UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM 10-Q
x
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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For the
quarterly period ended March 31, 2008
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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For the
transition period from
to
Commission
file number 001-32290
GMH
COMMUNITIES TRUST
(Exact Name of
Registrant as Specified in Its Charter)
Maryland
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201181390
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(State or other
Jurisdiction of
Incorporation or Organization)
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(IRS Employer
Identification No.)
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10
Campus Boulevard, Newtown Square, PA
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19073
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(Address of Principal
Executive Offices)
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(Zip Code)
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Registrants 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
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Accelerated filer
x
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Non-accelerated filer
o
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Smaller reporting
company
o
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(Do not check if a
smaller reporting company)
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Indicate by check
mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act). Yes
o
No
x
On May 9, 2008,
41,669,879
of the registrants common
shares of beneficial interest, $0.001 par value, were outstanding.
GMH COMMUNITIES TRUST
INDEX TO FORM 10-Q
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 Companys 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 Companys 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 Companys
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
Managements
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
managements 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
Managements 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 managements 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)
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March 31,
2008
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December 31,
2007
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(unaudited)
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ASSETS
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Real estate investments:
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Student housing properties
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$
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1,420,396
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$
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1,419,894
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Accumulated depreciation
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100,712
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95,830
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1,319,684
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1,324,064
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Corporate assets:
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Corporate assets
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9,983
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10,142
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Accumulated depreciation
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1,636
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1,582
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8,347
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8,560
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Cash and cash equivalents
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7,017
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15,727
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Restricted cash
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21,605
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20,816
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Accounts and other receivables, net:
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Related party
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1,042
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23,288
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Third party
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4,229
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4,824
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Investments in joint ventures:
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Military housing projects
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70,264
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Student Housing projects
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1,261
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1,284
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Deferred contract costs
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1,883
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Deferred financing costs, net
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3,841
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4,338
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Lease intangibles, net
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20
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40
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Deposits
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534
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629
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Assets held for sale
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97,506
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Other assets
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8,995
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13,129
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Total assets
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$
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1,474,081
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$
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1,488,846
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LIABILITIES AND BENEFICIARIES EQUITY
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Mortgage notes payable
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$
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960,236
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$
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961,531
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Line of credit
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55,105
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53,605
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Accounts payable
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2,495
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10,263
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Accrued expenses
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22,630
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30,448
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Dividends and distributions payable
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11,767
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11,759
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Liabilities related to assets held for sale
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14,092
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Other liabilities
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9,542
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17,738
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Total liabilities
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1,075,867
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1,085,344
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Minority interest
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134,247
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136,422
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Commitments and contingencies (Note 9)
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Beneficiaries equity:
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Common shares of beneficial interest, $0.01 par value; 500,000,000
shares authorized, 41,669,879 issued and outstanding at March 31, 2008,
and 41,621,594 issued and outstanding at December 31, 2007
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42
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42
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Preferred shares100,000,000 shares authorized, no shares issued or
outstanding
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Additional paid-in capital
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331,258
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331,155
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Cumulative earnings
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36,415
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32,755
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Cumulative dividends
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(103,748
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)
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(96,872
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)
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Total beneficiaries equity
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263,967
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267,080
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Total liabilities and beneficiaries equity
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$
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1,474,081
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$
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1,488,846
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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)
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Three Months Ended March 31,
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2008
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2007
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Revenue:
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Rent and other property income
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$
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46,582
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$
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51,464
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Expense reimbursements:
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Related party
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687
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64
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|
Third party
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1,592
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1,446
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|
Management fees:
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|
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Related party
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209
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|
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|
Third party
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609
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678
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Other income
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71
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208
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Total revenue
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49,750
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53,860
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Operating Expenses:
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Property operating expenses
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19,351
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20,167
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Reimbursed expenses
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2,279
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1,510
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Real estate taxes
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4,689
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|
4,901
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|
Administrative expenses
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3,714
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4,650
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|
Transactional expenses
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2,125
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Depreciation and amortization
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5,051
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11,688
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Interest
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13,382
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17,475
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Total operating expenses
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50,591
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60,391
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Loss before equity in earnings of unconsolidated entities, income
taxes and minority interest from continuing operations
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(841
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)
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(6,531
|
)
|
Equity in earnings of unconsolidated entities
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(84
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)
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Loss before income taxes and minority interest from continuing
operations
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(925
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)
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(6,531
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)
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Income tax (benefit)/expense
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(20
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)
|
68
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|
Loss before minority interest from continuing operations
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(905
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)
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(6,599
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)
|
Minority interest (income)/loss attributable to continuing operations
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313
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2,874
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Loss from continuing operations
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(592
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)
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(3,725
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)
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Discontinued Operations:
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Income from discontinued operations before minority interest, net of
$1,501 and $1,458 of income tax expense in 2008 and 2007, respectively
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7,281
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6,827
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Minority interest (income)/loss attributable to discontinued
operations
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(3,029
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)
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(2,973
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)
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Income from discontinued operations
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4,252
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3,854
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Net income
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$
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3,660
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$
|
129
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Earnings per common share-basic
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Continuing operation
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$
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(0.01
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)
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$
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(0.09
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)
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Discontinued operations
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0.10
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|
0.09
|
|
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|
0.09
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$
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0.00
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Earnings per common share-diluted
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Continuing operations
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$
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(0.01
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)
|
$
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(0.09
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)
|
Discontinued operations
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0.10
|
|
0.09
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|
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$
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0.09
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$
|
0.00
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|
Weighted-average shares outstanding during the period:
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Basic
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41,566,158
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41,494,521
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Diluted
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71,231,686
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73,128,701
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Common share dividend declared per share
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$
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0.1650
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$
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0.1650
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See accompanying notes to consolidated financial statements.
