UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q

 

x

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the quarterly period ended March 31, 2008

 

 

 

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                  to                 

 

Commission file number 001-32290

 

GMH COMMUNITIES TRUST

(Exact Name of Registrant as Specified in Its Charter)

 

Maryland

 

201181390

(State or other Jurisdiction of
Incorporation or Organization)

 

(IRS Employer Identification No.)

 

 

 

10 Campus Boulevard, Newtown Square, PA

 

19073

(Address of Principal Executive Offices)

 

(Zip Code)

 

Registrant’s Telephone Number, Including Area Code (610) 355-8000

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x    No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso     No x

 

On May 9, 2008, 41,669,879 of the registrant’s common shares of beneficial interest, $0.001 par value, were outstanding.

 

 



 

GMH COMMUNITIES TRUST
INDEX TO FORM 10-Q

 

Cautionary Note Regarding Forward-Looking Statements

ii

 

 

Part I — Financial Information

1

Item 1. Financial Statements

21

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

36

Item 3. Quantitative and Qualitative Disclosure About Market Risk

36

Item 4. Controls and Procedures

 

 

 

Part II — Other Information

37

Item 1. Legal Proceedings

37

Item 1A. Risk Factors

37

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

37

Item 3. Defaults Upon Senior Securities

37

Item 4. Submission of Matters to a Vote of Security Holders

37

Item 5. Other Information

37

Item 6. Exhibits

38

 

 

Signatures

 

 

i



 

Cautionary Note Regarding Forward-Looking Statements

 

Sale of Military Housing Division

 

On April 30, 2008, GMH Communities Trust, referred to throughout this report as “we” or “the Company,” completed the sale of our former military housing division, GMH Military Housing, to a U.S. subsidiary of Balfour Beatty plc, a UK-based company, referred to in this report as the “Military Housing Sale.” Under the terms of the Securities Purchase Agreement covering the sale transaction, Balfour Beatty purchased all of the issued and outstanding equity interests in the subsidiaries representing the Company’s military housing division for a total cash purchase price of $350.5 million.  Approximately $62.1 million of the proceeds were used to repay and terminate the Company’s Note Facility with Merrill Lynch, Pierce, Fenner & Smith Incorporated, or Merrill Lynch.  As previously announced, the Company intends to make two separate special distributions to its shareholders and the unitholders of GMH Communities, LP, referred to as our “Operating Partnership.”  Our Board of Trustees has declared an initial special distribution of $3.10 per share/unit to our shareholders and unitholders of our Operating Partnership, which represents a substantial portion of the net proceeds from the Military Housing Sale.  This distribution will be payable on May 15, 2008 to shareholders and unitholders of record as of the close of business on May 10, 2008.  The initial distribution will total approximately $221.1 million in the aggregate.  The remainder of the proceeds from the Military Housing Sale is being retained as a reserve fund, pending the closing of our proposed merger with American Campus Communities, Inc., or ACC, and referred to throughout this report as the “Merger.”  The Merger is currently anticipated to occur during the second quarter of 2008, subject to approval of the Company’s shareholders and assuming that the other conditions in the merger agreement with ACC are satisfied or waived.  Immediately prior to the proposed merger with ACC, it is currently anticipated that there will be a second special distribution to shareholders and unitholders of approximately $0.98 per share/unit payable, comprised of the remaining net proceeds from the Military Housing Sale that were previously held in reserve.

 

The remainder of this report provides disclosures of our business relating to the first quarter of 2008, during which time the military housing division was still part of our business. Where this report requires that we discuss historical operations prior to April 30, 2008, we have included references to operations of the military housing division.  References to future periods and results or expectations of the Company, however, will exclude the military housing division and its activities.

 

Our disclosure and analysis in this document and in the documents that are or will be incorporated by reference into this document contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements provide our current expectations or forecasts of future events and are not statements of historical fact. These forward-looking statements include information about possible or assumed future events, including, among other things, operating or financial performance, strategic plans and objectives, or regulatory or competitive environments. The disclosures contained throughout this report will refer to our business as an ongoing operation with the impact of the Merger not considered unless otherwise noted.

 

Statements regarding the following subjects are forward-looking by their nature:

 

· the expected closing of the Merger as described in the section of this report titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2;

 

· our ability to successfully implement our current business strategy, including our ability to acquire and manage student housing properties;

 

· our projected operating results and financial condition;

 

· completion of any of our targeted acquisitions or development projects, sales of assets, refinancings or joint venture transactions within our expected timeframe or at all;

 

· our ability to obtain future financing arrangements on terms acceptable to us, or at all;

 

· estimates relating to, and our ability to pay, future dividends;

 

ii



 

· our ability to qualify as a REIT for federal income tax purposes;

 

· our understanding of our competition, market opportunities and trends;

 

· projected timing and amounts of capital expenditures; and

 

· the impact of technology on our properties, operations and business.

 

The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. Factors that could cause actual results to differ materially from our management’s current expectations include, but are not limited to:

 

· failure to satisfy conditions to the completion of the Merger, including receipt of approval from our shareholders relating to the Merger; occurrence of any effect, event, development or change that could give rise to the termination of the agreement relating to the Merger; the failure of the Merger, or any of its components, to close for any other reason; risks that the Merger disrupts current plans and operations, including potential difficulties in employee retention; and the amount of the costs, fees, expenses and charges related to the Merger;

 

· the factors referenced in the sections of this report under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2;

 

· changes in our business strategy, including acquisition, sales, and development activities;

 

· availability, terms and deployment of capital, including equity and debt financing;

 

· availability of qualified and/or sufficient personnel, including, but not limited to, within our accounting staff;

 

· failure to effectively remediate any deficiencies or material weaknesses in our disclosure controls and procedures and internal control over financial reporting, or failure to identify additional material weaknesses and deficiencies in our disclosure controls and procedures and internal control over financial reporting that could occur in the future;

 

· the adverse effects of pending litigation or any investigation of the Company by the SEC;

 

· unanticipated costs associated with the acquisition and integration of our student housing property acquisitions and development projects;

 

· changes in student population enrollment at colleges and universities or adverse trends in the off-campus student housing market;

 

· changes in the student housing industry, interest rates or the general economy;

 

· changes in local real estate conditions (including changes in rental rates and the number of competing properties) and the degree and nature of our competition;

 

· failure to lease unoccupied space in accordance with management’s projections;

 

· potential liability under environmental or other laws; and

 

· the existence of complex regulations relating to our status as a REIT and the adverse consequences of our failure to qualify as a REIT.

 

When we use the words “believe,” “expect,” “may,” “potential,” “anticipate,” “estimate,” “plan,” “will,” “could,” “intend” or similar expressions, we intend to identify forward-looking statements. You should not place undue reliance on

 

iii



 

these forward-looking statements. We are not obligated to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except to the extent otherwise required by law.

 

iv



 

PART I — FINANCIAL INFORMATION

 

Item 1.    Financial Statements

 

GMH COMMUNITIES TRUST
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value and number of shares)

 

 

 

March 31,
2008

 

December 31,
2007

 

 

 

(unaudited)

 

 

 

ASSETS

 

 

 

 

 

Real estate investments:

 

 

 

 

 

Student housing properties

 

$

1,420,396

 

$

1,419,894

 

Accumulated depreciation

 

100,712

 

95,830

 

 

 

1,319,684

 

1,324,064

 

Corporate assets:

 

 

 

 

 

Corporate assets

 

9,983

 

10,142

 

Accumulated depreciation

 

1,636

 

1,582

 

 

 

8,347

 

8,560

 

 

 

 

 

 

 

Cash and cash equivalents

 

7,017

 

15,727

 

Restricted cash

 

21,605

 

20,816

 

Accounts and other receivables, net:

 

 

 

 

 

Related party

 

1,042

 

23,288

 

Third party

 

4,229

 

4,824

 

Investments in joint ventures:

 

 

 

 

 

Military housing projects

 

 

70,264

 

Student Housing projects

 

1,261

 

1,284

 

Deferred contract costs

 

 

1,883

 

Deferred financing costs, net

 

3,841

 

4,338

 

Lease intangibles, net

 

20

 

40

 

Deposits

 

534

 

629

 

Assets held for sale

 

97,506

 

 

Other assets

 

8,995

 

13,129

 

Total assets

 

$

1,474,081

 

$

1,488,846

 

LIABILITIES AND BENEFICIARIES’ EQUITY

 

 

 

 

 

Mortgage notes payable

 

$

960,236

 

$

961,531

 

Line of credit

 

55,105

 

53,605

 

Accounts payable

 

2,495

 

10,263

 

Accrued expenses

 

22,630

 

30,448

 

Dividends and distributions payable

 

11,767

 

11,759

 

Liabilities related to assets held for sale

 

14,092

 

 

Other liabilities

 

9,542

 

17,738

 

Total liabilities

 

1,075,867

 

1,085,344

 

 

 

 

 

 

 

Minority interest

 

134,247

 

136,422

 

Commitments and contingencies (Note 9)

 

 

 

Beneficiaries’ equity:

 

 

 

 

 

Common shares of beneficial interest, $0.01 par value; 500,000,000 shares authorized, 41,669,879 issued and outstanding at March 31, 2008, and 41,621,594 issued and outstanding at December 31, 2007

 

42

 

42

 

Preferred shares—100,000,000 shares authorized, no shares issued or outstanding

 

 

 

Additional paid-in capital

 

331,258

 

331,155

 

Cumulative earnings

 

36,415

 

32,755

 

Cumulative dividends

 

(103,748

)

(96,872

)

Total beneficiaries’ equity

 

263,967

 

267,080

 

Total liabilities and beneficiaries’ equity

 

$

1,474,081

 

$

1,488,846

 

 

See accompanying notes to consolidated financial statements.

 

1



 

GMH COMMUNITIES TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited and in thousands, except share and per share information)

 

 

 

Three Months Ended March 31,

 

 

 

2008

 

2007

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

Rent and other property income

 

$

46,582

 

$

51,464

 

Expense reimbursements:

 

 

 

 

 

Related party

 

687

 

64

 

Third party

 

1,592

 

1,446

 

Management fees:

 

 

 

 

 

Related party

 

209

 

 

Third party

 

609

 

678

 

Other income

 

71

 

208

 

Total revenue

 

49,750

 

53,860

 

Operating Expenses:

 

 

 

 

 

Property operating expenses

 

19,351

 

20,167

 

Reimbursed expenses

 

2,279

 

1,510

 

Real estate taxes

 

4,689

 

4,901

 

Administrative expenses

 

3,714

 

4,650

 

Transactional expenses

 

2,125

 

 

Depreciation and amortization

 

5,051

 

11,688

 

Interest

 

13,382

 

17,475

 

Total operating expenses

 

50,591

 

60,391

 

Loss before equity in earnings of unconsolidated entities, income taxes and minority interest from continuing operations

 

(841

)

(6,531

)

Equity in earnings of unconsolidated entities

 

(84

)

 

Loss before income taxes and minority interest from continuing operations

 

(925

)

(6,531

)

Income tax (benefit)/expense

 

(20

)

68

 

Loss before minority interest from continuing operations

 

(905

)

(6,599

)

Minority interest (income)/loss attributable to continuing operations

 

313

 

2,874

 

Loss from continuing operations

 

(592

)

(3,725

)

Discontinued Operations:

 

 

 

 

 

Income from discontinued operations before minority interest, net of $1,501 and $1,458 of income tax expense in 2008 and 2007, respectively

 

7,281

 

6,827

 

Minority interest (income)/loss attributable to discontinued operations

 

(3,029

)

(2,973

)

Income from discontinued operations

 

4,252

 

3,854

 

Net income

 

$

3,660

 

$

129

 

Earnings per common share-basic

 

 

 

 

 

Continuing operation

 

$

(0.01

)

$

(0.09

)

Discontinued operations

 

0.10

 

0.09

 

 

 

0.09

 

$

0.00

 

Earnings per common share-diluted

 

 

 

 

 

Continuing operations

 

$

(0.01

)

$

(0.09

)

Discontinued operations

 

0.10

 

0.09

 

 

 

$

0.09

 

$

0.00

 

Weighted-average shares outstanding during the period:

 

 

 

 

 

Basic

 

41,566,158

 

41,494,521

 

Diluted

 

71,231,686

 

73,128,701

 

Common share dividend declared per share

 

$

0.1650

 

$

0.1650

 

 

See accompanying notes to consolidated financial statements.

