Campus Issues at Missouri Hinder EdR's Earnings

EdR reported results for the quarter ended Sept. 30, 2016, earlier today. Issues at two universities in the Heartlland hurt the REIT's performance, according to Sandler O'Neill + Partners:

As EDR previously announced, final 2016/2017 leasing was negatively impacted by the attempt to change pricing at OK Norman and the well known campus issues at Missouri. Otherwise, preleasing finished up on par with last year. Given the impact these two assets had on this year as well as shortfall at The Hub at Madison (underleased, acquired in May), it would seem like there will always be a few properties that impede full occupancy. To this point, we note EDR's same store revenue expectation for 1H17 of 2.3% versus ACC's FY17 of 2.7% - 4.2% and look for management's comments about how EDR's FY17 may stack up versus ACC.

Here's the release from EdR:

Company Highlights

• Net loss attributable to common stockholders was $3.5 million, or $0.05 per share, for the third quarter of 2016 as compared to a net loss of $4.7 million, or $0.10 per share, for the third quarter of 2015. Year to date, net income attributable to common stockholders was $30.8 million, or $0.45 per share, as compared to $5.1 million, or $0.11 per share, in 2015;

• Operating income for the quarter declined $1.2 million to $1.2 million for the third quarter on a 13.8% increase in revenue and a 16.5% increase in operating expenses. Year to date, operating income was up 22.8% on revenue growth of 14.0% and a 12.5% increase in operating expenses;

• Same-community NOI declined 0.8% for the quarter, on a 2.7% increase in revenue and a 6.0% increase in operating expenses. Year to date, same-community NOI was up 4.1% on revenue growth of 3.7% and a 3.1% increase in operating expenses. Operating expense growth for the quarter was generally as expected with year to date growth of 3.1% in line with full year expectations;

• Core funds from operations ("Core FFO") increased 33.4% for the third quarter with Core FFO per share/unit down $0.04, or 13.3%, from prior year to $0.26. Year to date, Core FFO increased 35.4% with Core FFO per share/unit down 3.3% from the prior year. Core FFO declined on a per share/unit basis primarily due to deleveraging equity transactions in 2016 and late 2015, which reduced debt to gross assets from 40% at September 30, 2015 to 18% at September 30, 2016;

• Reaffirmed 2016 guidance, including diluted earnings per share in the range of $0.77 to $0.80 and Core FFO per share/unit in the range of $1.73 to $1.79;

• Awarded the right to negotiate a third-party fee development by New Mexico State University. This on-campus project is anticipated to include multi-phases for over 2,000 beds with EdR managing the university's entire on-campus housing portfolio, including existing beds, when completed;

• Construction is underway on four on-campus ONE Plan developments at Boise State University, Northern Michigan University and the University of Kentucky for 2017 delivery;

• Purchased our partner's 25% minority interest in the recently opened Retreat at Blacksburg at Virginia Tech in September; and

• Completed forward sales under our ATM program, since August, for a total of 4.6 million shares at a weighted average net price of $43.73 and available proceeds of $199.6 million. The forward transactions can be settled, shares issued and proceeds received through December of 2017, however, none have been settled to date.

"It has been a busy and productive year for EdR," stated Randy Churchey, EdR's chief executive officer. "Our same-community portfolio is performing well, we added eight top of class assets to our portfolio though developments and acquisitions so far in 2016 and our opportunities for continued external growth are robust. Our 2016-2017 leasing results exhibit continued strength across our markets, which along with the expectation that 2017 supply and demand dynamics will remain consistent with 2016, bodes well for next year."

Net Income Attributable to Common Stockholders

Net loss attributable to common stockholders for the quarter was $3.5 million, or $0.05 per diluted share, as compared to net loss of $4.7 million, or $0.10 per diluted share, for the third quarter of 2015. The $1.2 million decrease in net loss attributable to common stockholders relates primarily to the following:

• a $3.1 million increase in total community NOI, and

• a $2.4 million decrease in net interest expense, mostly offset by

• a $4.5 million increase in depreciation,

• a $0.8 million increase in development pursuit costs, and

• a $1.1 million increase in other operating income, representing a noncash fair value adjustment related to an acquired community.