2
GMH COMMUNITIES TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands)
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Three Months Ended March 31,
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2008
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2007
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Cash flows from operating activities:
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|
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Net income
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$
|
3,660
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|
$
|
129
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Minority interest
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2,716
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|
99
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|
Adjustments to reconcile net income to net cash provided by operating
activities from continuing operations:
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Depreciation
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5,039
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11,469
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Amortization:
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Lease intangibles
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20
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1,125
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Investment in military housing projects
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142
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|
111
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|
Notes payable fair value adjustment
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(276
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)
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(1,994
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)
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Deferred loan costs
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475
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1,337
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|
Restricted shares
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101
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|
95
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|
Allowance for doubtful accounts
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|
1,284
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|
530
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|
Equity in earnings of unconsolidated entities in excess of
distributions received
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(635
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)
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(332
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)
|
Changes in operating assets and liabilities from continuing
operations:
|
|
|
|
|
|
Restricted cash
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(807
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)
|
(1,396
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)
|
Accounts and other receivables
|
|
1,758
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|
2,074
|
|
Deferred contract costs
|
|
1,882
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|
2,209
|
|
Deposits and other assets
|
|
(1,578
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)
|
(2,150
|
)
|
Accounts payable
|
|
(1,987
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)
|
(797
|
)
|
Accrued expenses and other liabilities
|
|
(6,686
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)
|
(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
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)
|
(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 Companys 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 ACCs 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 Companys 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 Companys
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 Companys Board of Trustees, and has been recommended for
approval by the Companys 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
Companys consolidated financial statements and notes to the financial
statements included in the Companys 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 Companys
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
receivablerelated 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 Companys 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
projects 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 Companys
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
Companys 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 Companys 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 Companys 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 ventures 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 Companys 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 Companys 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 parents 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 parents
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 Companys
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 Companys
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
ventures operating agreement. The terms of the various agreements generally
provide for the payment to the Company of an agreed upon return on the Companys
invested capital and a return of the Companys 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 Companys 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
LLCs 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 LLCs 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 projects
net operating income, which will decrease to 30% and 15% in 2012 and 2016,
respectively. After 2016 and through 2025, the Companys returns on its
investments are subject to an annual maximum amount of $1.75 million. The
project began repaying the Companys 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, LLCs
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 Companys 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 reimbursementsrelated 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 projects 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 Companys 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 Companys 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 Companys 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
Companys financial position or results of operations.
Under the provisions of
FIN 45,
Guarantors 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 Companys securities between May 5,
2005 and March 10, 2006 based upon the Companys 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 Companys
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 Companys management evaluates each segments 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 Companys ongoing management of
the properties, in addition to the cash flows resulting from the Companys 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 Companys
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 Companys 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 Companys 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.
Managements 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 managements
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 Companys student
housing segment and seek to acquire properties located in our targeted markets
that meet managements 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 Companys 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 Companys 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 Companys
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
HousingManagement
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 Managements
Discussion and Analysis of Financial Condition and Results of Operations
discusses the Companys 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
Companys consolidated financial statements. Changes in these judgments and
estimates could have a material effect on these financial statements.
Revenue
Recognition
Student HousingOwned 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 projects 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 Companys 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 ventures 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 housingowned 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
|
|
$
|
(9,951
|
)
|
$
|
|
|
$
|
3,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
|
|
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
|
|
29
Student Housing
Student HousingOwned Properties
Revenue.
As
of March 31, 2008, we had 64 wholly-owned student housing
properties that are included in our results from continuing operations. Rent and other property income decreased to
$46.5 million during the three months ended March 31, 2008 from $5l.4
million during the three months ended March 31, 2007. The decrease in rent and other property
income experienced during the three months ended March 31, 2008 relates to
lower economic occupancy levels achieved for the 2007-2008 academic year for
our portfolio versus the prior year. Although we generally seek rent increases
that will exceed projected increases in property operating expenses, increases
in our property operating expenses exceeded our rent increases from 2007 to
2008, primarily as a result of increases in payroll and utility expenses
incurred during the first quarter of 2008 and the fact that rental rate growth
was offset by lower occupancy levels. In future periods, our net income will be
negatively affected to the extent property operating expenses are higher than
those projected by our management for such period prior to lease execution for
the applicable academic year.
We owned 63 properties
which are included in our results from continuing operations during both the
three months ended March 31, 2008 and 2007, referred to herein as our same
store properties. Our revenues at the same store properties were $46.2 million
during the three months ended March 31, 2008 as compared to $47.4 million
during the three months ended March 31, 2007.
Other income remained relatively consistent during the
three months ended March 31, 2008 compared to the same period in the
previous year. Other income consists
primarily of interest income on invested cash.