 

2



 

GMH COMMUNITIES TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited and in thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2008

 

2007

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

3,660

 

$

129

 

Minority interest

 

2,716

 

99

 

Adjustments to reconcile net income to net cash provided by operating activities from continuing operations:

 

 

 

 

 

Depreciation

 

5,039

 

11,469

 

Amortization:

 

 

 

 

 

Lease intangibles

 

20

 

1,125

 

Investment in military housing projects

 

142

 

111

 

Notes payable fair value adjustment

 

(276

)

(1,994

)

Deferred loan costs

 

475

 

1,337

 

Restricted shares

 

101

 

95

 

Allowance for doubtful accounts

 

1,284

 

530

 

Equity in earnings of unconsolidated entities in excess of distributions received

 

(635

)

(332

)

Changes in operating assets and liabilities from continuing operations:

 

 

 

 

 

Restricted cash

 

(807

)

(1,396

)

Accounts and other receivables

 

1,758

 

2,074

 

Deferred contract costs

 

1,882

 

2,209

 

Deposits and other assets

 

(1,578

)

(2,150

)

Accounts payable

 

(1,987

)

(797

)

Accrued expenses and other liabilities

 

(6,686

)

(3,004

)

Net cash provided by operating activities

 

5,108

 

9,505

 

Cash flows from investing activities:

 

 

 

 

 

Property acquisitions

 

 

(1,291

)

Capitalized expenditures

 

(1,404

)

(1,568

)

Distributions received in excess of earnings of unconsolidated entities

 

48

 

654

 

Investments in military housing projects

 

(1,100

)

(13,850

)

Investment in student housing joint ventures

 

(84

)

 

Net cash used in investing activities

 

(2,540

)

(16,055

)

Cash flows from financing activities:

 

 

 

 

 

Owner distributions

 

(11,759

)

(12,076

)

Proceeds from line of credit

 

1,500

 

12,000

 

Repayment of line of credit

 

 

(73,611

)

Proceeds from notes payable

 

 

90,000

 

Repayment of notes payable

 

(1,019

)

(15,484

)

Payment of financing costs

 

 

(464

)

Net cash (used)/provided by financing activities

 

(11,278

)

365

 

Net increase (decrease) in cash and cash equivalents

 

(8,710

)

(6,185

)

Cash and cash equivalents, beginning of period

 

15,727

 

22,539

 

Cash and cash equivalents, end of period

 

$

7,017

 

$

16,354

 

 

 

 

 

 

 

Supplemental information:

 

 

 

 

 

Cash paid for interest

 

$

14,392

 

$

17,758

 

Cash paid for taxes

 

$

1,167

 

$

1,002

 

 

See accompanying notes to consolidated financial statements.

 

3



 

GMH COMMUNITIES TRUST

 

Notes to Consolidated Financial Statements
March 31, 2008
(Unaudited)

 

1. Organization and Basis of Presentation

 

Organization

 

GMH Communities Trust (the “Trust,” the “Company,” or sometimes referred to as “we”) conducts substantially all of its operations through its operating partnership, GMH Communities, LP, a Delaware limited partnership (the “Operating Partnership”). As of March 31, 2008, the Operating Partnership had 71,314,214 units of partnership interest outstanding, of which the Trust owned 41,088,710 units of limited partnership interest; and through a wholly-owned subsidiary, GMH Communities GP Trust, the Trust owned 581,169 units of general partnership interest, which represents 100% of the general partnership interest in the Operating Partnership. As of March 31, 2008, there were 29,644,335 units of limited partnership interest outstanding that were not owned by the Company.

 

We, through the Operating Partnership and its subsidiaries, are a self-advised, self-managed, specialty housing company that focuses on providing housing to college and university students residing off-campus and to members of the U.S. military and their families located on or near military bases throughout the United States. Through the Operating Partnership, we own and operate our student housing properties and the interests in joint ventures that own military housing privatization projects (“military housing projects”).

 

On February 11, 2008, the Company entered into two definitive agreements in connection with the sale of its military and student housing divisions.  The first agreement was a Securities Purchase Agreement with a U.S. subsidiary of Balfour Beatty plc (“Balfour Beatty”), pursuant to which Balfour Beatty agreed to purchase the Company’s military housing division (the “Military Housing Sale”). This transaction was completed on April 30, 2008 (see Note 13).  The second agreement was an Agreement and Plan of Merger, referred to as the merger agreement, with American Campus Communities, Inc. (“ACC”), pursuant to which, following the close of the Military Housing Sale and contingent upon shareholder approval and other conditions precedent, the Company will be acquired by a subsidiary of ACC (the “Merger”).

 

Following the Military Housing Sale, and upon completion of several conditions precedent, including shareholder approval, the Company will be acquired by ACC pursuant to the merger agreement.  Under the terms of the merger agreement, each common share of the Company and each unit of the Company Operating Partnership will be entitled to receive at the closing of the Merger (i) 0.07642 of an ACC share of common stock, and (ii) $3.36 in cash, or approximately $5.53 in value based on the closing price of ACC’s shares of common stock on February 11, 2008 (the “Merger Consideration”).  In connection with the Merger, the Company anticipates selling its home office (the “Home Office”) immediately prior to the closing of the Merger, and will also have the right, but not the obligation, to sell up to 10 additional student housing assets (collectively with the Home Office, the “Disposition Assets”).  A percentage of the amount received, if any, in connection with the sale of the Disposition Assets will be payable to the Company’s common shareholders and unitholders immediately preceding the closing of the Merger (“the Special Distribution”), and will be in addition to the Merger Consideration.  No assurance can be given that the Company will be successful in disposing of any of the Disposition Assets or that the shareholders and unitholders will be entitled to any additional proceeds other than the Merger Consideration.

 

Completion of the Merger is subject to the sale of the military housing division and certain other closing conditions, including approval of the Merger by the Company’s shareholders.  The closing of the Merger, as contemplated by the merger agreement, is not subject to a financing condition.  The Merger is currently expected to close during the second quarter of 2008. The Merger has been unanimously approved by the Company’s Board of Trustees, and has been recommended for approval by the Company’s common shareholders.

 

Based upon the foregoing transactions, the Company has determined that there are two disposal groups, military housing and student housing, and that both disposal groups are recoverable.  As a result of the completion of the Military Housing Sale to Balfour Beatty on April 30, 2008, the military housing division has been presented in discontinued operations.  The Student Housing division has not been presented as discontinued operations as it would not be meaningful to present the entire Company as discontinued operations.

 

4



 

Basis of Presentation

 

The consolidated financial statements have been prepared by the Company without audit, except as to the balance sheet as of December 31, 2007, which has been derived from audited data, pursuant to the rules and regulations of the United States Securities and Exchange Commission. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the included disclosures are adequate to make the information presented not misleading. In the opinion of management, all adjustments (consisting solely of normal recurring matters) necessary for a fair presentation of the financial position of the Company as of March 31, 2008, the results of its operations for the three-month periods ended March 31, 2008 and March 31, 2007 and its cash flows for the three-month periods ended March 31, 2008 and March 31, 2007 have been included.  The results of operations for such interim periods are not necessarily indicative of the results for a full year. These consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes to the financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

 

2. Summary of Significant Accounting Policies

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect various amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

 

Real Estate Investments and Corporate Assets

 

We carry real estate investments and corporate assets at cost, net of accumulated depreciation. Cost of acquired assets includes the purchase price and related closing costs. We allocate the cost of real estate investments to net tangible and identified intangible assets based on relative fair values in accordance with SFAS No. 141, Business Combinations (“SFAS 141”). We estimate fair value based on information obtained from a number of sources, including our due diligence, marketing and leasing activities, independent appraisals that may be obtained in connection with the acquisition or financing of the respective property, and other market data.

 

The value of in-place leases is based on the difference between (i) the property valued with existing in-place leases and (ii) the property valued as if vacant. As lease terms typically are 12 months or less, actual rates on in-place leases generally approximate market rental rates. Factors that we consider in the valuation of in-place leases include an estimate of incremental carrying costs during the expected lease-up periods considering current market conditions and nature of the tenancy. Purchase prices of student housing properties to be acquired are not expected to be allocated to tenant relationships considering the terms of the leases and the expected levels of renewals. We amortize the value of in-place leases to expense over the remaining term of the respective leases, which is generally one year or less. Accumulated amortization related to intangible lease costs was $40,000 at March 31, 2008 and $20,000 at December 31, 2007.

 

We expense routine repair and maintenance expenditures that do not improve the value of an asset or extend its useful life, including turnover costs. We capitalize expenditures that improve the value and extend the useful life of an asset. We compute depreciation using the straight-line method over the estimated useful lives of the assets, which is generally 40 years for buildings including student housing properties and the commercial office building, and three to five years for residential furniture and appliances. Commencing towards the end of the second quarter and more significantly during the third quarter of each fiscal year, the Company typically will experience an increase in property operating expenses over other quarters as a result of repair and maintenance expenditures relating to turnover of units at student housing properties. The Company’s student housing lease terms generally commence in August or September to coincide with the beginning of the academic year. Accordingly, the Company expects to incur a majority of its repair and maintenance costs in the second and third quarters to prepare for new residents.

 

In accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, long-lived assets, such as real estate investments and purchased intangibles subject to amortization, are reviewed for impairment whenever

 

5



 

events or changes in circumstances indicate that the carrying amount may not be recoverable. These circumstances may include, but are not limited to, operational performance, market conditions and competition from other off-campus properties and on-campus housing, legal and environmental concerns, and results of appraisals or other information obtained as part of a financing or disposition strategy. When required, we review recoverability of assets to be held and used through a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized in an amount by which the carrying value of the asset exceeds the fair value of the asset determined using customary valuation techniques, such as the present value of expected future cash flows. Assets to be disposed of are separately presented in the balance sheet as assets held for sale and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated.  The Company ceased depreciating all the student housing properties and the corporate building on February 11, 2008.  These assets have not been included in assets held for sale along with the military housing division assets, as it would not be meaningful to present the entire Company in assets and liabilities held for sale.

 

Cash Equivalents

 

All highly-liquid investments with an original maturity of three months or less are considered to be cash equivalents. The Company has substantially all of its cash and short-term investments with one major financial institution. Such cash balances, at times, may exceed FDIC limits.

 

Restricted Cash

 

Restricted cash consists of security deposits and cash held as escrow for real estate taxes, capital expenditures and other amounts, as required by the terms of various loan agreements.