Operating Income

Operating income for the third quarter was $1.2 million as compared to $2.4 million for the third quarter of 2015. The $1.2 milliondecrease relates primarily to the following:

• a $3.1 million increase in total community NOI, and

• a $1.1 million increase in other operating income, representing a noncash fair value adjustment related to an acquired community, offset by

• a $4.5 million increase in depreciation, and

• a $0.8 million increase in development pursuit costs.

Core Funds From Operations

Core FFO for the quarter was $19.4 million as compared to $14.5 million in the prior year. The $4.9 million increase relates primarily to the following:

• a $3.1 million increase in total community NOI,

• a $2.4 million decrease in net interest expense, mostly offset by

• a $0.8 million increase in development pursuit costs.

Core FFO per share/unit for the quarter declined $0.04, or 13.3%, to $0.26, primarily due to a 50.4% increase in weighted average shares related to deleveraging equity transactions in 2016 and late 2015 which reduced debt to gross assets from 40% at September 30, 2015 to 18% at September 30, 2016.

A reconciliation of GAAP net income attributable to common stockholders to funds from operations ("FFO") and Core FFO is included with the financial tables accompanying this release.

Same-Community Results

Same community NOI for the third quarter declined 0.8% to $22.5 million on revenue growth of 2.7%, comprised of a 3.0% increase in rental rates, a 0.6% decline in occupancy, and a 0.3% increase in other income, offset by a 6.0%, or $1.5 million, increase in operating expenses. Year to date, NOI is up 4.1% on revenue growth of 3.7% and a 3.1% increase in operating expenses. Operating expense growth for the quarter was generally as expected with year to date growth of 3.1% in line with full year expectations.

2016-2017 Final Leasing

The same-community portfolio of 27,537 beds opened the 2016-2017 lease term 96.7% occupied with rate growth of 3.4%. Although near optimum occupancy levels for the same-community portfolio, opening occupancy for the 2016-2017 lease term was 111 basis points (297 beds) behind prior year and 61 bps (169 beds) below the low end of prior guidance due to the previously discussed issues at the Company's two communities serving the universities of Missouri and Oklahoma, which opened 81.4% and 61.3% occupied, respectively.

Without the negative leasing impact from the communities at Missouri and Oklahoma the remaining 46 communities in the same-community portfolio opened the 2016-2017 lease term 97.9% occupied, same as the prior lease term, with an average rate increase of 3.5%.

Keep in mind, there are differences between what communities get categorization as "same" for leasing and for supplemental financial reporting purposes. In addition, the supplemental financial reporting same-community mix changes at the beginning of each year. As a result of this mix difference and absent other quarterly leasing fluctuations, the same-community leasing results above, that were achieved for the 2016-2017 lease term, equate to supplemental financial reporting same-community revenue growth of about 1.5% for the fourth quarter of 2016 and will return to the approximate 2.3% in the first and second quarters of 2017 when more of the same-leasing communities roll into the same-community portfolio for supplemental financial reporting purposes.

EdR's new-community portfolio opened the 2016-2017 lease term 88.8% occupied, at the lower end of expectations. Opening occupancy was lower than typical underwriting due to known occupancy shortfalls at The Hub at Madison community, serving the University of Wisconsin. As the community was acquired in May, we could not meaningfully impact leasing results for 2016-2017, but this is a strong, well-located asset in a good market that we expect to achieve occupancies in the high nineties next year.

The Company provides additional leasing information in its quarterly earnings supplement located at http://www.snl.com/irweblinkx/yearlypresentations.aspx?iid=4095382.

Market Supply and Demand

AXIOMetrics recently reported that on a national level new student housing supply in 2017 is anticipated to be consistent with 2016 levels and that over the next five years annual effective rent growth is expected to average 3.3%, with occupancy remaining relatively stable in the mid 95% range.

Consistent with the supply and demand update given in our second quarter earnings release, we currently anticipate 2017 new student housing supply as a percentage of enrollment, in EdR markets, to exceed projected enrollment growth by 40 basis points. This 40 basis point spread is comprised of supply growth representing 2.2% of enrollment as compared to an expected enrollment growth of 1.8% and is consistent with the supply to enrollment gap EdR experienced in our markets over the last four years as follows:

The Company provides additional enrollment and supply information by market in its quarterly earnings supplement located at http://www.snl.com/irweblinkx/yearlypresentations.aspx?iid=4095382.

