 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.
We will also discuss certain non-GAAP financial measures including, but not limited to FFO, NOI and adjusted EBITDA. Definitions for 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 website.
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 for the EdR fourth quarter 2017 earnings call.
We had many successes in 2017 including core FFO per share up 7%, winning seven on campus awards including two in early 2018, delivery of $281 million of own development, a fully funded active development pipeline of $900 million, delivering in 2018 and 2019, acceleration of our Hawai’i development from summer of 2019 delivery to summer of 2018, a low leveraged balance sheet with net debt to gross assets of 21%, and a seventh consecutive year of dividend increases.
However, our overall financial results met the low end of our original expectations, due primarily to a disappointing finish to the 2017-2018 leasing season. First, information on internal growth and industry dynamics. With the softness in the industries final leasing for the 2017-2018 lease term, one of the biggest questions facing the student housing industry relates to the impact of cumulative supply on future internal growth.
From 2010 when this management team took over through 2017 our operations team produced same-community revenue and NOI, compounded annual growth rates of 3.3% and 3.4% respectively. These are very consistent results that were achieved during a period when supply growth outpaced enrollment growth by an average of 64 basis points. While internal growth for 2017 and our projected results for 2018 fall short of this historical trend, our guidance for the 2018-2019 fall leasing is for growth in same-community revenue of 2% to 4%.
We feel that over the long-term, student housing will generate revenue growth in a range of 1.5% to 3.5% and NOI growth in the range of 2% to 4%, consistent with historical averages. We believe our best-in-class portfolio of on and off campus student housing assets, the stronger markets we operate in, and our outstanding property operations team best positions us to navigate the current environment to meet our goal of producing consistent internal growth in NOI.
Our communities -- our portfolio of communities post the following characteristics. 90% of 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 of our portfolio, 1/10 of a mile, average enrollment of universities served 27,000, average age of seven years and average monthly rental rate of $816 per bed.
A further note about our portfolio, including our active developments 82% of our one plan assets and 77% of our total portfolio serve universities in the Ivy League and Power Five conferences, and impressive an 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. In addition to the 16% growth in collegian housing assets in 2017, our current prefunded development pipeline represents an additional 32% increase in collegian housing assets over year-end 2017, importantly 29% of our developments are located on-campus and 96% of our new developments are on-campus or pedestrian a campus.
Most importantly the P3 market continue to be vibrant with two new awards we just announced, EdR has won seven on-campus deals in the last 12 months, these recent win along with 30 plus opportunities we are actively pursuing are a clear indication that 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 of having 32% 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 any value for our platform. And the private market is valuing similar assets at a cap rate of 5% or less. In early January 2018, over $1 billion of student housing assets trade at these cap rates, giving no evidence that the private market valuations are changing at this time.
A few things we are doing to hopefully narrow the public-private valuation gap. We're communicating recent student housing transactions that demonstrate the mid-to-high 4% and low 5% cap rate values for assets similar in quality to our off campus portfolio. Two, we're selling six to seven assets from our off-campus portfolio that have an average distance to campus of six tenth of a mile and average age of 14 years. Our expectation is that these assets which were in the bottom tier of our asset quality will trade at values equal to or inside our current implied cap rate for the portfolio.
Third, we're not active [ph] in the acquisitions market and have also restrained our off-campus development pipeline. We are assuming that any new capital commitment will have to 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 values 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 market remains very attractive and we're very well positioned to seize these opportunities.
Now Chris will discuss property operations.
Thanks, Randy. Our same-community portfolio finished 2017 with NOI growth of 80 basis points on a 1.9% increase in revenue and the 3.7% increase in total operating expenses. For the year, our community teams kept direct operating expense growth to just 2.3% capping off a five year period where direct operating expenses grew at a 2.7% compounded annual rate, a fantastic job of direct expense control by our community team.
Revenue growth for the first half of 2018 is driven by the 2017-2018 leasing results. As a reminder, the 2017-2018 leasing season opened at 95.2% occupancy and generated rate growth of 3%. However, final occupancy was 120 basis points below prior year. There were three main themes in the 2017-2018 lease up. First, the majority of our communities performed well. The same-community portfolio opened at 95.2% occupied, and 69% of our communities achieved rate growth of at least 3%, reflecting the continued pricing power across the majority of the portfolio.
Second, our beds at the University of Kentucky opened at 95% occupied compared to 99% prior year. And third, the final month of leasing in supply challenged market was weaker than expected.
Now turning to 2018, I want to take a moment to point out a change in what we will be providing relating to our fall 20182019 lease up. Last year, we discussed that beginning this leasing season, we most likely were not going to provide leasing velocity details during the lease up. We have concluded that we will update our fall leasing expectations as appropriate based on changes in estimates. So we will no longer provide the leasing velocity details in our release and supplement.
We believe that the interim data is not necessarily reflective of where we believe the annual results will end up. As an example, last February, we were nearly 5% ahead of the prior year leasing velocity and ended up 1% behind. We will update the guidance range when necessary.