 

Allowance for Doubtful Accounts

 

We estimate the collectibility of receivables generated by rental and other income as a result of the operation of our student housing properties. If we believe that the collectibility of certain amounts is questionable, we record a specific reserve for these amounts to reduce the amount outstanding to an amount we believe will be collectible and a reserve for all other accounts based on a range of percentages applied to aging categories, which is based on historical collection and write-off experience.

 

We also evaluate the collectibility of fee income and expense reimbursements generated by the management of student housing properties owned by others and through the provision of development, construction, renovation, and management services to our military housing projects based upon the individual facts and circumstances, and record a reserve for specific amounts, if necessary.

 

Accounts receivable are presented net of the allowance for doubtful accounts of $277,000 and $239,000 at March 31, 2008 and December 31, 2007, respectively.

 

Deferred Financing Costs

 

Costs incurred in connection with obtaining financing are deferred and amortized on a straight-line basis over the term of the related loan, which is not materially different than the effective interest method. Amortization of deferred financing costs is included in interest expense. Accumulated amortization of deferred financing costs was $2.6 million and $2.1 million at March 31, 2008 and December 31, 2007, respectively.

 

Deferred Contract Costs

 

Deferred contract costs include costs attributable to a specific military housing project incurred in connection with seeking Congressional approval of a Community Development and Management Plan, or CDMP, subsequent to a military housing project being awarded by the Department of Defense, or DoD. In addition, deferred contract costs also include transition and closing costs incurred that are expected to be reimbursed by the military housing project. Such amounts are evaluated as to the probability of recovery and costs that are not considered probable of recovery are written off. Revenue is recognized and the related costs are expensed at the time that the reimbursement for preparing the CDMP is approved by Congress or at closing of the military housing project.  These amounts are included in assets held for sale at March 31, 2008 on the accompanying consolidated balance sheets.

 

6



 

Deposits

 

Deposits primarily consist of deposits paid to utility companies at March 31, 2008 and December 31, 2007 respectively.

 

Fair Value of Financial Instruments

 

The carrying amount of cash and cash equivalents, restricted cash, accounts and other receivables, deposits, other assets, accounts payable, accrued expenses, dividends and distributions payable and other liabilities approximate fair value because of the relatively short-term nature of these instruments.

 

Debt assumed in connection with property acquisitions is recorded at fair value at the date of acquisition and the resulting premium or discount is amortized through interest expense over the remaining term of the debt, resulting in a non-cash decrease (in the case of a premium) or increase (in the case of a discount) in interest expense.

 

The carrying value and fair value of fixed-rate notes payable at March 31, 2008 was approximately $928.6 million and $917.9 million, respectively.  Fair value was estimated using rates the Company believed were available to it as of March 31, 2008 for debt with similar terms. The carrying value of variable-rate notes payable approximates fair value at March 31, 2008.

 

Advertising Costs

 

Advertising costs are expensed as incurred.

 

Revenue Recognition

 

Student Housing Owned Properties Segment

 

Rental revenue is recognized when due over the lease terms, which are generally 12 months or less.

 

Other property income, including, but not limited to, lease processing fees, move-in fees,  utility reimbursements and activity fees is recognized as earned throughout the course of the year. The timing of these fees typically fluctuates in relation to the academic year leasing cycle.

 

Student Housing Managed Properties Segment

 

Standard management fees are based on a percentage of monthly cash receipts or gross monthly rental and other revenues generated by the properties managed for others. We recognize these fees on a monthly basis as the services are performed.

 

Incentive management fees are earned as a result of the achievement of certain operating performance criteria over a specified period by certain managed properties, including targeted annual debt service coverage ratios of the properties. We recognize these fees at the amount that would be due under the contract if the contract was terminated on the balance sheet date.

 

Expense reimbursements are comprised primarily of salary and related costs of certain of our employees working at certain properties we manage for others, the cost of which is reimbursed by the owners of the related properties. We accrue operating expense reimbursements as the related expenses are incurred.

 

Military Housing Segment – Included in Discontinued Operations

 

Standard and incentive management fees, which are based on a percentage of effective gross revenue generated by the military housing privatization projects from the basic allowance for housing (BAH) provided by the government to service members are recognized when the revenue is earned by the military housing projects. Incentive management fees are based upon the satisfaction of certain criteria including, among other things, satisfying designated benchmarks relating to emergency work order response, occupancy rates, home turnover and resident satisfaction surveys. Incentive management fees are recognized when the various criteria stipulated in the management contract have been satisfied. Accrued and unbilled incentive management fees of $3.0 million and $2.3 million are included in assets held for sale at March 31, 2008 and in accounts receivable—related party at December 31, 2007, respectively.

 

7



 

Standard and incentive development and construction/renovation fees, which are based on a percentage of development and construction/renovation costs incurred by the military housing projects, including hard and soft costs and financing costs, are recognized on a monthly basis as the costs are incurred by the military housing projects. Incentive development and construction/renovation fees are based upon the satisfaction of certain criteria including, among other things, completing a number of houses according to schedule, achieving specific safety records and implementing small business or minority subcontracting plans. Incentive development and construction/renovation fees are recognized when the various criteria stipulated in the contract have been satisfied. Accrued and unbilled incentive development and construction/renovation fees of $2.8 million and $3.9 million are included in assets held for sale at March 31, 2008 and in accounts receivable-related party at December 31, 2007, respectively.

 

Revenues on our renovation contracts are recorded on the percentage-of-completion method. When the percentage-of-completion method is used, contract revenue is recognized in the ratio that costs incurred to date bear to estimated costs at completion. Adjustments to cost estimates are made in the period in which the facts requiring such revisions become known. When the revised estimates indicate a loss, such loss is currently provided for in its entirety.

 

Business development fees are earned from one of the Company’s construction partners in connection with its military housing projects. The fees consist of (i) an annual base fee, and (ii) an additional fee, which is paid on a monthly basis. As of December 31, 2007, payment of the additional fee has been terminated. The fees are recognized on a straight-line basis over the term of the related business development agreement, which is generally one year.

 

In certain instances, the Company may receive fees relating to the performance of pre-construction/renovation services. These pre-construction/renovation fees are determined on a project-by-project basis, and are (i) paid in proportion to the amount of pre-construction/renovation costs incurred by us for the project, and (ii) recognized as revenue upon performance of the pre-construction/renovation services.

 

The Company earns equity returns on its investments in military housing projects. During the initial development period (“IDP”) for certain of our projects, the equity returns are a fixed percentage of our investment and subsequent to the IDP for a project, the equity returns are based on a fixed percentage of our investment and on the project’s net operating income, subject to cash distribution caps, as defined in the operating agreements related to the particular project. As of March 31, 2008, only the Fort Carson project had passed its initial development period.

 

Expense reimbursements are comprised primarily of renovation expenses and property management expenses, the costs of which are reimbursed by the military housing projects to which they relate. The expenses include payments to third parties for renovation services, and include salaries and related costs of the Company’s employees that are managing the renovation and property management services. The Company accrues expense reimbursements as the related expenses are incurred.

 

Minority Interest

 

The Operating Partnership is obligated to redeem, at the request of a holder, each unit of limited partnership interest for cash or common shares on a one-for-one basis, at the Company’s option, subject to adjustments for share splits, dividends, recapitalizations and similar events; except that Gary M. Holloway, Sr. has the right to require the Operating Partnership to redeem his and his affiliates’ units of limited partnership interest for common shares, subject to his restriction from owning more than 20% of the Company’s outstanding common shares. If the minority interest unitholders’ share of a current year loss would cause the minority interest balance to be less than zero, the minority interest balance will be reported as zero unless there is an obligation of the minority interest holders to fund those losses. Any losses in excess of the minority interest will be charged against equity. If future earnings materialize, equity will be credited for all earnings up to the amount of those losses previously absorbed. Distributions to limited partnership unitholders other than the Company are recorded as a reduction to minority interest.

 

8



 

Investments in Military Housing Projects and Student Housing Joint Ventures

 

The Company owns equity interests in the joint ventures that own our military housing privatization projects with the U.S. military to design, develop, construct/renovate and manage the military family housing located on or near various bases throughout the United States. In addition, the Company also owns equity interests in two joint ventures that own student housing properties.  The Company evaluates its investments in military housing project joint ventures in which we have a variable interest to determine if the underlying entity is a variable interest entity (“VIE”) as defined under FASB Financial Interpretation No. 46 (as revised) (“FIN 46(R)”). The Company has concluded that each of the military housing project joint ventures in which it has a variable interest is a VIE and that the Company is not the primary beneficiary of any of these VIEs. The Company records its investments in joint ventures in accordance with the equity method of accounting. The Company’s investment is initially recorded at cost, and then subsequently adjusted at each balance sheet date to an amount equal to what the Company would receive from the joint venture in the event that it were liquidated at net book value as of that date, and assuming that the proceeds from the liquidation are distributed in accordance with the terms of, and priority of returns set forth under, the joint venture’s operating agreement. The Company has exposure to loss to the extent of its investments, if any, and any receivables due from the military project or joint ventures.

 

Income Taxes

 

The Company elected to be taxed as a REIT under Internal Revenue Code of 1986, as amended, or the Code, commencing with its taxable year ended December 31, 2004. To continue to qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement that we currently distribute at least 90% of our adjusted taxable income to our shareholders. We believe we are organized and operate in a manner that allows us to qualify for taxation as a REIT under the Code, and it is our intention to adhere to these requirements and maintain the Company’s REIT status in the future. Accordingly, no provision has been made for federal income taxes in the accompanying consolidated financial statements, other than with respect to the Company’s taxable REIT subsidiaries.

 

 Transactional  Expenses

 

During the first quarter of 2008, the Company incurred $2.1 million of legal, investment banking and other expenses associated with the Military Housing Sale and the pending Merger.

 

Adoption of Recent Accounting Pronouncements

 

Fair Value Accounting:

 

In 2006, the FASB issued SFAS No. 157 “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a market-based framework or hierarchy for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 is applicable whenever another accounting pronouncement requires or permits assets and liabilities to be measured at fair value.  SFAS 157 does not expand or require any new fair value measures, however the application of this statement may change current practice.  The requirements of SFAS 157 are first effective for our fiscal year beginning January 1, 2008.  However, in February 2008, the FASB decided that an entity need not apply this standard to non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis until the subsequent year.  Accordingly, our adoption of this standard on January 1, 2008 is limited to financial assets and liabilities.  The adoption of SFAS 157 did not have an effect on our financial condition or results of operations.  However, we are still in the process of evaluating this standard with respect to its effect on non-financial assets and liabilities and therefore have not yet determined the impact that it will have on our financial statements upon full adoption.

 

In February 2007, the FASB issued SFAF No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – including an Amendment of FASB Statement No. 115” (“SFAS 159”).  SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value.  Entities that elect the fair value option will report unrealized gains and losses in earnings at each subsequent reporting date.  The fair value option may be elected on an instrument-by-instrument basis, with few exceptions.  FAS 159 also established presentation and disclosure requirements to facilitate comparisons between companies that choose different measurement attributes for similar assets and liabilities. The requirements of SFAS 159 are effective for our fiscal year beginning January 1, 2008.  The adoption of this statement did not have an effect on our financial condition or results of operations.