Investment Activity

During the quarter, EdR completed the previously announced acquisitions of Pura Vida Place and Carriage House, two communities totaling 194 beds serving Colorado State University as well as a 38% interest in Urbane, a 311-bed community at the University of Arizona. The acquisition of Urbane is a two-phase purchase with the final closing anticipated to be completed in September of 2017.

The previously announced $80 million pending acquisition of a 700-bed community serving a tier-one university is still in process. Closing is subject to customary conditions, including normal due diligence.

On the development front, EdR successfully delivered its 2016 developments at Virginia Tech, the University of Kentucky and the University of Mississippi on time and on budget. In addition, our active developments at Boise State, Michigan State, Texas State, Oklahoma State, Northern Michigan University and the University of Kentucky for 2017 delivery and at the University of Pittsburgh and Florida State University for 2018 delivery continue to proceed as planned and are on pace for their targeted openings.

The recently awarded project at Cornell continues to progress with the university and the town of Ithaca working on project approval.

During the quarter, the Company hired Jared Everett to augment its capabilities in the pursuit of on-campus ONE Plan projects. Everett comes to EdR from Boise State University where he served in several capacities over his nearly 14 years, most recently as treasurer and executive director of real estate and business development. Everett, who recently served as the president of the Association of University Real Estate Officials (AUERO), worked at Arizona State University before moving to Boise State University.

The Company was recently awarded the right to negotiate a third-party fee development project by New Mexico State University. This on-campus project is anticipated to include multiple phases for more than 2,000 beds. The university plans to have EdR manage the universities entire on-campus housing portfolio, including existing beds, when the project is completed. This project reflects the multiple ways universities are solving their on-campus housing needs and EdR's position as a leading university partner.

"With active development deliveries that represent a 20% growth in our collegiate housing assets over September 30, 2016, we still have six months to convert our many on and adjacent to campus pursuits into 2018 development deliveries," stated Tom Trubiana, EdR's president. "We are seeing an abundance of opportunities and importantly, our team is very busy working on over 30 on-campus opportunities."

Capital Structure

At September 30, 2016, the Company had cash and cash equivalents totaling $115.5 million and availability on its unsecured revolving credit facility of $500 million. The Company's net debt to gross assets was 14.4%, its net debt to EBITDA - adjusted was 1.7x, and its interest coverage ratio was 7.0x.

Moody's, who has a Baa3 investment grade rating on EdR, recently increased the Company's credit outlook from stable to positive in recognition of EdR's consistent operating performance as well as management's more conservative financing strategy and reduced leveraged targets.

In August, the Company renewed its ATM program with a $300 million authorization. The renewed program includes the capability of selling shares in a forward structure, which allows the Company to lock in equity for future funding needs at a known cost of capital, including carrying costs of less than 1%, without issuing shares and diluting earnings until the funds are needed. Since August 2016, the Company has sold 4.6 million shares under forward contracts for a weighted average net price of $43.73 and initial available proceeds of $199.6 million.

The forward transactions can be settled, shares issued and proceeds received at any time at the Company's option through the end of 2017. The forward price and resulting settlement proceeds received by the Company will be determined on the settlement date(s) with adjustments during the term of the contract for the Company's dividends as well as for a daily interest factor that varies with changes in the federal funds rate. Dividends are not paid on the forward sales until settlement and to date no sales have been settled or shares issued.

At September 30, 2016, the Company had capital commitments relating to developments and acquisitions of $526 million, comprised of $350 million on active 2017 and 2018 developments, $80 million for Cornell University and $96 million to be funded on announced acquisitions that are yet to be closed. The Company estimates that of its $526 million in remaining capital commitments, $197 millionwill be funded in 2016, $236 million in 2017 and $93 million in 2018.

"Even though these capital commitments will be drawn during 2016, 2017 and 2018, due to our current low leverage, we can fund them today with cash on hand of $116 million, proceeds from the future settlement of the completed ATM forward sales of $199.6 million and borrowings under our line of credit of $210 million, on which we have $500 million of availability, and our debt to gross assets would only be 22.3%," stated Bill Brewer, EdR's chief financial officer.