We are expecting supply and demand dynamics across our portfolio for the 2018-2019 lease term to be similar to 2017. While the new supply as a percentage of enrollment is expected to improve slightly, we are projecting that 2018 enrollment growth will slow a bit to 1.3%. As a result, we are currently 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.
We have six markets facing cumulative three year supply for 2018 that’s in excess of 10% of enrollment. They include Ole Miss, Arizona State Tempe Campus, Colorado State, [indiscernible] Florida State and Texas Tech. Our marketing and rate plans are established 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.
While our 2018-2019 leasing guidance includes solid growth for the portfolio, based on the 2017-2018 leasing experience, we've adjusted our marketing and expectations for the markets posting continual growth in new supply over the last couple of years.
As part of our guidance for 2018, we released projections for the 2018-2019 lease up. We expect revenue for our same leasing communities, those where we've managed the lease up for the last two years to grow between 2% and 4%. This includes growth of 1.5% to 3% from our communities that are reported as same for the 2018 financial reporting purposes and stronger growth from our 2017 developments and acquisitions.
Turning to the University of Kentucky, we are working hard with the University to make returning to on-campus housing more appealing and desirable for upper-class men in order to attract and keep more talent [ph]. We are also collecting applications for all of our on-campus communities in preparation for the assignment process that begins in May.
Leasing of our 2018 development deliveries is progressing as you would expect. Early velocity in markets with little existing purposeful 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.
In addition to our sales and marketing efforts, we are focused on our revenues providing outstanding customer services and ensuring that the over 40,000 students and our 85 communities live here and live well.
I will now pass the call on to Tom.
Thank you, Chris. Good morning. I'm proud to announce that EdR has recently been awarded two new on-campus developments. The first is a possible ONE Plan development on the campus of Sacramento State University. The development is expected to provide approximately 1,100 beds and is targeted for a 2021 delivery.
The second is a third-party fee development on the campus of UMass Dartmouth that is expected to provide approximately 1,200 beds for an opening in 2020. As this is the recent trend in the P3 market, both of these are larger projects at strong universities.
With these two new awards EdR has been awarded seven on-campus development projects since the beginning of 2017, which include Lehigh University ONE Plan, Mississippi State University ONE Plan, Cornell University East Hill Village ONE Plan, University of South Florida St. Petersburg third-party development, the University of South Carolina third-party development and the two new awards at Sacramento State ONE Plan and UMass Dartmouth third-party development.
In addition to winning these new awards our team has been working hard on all of our recently awarded on-campus mandates. Since our third quarter earnings call, we've made significant progress on our ONE Plan developments at Mississippi State and Lehigh Universities, which are now reflected as active developments in our financial supplemental. Both are underway for their targeted delivery in 2019.
While not as far along in the design and approval phase, we are also progressing on our mandates at Cornell University East Hill Village, the University of South Carolina and the University of South Florida St. Petersburg.
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 the successful partnerships. The need to replace older on-campus housing and demands on institutional funds for academic and support service initiatives combined with the decline in state support for higher education is driving this increased interest in P3s.
Preserving limited debt capacity for academic and research initiatives is the primary motive of universities seeking equity financing for their housing needs. EdR is currently involved in over 30 active pursuits including several bit of new beyond the initial RFP stage and have shortlisted possible candidates.
Overall our active pipeline is progressing as expected with our $900 million of active developments for 2018 and 2019, representing a 32% increase in collegian housing assets over December 31, 2017. With first year economic yields that represented an approximate 25% to 30% premium to current valuation for student housing assets pedestrian for tier 1 universities our development pipeline is creating value for EdR and its shareholders.
Turning to dispositions, as previously disclosed we anticipate disposing of six to seven communities in 2018. The process is well underway and we anticipate that the majority of the dispositions will close in the first quarter. You remember that the properties that we’re disposing off include approximately 4,000 beds that on average of 14 years in age and an average of 0.6 miles from campus. In total these communities are of the same quality and location to campus as the assets we sold in 2016. Please keep in mind there is no assurances that we will transact on all of these communities.
In closing, EdR’s external growth priorities continue to be delivery all developments on-time and on-budget and within operating performance and keeping with our underwriting, win more on-campus ONE Plan development opportunities, create a meaningful pipeline of off-campus developments for 2019 and beyond, and the disciplined monitoring of assets in the acquisition market.
With that report, allow me to turn the call over to Chief Financial Officer, Bill Brewer.
Thank you, Tom and good morning everyone. For the full year 2017 core FFO increased $18.5 million or 15% to $141.5 million and core FFO per share increased $0.13 or 7.3%, to $1.90. The $18.5 million growth in core FFO primarily relate to a $22.6 million increase in total community NOI, driven by our 2016 and 2017 development and acquisitions.
Our full year core FFO of $141.5 million was slightly above the midpoint of guidance given in the third quarter note that as a result of the Tax Cuts and Job Acts signed into law on December 22, 2017, we recoded tax expense in the amount of $835,000 that was not reflected in our earlier guidance estimate. Without this charge which we have not added back to core FFO, our core FFO per share results would have been one penny higher for the fourth quarter and full year. 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 asset 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 December 31, 2017 our net debt to gross assets was 27% and we had $190 million of sold but not yet settled ATM forward equity shares. If we had drawn those proceeds prior to quarter end our net debt to gross assets would have been 21%. We did not settle any additional ATM forward shares in the fourth quarter in anticipation of the disposition proceeds we expect to receive in the first quarter of 2018.