Expenses.
Property operating expenses from
continuing operations decreased to $17.8 million during the first quarter of
2008 from $18.1 million for the first quarter of 2007. The decrease of $0.3
million is attributable to a $0.2 million decrease in utilities expense and a
$0.5 million decrease in insurance expense.
The decreases were offset by a $0.1 million increase in repairs and
maintenance expense; a $0.2 million increase in other taxes; and a $0.1 million
increase in security services.
With respect to our same
store properties, we experienced an increase in property operating expenses of
approximately $1.2 million for first quarter of 2008, as compared to 2007. This
increase was primarily attributable to an increase in payroll expense of $0.6
million, an increase in utilities expense of $0.3 million, an increase in
security expense of $0.2 million, and an increase in property marketing
expenses of $0.1 million.
Real estate taxes from
continuing operations decreased to $4.7 million in 2008 from $4.9 million
in 2007. Real estate taxes relating to
our same store properties remained relatively consistent during the three
months ended March 31, 2008 as compared to the same period in the previous
year. We may see an increase in real
estate taxes to the extent that local authorities continue to aggressively
pursue higher real estate tax assessments on properties that we currently own.
Depreciation and
amortization from continuing operations decreased to $4.8 million as compared
to $11.6 million in 2007. The
significant decrease is due to the fact that our student housing properties
were classified as held for sale upon the announcement of our pending merger
with ACC and, therefore, we ceased depreciation of our student housing
properties on February 12, 2008.
Interest expense from
continuing operations decreased to $13.2 million for the first quarter of 2007
from $16.0 million in 2007. We
expect interest expense to decrease during the remainder of 2008, since the Company
paid down the remaining outstanding balance on its note facility with Merrill
Lynch in connection with the Military Housing Sale effected on April 30,
2008.
Student Housing Management
Revenue.
Expense reimbursements from related
parties increased to $0.6 million for the first quarter of 2008 from zero in
2007, as a result of the commencement of management services during 2007 for
six properties that we transferred into a joint venture with Fidelity Real
Estate Group, as well as two properties in our joint venture with AEW Capital Management,
LP.
30
Expense reimbursements
from third parties remained relatively consistent during the three months ended
March 31, 2008, as compared to the same period in the prior year. Reimbursed expenses are comprised of payroll
expenses for on-site employees. We
expect expense reimbursements to decrease in 2008 as a result of the
termination of the management contracts we maintained with SCI Real Estate
Investments relating to five student housing properties sold during 2007.
Management fee income
from third parties remained relatively consistent during the three months ended
March 31, 2008, as compared to that same period in the prior year.
Expenses.
Property
operating expenses decreased from $2.1 million during the three months ended March 31,
2007 to $1.5 million during the three months ended March 31, 2008,
primarily due to the termination of the management contracts we maintained with
SCI Real Estate Investment relating to five properties that we sold during
2007. These expenses are comprised of payroll and general and administrative
expenses directly associated with the operations of the Companys owned and
managed portfolios. While those employees who are directly responsible for the
oversight of specific properties are charged directly to the Student
Housing-Owned segment, this segment staffs a full operations department. This
department includes those employees responsible for portfolio oversight, which
includes regional vice presidents, regional property managers, regional leasing
specialists and the associated expenses such as travel directly related to
those employees who perform this function. Such expenses are considered part of
our student housing management operation.
Reimbursed expenses,
which includes related party and third party managed properties remained
relatively consistent during the three months ended March 31, 2008, as
compared to the same period in the prior year.
Reimbursed expenses are comprised mostly of payroll expenses for on-site
employees.
Income taxes for the
three months ended March 31, 2008 amounted to a $20,000 tax benefit versus
no income tax expense for the same period in the prior year. Income taxes
consist primarily of taxes associated with the operations of our student
housing taxable REIT subsidiary, which manages properties for third parties.
Military Housing - Discontinued Operations
The following table
summarizes the revenue and expense information related to the military housing
segment, which is included in discontinued operations for the three months
ended March 31, 2008 and 2007 (in thousands).
|
|
Three months ended
|
|
|
|
March 31, 2008
|
|
March 31 ,2007
|
|
Revenue:
|
|
|
|
|
|
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
|
|
20
|
|
Total revenue
|
|
34,176
|
|
25,914
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
Property operating expenses
|
|
2,209
|
|
1,975
|
|
Reimbursed expenses.
|
|
23,463
|
|
17,335
|
|
Depreciation and amortization
|
|
150
|
|
118
|
|
Total operating expenses
|
|
25,822
|
|
19,428
|
|
|
|
|
|
|
|
Income from discontinued operations before equity in earnings of
unconsolidated entities, minority interest and income taxes
|
|
8,354
|
|
6,486
|
|
Equity in earnings of unconsolidated entities
|
|
1,607
|
|
1,029
|
|
Income from discontinued operations before minority interest and
income taxes
|
|
9,961
|
|
7,515
|
|
Income tax expense
|
|
1,501
|
|
1,458
|
|
Income from military housing division
|
|
$
|
8,460
|
|
$
|
6,057
|
|
Revenue.