 

9



 

Recent Accounting Pronouncements

 

Business Combinations:

 

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”).  SFAS 141(R) significantly changes the accounting for business combinations.  Under SFAS 141(R), an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date at fair value with limited exceptions.  SFAS 141(R) further changes the accounting treatment for certain specific items, including:

 

·                  Acquisition costs will be expensed as incurred;

·                  Non-controlling interests (formerly known as “minority interest” – see SFAS 160 discussion below) will be valued at  fair value at the acquisition date;

·                  Acquired contingent liabilities will be recorded at fair value at the acquisition date and subsequently measured at either the higher of such amount or the amount determined under existing guidance for non-acquired contingencies; and

·                  Restructuring costs associated with a business combination will be generally expensed subsequent to the acquisition date.

 

The standard is effective for annual reporting periods beginning after December 15, 2008 and will be applied prospectively.  Early adoption is prohibited. We have not yet completed our assessment of the impact SFAS 141(R) will have on our financial condition or results of operations.

 

Noncontrolling Interests

 

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51”. (“SFAS 160”).

 

SFAS 160 established new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary.  Specifically, this statement requires the recognition of noncontrolling interests (minority interests) as equity in the consolidated financial statements and separate from the parent’s equity.  The amount of net income attributable to noncontrolling interests will be included in consolidated net income on the face of the statement of operations.  SFAS 160 clarifies that changes in a parent’s ownership interest in a subsidiary that does not result in deconsolidation are treated as equity transactions if the parent retains its controlling financial interest.  In addition, this statement requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated.  Such gain or loss will be measured using the fair value of the noncontrolling equity investment on the deconsolidation date.  SFAS No. 160 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interests.

 

SFAS 160 is effective for our fiscal year, and interim periods within such a year, beginning January 1, 2009.  Early adoption of SFAS 160 is prohibited. The adoption of SFAS 160 will result in the reclassification of minority interests to beneficiaries’ equity.  The balance at March 31, 2008 was $136.4 million. We are currently evaluating further impacts, if any, of these standards on our financial statements.

 

Reclassifications

 

Certain amounts in the prior period financial statements have been reclassified to be consistent with the current period presentation.

 

3.  Real Estate Investments

 

Included in real estate investments are 64 student housing properties that the Company wholly owns, located near 41 colleges and universities in 23 states. These properties contain an aggregate of 12,092 units and 38,510 beds. The Company’s investment in student housing properties at March 31, 2008 and December 31, 2007 was as follows (in thousands):

 

10



 

 

 

March 31,
2008

 

December 31,
2007

 

Land

 

$

148,938

 

$

149,136

 

Building and improvements

 

1,221,821

 

1,220,344

 

Residential furniture and appliances

 

47,818

 

47,340

 

Construction in progress

 

1,819

 

3,074

 

 

 

$

1,420,396

 

$

1,419,894

 

 

4.  Assets and liabilities held for sale

 

On February 11, 2008, the Company entered into a Securities Purchase Agreement in connection with the Military Housing Sale to Balfour Beatty.  The sale was consummated on April 30, 2008, whereupon Balfour Beatty purchased all the issued and outstanding equity interests of the subsidiaries representing the Company’s military housing division for a cash purchase price of $350.5 million.  The assets and liabilities held for sale as of March 31, 2008 were as follows (in thousands):

 

Corporate assets

 

$

21

 

Cash and cash equivalents

 

18

 

Accounts receivable – Related party

 

19,794

 

Accounts receivable – Third party

 

5

 

Investments in military housing projects

 

71,844

 

Deferred contract costs

 

2,454

 

Other assets

 

3,370

 

Total assets held for sale

 

$

97,506

 

 

Accounts payable

 

$

5,781

 

Accrued expenses

 

2,033

 

Other liabilities

 

6,278

 

Total liabilities held for sale

 

$

14,092

 

 

5.  Investments in Military Housing Projects

 

We record our investments in joint ventures under our military housing projects in accordance with the equity method of accounting.  Our investment is initially recorded at cost, and subsequently adjusted at each balance sheet date to an amount equal to what we would receive from the joint venture in the event that it were liquidated at net book value as of that date, assuming that the proceeds from the liquidation are distributed in accordance with the terms of, and the priority of returns set forth under, the joint venture’s operating agreement. The terms of the various agreements generally provide for the payment to the Company of an agreed upon return on the Company’s invested capital and a return of the Company’s invested capital prior to the distribution of any amounts to the government entity that is a member of the joint venture.

 

As of March 31, 2008, of the Company’s joint venture entities in which it has ownership interests relating to military housing projects in operation as of that date, the Company had invested capital in the joint ventures as discussed below.

 

During the first quarter of 2008, the Company contributed $1.1 million to its joint venture GMH/Benham Military Communities LLC. The joint venture used these funds to make a required $1.1 million equity contribution to Fort Hamilton Housing LLC, which operates our Fort Hamilton military housing project.  The Company has a 100% interest in GMH/Benham Military Communities LLC, investment in Fort Hamilton Housing LLC. The Company is entitled to a preferred return on its investment in Fort Hamilton Housing LLC after the end of the IDP for the project.  The carrying value of this investment, net of minority interest, was $1.1 million at March 31, 2008.

 

In October 2007, the Company contributed $6.75 million to GMH Military Housing-Navy Southeast LLC in return for a 90% interest and Balfour Beatty Construction LLC contributed $750,000 for the remaining 10% interest. The Company consolidates GMH Military Housing-Navy Southeast LLC as it has a 90% economic interest and controls a majority of the

 

11



 

voting interests.  Balfour Beatty Construction LLC’s 10% interest is accounted for as minority interest and is included in liabilities held for sale at March 31, 2008 and in other liabilities at December 31, 2007, on the accompanying consolidated balance sheet.  GMH Military Housing-Navy Southeast invested $7.5 million in Southeast Housing LLC, which owns and operates the Navy Southeast Region military housing project.  The Company will not accrue preferred returns for this project until the end of the IDP for the project. The carrying value of this investment, net of minority interest, was $6.8 million at both March 31, 2008 and December 31, 2007.

 

In November 2007, the Company contributed $7.0 million to GMH/Phelps Military Communities LLC in return for a 90% interest and Phelps Development LLC contributed $780,000 for the remaining 10% interest. The Company consolidates GMH/Phelps Military Communities LLC as it has a 90% economic interest and controls a majority of the voting rights. Phelps Development LLC’s 10% interest is accounted for as minority interest and is included in liabilities held for sale at March 31, 2008 and in other liabilities at December 31, 2007 on the accompanying consolidated balance sheet.  GMH/Phelps Military Communities LLC, through its two wholly-owned subsidiaries, invested $7.8 million into Vandenberg Housing LP, which owns and operates the Vandenberg project with the Department of the Air Force.  The Company earns a preferred return on its investment in Vandenberg Housing LP. The preferred returns will accrue but not be paid, until the end of the IDP for the project which is in 2012.  The carrying value of this investment net of minority interest was $7.3 million at March 31, 2008 and $7.1 million at December 31, 2007.

 

In February 2007, the Company closed on the Air Education and Training Command (“AETC”) Group I project with the Department of the Air Force.  The Company invested $8.0 million for its 80% interest in the partnership that owns AETC Housing LP, the entity that owns and operates the AETC Group I project.  The Company consolidates partnerships that own AETC Housing LP, as it has an 80% economic interest and controls a majority of the voting interests.  The remaining 20% interest is owned 10% by Hensel Phelps Construction Co. and 10% by The Benham Companies LLC, and is accounted for as minority interest and is included in liabilities held for sale at March 31, 2008 and in other liabilities at December 31, 2007 on the accompanying consolidated balance sheet.  The Company has concluded that AETC Housing LP is a VIE as defined under FIN 46(R) and that the Company is not the primary beneficiary.  The primary beneficiary is a non-equity partner in the joint venture that is more closely associated with the VIE.  The Company earns a preferred return on its investment in the AETC Group I project.   The preferred return will accrue, but not be paid, until the end of the IDP for the project, which is projected to be in 2012.  The carrying value of this investment, net of minority interest, was $8.9 million at March 31, 2008 and $8.7 million at December 31, 2007.

 

During the first quarter of 2007, the Company contributed $5.9 million and Benham Military Communities, LLC contributed $0.6 million, through their joint venture, GMH/Benham Military Communities LLC, which used the funds to make a required $6.5 million equity contribution commitment to FDWR Parent LLC, which operates the Fort Detrick/Walter Reed Medical Center military housing project.  The Company has a 90% interest and Benham has a 10% interest in GMH/Benham Military Communities LLC, which is entitled to a preferred return on its investment in FDWR Parent LLC commencing after the end of the IDP for the project.  The Company consolidates GMH/Benham Military Communities LLC as it has a 90% economic interest and controls a majority of the voting interests.  The 10% interest held by Benham Military Communities, LLC is accounted for as minority interest and is included in liabilities held for sale at March 31, 2008 and in other liabilities at December 31, 2007 on the accompanying consolidated balance sheet.  The carrying value of this investment, net of minority interest, was $5.9 million at both March 31, 2008 and December 31, 2007.

 

The acquisition of our ownership interests in the joint venture that owns a 10% interest in Fort Carson Family, LLC and has the rights to exclusively negotiate the Fort Eustis/Fort Story military housing projects was recorded at the fair value of the consideration paid in the amount of $31.0 million.  The underlying book value of the equity on the acquisition date was approximately $11.5 million.  The remaining $19.5 million of this investment is being amortized based on the then current fiscal year revenue as a percentage of the estimated revenue to be earned over the remaining lives of the projects, which are 45 years for the Fort Carson project and 50 years for the Fort Eustis/Story project. Amortization expense was $136,000 and $110,000 for the three months ended March 31, 2008 and 2007, respectively.  The accumulated amortization of the excess purchase price was $1.3 million and $1.2 million at March 31, 2008 and December 31, 2007, respectively. The carrying value of these investments was $23.6 million at March 31, 2008 and $23.8 million at December 31, 2007.  The Company is entitled to a preferred return on its investment in Fort Carson Family Housing LLC, plus 50% of the project’s net operating income, which will decrease to 30% and 15% in 2012 and 2016, respectively. After 2016 and through 2025, the Company’s returns on its investments are subject to an annual maximum amount of $1.75 million. The project began repaying the Company’s initial investment in Fort Carson Family Housing LLC in July 2005.  The equity is expected to be completely repaid by 2015. During each of the three months ended March 31, 2008 and 2007, the Company received $0.4 million of equity distributions from Fort Carson Family Housing LLC.

 

12



 

In November 2004, the Company contributed $9.5 million to GMH/Benham Military Communities LLC in return for a 90% interest and Benham Military Communities, LLC invested $1.1 million for the remaining 10% interest. The Company consolidates GMH/Benham Military Communities LLC as it has a 90% economic interest and controls a majority of the voting interests. Benham Military Communities, LLC’s 10% interest is accounted for as minority interest and is included in liabilities held for sale at March 31, 2008 and in other liabilities at December 31, 2007, on the accompanying balance sheets.  In November 2004, GMH/Benham Military Communities, LLC invested $10.6 million in Northeast Housing LLC, which owns and operates the Navy Northeast Region military housing project. GMH/Benham Military Communities LLC is entitled to a preferred return on its investment in Northeast Housing LLC. The preferred return will accrue, but not be paid, until the end of the initial development period for the project in October 2010. The carrying value of this investment net of minority interest was $12.5 million and $12.3 million at March 31, 2008 and December 31, 2007, respectively.

