Education Realty Trust Inc. Reports Operating Results (10-Q)
Education Realty Trust owns manages and develops student housing communities located near university campuses throughout the United States. EDR will elect to be taxed as a real estate investment trust. EDR also manages student housing communities for college and university systems across the country. Education Realty Trust Inc. has a market cap of $135.2 million; its shares were traded at around $4.74 with a P/E ratio of 5.2 and P/S ratio of 1. The dividend yield of Education Realty Trust Inc. stocks is 8.6%. Highlight of Business Operations:Revenue from our development consulting services, excluding operating expense reimbursements, represented approximately 5.8% of our revenue for the three months ended March 31, 2009. Fees for these services are typically 3-5% of the total project cost and are payable over the life of the project, which is typically one to two years in length. We incur expenses that are reimbursable by a project when awarded. We recognize the expenses when incurred while the reimbursement revenue is not recognized until the consulting contract is awarded. These operating expenses are wholly reimbursable and therefore not considered by our management when analyzing the operating performance of our third-party development consulting services business. Also, at times, we will pay pre-development project expenses such as architectural fees and permits if such are required prior to the project s financing being in place. We typically obtain a guarantee from the owner for repayment of these project specific costs.
For the three months ended March 31, 2009, same-community revenue per available bed increased to $411 and same-community physical occupancy decreased to 92.3% compared to revenue per available bed of $409 and physical occupancy of 95.3% for the three months ended March 31, 2008. The results represent averages for the Trust s portfolio which are not necessarily indicative of every property in the portfolio. As would be expected, individual properties can and do perform both above and below these averages, and, at times, an individual property may show a decline in total revenue due to local university and economic conditions. Our management focus is to assess these situations and address them as quickly as possible in an effort to minimize the Trust s exposure and reverse any negative trend.
On a same-community basis, the 2008-2009 lease year has an average rate growth of 4.9% and an occupancy decline of approximately 1.1%, excluding three communities in the currently challenging markets of Kalamazoo, Michigan, Gainesville, Florida, and Oxford, Mississippi. These three properties have faced significant new supply in their respective markets while enrollment at each school is flat or declining. Combined, these communities experienced a 13.5% decline in occupancy and a 3.4% decline in rate for the 2008-2009 lease term. We will continue to focus on improving occupancy at these properties, but it will take time for the imbalance to reach a level of equilibrium. In total, including these three communities, same-community average rates for the 2008-2009 lease year grew about 3.3% and occupancy declined approximately 2.9%.
As of April 26th, leasing for the fall of 2009 on a same community basis reflected approximately 69.0% of beds applied for and 59.7% already leased compared to 69.9% and 62.3%, respectively, at this time last year. An application is defined as a signed student lease without the receipt of an executed parental guarantee, which can take time to obtain. We currently view these leasing results as in line with prior year and attribute some of the lag in leased percentage to newly implemented credit processes and us seeking to ensure the guarantor has acceptable credit before finalizing the lease. Leasing for the three properties in the previously identified challenged markets shows 66.1% of beds applied for and 52.1% leased compared to 57.3% applied for and 49.8% leased one year ago. The Place Portfolio, which we began managing in February of 2008, has approximately 59.6% of the beds applied for and 49.4% leased compared to 47.4% and 38.8%, respectively, at this time last year.
Same community operating expenses increased to $192 per bed in fiscal 2008 compared to $185 per bed in fiscal 2007. This increase is primarily attributable to a rise in payroll related expenses, increased marketing expenses, higher utility costs, and a loss on the sale of land and parking garage at our University Towers community. Excluding the impact of the land and parking garage sale, we experienced operating expense growth of 3.4% in 2008 compared to 2.4% in 2007. As a response to higher than desired expense growth in fiscal 2008 and due to significant declines in the economy a targeted cost reduction plan was commenced in the fourth quarter of 2008 which continues in fiscal 2009. Specifically, we have put in place selective staff reductions, a hiring freeze and a moratorium on wage increases at both the property and corporate levels. Furthermore, we are curbing discretionary spending as we work to improve our margins and strengthen our communities during the current volatile and unsettled US economic conditions. For the three months ended March 31, 2009, same-community operating expenses declined 6.0% year over year. This decrease is primarily attributable to the loss on the land and parking garage mentioned above; however, an improvement in property general and administrative and maintenance expenses also contributed to the expense improvement over the first quarter of 2008.
On February 1, 2008, the Trust terminated the lease with Place Properties, Inc. (“Place”) for 13 properties owned by the Trust but previously operated and managed by Place. Under the termination agreement, the Trust received a lease termination fee of $6,000. As a result of the lease termination, the Trust began managing these properties and began recognizing the results of operations for these properties in its consolidated financial statements as of the lease termination date. Previously, the Trust recognized base rental income of $13,740 annually for the lease and had the right to receive “Additional Rent” annually if the properties exceeded certain criteria defined in the lease agreement. In the near term, the net operating income generated by these properties is expected to be less than the rental income received under the lease; thus, potentially reducing our net income from continuing operations over the next 2 to 3 years. The Trust negotiated the lease termination fee of $6,000 in part to offset the expected shortfall in operating results of the communities. Over time, we expect to be able to improve the operating results of the Place Portfolio through revenue growth driven by improved marketing and customer service strategies. However, as with all its communities, management continually assesses each community and their respective markets to determine if such growth is achievable or if other alternatives should be pursued. The Place Portfolio opened the 2008-2009 lease year with an occupancy of 81.9% compared to 87.8% for the prior lease year.
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