Expense
reimbursements increased to $23.5 million for the three months ended March 31,
2008, as compared to $17.3 million for the three months ended March 31,
2007. The increase is due primarily to the reimbursement of
31
closing
and transition expenses from our Navy Southeast Region and Vandenberg projects,
both of which commenced operations during the fourth quarter of 2007; and
increases in the reimbursement of renovation expenses at our Fort Hamilton,
Fort Eustis/Story, Navy Northeast, Fort Bliss/White Sands, Fort Carson, Fort
Gordon, Navy Southeast Region and Vandenberg projects, offset by declines in
reimbursement of renovation expenses at our Fort Stewart/Hunter, AETC Group I
and Carlisle Picatinny projects. The table below sets forth certain information
regarding the revenue from expense reimbursements for each of our military
housing projects for the three months ended March 31, 2008 and 2007.
Project
|
|
2008
|
|
2007
|
|
|
|
(in millions)
|
|
Expense Reimbursements
|
|
|
|
|
|
Fort Stewart and Hunter Army Airfield Project
|
|
$
|
1.0
|
|
$
|
2.1
|
|
Fort Carson Project
|
|
1.5
|
|
0.9
|
|
Fort Hamilton Project
|
|
0.4
|
|
0.1
|
|
Walter Reed Army Medical Center and Fort Detrick Project
|
|
0.2
|
|
0.2
|
|
Fort Eustis/Fort Story
Project
|
|
1.2
|
|
0.8
|
|
Navy Northeast Region Project
|
|
6.8
|
|
4.8
|
|
Fort Bliss/White Sands Missile Range Project
|
|
4.5
|
|
1.9
|
|
Fort Gordon Project
|
|
0.7
|
|
0.4
|
|
Carlisle/Picatinny Project.
|
|
0.5
|
|
1.3
|
|
AETC Group I (1)
|
|
2.8
|
|
4.8
|
|
Navy Southeast Region Project (2)
|
|
3.3
|
|
|
|
Vandenberg Project (2)
|
|
0.6
|
|
|
|
Total expense reimbursements
|
|
$
|
23.5
|
|
$
|
17.3
|
|
(1)
|
The AETC Group I project commenced operations in the
first quarter of 2007 and included $4.1 million of transition cost
reimbursements for the three months ending March 31, 2007.
|
|
|
(2)
|
The Navy Southeast Region and Vandenberg projects
commenced operations in the fourth quarter of 2007.
|
Management fees from
related parties increased to $3.7 million for the three months ended March 31,
2008, compared to $2.4 million for the three months ended March 31, 2007.
The amount of management fees from related parties that we receive during a
fiscal period is affected by the number of housing units that we manage under
our military housing projects during that period, which fluctuates based on the
number of housing units that we construct/renovate or demolish during that
period. Management fees from related
parties increased during the three months ended March 31, 2008, as
compared to the three months ended March 31, 2007, due to the commencement
of our AETC Group I project in the first quarter of 2007 and the commencement
of our Navy Southeast Region and Vandenberg projects in the fourth quarter of
2007. The table below sets forth certain
information regarding our revenue from management fees from related parties for
each of our military housing projects for the three months ended March 31,
2008 and 2007.
Project
|
|
2008
|
|
2007
|
|
|
|
(in millions)
|
|
Fort Stewart and Hunter Army Airfield Project
|
|
$
|
0.4
|
|
$
|
0.4
|
|
Fort Carson Project
|
|
0.3
|
|
0.3
|
|
Fort Hamilton Project
|
|
0.1
|
|
0.1
|
|
Walter Reed Army Medical Center and Fort Detrick Project
|
|
0.1
|
|
0.1
|
|
Fort Eustis/Fort Story
Project
|
|
0.2
|
|
0.1
|
|
Navy Northeast Region Project
|
|
0.8
|
|
0.8
|
|
Fort Bliss/White Sands Missile Range Project
|
|
0.3
|
|
0.3
|
|
Fort Gordon Project
|
|
0.1
|
|
0.1
|
|
Carlisle/Picatinny Project
|
|
0.1
|
|
0.1
|
|
AETC Group I Project (1)
|
|
0.3
|
|
0.1
|
|
Navy Southeast Region Project (2)
|
|
0.8
|
|
|
|
Vandenberg Project (2)
|
|
0.2
|
|
|
|
Total
|
|
$
|
3.7
|
|
$
|
2.4
|
|
32
|
|
(1)
|
The AETC Group I project commenced in the first
quarter of 2007.
|
|
|
(2)
|
The Navy Southeast Region and Vandenberg projects
commenced operation in the fourth quarter of 2007.