 

The following is a summary of the unaudited financial position of the unconsolidated military housing projects in which the Company had invested capital (in thousands):

 

 

 

March 31,
2008

 

December 31,
2007

 

Net Property

 

$

1,277,851

 

$

966,334

 

Other Assets

 

$

1,192,580

 

$

1,200,897

 

Notes payable

 

$

1,726,620

 

$

1,674,845

 

Other Liabilities

 

$

279,680

 

$

84,437

 

Equity

 

$

464,131

 

$

407,949

 

 

The following is a summary of the results of operations of the unconsolidated military housing projects in which the Company has invested capital (in thousands):

 

 

 

Three months ended March 31,

 

 

 

2008

 

2007

 

Revenue

 

$

63,957

 

$

7,490

 

Operating Expenses

 

$

34,180

 

$

2,552

 

Interest Expense, net

 

$

9,466

 

$

2,475

 

Depreciation and amortization

 

$

15,669

 

$

1,894

 

Net Income

 

$

4,642

 

$

569

 

 

6.  Investment in Student Housing Joint Ventures

 

In April 2007, the Company entered into a joint venture with Fidelity Real Estate Group, pursuant to which the Company transferred its 100% interest in six student housing properties into the joint venture in exchange for cash and a 10% interest in the joint venture.  As part of the transaction, the Company recorded a deferred gain of approximately $2.4 million. The carrying value of this investment, net of deferred gain, is approximately $25,000 at March 31, 2008 and $78,000 at December 31, 2007.

 

In August 2005, the Company entered into a joint venture with an institutional investor, AEW Capital Management, to develop and construct two student housing projects which were completed in August 2006. The Company contributed land to the joint venture in exchange for its 10% interest and cash.  The carrying value of this investment at both March 31, 2008 and December 31, 2007 was $1.2 million.  The joint venture became in default at March 31, 2008 under certain debt service coverage provisions relating to the mortgage indebtedness.

13



 

The following is a summary of the unaudited financial position of the unconsolidated student housing joint ventures in which the Company has an equity interest (in thousands):

 

 

 

March 31,
2008

 

December 31,
2007

 

Net property

 

$

155,893

 

$

157,048

 

Other assets

 

$

4,522

 

$

4,619

 

Debt

 

$

124,352

 

$

124,406

 

Other liabilities

 

$

3,351

 

$

3,693

 

Equity

 

$

32,712

 

$

33,568

 

 

The following is a summary of the unaudited results of operations of the unconsolidated student housing joint ventures in which the Company held a 10% equity interest for the three months ending March 31, 2008 (in thousands):

 

 

 

2008

 

Revenue

 

$

5,089

 

Operating expenses

 

$

2,802

 

Interest expense

 

$

1,852

 

Depreciation and amortization

 

$

1,464

 

Net income (loss)

 

$

(1,029

)

 

7.  Notes Payable

 

At March 31, 2008, notes payable totaling approximately $960.0 million were secured by 62 wholly-owned student housing properties and our corporate office.  The net carrying value of these encumbered properties was $1.27 billion at March 31, 2008.  These notes payable had a weighted average interest rate of 5.32%, and a weighted average maturity of 6.63 years, maturing at various dates between February 2009 and April 2024, and require monthly payments of principal and interest or monthly payments of interest only.

 

During the first quarter of 2008, the Company did not make its scheduled payments on mortgages covering five of its wholly-owned student housing properties, with outstanding principal balances totaling $64.3 million.  The Company has placed the regularly required payments into a Company-controlled escrow account and is in discussions with the lenders regarding a work-out of the mortgage debt. All five of the properties were placed into receivership during the second quarter of 2008, which will not impact the Company’s ability to close on its pending merger with ACC.  At March 31, 2008, the net carrying value of the five properties encumbered by these mortgages was $80.1 million.

 

8.  Transactions with Related Parties

 

In the ordinary course of its operations, the Company has on-going business relationships with Gary M. Holloway, Sr., entities affiliated with Mr. Holloway, and entities in which Mr. Holloway or the Company has an equity investment. The operating results or financial position of the Company could be significantly different from those that would have been reported if the entities were autonomous. These relationships and related transactions are summarized below.

 

Shared costs for human resources, information technology, office equipment and furniture, and certain management personnel were allocated to the various entities owned or controlled by Mr. Holloway, using assumptions based on headcount that management believed were reasonable. The allocation of such costs to other entities owned or controlled by Mr. Holloway during the three months ended March 31, 2008 and 2007 totaled $42,000 and $64,000, respectively, and are reflected as expense reimbursements from related parties in the accompanying consolidated statements of operations.

 

The Company leases space in its corporate headquarters to entities wholly-owned by Mr. Holloway. During each of the three month periods ended March 31, 2008 and 2007, rental income from these entities totaled $39,000. These amounts are included in other property income in the accompanying consolidated and combined statements of operations.  In addition, during the first quarter of 2008, the Company, through its subsidiary that owns the interests in the corporate headquarters, entered into a Put Option Agreement with Mr. Holloway, pursuant to which the Company has the right to require the sale of the corporate headquarters to Mr. Holloway for a sum of $8.0 million in the event that the building cannot be sold to an unaffiliated third party prior to the pending merger with ACC.

 

14



 

The Company is reimbursed by the joint ventures relating to certain of its military housing projects and student housing properties in which the Company has an ownership interest, for the cost of certain employees engaged in the daily operation of those military housing projects and student housing properties. The reimbursement of these costs is included in expense reimbursements—related party with respect to the student housing properties and discontinued operations with respect to the military housing projects, in the accompanying consolidated statements of operations. During the three months ended March 31, 2008 and 2007, such expense reimbursements relating to these military housing projects and student housing properties totaled $24.1 million and $17.3 million, respectively.

 

Mr. Holloway owns Bryn Mawr Abstract, Inc., an entity that provides title abstract services to third-party title insurance companies, from which we have purchased title insurance with respect to certain student housing properties and military housing projects that we have acquired or refinanced. In connection with the purchase of title insurance for these student housing properties and military housing projects, premiums were paid to other title insurance companies, which fees in some cases are fixed according to statute. From these premiums, the other title insurance companies paid to Bryn Mawr Abstract, Inc. $23,000 and $82,000 during the three months ended March 31, 2008 and 2007, respectively, for providing title abstract services.

 

Mr. Holloway owns Corporate Flight Services, LLC, an entity that provides aircraft services.  During the three months ended March 31, 2008 and 2007, the Company paid Corporate Flight Services, LLC $132,000 and $283,000, respectively for use of an aircraft owned by Corporate Flight Services, LLC.

 

9. Commitments and Contingencies

 

With regard to military housing privatization projects at Army bases, depending on the terms of each respective agreement, the Company is either required to fund its portion of the equity commitment to the project’s joint venture (i) after all other sources of funding for the project have been expended or (ii) after the IDP is completed. With respect to the Company’s Navy Northeast Region project and AETC Group I project, however, the Company was required to fund the equity commitment at commencement of the project.  With respect to the Company’s Fort Detrick/Walter Reed Army Medical Center project, the Company was required to fund its equity commitment during the first quarter of 2007. In connection with finalizing the agreements with the DoD for the Company’s military housing projects, the Company has committed to contribute the following aggregate amounts as of March 31, 2008 (in thousands):

 

2008

 

$

1,100

 

2009

 

1,500

 

2010

 

20,500

 

2011

 

7,000

 

Total

 

$

30,100

 

 

In connection with the development, management, construction and renovation agreements for certain of the military housing projects, the Company guarantees the completion of its obligations under the agreements. The guarantees require the Company to fund any costs in excess of the amounts budgeted in the underlying development, management, construction and renovation agreements. The maximum exposure to the Company on these guarantees cannot be determined at this time. Management believes that these guarantees will not have a material adverse impact on the Company’s financial position or results of operations.

 

Under the provisions of FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34,” a guarantor is to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken by issuing the guarantee. The Company enters into indemnification agreements in the ordinary course of business that are subject to the provisions of FIN 45. Under these agreements, the Company indemnifies, holds harmless, and agrees to reimburse the indemnified party for losses suffered or incurred by the indemnified party. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. The Company believes the estimated fair value of these agreements is immaterial. Accordingly, there were no liabilities recorded for these agreements as of March 31, 2008 and December 31, 2007.

 

As of November 2, 2007, the Company had entered into a settlement agreement with the lead plaintiffs in connection with a class action lawsuit alleging violations of Sections 11, 12(a)(2) and 15 of the Securities Act and

 

15



 

Sections 10(b) and 20 of the Exchange Act, and Rule 10b-5.  The class action lawsuit had been filed in the United States District Court for the Eastern District of Pennsylvania, naming as defendants GMH Communities Trust, Gary M. Holloway, Sr., and Bradley W. Harris, and was brought on behalf of a class of purchasers of the Company’s securities between May 5, 2005 and March 10, 2006 based upon the Company’s restatement of certain financial results.  The Court preliminarily approved the settlement agreement by Order dated February 13, 2008 and scheduled a Settlement Hearing for April 25, 2008.  Under the terms of the settlement agreement, all claims against the Company and related defendants would be dismissed without admission or presumption of liability or wrongdoing.  An order of the Court providing granting final approval of the settlement agreement was entered on April 28, 2008. Appeals relating to the settlement must be filed within 30 days of the date of the order. The Company can provide no assurance that an appeal will not be filed, and if an appeal, is filed and the settlement approval is reversed, then the Company would be required to continue to defend itself.

 

The Company also is subject to routine litigation, claims and administrative proceedings arising in the ordinary course of business. Other than the matters described above, we are not involved in any other material litigation nor, to our knowledge, is any material litigation pending or threatened against us. The maximum exposure to the Company relating to these matters cannot be determined at this time. Management believes that the disposition of these routine litigation matters will not have a material adverse impact on the Company’s financial position or results of operations.

 

10. Segment Reporting

 

The Company is comprised of four reportable segments: (1) student housing – owned properties (2) student housing – management, (3) military housing and (4) corporate. The corporate segment also includes the corporate overhead and other service departments. The Company’s management evaluates each segment’s performance based upon net income. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies.