Please refer to the financial supplement as I discuss sources and uses of capital. At December 31, 2017 our capital commitment totaled $900 million with $488 million remaining to be funded of which $426 million is expected to be needed in 2018. We currently anticipate funding these commitments was existing cash, disposition proceed 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 fund our 2018 and 2019 development commitments without settling additional equity our debt to gross assets would be approximately 26% at the end of 2018 and 27% at the end of 2019, within management’s targeted leverage range of 25% to 30%. What a great place to be, built-in growth in collegian housing assets of 32% already funded.
In February, we amended and extended our revolving credit facility that was set to mature in the fourth quarter of 2018. The amended facility has a term of five years matures in 2023 and the capacity was expanded by $100 million to $600 million. With this extension our first debt maturity is in three years, 2021.
Turning to 2018 guidance, please refer to our release and supplement for guidance details. Full year core FFO per share before capital transactions is projected to be in a range of $1.89 to $1.99 and after capital transactions we expect core FFO per share to be in a range of $1.81 to $1.91. We have presented our 2018 guidance before and after capital transactions to illustrate the impact on our core FFO per share.
The capital transaction in guidance includes a settlement of $4.8 million ATM forward equity shares that have already been sold and $225 million of anticipated proceeds from the previously announced asset dispositions. These transactions which relate primarily to funding our active development net to $0.08 dilution in 2018 FFO per share versus 2017.
A few comments on our guidance assumptions, our 2018 same community revenue growth of 1.3% at the mid-point is lower than what we expected from the 2017-2018 fall leasing results of 1.8% and the estimate of 1.5% to 3% we expect for 2018 same-community portfolio to achieve for the 2018-2019 lease term. This was primarily due to lower than expected new leases in January 2018 and higher than expected attrition of students who were enrolled in the fall of 2017-2018 not returning to school in January of 2018.
Same-community operating expense growth of 3% to 4% for 2018 is consistent with the growth experienced in 2017. Guidance reflects no third party development fee revenue in 2018, which results in an $0.08 decline in FFO per share in 2018 versus 2017. As noted in our supplement, we have three recently awarded third party development projects with anticipated delivery dates between fall of 2019 and fall of 2024. We are continuing to negotiate with the universities, but none of these deals have been executed at this time.
And finally in relation to our development pipeline the University of Hawai’i development is included as being delivered in the fall of 2018, while we believe our Oklahoma State development will deliver in 2018 our guidance does not reflect any property level NOI from this community in 2018.
And consistent with our investment underwriting, our guidance reflects a marginally lower opening occupancy on 2018 development deliveries than prior years due to stabilization occurring at a slower pace than historically. As we discussed in our third quarter earnings call we will update all of our 2018 guidance metrics on a quarterly basis throughout 2018.
With that overview, operator, please open the line for questions.
Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets. Please proceed with your question.
Hi, good morning. First question with regard to development, last quarter Tom I believe you referenced $200 million to $250 million of development slated or targeted for 2019. We’ve got a $117 million now showing as under construction for 2019 delivery, which is really resulting in a big drag or burn off of capitalized interest and drag on FFO. So what are you assuming in terms of funding for 2019? And then do you assume 2019 deliveries will still get to that $200 million to $250 million range.
Keep in mind that 2019 deliveries that included Hawai’i until this point in time. And so you're correct that moving Hawai’i into the 2018, the turn amounts that we have reflected that we have under contract is the $117 million. We do have a couple of developments that are tied up working through it that could still potential -- they’re smaller developments that could still potentially be 2019 deliveries. So the movement of Hawai’i and with the others still put this kind of in the range of what we had previously talked about.
So right now, the guidance just assumes the $117 million of deliveries for next year from a funding perspective.
That is correct.
Thank you. And then touching a little bit on the 2% to 4% revenue growth expectation. Just curious in the current supply demand environment, what gives you the confidence in that 2% to 4% number today versus the long-term historical average as you referenced. And then also curious, what are you assuming Kentucky was a little bit of a drag versus your initial expectations last year. How much of that occupancy are you assuming, you recapture in this year's 2% to 4% number?
Hey, Austin, this is Chris. So in that guidance of 2% to 4% for the fall, it includes the 2017 new development rolling into the 2019 numbers. And so if you remember, our new developments opened in aggregate at 88%. So 2% to 4% is being driven by the new developments and acquisitions in 2017 that are rolling in to 2019.
I think a prime example of that, where that's coming from is we talked about Michigan State last year. And how Michigan State opened at 64% occupancy, and clearly it is -- due to the fact that it was an early leasing market and the leasing takes place in the fall. And the building wasn't in any condition to lease up. So we rolled common activity with an open building. So that's where a lot of the comfort comes from in the 2% to 4%.