|
Other fee income from
related parties, which includes development and construction/renovation fees
and business development fees, totaled $6.9 million for the three months ended March 31,
2008, as compared to $6.1 million for the same period in 2007. Of the 2008 amount, $6.7 million related to
development and construction/renovation fees, and $0.2 million related to
business development fees. The amount of
other fee income from related parties that we receive during a fiscal period is
affected by the number of housing units that we construct or renovate under our
military housing projects during that period, which will fluctuate based on the
point at which we are during the initial development period for the project. Generally, the majority of new construction
work is completed during the beginning years of an initial development period,
while construction/renovation work is completed throughout the initial
development period. Other fee income from related parties increased during the
three months ended March 31, 2008, as compared to the three months ended March 31,
2007, primarily due to increases in construction activities at our Fort
Bliss/White Sands, Fort Carson, Fort Hamilton, Navy Northeast Region and
Carlisle Picatinny projects; and the commencement of our AETC I project in the
first quarter of 2007 and our Navy Southeast Region and Vandenberg projects in
the fourth quarter of 2007, offset by decreases in construction activity at our
Fort Detrick and Walter Reed Army Medical Center, our Fort Eustis/Fort Story
project and our Fort Gordon projects. Business development fees decreased to $0.2
million for the three months ended March 31, 2008, as compared to $1.0
million for the same period in 2007, primarily due to the expiration of one of
our business development agreements at December 31, 2007. The table below sets forth certain
information regarding the revenue from other fee income from related parties
for each of our military housing projects for the three months ended March 31,
2008 and 2007.
Project
|
|
2008
|
|
2007
|
|
|
|
(in millions)
|
|
Development and Construction/Renovation Fees
|
|
|
|
|
|
Fort Stewart and Hunter Army Airfield Project
|
|
$
|
0.2
|
|
$
|
0.2
|
|
Fort Carson Project
|
|
0.6
|
|
0.2
|
|
Fort Hamilton Project
|
|
0.1
|
|
|
|
Walter Reed Army Medical Center and Fort Detrick Project
|
|
|
|
0.2
|
|
Fort Eustis/Fort Story
Project
|
|
0.4
|
|
0.7
|
|
Navy Northeast Region Project
|
|
1.2
|
|
1.0
|
|
Fort Bliss/White Sands Missile Range Project
|
|
1.8
|
|
1.0
|
|
Fort Gordon Project
|
|
0.2
|
|
0.6
|
|
Carlisle/Picatinny Project
|
|
0.3
|
|
0.1
|
|
AETC I (1)
|
|
1.7
|
|
1.1
|
|
Navy Southeast Region Project (2)
|
|
0.1
|
|
|
|
Vandenberg Project (2)
|
|
0.1
|
|
|
|
Total Development and Construction Fees
|
|
$
|
6.7
|
|
$
|
5.1
|
|
Business Development Fees
|
|
$
|
0.2
|
|
$
|
1.0
|
|
Total Other Fee Income Related Parties
|
|
$
|
6.9
|
|
$
|
6.1
|
|
(1)
|
The AETC Group I project commenced operations in the
first quarter of 2007.
|
|
|
(2)
|
The Navy Southeast Region and Vandenberg projects
commenced operations in the fourth quarter of 2007.
|
Equity in earnings of
unconsolidated entities, consisting of equity income and preferred returns from
our military housing project joint ventures, totaled $1.6 million for the three
months ended March 31, 2008, as compared to $1.0 million for the three
months ended March 31, 2007. The
increase was primarily due to preferred returns earned on our AETC Group I and
Vandenberg projects, and an increase in preferred returns earned on our Fort
Carson project due to an increase in rental revenue and net operating
income. The table below sets forth
certain information regarding equity in earnings of unconsolidated entities for
the three months ended March 31, 2008 and 2007.
33
Project
|
|
2008
|
|
2007
|
|
|
|
(in millions)
|
|
Fort Carson Project
|
|
$
|
1.0
|
|
$
|
0.7
|
|
Navy Northeast Region Project
|
|
0.2
|
|
0.2
|
|
AETC Group I Project (1)
|
|
0.2
|
|
0.1
|
|
Vandenberg Project (2)
|
|
0.2
|
|
|
|
Total
|
|
$
|
1.6
|
|
$
|
1.0
|
|
(1)
The
AETC Group I project commenced operations in the first quarter of 2007.
(2)
The
Vandenberg Project commenced operations in the fourth quarter of 2007.
Expenses.
Property
operating expenses include costs related to operating the military housing
segment of our business, such as the compensation expense related to our
military housing personnel located in our corporate headquarters. These costs
increased to $2.2 million in for the three months ended March 31, 2008,
from $2.0 million in the three months ended March 31, 2007. The increase
was due to increases in (i) our renovation company operations and (ii) management
and administrative expenses related to our overall expansion of our business.
Reimbursed expenses
increased to $23.5 million for the three months ended March 31, 2008 from
$17.3 million for the three months ended March 31, 2007, primarily
due to payroll and renovation expenses related to the 12 military housing
projects in operation as of March 31, 2008, as compared with the seven
military housing projects in operation as of March 31, 2007, offset by
anticipated declines in construction and renovation activity at certain
projects.
Income Taxes.
The effective tax rate on income taxes resulting from the
portion of income that is earned in our Military Housing taxable REIT
subsidiary remained relatively constant at 35.7% in 2008 versus 36.0% in 2007.
Corporate
Rental revenue and
expense reimbursements, which were recognized with respect to the portion of
our corporate headquarters leased to entities affiliated with Gary M. Holloway, Sr.,
and payroll and related expenses reimbursed by entities affiliated with Mr. Holloway
for the provision of common services, remained relatively constant during the
three months ended March 31, 2008 and 2007.
Other income, consisting
primarily of interest income, decreased by $112,000 primarily due to decreased
overnight cash investments.