 

16



 

 

 

Three Months Ended March 31, 2008

 

 

 

Student
Housing-
Owned
Properties

 

Student
Housing
Management

 

Military
Housing

 

Corporate

 

Elimination

 

Total

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

Rent and other property income

 

$

46,543

 

$

 

$

 

$

39

 

$

 

$

46,582

 

Expense reimbursements:

 

 

 

 

 

 

 

 

 

 

 

 

 

Related party

 

 

645

 

 

42

 

 

687

 

Third party

 

 

1,592

 

 

 

 

1,592

 

Management fees:

 

 

 

 

 

 

 

 

 

 

 

 

 

Owned properties

 

 

1,774

 

 

 

(1,774

)

 

Related party

 

 

209

 

 

 

 

209

 

Third party

 

 

609

 

 

 

 

609

 

Other income

 

11

 

1

 

 

59

 

 

71

 

Total revenue

 

46,554

 

4,830

 

 

140

 

(1,774

)

49,750

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating expense

 

17,849

 

1,502

 

 

 

 

19,351

 

Intercompany management fee

 

1,774

 

 

 

 

(1,774

)

 

Reimbursed expenses

 

 

2,237

 

 

42

 

 

2,279

 

Real estate taxes

 

4,664

 

 

 

25

 

 

4,689

 

Administrative expenses

 

 

 

 

3,714

 

 

3,714

 

Transactional expenses

 

 

 

 

2,125

 

 

2,125

 

Depreciation and amortization

 

4,839

 

63

 

 

149

 

 

5,051

 

Interest

 

13,241

 

 

 

141

 

 

13,382

 

Total operating expenses

 

42,367

 

3,802

 

 

6,196

 

(1,774

)

50,591

 

Income (loss) before equity in earnings of unconsolidated entities, income taxes and minority interest from continuing operations

 

4,187

 

1,028

 

 

(6,056

)

 

(841

)

Equity in (loss)/earnings of unconsolidated entities

 

(84

)

 

 

 

 

(84

)

Income (loss) before income taxes and minority interest from continuing operations

 

4,103

 

1,028

 

 

(6,056

)

 

(925

)

Income tax benefit

 

 

(20

)

 

 

 

(20

)

Income (loss) before minority interest

 

4,103

 

1,048

 

 

(6,056

)

 

(905

)

Minority interest loss attributable to continuing operations

 

 

 

 

313

 

 

313

 

Income (loss) from continuing operations

 

4,103

 

1,048

 

 

(5,743

)

 

(592

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Discontinued Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations before minority interest, net of $1,501 income tax expense

 

 

 

8,460

 

(1,179

)

 

7,281

 

Minority interest income

 

 

 

 

(3,029

)

 

(3,029

)

Income (loss) from discontinued operations

 

 

 

8,460

 

(4,208

)

 

4,252

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income(loss)

 

$

4,103

 

$

1,048

 

$

8,460

 

$

(9,951

)

$

 

$

3,660

 

 

17



 

 

 

Three Months Ended March 31, 2007

 

 

 

Student
Housing-
Owned
Properties

 

Student
Housing
Management

 

Military
Housing

 

Corporate

 

Elimination

 

Total

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

Rent and other property income

 

$

51,425

 

$

 

$

 

$

39

 

$

 

$

51,464

 

Expense reimbursements:

 

 

 

 

 

 

 

 

 

 

 

 

 

Related party

 

 

 

 

64

 

 

64

 

Third party

 

 

1,446

 

 

 

 

 

1,446

 

Management fees:

 

 

 

 

 

 

 

 

 

 

 

 

 

Owned properties

 

 

1,914

 

 

 

(1,914

)

 

Related party

 

 

 

 

 

 

 

Third party

 

 

678

 

 

 

 

678

 

Other income

 

29

 

8

 

 

171

 

 

 

208

 

Total revenue

 

51,454

 

4,046

 

 

274

 

(1,914

)

53,860

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating expense

 

18,114

 

2,053

 

 

 

 

20,167

 

Intercompany management fee

 

1,914

 

 

 

 

(1,914

)

 

Reimbursed expenses

 

 

1,446

 

 

 

64

 

 

1,510

 

Real estate taxes

 

4,877

 

 

 

24

 

 

4,901

 

Administrative expenses

 

 

 

 

4,650

 

 

4,650

 

Transactional expenses

 

 

 

 

 

 

 

Depreciation and amortization

 

11,571

 

 

 

117

 

 

 

11,688

 

Interest

 

15,984

 

 

 

1,491

 

 

 

17,475

 

Total operating expenses

 

52,460

 

3,499

 

 

6,346

 

(1,914

)

60,391

 

(Loss)/income before income taxes and minority interest from continuing operations

 

(1,006

)

547

 

 

(6,072

)

 

(6,531

)

Income tax expense

 

 

68

 

 

 

 

68

 

Income (loss) before minority interest

 

(1,006

)

479

 

 

(6,072

)

 

(6,599

)

Minority interest loss attributable to continuing operations

 

 

 

 

2,874

 

 

2,874

 

(Loss)/income from continuing operations

 

(1,006

)

479

 

 

(3,198

)

 

(3,725

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Discontinued Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from discontinued operations before minority interest, net of $1,458 of income tax expense

 

789

 

201

 

6,057

 

(220

)

 

6,827

 

Minority interest

 

 

 

 

(2,973

)

 

(2,973

)

Income/(loss) from discontinued operations

 

789

 

201

 

6,057

 

(3,193

)

 

3,854

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income/(loss)

 

$

(217

)

$

680

 

$

6,057

 

$

(6,391

)

$

 

$

129

 

 

18



 

 

 

Student
Housing
Owned
Properties

 

Student
Housing-
Management

 

Military
Housing

 

Corporate

 

Total

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2008:

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,347,596

 

$

5,826

 

$

97,506

 

$

23,153

 

$

1,474,081

 

Total liabilities

 

$

979,760

 

$

866

 

$

14,092

 

$

81,149

 

$

1,075,867

 

As of December 31, 2007

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,352,640

 

$

6,005

 

$

95,820

 

$

34,381

 

$

1,488,846

 

Total liabilities

 

$

983,477

 

$

1,108

 

$

16,691

 

$

84,068

 

$

1,085,344

 

 

11.  Earnings Per Common Share

 

The following table details the number of shares and net income used to calculate basic and diluted earnings per share for the three months ended March 31, 2008 and March 31, 2007 (in thousands, except share and per share amounts):

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

March 31, 2008

 

March 31, 2007

 

 

 

Basic

 

Diluted

 

Basic

 

Diluted

 

Net loss from continuing operation

 

$

(592

)

$

(592

)

$

(3,725

)

$

(3,725

)

Minority interest in continuing operations

 

 

(313

)

 

(2,874

)

Loss from continuing operations available to common shareholders

 

(592

)

(905

)

(3,725

)

(6,599

)

 

 

 

 

 

 

 

 

 

 

Net income from discontinued operations

 

$

4,252

 

$

4,252

 

$

3,854

 

$

3,854

 

Minority interest in discontinued operations

 

 

3,029

 

 

2,973

 

Income from discontinued operations available to common shareholders

 

$

4,252

 

$

7,281

 

$

3,854

 

$

6,827

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

41,566,158

 

41,566,158

 

41,494,521

 

41,494,521

 

Units of limited partnership held by minority interest holders

 

 

29,644,335

 

 

31,624,617

 

Restricted common shares

 

 

21,193

 

 

9,563

 

Total weighted-average shares outstanding

 

41,566,158

 

71,231,686

 

41,494,521

 

73,128,701

 

Earnings (loss) per common share

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.01

)

$

(0.01

)

$

(0.09

)

$

(0.09

)

Discontinued operations

 

0.10

 

0.10

 

0.09

 

0.09

 

 

 

$

0.09

 

$

0.09

 

$

0.00

 

$

0.00

 

 

On March 20, 2008, the Company declared a quarterly dividend of $0.165 per outstanding common share.  The aggregate amount of dividends of $11.8 million was paid on April 15, 2008, of which $6.9 million and $4.9 million, respectively, was paid to common shareholders and unitholders of the Operating Partnership of record on March 31, 2008.

 

12. Discontinued Operations

 

For the three-month periods ended March 31, 2008, income from discontinued operations relates to the military housing division that the Company held for sale as of March 31, 2008.

 

For the three-month periods March 31, 2007, income from discontinued operations relates to the military housing division, as well as six of the 12 student housing properties that the Company held for sale as of March 31, 2007. The other six student housing properties have not been presented as discontinued operations because the Company (i) expects to receive significant continuing cash flows generated by earning management fees from the Company’s ongoing management of the properties, in addition to the cash flows resulting from the Company’s 10% equity ownership in the joint venture that owns

 

19



 

and operates the properties, and (ii) continues to have significant involvement in the ongoing operations through its continuing management of the properties and its 10% equity ownership in the joint venture that owns the properties.

 

The following table summarizes the revenue and expense information for the three months ended March 31, 2008 and 2007 (in thousands).

 

 

 

Three months ended

 

 

 

March 31, 2008

 

March 31 ,2007

 

Revenue:

 

 

 

 

 

Rent and other operating income

 

$

 

$

5,271

 

Expense reimbursements – related party

 

23,463

 

17,335

 

Management fees – related party

 

3,658

 

2,421

 

Other fee income – related party

 

6,935

 

6,138

 

Other income

 

120

 

21

 

Total revenue

 

34,176

 

31,186

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

Property operating expenses

 

2,209

 

3,702

 

Reimbursed expenses

 

23,463

 

17,335

 

Real estate taxes

 

 

595

 

Administrative

 

283

 

220

 

Depreciation and amortization

 

150

 

1,016

 

Interest expense

 

896

 

1,062

 

Total operating expenses

 

27,001

 

23,930

 

 

 

 

 

 

 

Income from discontinued operations before equity in earnings of unconsolidated entities, minority interest and income taxes

 

7,175

 

7,256

 

Equity in earnings of unconsolidated entities

 

1,607

 

1,029

 

Income from discontinued operations before minority interest and income taxes

 

8,782

 

8,285

 

Income tax expense

 

1,501

 

1,458

 

Income from discontinued operations before minority interest

 

7,281

 

6,827

 

Minority interest

 

(3,029

)

(2,973

)

Income from discontinued operations

 

$

4,252

 

$

3,854

 

 

The following table summarizes the cash flow information from discontinued operations (in thousands):

 

 

 

Three months ended

 

 

 

March 31, 2008

 

March 31, 2007

 

Net cash (used in) provided by operating activities

 

$

(3,165

)

$

5,237

 

Net cash used in investing activities

 

$

(1,057

)

$

(13,522

)

Net cash used in financing

 

$

 

$

(107

)

 

 

13. Subsequent Events

 

On April 30, 2008, the Company completed the Military Housing Sale to Balfour Beatty.  The cash purchase price paid by Balfour Beatty at closing totaled $350.5 million. Approximately $62.1 million of the proceeds were used to repay and terminate the Company’s Note Facility with Merrill Lynch.  As previously announced, the Company intends to make two separate special distributions its shareholders and the unitholders of the Operating Partnership.  The Company’s Board of Trustees has declared an initial special distribution of $3.10 per share/unit to the holders of common shares and unitholders of the Operating Partnership, which represents a substantial portion of the net proceeds from the Military Housing Sale.   This distribution will be payable on May 15, 2008 to shareholders and unitholders of record as of the close of business on May 10, 2008.  The initial distribution will total approximately $221.1 million in the aggregate.  The remainder of the net proceeds from the transaction will be retained as working capital pending the closing of the proposed merger of GMH with ACC.  The proposed merger is currently anticipated to occur during the second quarter of 2008, subject to the approval of the Company’s shareholders and assuming that the other conditions in the merger agreement are satisfied or waived. It is currently anticipated that there will be an additional distribution to shareholders and unitholders of approximately $0.98 per/unit payable immediately prior to the proposed merger with ACC, which will be comprised of any remaining net proceeds from the Military Housing Sale.

 

On May 8, 2008, the Company, through its subsidiary 353 Associates, entered into an Agreement of Sale with an entity owned by Gary M. Holloway, President and CEO of the Company, relating to a sale of the corporate headquarters to Mr. Holloway. As previously announced by the Company in connection with the pending Merger, Mr. Holloway had entered into a Put Option agreement that allowed the Company to exercise an option to put the sale of the building to Mr. Holloway prior to the consummation of the Merger for a total of $8.0 million, in the event that the Company was unable to identify an unaffiliated third-party buyer. The terms of the agreement provides that Mr. Holloway is required to place an initial deposit of $240,000 into escrow within three business days after the effective date of the agreement and that the closing on the sale of the building will occur immediately prior to the consummation of the Merger. The agreement also provides that either the buyer or seller may terminate the agreement upon written notice in the event that the merger agreement with ACC is terminated in accordance with Article IX thereof.