On the UK assumption, I mean, so I'll give some more color around UK and then kind give you my estimation at the end on the how it plays into the 2% to 4%. For the 6,850 [ph] beds, on campus we're marketing obviously to both first year students and returning students. So over the last seven years or so about 88% of the first year students live on campus at UK. And first enrollment at UK last year was about 4,900 students and we believe that they're targeting a similar number this year.
So hand-in-hand with UK, we've made some changes to be the upper class residential policies. We've designated some specific buildings for upper class wings so that we can get a return as a similar free that they've experienced off campus. And then we enhance the cancellation policy similar to off-campus and the enhanced academic success returns achieved in aggregate over their peers using off-campuses is marketable. So these adjustments that we've made to our kind of strategy at UK hand-in-hand with the university give us comfort that that UK portfolio will achieve results similar to the portfolio as a whole.
Okay, got it. Okay, that's helpful. And maybe we can walk through a little bit of that additional detail offline. One more for me, in the prepared remarks Randy, you referenced measures that you think towards enhancing communication and execution, and just wanted to get a little bit more detail there into what are you referencing and what steps have you taken?
Well as you recall, our second quarter call did not go particular well. And so one of the feedbacks that we had was that maybe we weren't as fourth coming on some of the data that we should have been. So I think you saw in our third quarter release and hopefully you agree with this release that the data that we published is all inclusive and very, very detailed. So we've done that.
A few things that we've done from an execution standpoint, which I think we touched on in the third quarter. One area was in the development construction area. We've hired a number of additional construction people starting in the second quarter I think of last year. And those folks are fully up to speed and on the ground running. We've limited a particular construction oversight person to two jobs versus in the past that may have had more.
So those are some of the examples of what we've done from a staffing and policy standpoint to try to overcome some of the noise, one of the items I just popped into my head that I forgot to mention was we've been backing up for construction deliveries. We've been backing up the number of days before school start so that we have additional cushion to be able to open product on time now absent Oklahoma State, which has unique issues, we've opened everything on time and on budget.
So today for a typical August middle of August opening date for a school -- or typical August school start date, today our targeted completion date and GC contract date would be June 1st. So those are just some of the few things that we have been doing.
Great, thanks for taking the questions.
Thanks, Austin.
Our next question comes from the line of Alexander Goldfarb from Sandler O'Neill. Please proceed with your question.
Hey, good morning. Just a few questions from our end. First up, understand that this past year was tough one, just on really you think in expenses, but what is expected that this coming fall with 3% revenue growth and presumably easier comps on expenses, would have meant that same-store NOI metrics would have been better this year, being helped by the back half of the new school year.
So can you just give a little bit more color why the 3% expected revenue growth doesn’t flow-through or help on the top line revenue? And then also, why expenses are expected to be elevated is that continuing property tax, abatement roll or what's driving that there's not a benefit from a comp basis in the second half.
Hey, Alex, this is Bill. On the first part, when you say 3% revenue growth for the back half of 2018, that’s on a 2019 same-store grouping. So that's why it doesn’t show within guidance because the 2% to 4% is the 2019 financial grouping. So the growth for the back half of the 2018 grouping is 1.5% to 3%. And as I said in my prepared remarks, the full year growth at the midpoint of 1.3% is a little different than the math of last year’s fall leasing pluses 1.5% to 3% due to attrition of kids from that were in school in August that are not there in January.
So that’s on the revenue side so it’s not 3%. And when you look at the expense side, the expense numbers are essentially flat with last year, we’re budgeting same-store expenses to be 3% to 4%, we finished last year at 3.7%. The trends in the expense continue to be the same as the direct expense are low 2% to 2.5%. And the wildcard is real estate taxes, which were up low double-digit last year in line with guidance and we are not giving individual line items on budget going forward, but it's a similar increase on real estate taxes for the budget for 2018.
Okay. But -- I appreciate that, but still, when do you think we would expect to get back to that sort of long-term NOI growth of the call it 2% to 4%, call it 3%, I mean, it seems like last year and this year the expenses are offset, it’s not showing up in revenue and the expenses are mitigating that. So when do you think we get back to that sort of industry expectation of a sort of 3-ish percent NOI growth?
Yes, Alex, this is Randy. Look I think that's the most important question for the business going forward and I personally believe we get back to that trend very soon maybe even starting in 2019. A few things that happened in 2017 that I think provides a little bit of color and maybe gives us -- makes us a little gun shy on our guidance this year, but we will see.
In 2017, while the final leasing results weren’t exactly what we had hoped, we still had 68% of the portfolio with a rate growth of 3%. So the overall environment was still positive, but each and every year we have had supply growth in a variety of markets. And so we identified three or four markets that were very challenging and so did ACC. But overall, the entire market was still positive. Recall last year we finished the season at 95%, so I think 120 basis points reduction.
But 95% occupancy across the same-store portfolio, I think, it’s pretty good and we think this occupancy level for our portfolio is still very achievable given the occupancy rates on campus and also in multifamily.