Administrative expenses,
primarily relating to management of our corporate office, accounting, legal,
human resources, information technology and acquisition departments, decreased
to $3.7 million for the three months ended March 31, 2008 from $4.7
million in 2007, primarily due to decreases in professional fees, as well as
training costs incurred during 2007 associated with implementation of new
leasing software relating to our Student Housing division as well as other one
time software licensing costs, and a decrease in other taxes.
Transactional expenses of
$2.1 million consisted of legal, investment banking and other expenses
associated with the Military Housing Sale and the pending Merger.
Interest expense
decreased to $0.1 million for the three months ended December31, 2008 from
$1.5 million in 2007, primarily due to the presentation of interest on our
note facility presented in discontinued operations in 2008, as the facility was
terminated in connection with the Military Housing Sale. This note facility was not in place during
the first quarter of 2007.
Liquidity and Capital Resources
Short-term liquidity
requirements consist primarily of funds necessary to pay operating expenses and
other costs. These expenses and costs include (i) recurring maintenance
and capital expenditures to maintain and lease our properties, (ii) interest
expense and scheduled principal payments on outstanding indebtedness, (iii) real
estate taxes and insurance, (iv) corporate salaries, employee benefits and
other corporate overhead and administrative expenses, and (v) distributions
to shareholders and unitholders of our operating partnership. During the first
quarter of 2008, our short-term liquidity needs
34
were funded primarily
through our three-year $100.0 million revolving note facility with Merrill
Lynch, Pierce, Fenner & Smith Incorporated. In connection with
consummation of the Military Housing Sale, we terminated this facility on April 30,
2008. We currently expect that any of our short-term and long-term liquidity
needs may be met through our working capital on hand, including approximately $67.0
million in proceeds from the Military Housing Sale that we have retained as a
reserve fund through the anticipated Merger that is expected to occur in the
second quarter of 2008. In the event that the Merger is not consummated,
management may seek to obtain a replacement credit line/facility to be secured
by the Companys student housing operations and properties in order to fund
operations going forward. While management expects the $67.0 million of
retained proceeds from the Military Housing Sale to provide sufficient
liquidity through the anticipated closing of the Merger or until a new credit
facility can be established if the Merger is not completed, there can be no
assurance that we will be able to obtain a replacement credit line/facility on
terms that are favorable to us or at all.
We elected to be treated
as a REIT for federal income tax purposes commencing with our taxable year
ended December 31, 2004. As a REIT, we are required to distribute at least
90% of our REIT taxable income to our shareholders on an annual basis.
Therefore, except as discussed below, as a general matter, a substantial
portion of cash generated by our operations will be used to fund distributions
to shareholders and holders of limited partnership interests in our operating
partnership, and will not be available to satisfy our liquidity needs. Future
dividends will be declared at the discretion of our Board of Trustees and will
depend on our actual cash flow, our financial condition, capital requirements,
the annual distribution requirements under the REIT provisions of the Code and
other such factors as our Board of Trustees deems relevant. For the first
quarter of 2008, we declared a quarterly dividend distribution of $0.165 per
common share, and at the same time, our operating partnership paid a
distribution of $0.165 per unit to holders of limited partnership interests in
our operating partnership. Under the terms of the Merger Agreement, we are
prohibited from making quarterly distributions to our shareholders going
forward. To the extent we do not complete the Merger, we cannot assure you that
we will continue to have cash available for distributions at historical levels
or at all. Any distributions we pay in the future will depend upon our actual
results of operations, economic conditions and other factors that could differ
materially from our current expectations. To the extent that our cash flow from
operations is insufficient to fund our anticipated dividend distributions, we
may seek to borrow funds through other third-party debt financing or we may
lower our dividend distribution. Our available cash for distributions will be
affected by a number of factors, including: the revenue we receive from our
student housing properties; revenues from management fees in connection with
management services that we will provide for student housing properties owned
by others; our operating expenses; interest expense; costs related to our
pending litigation; and any unanticipated expenditures. For more information
regarding risk factors that could materially adversely affect our ability to
pay dividend distributions to our shareholders and our results of operations,
please see the section of our Annual Report on Form 10-K for the year
ended December 31, 2007 titled Risk Factors under Part I,
Item 1A thereof.
With regard to our
currently owned student housing properties, we do not have any material
short-term capital commitments, other than with respect to our short-term
capital needs relating to the general expenses and costs associated with
operating and managing these properties, including anticipated third quarter
turnover costs. Since the beginning of 2007, our management has placed less
emphasis on the acquisition of additional student housing properties, and has
continued to focus on the operational performance of our existing student
housing properties and development projects. In the event that the Merger with
ACC is not completed and we continue our student housing operations, however,
we will require funds in connection with any future acquisitions of student
housing properties. See the section above titled
OverviewStudent HousingOwned Properties
for a more
detailed discussion of managements expectations regarding funding sources for
any future property acquisitions. During the first quarter of 2008, we did not
make scheduled debt service payments on mortgage debt relating to five of our
wholly-owned student housing properties, which collectively have outstanding
principal balances totaling $64.3 million.