 

20



 

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

As described above under the section of this report titled “Cautionary Note Regarding Forward-Looking Statements — Military Housing Sale,” the Company completed the Military Housing Sale. In addition, the remaining operations of the Company, including the student housing business, are expected to be acquired through a merger with American Campus Communities, Inc., or  ACC, expected to be completed during the second quarter of 2008, referred to as the “Merger.”

 

Unless otherwise noted in this section, the disclosures of our business include references to operations of the military housing division; however, statements relating to future periods and results or expectations of the Company necessarily exclude the military housing division and its activities. The disclosures contained throughout this section also refer to our business as an ongoing operation with the impact of the Merger not considered unless otherwise noted.

 

Overview

 

We are a self-advised, self-managed, specialty housing company that focuses on providing housing to college and university students residing off-campus and to members of the U.S. military and their families.

 

As of March 31, 2008, we owned, or had ownership interests in, 72 student housing properties containing a total of 13,232 units and 42,670 beds and seven undeveloped or partially developed parcels of land held for development as student housing properties. As of the date of this report, we held a 10% interest in joint ventures that owned eight of these student housing properties, covering a total of 1,140 units and 4,160 beds and provided management services for all of these properties.  In addition, we managed a total of 12 student housing properties owned by others, containing a total of 2,237 units and 7,191 beds, including 48 units and 262 beds currently under construction.

 

In our military housing segment, as of March 31, 2008, our operating partnership had an ownership interest in, and through various wholly-owned subsidiaries operated, 12 military housing privatization projects, comprising an aggregate of 25,658 end-state housing units on 37 military bases.  This includes our Fort Stewart unaccompanied personnel housing (UPH) project, the award of which was finalized during the first quarter of 2008, and which project comprises a total of 334 end-state housing units. Through our taxable REIT subsidiaries, we provide development, construction, renovation and management services to our military housing privatization projects (other than our AETC Group I and Vandenberg projects with the U.S. Air Force), and property management services to student housing properties owned by others. In addition, we provide consulting services with respect to the management of certain student housing properties owned by others, including colleges, universities, and other private owners. In order to comply with the applicable requirements under the REIT provisions of the Code, we must limit the operations of taxable REIT subsidiaries so that securities issued to us by our taxable REIT subsidiaries do not represent more than 20% of our total assets as of the close of any quarter in our taxable year and so that dividends from our taxable REIT subsidiaries, together with our other non-qualifying gross income, do not exceed 25% of our gross income for any taxable year.

 

Currently, our operations are managed within three operating segments that are separately reported: (1) student housing owned properties (2) student housing management and (3) military housing. This structure provides an effective platform for maximizing market penetration and optimizing operating economies of scale. In addition, we separately report the activities of certain departments from a corporate level, which includes personnel that service the Company as a whole and support our overall operations.

 

Student Housing Owned Properties

 

The student housing-owned properties segment reflects the revenues and expenses of off-campus student housing properties acquired and owned through the REIT ownership structure which are strategically located near college or university campuses. During the prior three fiscal years, our rental revenue (including continuing and discontinuing operations) increased substantially as a result of our acquisition activity. Although our acquisition activity slowed during 2007, we continued to experience increases in operating expenses, real estate taxes and depreciation and amortization as a result of our prior acquisitions. Further, interest expense increased related to the financing of the properties that we acquired.

 

21



 

Historically, we have found certain property revenues and operating expenses to be cyclical in nature, and therefore not incurred ratably over the course of the year. As our properties are leased predominantly on an academic-year basis, certain of our operating revenues and expenses will vary from quarter to quarter depending on the leasing cycle. For example, we experience significant turnover costs commencing towards the end of the second quarter and more significantly during the third quarter of our fiscal year, in connection with preparing our properties for new residents prior to commencement of the new academic-year lease period, which typically begins in August or September. In addition, we also typically incur higher lease-up costs during the first two quarters of our fiscal year, as this is the period during which we heavily target students for leases that will commence for the next academic year. Property revenues and expenses may differ from expected results in the year of acquisition, depending on the timing of the acquisition in relation to the leasing cycle. With respect to our lease-up and physical occupancy results for the start of the 2007/2008 academic year, our occupancy levels on a portfolio-wide basis were lower than levels achieved for the start of the 2006/2007 academic year. While our net rental rates have increased for the 2007/2008 academic year over the prior academic year, this revenue growth will be offset by lower occupancy levels at our properties.

 

In the event that the Merger is not consummated and we continue our operations, we expect to continue to place less emphasis on the acquisition of additional student housing properties relative to prior years, and continue to focus on the operational performance of our existing student housing properties and development projects. To the extent our operational performance meets or exceeds management’s expectations going forward, and the Company has sufficient working capital or financing sources for additional acquisitions, we may determine that it is appropriate to place greater emphasis on acquisitions in the Company’s student housing segment and seek to acquire properties located in our targeted markets that meet management’s underwriting criteria for creating long-term growth potential. If we seek to acquire student housing properties, we will consider funding the acquisitions through joint venture structures similar to the joint venture terms that we have entered into with respect to our current joint venture properties. The timing of any additional acquisitions or development projects will be dependent upon various factors, including the ability to complete satisfactory due diligence, to find suitable joint venture partners and agree upon mutually acceptable joint venture terms, to obtain appropriate debt financing on the properties, and the availability of capital. We have traditionally funded at least a portion of our acquisition costs through the placement of mortgage debt on our student housing properties. As a result of recent volatility in the U.S. capital markets resulting from concerns over the sub-prime mortgage debt sector, our ability to obtain mortgage debt on terms that are as favorable to us as we have achieved in the past may be negatively impacted. We would consider funding our equity portion of any joint ventures by using funds from available cash from operations or borrowings, if available. We also may determine that it is appropriate to purchase additional student housing properties outright, as opposed to with a joint venture partner, depending upon many factors which may include, but are not limited to, the applicable purchase price, available capital, and projected returns with respect to the property.

 

In addition, to the extent that the Merger is not consummated and we continue our operations, and in recognition of the fact that certain of our student housing properties have not performed in line with internal projections, our management would analyze the Company’s owned student housing portfolio as a whole, and determine whether there are properties in certain markets that should be positioned for sale or transferred into a joint venture similar to the Company’s joint venture structure with Fidelity Real Estate Group. In performing this analysis, our management would take into consideration a number of factors, including, but not limited to, current and anticipated future supply and demand issues, projected enrollment growth at colleges and universities within the market, and an assessment of potential economies of scale in markets where the Company has multiple assets. In the event that management performs this analysis, we cannot provide any assurance that we will determine to reposition any of the Company’s student housing properties, or that the Company would be successful in any effort to complete such transactions if attempted. Any such plans to sell or place properties into a joint venture also would be subject to approval by our Board of Trustees.

 

Student Housing—Management

 

The student housing-management segment provides the on-site management function for, and generally oversees the management of, all off-campus student housing properties for the Company and for properties we manage that are owned by third parties. Also included in this segment, are activities relating to development and joint venture structuring

 

22



 

activities. Third parties may be related parties or parties unaffiliated with the Company. The properties are strategically located near college or university campuses. Total revenues from management activities, including reimbursement of expenses, increased by approximately 20% from the three months ended March 31, 2007 to the same period in 2008, including management fees earned from the properties managed for the Company.

 

We earn management fees from managing properties for third parties. These fees are typically equal to a percentage of cash receipts or gross rental revenues generated by the managed properties, or equal to a fixed monthly amount, according to the respective management agreements. We also have the ability to earn incentive management fees by achieving specified property-level performance criteria for certain properties we manage for third parties. Further, certain operating expenses incurred related to properties we manage for others are reimbursed by the owners of the properties managed.

 

As of March 31, 2008, we managed a total of 12 student housing properties owned by others, containing a total of 2,237 units and 7,191 beds, including 48 units and 262 beds currently under construction. One of these management contracts was terminated during the second quarter, representing 51 units and 239 beds. We expect our third-party management income to decline during 2008 unless we are able to enter new management contracts. In addition, to the extent that we continue to obtain fee revenue and operating expense reimbursements from the properties that we manage for others, these amounts are expected to become less significant as a percentage of our overall revenues as rental income increases from the properties we own and to the extent our managed property portfolio does not correspondingly increase. In the event that the Merger is not consummated and we continue our operations, we expect to continue to pursue new third-party management agreements during 2008 by utilizing relationships in the student housing market and providing our significant operational economies of scale as a savings mechanism for other third-party owners, including institutional owners and individual student housing owners.

 

Military Housing

 

Our military housing segment develops, constructs, renovates and manages military housing privatization projects in which we acquire equity interests. Revenue from our military housing segment is comprised primarily of fee income for providing development, construction/renovation and management services to our military housing privatization projects. We also are entitled to returns on the equity we invest in the projects. In addition, we earn business development fees from certain of our business partners in connection with our military housing privatization projects, such as our construction and architectural/engineering partners. We seek these fees as payment for our business development efforts incurred by us in connection with pursuing and coordinating the completion of military housing privatization projects that benefit these business partners. We also receive expense reimbursements, consisting primarily of payroll and related expenses, closing costs and transition costs we incur for the project in the periods preceding the initiation of our management of the project. Typically, at the time we initiate management on a project, the project reimburses us for these amounts from the proceeds of the debt securities issued by the military housing privatization project.

 

During the first quarter of 2008, we finalized the plans and financing for the Fort Stewart UPH project, pursuant to which the Army selected the Company to be the private sector developer for UPH for soldiers in the ranks of SSG (E-6) and above at Fort Stewart located in Hinesville, Georgia. The project is coterminous with the existing 50-year ground lease relating to the Company's Fort Stewart/Hunter family housing project and commences with a two-year IDP that includes design, construction, management, maintenance and operational responsibilities for an estimated 334 end-state housing units with project costs of approximately $37.0 million.

 

As of March 31, 2008, we owned equity interests in the joint ventures that owned 12 military housing privatization projects, comprising an aggregate of 25,658 end-state housing units on 37 military bases. During the three months ended March 31, 2008, we earned fees for providing development, construction/renovation and management services to these 12 military housing privatization projects.

 

Critical Accounting Policies

 

Our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” discusses the Company’s consolidated financial statements which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. While the estimates and judgments associated with the application of these accounting principles may be affected by different assumptions or conditions, we believe the estimates and judgments associated with the reported amounts are appropriate under the circumstances in which they were made. In addition, other companies in similar businesses may utilize different estimation policies and methodologies, which may impact the comparability of our results of operations and financial condition to those companies.

 

23



 

The following policies require significant judgments and estimates on our part in preparing the Company’s consolidated financial statements. Changes in these judgments and estimates could have a material effect on these financial statements.

 

Revenue Recognition

 

Student Housing—Owned Properties Segment

 

Rental revenue is recognized when due over the lease terms, which are generally 12 months or less.

 

Other property income, including, but not limited to, lease processing fees, move-in fees, and activity fees is recognized as earned throughout the course of the year. The timing of these fees typically fluctuates in relation to the academic year leasing cycle.

 

Student Housing Managed Properties Segment

 

Standard management fees are based on a percentage of monthly cash receipts or gross monthly rental and other revenues generated by the properties managed for others. We recognize these fees on a monthly basis as the services are performed.

 

Incentive management fees are earned as a result of the achievement of certain operating performance criteria over a specified period by certain managed properties, including targeted annual debt service coverage ratios of the properties. We recognize these fees at the amount that would be due under the contract if the contract was terminated on the balance sheet date.

 

Expense reimbursements are comprised primarily of salary and related costs of certain of our employees working at certain properties we manage for others, the cost of which is reimbursed by the owners of the related properties. We accrue operating expense reimbursements as the related expenses are incurred.