And then when you look at our portfolio in particular something like 70% of our NOIs drive from markets with accumulative supply was I think three years was less than 6%. Also our portfolio nationwide about 25% of kids live in purpose builds student housing, but it’s 70% of our markets is less than a 25%. And of course our portfolio is a tenth of a mile from campus. So really all that combined together, I think, we’re going to be fine on the demand side. And lastly land price and construction cost keep going up and at some point in time that is going to have an impact on supply.
So look that was a very long answer to -- now going forward what we have to get is or what we plan to get is mainly rate growth and we plan to hold occupancy at 95% I think that’s very achievable. And as we mentioned the same-store grouping for 2019 financials is 2% to 4%, I think that bodes well for 2019 and forward getting back to the historical norm.
Okay. And then let me ask this question, at what point -- I mean, you guys have done a lot to make the portfolio more pedestrian you’ve obviously done a lot of on-campus development and investments and the overall from a company perspective and shareholder perspective we dealt with last year and the pre-leasing short fall this year the guidance felt short of expectations.
So at what point do you guys sort of reassess the business model and then also just given where the stock is how does this impact where you see capital going forward, are you -- Randy are you going to stair back development and think of more about stock buybacks or how are you thinking about the current cost of capital not for the currently pipeline, but for what you would want to put in there in the future for the next round versus the stock?
Sure, I guess, I’ll take exception to a little bit of what you said upfront. Since this management team took over we have grown core FFO per share by a CAGR of over 5% and that was at a time when we reduced leverage from 40 something percent down to the current level. And we also increased FFO per share 7% last year. So there has been nice growth in core FFO per share over the period of time. Also that was a time when we sold over 70% of our portfolio that was in existence. So, I think, what we’ve done by both transforming the balance sheet and transforming the portfolio has yielded great result for our shareholders.
But to your point precisely look we realized that any new capital commitment that we make if we want to stay in our 25% to 30% leverage ratio, which we do has to be generated by the various levers. And right now the only lever that make sense is selling assets, which we are doing this year.
So what we’re going to do going forward it all be based upon whatever the cost of capital various levers are at that time. But with that said, at times like these we look at development opportunities probably a little harsher than we would otherwise and therefore you’re seeing a bit of a restrained development pipeline for 2019. And if things persist, I think, you’ll see a restrained pipeline for 2020.
We’ve run the math on buybacks like I am sure you have. And at this time we don’t think it makes sense for instance if you buy $400 million worth of stock back, which is somewhere around 20% of our outstanding and do it with debt I think it’s accretive to NAV and FFO per share by 5%. But that increases the leverage to 40% and we don’t think that’s a level we want to be at because we want to be able to seize upon the opportunities on the on-campus marketplace.
So that if you switch levers instead -- or switch gears and say we’re going to buy $400 million stock and sell assets at say a 5 cap or lower, while that mathematically adds 2% to 3% accretion FFO per share and NAV per share. Again I'm not sure it makes a lot of sense to do so shrinking the size of the enterprise, which I think is one of the competitive advantages in winning the on-campus deal.
So we thought about the things that you've mentioned, but at this standpoint, given where everything lays we're preceding forward with a restrained development pipeline, doing the things that I mentioned in my prepared remarks to trying to narrow the discount to where the public markets -- or the private markets trade today. Did I answer your question, Alex?
Yes. And then did you give a cap rate on expected dispositions?
We did not, what we said I think in our prepared remarks is we were expecting the cap rate to be inside of our current implied cap rate, which is around 6.5%. And again these assets are in the lower quality tier of our off-campus portfolio.
Thank you, Randy.
Thank you.
Our next question comes from the line of David Corak from B. Riley FBR. Please proceed with your question.
Hey, good morning everyone. I just want to go back to the comments about the attrition and higher turnover of December ending leases. First what was the impact and how does that compared to kind of your historical attrition rates? And then second, is there are potential upside in backfilling that attrition and what is that upside realistically and you have any of that baked into guidance?
Hey, David, this is Chris. So the impact of that attrition was about 70 basis points. And the attrition is from our on-campus communities specifically UK. And the difference between on-campus and off-campus is that in on-campus if a student leaves the university that can't live in the housing, versus in off-campus they can stay in our housing and they're responsible for it regardless of their student status.
So the attrition was more than expected more than historically. And we are waiting on data that find out why. So when you ask the upside question, not really know because the way occupancy works on campuses that it starts out at the high peak and close -- declines essentially as the semester goes on as student drop out of school for academic, medical, family reasons, et cetera.
Yes, David this is Bill. We did not add anything to guidance for an assumed pickup of that attrition to your second question.
So year ending, through ending occupancy at UK was more like 94.3%?
Yes.
Realized and we talked about underwriting at UK or anywhere else. The 95% underwriting is the opening occupancy, and we'd always assume some attrition. But as Chris said, the attrition this year was different than the previous years and more and we're waiting on data from UK to fully understand why it was.
Okay, fair enough. And then can you provide any update on kind of discussions with NC State?
Sure admittedly, it's frustrating because it's taking longer than any of us would hope. But we are having meaningful dialogue with people from their administration real estate department and housing about a long-term solution. And while it's difficult for us to understand why it takes them so long to make decisions it does. And so at this point in time, until we have something definitive worked out, we're keeping Kentucky and other assets -- well not Kentucky at Carolina State University to ours and other assets. So -- but we continue to have dialogue given as recent as last week.