These properties had previously been identified as having insufficient
cash flow to fund debt service, and as a result, were placed on the market for
sale. Since we have been unable to
secure buyers at purchase prices above the existing mortgage debt on these
properties, and the mortgage debt is non-recourse to the Company, we initiated
discussions with the lenders to reach a work-out of the debt and/or surrender
the properties to receivership. In
addition, as of March 31, 2008, we were in default under certain debt
service coverage provisions relating to the mortgage indebtedness covering our
two student housing properties owned through a joint venture with AEW Capital
Management, LP (AEW). The total
mortgage debt on these properties is approximately $32.0 million, and we also
have an existing guaranty with the lender for $8.0 million. We are in
discussions with both the lender and AEW to effectuate a short-term relief of
the covenants and an acquisition of our joint venture interests and the
assumption of the guaranty by AEW. In
the event we are unable to negotiate a favorable outcome with the lender for
these properties, then the lender could, in addition to other remedies,
exercise its right to accelerate the debt and call the guaranty.
35
Neither the non-payment
of mortgage debt relating to the five wholly-owned student housing properties,
nor our default relating to the two joint venture student housing properties,
each referenced above will affect the requirement that ACC effect the Merger
(assuming all other closing conditions are met). In the event that the Merger
is not consummated, then we would continue to work with the lenders and AEW to
negotiate a work-out of the debt and/or seek to amend the ongoing debt-service
covenant requirements and effectuate the acquisition of our interests.
Long-term
liquidity requirements with respect to our student housing segment consists
primarily of amounts necessary to fund scheduled debt maturities, renovations
and other non-recurring capital expenditures that need to be made periodically
at our properties, and the costs associated with acquisitions of student
housing properties and awards or acquisitions of military housing privatization
projects that we pursue. Historically, we have satisfied our long-term liquidity
requirements through various sources of capital, including existing working
capital, cash provided by operations, and long-term mortgage indebtedness.
During the first quarter of 2008, our long-term liquidity requirements were
satisfied primarily through cash generated by operations and not used to fund
distributions and the additional external financing sources discussed above. We
also would expect to fund our long-term liquidity requirements primarily
through cash generated by operations and sales and not used to fund
distributions and the additional external financing sources discussed above.
Item
3.
Quantitative
and Qualitative Disclosure About Market Risk
Given
current market conditions, our strategy favors fixed-rate, secured debt over
variable-rate debt to minimize our exposure to increases in interest rates. As
of March 31, 2008, 96.7% of the outstanding principal amount of our notes
payable secured by properties we owned had fixed interest rates with a
weighted-average rate of 5.32%. The remaining 3.3% of outstanding principal
amount of our notes payable and our Merrill Lynch Note Facility at March 31,
2008, had variable interest rates primarily equal to LIBOR plus 1.90%.
As of March 31,
2008, we had $55.1 million in funds drawn from our Merrill Lynch Note Facility,
bearing a variable interest rate of 4.46%.
As of March 31,
2008, based on our variable rate debt balances described above, if interest
rates were to increase by 1.0%, our interest expense would have increased by
approximately $1.0 million on an annual basis.
Item
4.
Controls and
Procedures
(a)
Evaluation
of Disclosure Controls and Procedures.
We maintain disclosure
controls and procedures that are designed to provide reasonable assurance that
information required to be disclosed in our reports under the Exchange Act is
recorded, processed, summarized and reported within the time period specified
in the Securities and Exchange Commissions rules and regulations and that
such information is accumulated and communicated to management, including our
principal executive officer and principal financial officer, as appropriate, to
allow timely decisions regarding required disclosure.
As required by Rule 13a-15(b) promulgated
under the Exchange Act, our management, with the participation of our chief
executive officer and chief financial officer, evaluated the design and
operating effectiveness as of March 31, 2008 of our disclosure controls
and procedures, as defined in Rule 13a-15(e) promulgated under the
Exchange Act. Based on this evaluation,
our chief executive officer and chief financial officer concluded that our
disclosure controls and procedures were effective as of March 31,
2008. We believe that a controls system,
no matter how well designed and operated, cannot provide absolute assurance
that the objectives of the controls system are met, and no evaluation of
controls can provide absolute assurance that all control issues and instances
of fraud, if any, within a company have been detected.
(b)
Change in
Internal Control over Financial Reporting.
There have been no
changes in our internal control over financial reporting during our most recent
fiscal quarter that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
36
PART II OTHER INFORMATION
Item
1.
Legal
Proceedings
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 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 Companys securities between May 5,
2005 and March 10, 2006 based upon the Companys 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 appear 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.
Item 1A.
Risk Factors
In addition to the other
information set forth in this report, you should carefully consider the factors
discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K
for the year ended December 31, 2007, which could materially affect our
business, financial condition or future results. The risks described in our
Annual Report on Form 10-K are not the only risks facing our Company.
Additional risks and uncertainties not currently known to us or that we
currently deem to be immaterial also may materially adversely affect our
business, financial condition and/or operating results.
Item
2.
Unregistered
Sales of Equity Securities and Use of Proceeds
None.
Item
3.
Defaults Upon
Senior Securities
None.
Item
4.
Submission of
Matters to a Vote of Security Holders
None.
Item
5.
Other
Information
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 provide 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.