 

Military Housing

 

We earn military housing revenues for providing services to our military housing privatization projects, including the following:

 

· standard and incentive management fees, which are based on a percentage of revenue generated by the military housing privatization projects from the basic allowance for housing provided by the government to service members, referred to as BAH, are recognized when the revenue is earned by the military housing projects. Incentive management fees are based upon the satisfaction of certain criteria including, among other things, satisfying designated benchmarks relating to emergency work order response, occupancy rates, home turnover and resident satisfaction surveys. Incentive management fees are recognized when the various criteria stipulated in the management contract have been satisfied;

 

· standard and incentive development and construction/renovation fees, which are based on a percentage of development and construction/renovation costs incurred by the military housing privatization projects, including hard and soft costs and financing costs, are recognized on a monthly basis as the costs are incurred by the military housing projects. Incentive development and construction/renovation fees are based upon the satisfaction of certain criteria including, among other things, completing a number of housing units according to schedule, achieving specific safety records and implementing small business or minority subcontracting plans. The incentive development and construction/renovation fees are recognized when the various criteria stipulated in the contract have been satisfied. In addition, in certain instances, we may receive fees relating to the performance of pre-construction/renovation services. These pre-construction/renovation fees are determined on a project-by-project basis, and are paid in proportion to the amount of pre-construction/renovation costs incurred by us for the project and recognized as revenue upon performance of the pre-construction/renovation services;

 

· revenues on our renovation contracts are recorded on the percentage-of-completion method. When the percentage-of-completion method is used, contract revenue is recognized in the ratio that costs incurred to date bear to estimated costs at completion. Adjustments to cost estimates are made in the period in which the facts requiring such revisions become known. When the revised estimates indicate a loss, such loss is provided for currently in its entirety.

 

24



 

· business development fees are earned from a construction partner in connection with our military housing projects. These fees consist of an (i) annual base fee, and (ii) additional fee which is paid on a monthly basis. As of December 31, 2007, payment of the additional fee has been terminated. The fees are recognized on a straight-line basis over the term of the agreement, which is generally one year.

 

· equity returns are earned on our investments in military housing projects. During the initial development period for a project, the equity returns are a fixed percentage of our investment and subsequent to the initial development period for a project, the equity returns are based on a fixed percentage of our investment and on the project’s net operating income, subject to cash distribution caps, as defined in the operating agreements related to the particular project. As of December 31, 2007, only the Fort Carson project had passed its initial development period.

 

Real Estate Investments and Corporate Assets

 

We carry real estate investments and corporate assets at cost, net of accumulated depreciation. Cost of acquired assets includes the purchase price and related closing costs. We allocate the cost of real estate investments to net tangible and identified intangible assets based on relative fair values in accordance with Statement of Financial Accounting Standards No. 141 (“SFAS 141”), Business Combinations. We estimate fair value based on information obtained from a number of sources, including our due diligence, marketing and leasing activities, independent appraisals that may be obtained in connection with the acquisition or financing of the respective property, and other market data.

 

The value of in-place leases is based on the difference between (i) the property valued with existing in-place leases and (ii) the property valued as if vacant. As lease terms typically are 12 months or less, actual rates on in-place leases generally approximate market rental rates. Factors that we consider in the valuation of in-place leases include an estimate of incremental carrying costs during the expected lease-up periods considering current market conditions and nature of the tenancy. Purchase prices of student housing properties to be acquired are not expected to be allocated to tenant relationships considering the terms of the leases and the expected levels of renewals. We amortize the value of in-place leases to expense over the remaining term of the respective leases, which is generally one year or less.

 

We expense routine repair and maintenance costs that do not improve the value of an asset or extend its useful life, including turnover costs. We capitalize expenditures that improve the value and extend the useful life of an asset. We compute depreciation using the straight-line method over the estimated useful lives of the assets, which is generally 40 years for buildings including student housing properties and the commercial office building, and three to five years for residential furniture and appliances. Commencing towards the end of the second quarter and more significantly during the third quarter of each fiscal year, we typically will experience an increase in property operating expenses over other quarters as a result of repair and maintenance expenditures relating to turnover of units at student housing properties. Our student housing lease terms generally commence in August or September to coincide with the beginning of the academic year. Accordingly, we expect to incur a majority of the repair and maintenance costs during the second and third quarters to prepare for new residents.

 

In accordance with Statement of Financial Accounting Standards No. 144 (“SFAS 144”), Accounting for the Impairment or Disposal of Long-Lived Assets, long-lived assets, such as real estate investments and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. These circumstances may include, but are not limited to, operational performance, market conditions and competition from other off-campus properties and on-campus housing, legal and environmental concerns, and results of appraisals or other information obtained as part of a financing or disposition strategy. When required, we review the recoverability of assets to be held and used through a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized in an amount by which the carrying value of the asset exceeds the fair value of the asset determined using customary valuation techniques, such as the present value of expected future cash flows. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and no longer would be depreciated.

 

Allowance for Doubtful Accounts

 

We estimate the collectibility of receivables generated by rental and other income as a result of the operation of our student housing properties. If we believe that the collectibility of certain amounts is questionable, we record a specific reserve for these amounts to reduce the amount outstanding to an amount we believe will be collectible and a reserve for all other

 

25



 

accounts based on a range of percentages applied to aging categories, which is based on historical collection and write-off experience.

 

We also evaluate the collectibility of fee income and expense reimbursements generated by the management of student housing properties owned by others and through the provision of development, construction, renovation and management services to our military housing privatization projects based upon the individual facts and circumstances, and record a reserve for specific amounts, if necessary.

 

Minority Interest

 

Minority interest as initially recorded at the date of our initial public offering represented the net equity of our operating partnership, including the proceeds received from the sale of the warrant to Vornado, multiplied by the ownership percentage of holders of limited partnership units in our operating partnership other than the Company. Our operating partnership is obligated to redeem, at the request of a holder, each unit of limited partnership interest for cash or common shares on a one-for-one basis, at our option, subject to adjustments for share splits, dividends, recapitalizations or similar events; except that Gary M. Holloway, Sr. has the right to require our operating partnership to redeem his and his affiliates’ units of limited partnership interest for common shares, subject to his restriction from owning more than 20% of our outstanding common shares. If the minority interest unit holders’ share of a current year loss would cause the minority interest balance to be less than zero, the minority interest balance will be reported as zero unless there is an obligation of the minority interest holders to fund those losses. Any losses in excess of the minority interest will be charged against equity. If future earnings materialize, equity will be credited for all earnings up to the amount of those losses previously absorbed. Distributions to limited partnership unit holders other than us are recorded as a reduction to minority interest.

 

Investments in Military Housing Projects and Student Housing Joint Ventures

 

The Company owns equity interests in the joint ventures that own our military housing projects with the U.S. military to design, develop, construct/renovate and manage the military housing located on or near various bases throughout the United States. In addition the Company also owns equity interests in two joint ventures that own student housing properties. The Company evaluates its investments in these joint ventures in which we have a variable interest to determine if the underlying entity is a variable interest entity (“VIE”) as defined under FASB Financial Interpretation No. 46 (as revised) (“FIN 46(R)”). The Company has concluded that each of the joint ventures in which it has a variable interest is a VIE and that the Company is not the primary beneficiary of any of these VIEs. The Company records its investments in joint ventures in accordance with the equity method of accounting. The Company’s investment is initially recorded at cost, and then subsequently adjusted at each balance sheet date to an amount equal to what the Company would receive from the joint venture in the event that the project were liquidated at net book value as of that date, and assuming that the proceeds from the liquidation are distributed in accordance with the terms of, and priority of returns set forth under, the joint venture’s operating agreement. The Company has exposure to loss to the extent of its investments, if any, and any receivables due from the military projects or joint ventures.

 

Income Taxes

 

We elected to be taxed as a REIT under the Code commencing with our taxable year ended December 31, 2004. To continue to qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we currently distribute at least 90% of our adjusted taxable income to our shareholders. We believe we are organized and operate in a manner that allows us to qualify for taxation as a REIT under the Code, and it is our intention to adhere to these requirements and maintain our REIT status in the future. Accordingly, no provision has been made for federal income taxes in the accompanying consolidated financial statements, other than with respect to our taxable REIT subsidiaries.

 

26



 

Results of Operations

 

The results of operations for the three months ended March 31, 2008 and 2007 presented below reflect the results of operations of the Company. The eliminations column represents the management fees that are charged to our student housing—owned segment from our student housing management segment. Such amounts have been eliminated in consolidation.

 

27



 

Comparison of the Three Months Ended March 31, 2008 to the Three Months Ended March 31, 2007

 

 

 

Three Months Ended March 31, 2008

 

 

 

Student
Housing-
Owned
Properties

 

Student
Housing
Management

 

Military
Housing

 

Corporate

 

Elimination

 

Total

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

Rent and other property income

 

$

46,543

 

$

 

$

 

$

39

 

$

 

$

46,582

 

Expense reimbursements:

 

 

 

 

 

 

 

 

 

 

 

 

 

Related party

 

 

645

 

 

42

 

 

687

 

Third party

 

 

1,592

 

 

 

 

1,592

 

Management fees:

 

 

 

 

 

 

 

 

 

 

 

 

 

Owned properties

 

 

1,774

 

 

 

(1,774

)

 

Related party

 

 

209

 

 

 

 

209

 

Third party

 

 

609

 

 

 

 

609

 

Other income

 

11

 

1

 

 

59

 

 

71

 

Total revenue

 

46,554

 

4,830

 

 

140

 

(1,774

)

49,750

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating expense

 

17,849

 

1,502

 

 

 

 

19,351

 

Intercompany management fee

 

1,774

 

 

 

 

(1,774

)

 

Reimbursed expenses

 

 

2,237

 

 

42

 

 

2,279

 

Real estate taxes

 

4,664

 

 

 

25

 

 

4,689

 

Administrative expenses

 

 

 

 

3,714

 

 

3,714

 

Transactional expenses

 

 

 

 

2,125

 

 

2,125

 

Depreciation and amortization

 

4,839

 

63

 

 

149

 

 

5,051

 

Interest

 

13,241

 

 

 

141

 

 

13,382

 

Total operating expenses

 

42,367

 

3,802

 

 

6,196

 

(1,774

)

50,591

 

Income (loss) before equity in earnings of unconsolidated entities, income taxes and minority interest from continuing operations

 

4,187

 

1,028

 

 

(6,056

)

 

(841

)

Equity in (loss)/earnings of unconsolidated entities

 

(84

)

 

 

 

 

(84

)

Income (loss) before income taxes and minority interest from continuing operations

 

4,103

 

1,028

 

 

(6,056

)

 

(925

)

Income tax benefit

 

 

(20

)

 

 

 

(20

)

Income (loss) before minority interest from continuing operations

 

4,103

 

1,048

 

 

(6,056

)

 

(905

)

Minority interest loss attributable to continuing operations

 

 

 

 

313

 

 

313

 

Income (loss) from continuing operations

 

4,103

 

1,048

 

 

(5,743

)

 

(592

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Discontinued Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations before minority interest, net of $1,501 income tax expense

 

 

 

8,460

 

(1,179

)

 

7,281

 

Minority interest income

 

 

 

 

(3,029

)

 

(3,029

)

Income (loss) from discontinued operations

 

 

 

8,460

 

(4,208

)

 

4,252

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income(loss)

 

$

4,103

 

$

1,048

 

$

8,460<