Okay. So are you assuming like a comparable occupancy as you did last year like 50% or are you assuming kind of a stabilized number?
Yes, David, this is Bill. We took a hair cut off of what we actually achieved last year. But we didn't quite go down to the 50% because if you step back and look at the market, the entire market was still full between NC State and the off-campus. But we're unsure given where NC State is on their stuff whether that’s -- whether the ability to fill both still exists. So we took a hair cutting in our internal budgets and guidance on that property.
Alright, thanks guys. I’ll leave the floor.
Thank you.
Our next question comes from the line of Juan Sanabria from Bank of America Merrill Lynch. Please proceed with your questions.
Hi. Just a quick follow-up to David Corak's question about the impact of the turnover. So you had 1.7% same store revenue in the fourth quarter. Are you saying that the run rate in the first quarter due to the attrition is down 70 bps from that to 1%?
Yes, Juan, this is Bill. I think that’s right, I don’t have by quarter numbers in front of me, but that sounds right.
Okay. And then for the developments, what kind of yield are you guys expecting with more modest occupancy assumptions giving you experience last year for kind of year one initially yields for 2018-2019 school delivery developments.
Yes, up until relatively recently new developments actually pretty typically achieved 95% occupancy or more. We are seeing in many markets where you don’t reach stabilization until year two. And so, kind of on the market-by-market basis we are trying to anticipate what we think will happen in the first year and then reach stabilization typically in year two.
What does that mean from a yield perspective, because you were kind of around 5% if not lower for last year’s delivery is it a similar number for 2018?
So, I mean, typically what we were targeting were development yields at the 95% levels somewhere in the 6.5 range. So obviously -- and candidly what we look at is more an internal rate of return because that first year decline let’s assume if community opens at 85% or 90% instead of 95%, the change in internal rate of return over your ownership is really pretty nominal it’s just a small amount. But this clearly the first year yield would indeed something less maybe a half of basis points less.
Okay. And then for Oklahoma State the development there, is there any -- so there is no NOI assumed, what’s the assume timing, I guess, of when that project could be delivered if you could just give us kind of the latest thinking there?
So I guess on the positive our joint venture partner has indeed funded our anticipated cost over runs. The construction is back kind of in full force and we have on site persons that are monitoring even though we are not the developer of quoted risk we do have someone that’s monitoring and they are meeting the schedule and that makes us optimistic that this community will indeed be opened for 2018. But given the history of missing the opening last year it makes it somewhat suspect as to what kind of level of occupancy you’ll receive for this year.
So, we have hopefully rather conservatively assumed that given the uncertainty of where the leasing will be there still going to be operating costs so there is no contribution margin or NOI on this project budgeted for 2018.
Okay. And just the last one for me, can you just talk a little bit about the Sacramento State the university enrollment base and how that’s been trending?
Sure. Well Sacramento State actually has a student headcount of some 30,000 students some 23,000 is full time, really is underwrite kind of the credit rating of the university. So, Moody’s has them as a AA2 university. Their five year CAGR for freshman enrollment their growth has been 4.2% per year, their existing university is 100% occupied independent market studies by [indiscernible] and other reflect that the off-campus has been growing rental rates by 7% per year.
So we think this is clearly a great place for us to be with a ONE Plan and currently the university only houses about 7% of its enrollment. So, what’s contemplated is a lot to be done, but what is contemplated is approximately 1,100 beds and the department configuration and we are targeting currently a 2020 delivery.
Thank you.
You’re welcome.
Our next question comes from the line of Anthony Paolone with JP Morgan. Please proceed with your question.
Thank you, and good morning. Randy in your opening comments you talked about how robust the private markets are in terms of the transaction volume there, there also seems like a lot of the supply on the front end is getting driven by private capital. Can you comment on whether you see that easing up if you see the private side of the business continuing to raise a lot of capital for development or just what's happening with that side of the business?
Just a little additional background, I'm not sure it was in my prepared remarks. In 2017, 34 student housing assets that we think are reasonably comparable to our off-campus portfolio trade for $2.6 billion. We got this information from Peter Cath [ph] with one of our brokerage firms. The range of capital rates were 4.25 to 5.3 with an average of 4.96.
So 2017 was a great cap rate compression year and so the though as well as 2018 going to be similar. And so far it has been early in 2018 approximately $1.5 billion assets have been traded again off-campus at a high low to 5 to low -- or high 4 to low 5 cap rate range. So, it seems like the marketplace -- the product market place is still valuing assets like I just mentioned.
And the reason why is what you've just said Tony is the sovereign wealth fund amount of funds that are targeted for student housing is large and we've had number of different funds both in Canada and Far East and we are not seeing that slowdown. So it's hard, you never know when the facet gets is turned off. But at this time, the facet is wide open and I just don't see it changing.
Do you think that then continues to just be development just given the likelihood of just outsize spreads that is the private platforms are able to generate then?