37
Item
6.
Exhibits
Exhibit
|
|
Description of Document
|
10.1
|
|
Agreement and Plan of Merger, dated as of
February 11, 2008, by and among GMH Communities Trust, GMH
Communities, Inc., GMH Communities, LP, American Campus
Communities, Inc., American Campus Communities Operating Partnership LP,
American Campus Communities Acquisition LLC and American Campus Communities
Acquisition Limited Partnership LP. (Incorporated by reference from the
Registrants Current Report on Form 8-K, as filed with the Securities
and Exchange Commission on February 14, 2008).
|
10.2
|
|
Securities Purchase
Agreement, dated as of February 11, 2008, by and among GMH Communities
Trust, GMH Communities, Inc., Balfour Beatty, Inc. and, solely for
purposes of Article 8 therein, Balfour Beatty plc(Incorporated by
reference from the Registrants Current Report on Form 8-K, as filed
with the Securities and Exchange Commission on February 14, 2008).
|
10.3
|
|
Put Option to Sell
Agreement, dated as of February 11, 2008, by and between GMH
Communities, LP and Gary M. Holloway, Sr. (Incorporated by reference
from the Registrants Current Report on Form 8-K, as filed with the
Securities and Exchange Commission on February 14, 2008).
|
31.1
|
|
Certification of Principal Executive Officer
Required by Rule 13a-14(a) of the Securities Exchange Act of 1934,
as amended. (furnished herewith).
|
31.2
|
|
Certification of Principal Financial Officer
Required by Rule 13a-14(a) of the Securities Exchange Act of 1934,
as amended. (furnished herewith).
|
32.1
|
|
Certification of Principal Executive Officer
Required by Rule 13a-14(b) of the Securities Exchange Act of 1934,
as amended. (This exhibit shall not be deemed filed for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended, or
otherwise subject to the liability of that section. Further, this exhibit
shall not be deemed to be incorporated by reference into any filing under the
Securities Act of 1933, as amended, or the Securities Exchange Act of 1934,
as amended).
|
32.2
|
|
Certification of Principal Financial Officer
Required by Rule 13a-14(b) of the Securities Exchange Act of 1934,
as amended. (This exhibit shall not be deemed filed for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended, or
otherwise subject to the liability of that section. Further, this exhibit
shall not be deemed to be incorporated by reference into any filing under the
Securities Act of 1933, as amended, or the Securities Exchange Act of 1934,
as amended).
|
38
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
GMH COMMUNITIES TRUST
|
|
|
|
|
Date: May 12,
2008
|
/s/ Gary M. Holloway, Sr.
|
|
Gary M. Holloway, Sr.
|
|
President and Chief Executive Officer
|
|
|
|
|
|
/s/ J. Patrick OGrady
|
|
J. Patrick OGrady
|
|
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
|
39
EXHIBIT INDEX
Exhibit
|
|
Description of Document
|
10.1
|
|
Agreement
and Plan of Merger, dated as of February 11, 2008, by and among GMH
Communities Trust, GMH Communities, Inc., GMH Communities, LP, American
Campus Communities, Inc., American Campus Communities Operating
Partnership LP, American Campus Communities Acquisition LLC and American
Campus Communities Acquisition Limited Partnership LP. (Incorporated by
reference from the Registrants Current Report on Form 8-K, as filed
with the Securities and Exchange Commission on February 14, 2008).
|
10.2
|
|
Securities
Purchase Agreement, dated as of February 11, 2008, by and among GMH
Communities Trust, GMH Communities, Inc., Balfour Beatty, Inc. and,
solely for purposes of Article 8 therein, Balfour Beatty
plc(Incorporated by reference from the Registrants Current Report on Form 8-K,
as filed with the Securities and Exchange Commission on February 14,
2008).
|
10.3
|
|
Put
Option to Sell Agreement, dated as of February 11, 2008, by and between
GMH Communities, LP and Gary M. Holloway, Sr. (Incorporated by reference
from the Registrants Current Report on Form 8-K, as filed with the
Securities and Exchange Commission on February 14, 2008).
|
31.1
|
|
Certification
of Principal Executive Officer Required by Rule 13a-14(a) of the
Securities Exchange Act of 1934, as amended. (furnished herewith).
|
31.2
|
|
Certification
of Principal Financial Officer Required by Rule 13a-14(a) of the
Securities Exchange Act of 1934, as amended. (furnished herewith).
|
32.1
|
|
Certification
of Principal Executive Officer Required by Rule 13a-14(b) of the
Securities Exchange Act of 1934, as amended. (This exhibit shall not be
deemed filed for purposes of Section 18 of the Securities Exchange Act
of 1934, as amended, or otherwise subject to the liability of that section.
Further, this exhibit shall not be deemed to be incorporated by reference
into any filing under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended).
|
32.2
|
|
Certification
of Principal Financial Officer Required by Rule 13a-14(b) of the
Securities Exchange Act of 1934, as amended. (This exhibit shall not be
deemed filed for purposes of Section 18 of the Securities Exchange Act
of 1934, as amended, or otherwise subject to the liability of that section.
Further, this exhibit shall not be deemed to be incorporated by reference
into any filing under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended).
|
40
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