Perhaps, and I guess one comment I'll make that possibly tempers it, while we have seen five years accumulative supply equaling about enrollment growth or a little bit behind enrollment growth. What we are seeing is that the developments are still reasonably disciplined development from a location standpoint, most people are still developing within walking distance of campus.
Where there is just so much [indiscernible] land that's walking distance to campus. I would -- so, I think that's going to be a natural inhibitor of the growth going forward. What we're not seeing today, which is encouraging is we're not seeing people develop 1 mile or 2 miles from campus, because if you do that while our portfolios inside of that location, all supply hurts.
So if you start seeing supply 1 mile, 2 miles, 3 miles from campus, that's when I would start getting really concerned. And we're not seeing that. What we're seeing people do instead is going to say Tier II universities reclassify as and building close to campus there and that's not a place where we are players, I don't really -- we don't believe that the risk adjusted returns are sufficient there, but other people do.
Okay. And then as you look out and use if you want to start incremental development and your equity market access is not great, how do you think about the next slog of assets that you’d consider to be noncore or right for sale?
We have two levers like one we could sell noncore assets and really we've not really said noncore assets in the past. What we've really is said and we truly believe is that every asset that we have off-campus is available for sale to fund the appropriate on-campus development, and then maybe off-campus development as well.
So we have that lever that we can always pull and second which we've not done in the past. We have a lot of parties that would love to be a joint venture development partner with us. That's not what we are planning to do. But if this dislocation in share price and market fundamentals continues that’s something we can certainly pursue, and we have a lot of parties that would love to be joint venture partners with us.
Okay. And then last question just again thinking through some of the larger platforms on the price side of the business and how much capital they now have. Have you seen them computing more for on-campus projects versus historically or are they still mostly off-campus?
Virtually off-campus Tom. It's tough to be a new entry into the on-campus business. Because the first thing they want to know is your history and your success rate. So at least to-date, we have not seeing them pursue the on-campus business.
Okay, thank you.
You're welcome.
[Operator Instructions]. Our next question comes from the line of Nick Joseph with Citigroup. Please proceed with your questions.
Thanks. Just in terms of core FFO guidance, it looks like you provided with capital transactions and without. Is there a change that you either don't settled the forward ATM equity this year or that you don't do the dispositions that are expected? Just trying to understand kind of what's the difference between the two?
Nick, sure. I mean both of those -- I mean, none of the at dispositions are closed at this point. We've not pull down on the ATM at this point. We have until the end of 12-31-2018 to pull down the ATM. And in fact if we wanted to we could probably extend it to 2019, which is like we did last year. But from a guidance and modeling and the way we are running the balance sheet as we’ve provided the details, we are assuming the disposition of those assets as well as the ATM equity, forward proceeds to fund the known development pipelines then.
But even those are events that when we get to the point in time, where we decide, we need to pull down the equities or actually pull the trigger on a disposition those will be decisions that are made at that point in time based on our cost of capital and what we see coming forward in the pipeline.
So the range could actually be $1.81 at the low end assuming you do all the capital transactions to $1.99 if you postpone both of them?
Mathematically, sure.
Okay. And then in terms of pre-leasing I recognize kind of the year-over-year comps, maybe don't paint the full picture, but if you take kind of broader look at it maybe trailing three years or trailing five years. How is pre-leasing trending so far this year, relative to historical averages?
Obviously where we're at really I think today we believe is consistent with the guidance that we put out. And as you know what we're attempting to do is to not show pre-leasing data on each quarterly call. And the reason why is that many times the pre-leasing data in February doesn’t really reflect where it’s going to end up. For instance last year in February we were, I think, 5 percentage points ahead in occupancy versus the previous year, but ended up 1% down. So with all that said, where we're trending today is consistent with the guidance that we have put out.
Hey, it's Michael Bilerman speaking. Randy just a question your response about doing development joint ventures with a lot of the institutional capital that's out there, that's a best way to fund rather than using your equity, which arguably trades at a discount. I'm curious why, would you think about doing core joint ventures in terms of selling existing assets. Because I would assume as much as doing development joint ventures, while that would fund that commitment, you would lose the development upside that you're effectively funding on balance sheet today.
Sure, what I said was that what we've typically done is we've sold assets to fund developments when we have this type of dislocation. We've never entered into a development joint venture with anyone that didn't already have the land and brought it to us. So that is historically what we've done. But the one reason why we run the low leverage balance sheet that we do Michael is, we don't know when these on-campus opportunities are going to rise, and we don't know how large they're going to be.
So we need to have the balance sheet capacity to be able to seize upon those opportunities. So what I was intending by my comment is historically we've sold assets, but if somehow we win $400 billion of on-campus opportunities maybe that doesn't lend itself to just the recycle of assets. Maybe you need to go to the joint venture side.
Okay. And then just going back to the guidance, what is the timing of that $0.08 of dilution that's effectively in the guidance as you settle the equity and do the dispositions? What's the timing of those activities that’s embedded because arguably for class on beginning of the year there will be some impact to 2019 as you get the full year effect? So, can you just sort of highlight and then what is effectively in without capital transactions to fund is that just debt at -- are you just raising debt at some rate. So I am trying to understand the differentiate…
I will do the first piece and Bill will do the second because I can’t remember, but on the first piece the capital transaction the disposition six of the seventh are expected to close in February, March, April maybe even the first part of May. And as you can appreciate there are six I think there is five different contracts made they mature at various particular times. And then on the ATM forward it’s a level pulling down in the second, third, and the fourth quarters to get to 25% debt to gross assets at the end of each quarter approximately. Then on the second part of your question…
Yes, on the without capital transactions, Michael, we just ran everything up though the revolver from a guidance standpoint we have capacity on the revolver. And so that’s the high-end of guidance so without capital assumes no equity and that it’s all funded with debt.
But LIBOR based effectively floating rate debt so the achievement of this sort of call it $1.99 at the high-end, whether you settle the equity in 2019 you have to do a bond issuance at a much higher rate if you want to just be higher levered from that perspective, correct?
Yes, or other items like selling of assets, to doing a term loan like we have done in the past, that’s correct.
Okay. And then just from the shares it look like the difference between the projective shares is only 1.5 million of 4.8 million so you are only getting really 30% of the impact in 2018, as we start thinking towards 2019 there obviously is a lot of dilution on the comp as the equity gets fully baked in at that point.
Correct, I think the way we -- what you said is mathematically correct, but it does leave a piece and that piece is remember the $650 million of developments that we delivering in 2018 or only in for four or five months and you got capitalized interest. But for 2019 you have a full effect of those deliveries for the full year.
And then just last question, I guess, what was the rationale to actually put in FFO number without capital transactions, I mean, capital as part of your business as you spend money to fund development you need capital and there is a cost to that capital typically we’ve seen companies put out a guidance number and then walk through the items that are impacting it, what you are trying to sensitize the street to $1.95 type number that I don’t…
No, this…
Okay, alright. Thank you.
Our next question comes from the line of Drew Babin with Robert W. Baird. Please proceed with your question.
Hey, good morning. Question on assuming your universities on page 15 of the supplemental where there is higher supply expected for 2018 and I guess specifically with Arizona State Tempe, can you talk about what specifically as far as strategy goes you are doing in advance of September those new deliveries of your competitive supply presumably deliver maybe closer to the fall what are you doing early on is there anything you are doing differently at some of these universities to either guarantee yourself a high level of occupancy possibly at the expense of rate or otherwise can you just comment on maybe just dig a little deeper into strategies at those schools.
Yes, Drew, this is Chris. At Tempe over half of the new supply is us coming onboard, one of the strategy that we’ve put in place is marketing expenditures if you look at Q3 what I spend in marketing it was 19% over -- that 19% increase and that’s because we started our strategies earlier. So, new developments great in a new supply market come out of the box they try to come out early but sometimes come out later. So we get on -- we’ve gotten on the ground earlier to try to capture some of that velocity early in the season that we have done before.
So, I guess if I am talking about a total adjustment of strategy I want to talk about last year and where we got so that you can understand kind of our changes for this year. So -- and Randy said it earlier, as a reminder beside the three markets that we're really struggling right, last year resulted in an effective second tier II the portfolio have got to 96.6% with 3.3% rate growth. So a wholesale approach to all of our marketing strategy doesn't make a lot of sense for the whole portfolio.
So getting on the ground earlier and enhancing the spend earlier in the cycle to try and get a base has really helped. Adjusting the strategies for the new demographic, because our millennials have aged out and our [indiscernible] has come in and so that's a strategy adjustment. And I'll give one example on how this earlier strategy is working out, although I don't want to talk individual markets, so I'll give you an example of Tuscaloosa. So Tuscaloosa, Alabama has had layered new supply 2015, 2016, 2017 and now 2018.
So my community there is nominal marketing spend almost none in the years past still got to 100% invest so pretty early. So when we adjusted our pilot data and our new strategies for this year, Tuscaloosa is one of the markets that was highlighted because of the layered new supply.
So taking that information we have really didn't market in the past. So a strategy adjustment in Tuscaloosa market was to come out with some robust marketing very early similar to kind of the way that you market a new development with the events in and what have you. And what's actually done for us is all that the velocity in that market overall was little bit behind with the new supply is given us the ability to not sacrifice rate. It continue to get rate for us. So that has really been a result of this different strategy.
That's helpful. And I guess, just one follow-up on Texas Tech, obviously a lot of supply last year, but just seem data suggesting that there is very little if anything coming on this year, and so would it be accurate to kind of say that that's one university that probably can only will get better relative to how it did for the 2017-2018 lease up?
Yes, that is the conversation that we had, it kind of hit at 81% last year with almost 4,000 new beds that was somewhat rock bottom. And clearly the driver to absorption is going to be enrollment, and how that grows, but, yes, I would notice the supply coming on and no real material conversations from the university about a decline in enrollment and we should be seeing some upside there.
Okay, very helpful. Thank you.
There are no further questions in the queue. I would like to hand the call back to management for closing comments.
Well, thank you for your interest in EdR. And we look forward to updating you on our progress in April. Thank you.
Ladies and gentlemen this does concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time. And have a wonderful day.