EDUCATION REALTY TRUST, INC.
UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2006
Or
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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 |
For the transition period from to
Commission File Number: 001-32417
Education Realty Trust, Inc.
(Exact name of registrant as specified in its charter)
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Maryland
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20-1352180 |
(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.) |
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530 Oak Court Drive, Suite 300, Memphis, Tennessee
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38117 |
(Address of principal executive offices)
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(Zip Code) |
(Registrants telephone number, including area code): (901)259-2500
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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer o Non-accelerated filer þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).Yes o No þ
As of November 13, 2006, the latest practicable date, the Registrant had outstanding 26,570,139
shares of common stock, $.01 par value per share.
EDUCATION REALTY TRUST, INC.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2006
TABLE OF CONTENTS
Part I Financial Information
Item 1. Financial Statements.
EDUCATION REALTY TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
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|
September 30, 2006 |
|
|
December 31, 2005 |
|
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|
(Unaudited) |
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
Student housing properties, net |
|
$ |
812,075 |
|
|
$ |
620,305 |
|
Corporate office furniture, net |
|
|
814 |
|
|
|
991 |
|
Cash and cash equivalents |
|
|
3,900 |
|
|
|
61,662 |
|
Restricted cash |
|
|
11,707 |
|
|
|
6,738 |
|
Student contracts receivable, net |
|
|
245 |
|
|
|
470 |
|
Receivable from affiliate |
|
|
260 |
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|
|
|
|
Management fee receivable from third party |
|
|
720 |
|
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|
552 |
|
Goodwill and other intangibles, net |
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|
3,693 |
|
|
|
3,546 |
|
Other assets |
|
|
8,556 |
|
|
|
9,785 |
|
|
|
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|
|
|
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Total assets |
|
$ |
841,970 |
|
|
$ |
704,049 |
|
|
|
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Liabilities and stockholders equity |
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|
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Liabilities: |
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|
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Mortgage loans, net of unamortized premium/discount |
|
$ |
425,180 |
|
|
$ |
328,335 |
|
Other long term debt |
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|
50,000 |
|
|
|
|
|
Line of credit and other short term debt |
|
|
20,800 |
|
|
|
|
|
Accounts payable and accrued expenses |
|
|
12,987 |
|
|
|
9,370 |
|
Accounts payable affiliate |
|
|
|
|
|
|
225 |
|
Deferred revenue |
|
|
10,453 |
|
|
|
7,660 |
|
|
|
|
|
|
|
|
Total liabilities |
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|
519,420 |
|
|
|
345,590 |
|
|
|
|
|
|
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|
Minority interest |
|
|
19,367 |
|
|
|
27,926 |
|
|
|
|
|
|
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|
Commitments and contingencies |
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|
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Stockholders equity: |
|
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|
Common stock, $.01 par value, 200,000,000 shares authorized, 26,395,939 and 26,263,889 shares
issued and outstanding as of September 30, 2006 and December 31, 2005, respectively |
|
|
264 |
|
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|
263 |
|
Preferred shares, $0.01 par value, 50,000,000 shares authorized, no shares issued and outstanding |
|
|
|
|
|
|
|
|
Additional paid-in capital |
|
|
329,800 |
|
|
|
351,664 |
|
Loan to unitholder |
|
|
|
|
|
|
(5,996 |
) |
Warrants |
|
|
375 |
|
|
|
375 |
|
Accumulated deficit |
|
|
(27,256 |
) |
|
|
(15,773 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
303,183 |
|
|
|
330,533 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
841,970 |
|
|
$ |
704,049 |
|
|
|
|
|
|
|
|
See accompanying notes to the condensed consolidated and combined financial statements
2
EDUCATION REALTY TRUST, INC. AND
SUBSIDIARIES AND EDUCATION REALTY TRUST PREDECESSOR
CONDENSED CONSOLIDATED
AND COMBINED STATEMENTS OF OPERATIONS
(Amounts in thousands, except share and per share data)
|
|
|
|
|
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|
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|
|
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|
Education Realty Trust, Inc. |
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|
EDR Predecessor |
|
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|
Consolidated |
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|
Combined |
|
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|
Nine months ended |
|
|
Nine months ended |
|
|
January 1 through |
|
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|
September 30, |
|
|
September 30, |
|
|
January 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2005 |
|
|
|
(Unaudited) |
|
|
(Unaudited) |
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Student housing leasing revenue |
|
$ |
63,421 |
|
|
$ |
51,329 |
|
|
$ |
1,503 |
|
Student housing food service revenue |
|
|
2,670 |
|
|
|
2,334 |
|
|
|
269 |
|
Other leasing revenue |
|
|
10,577 |
|
|
|
|
|
|
|
|
|
Third-party development services |
|
|
2,283 |
|
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|
973 |
|
|
|
|
|
Third-party management services |
|
|
2,051 |
|
|
|
1,155 |
|
|
|
103 |
|
Operating expense reimbursements |
|
|
5,891 |
|
|
|
3,538 |
|
|
|
671 |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
86,893 |
|
|
|
59,329 |
|
|
|
2,546 |
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Student housing leasing operations |
|
|
32,159 |
|
|
|
26,782 |
|
|
|
524 |
|
Student housing food service operations |
|
|
2,427 |
|
|
|
2,194 |
|
|
|
255 |
|
General and administrative |
|
|
9,037 |
|
|
|
10,138 |
|
|
|
367 |
|
Depreciation and amortization |
|
|
27,445 |
|
|
|
23,387 |
|
|
|
260 |
|
Reimbursable operating expenses |
|
|
5,891 |
|
|
|
3,538 |
|
|
|
671 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
76,959 |
|
|
|
66,039 |
|
|
|
2,077 |
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
9,934 |
|
|
|
(6,710 |
) |
|
|
469 |
|
|
|
|
|
|
|
|
|
|
|
Nonoperating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
21,682 |
|
|
|
11,587 |
|
|
|
479 |
|
Exit fees on early repayment of mortgages |
|
|
|
|
|
|
1,084 |
|
|
|
|
|
Amortization of deferred financing costs |
|
|
834 |
|
|
|
582 |
|
|
|
|
|
Interest income |
|
|
(439 |
) |
|
|
(630 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonoperating expenses |
|
|
22,077 |
|
|
|
12,623 |
|
|
|
479 |
|
|
|
|
|
|
|
|
|
|
|
Loss before equity in earnings of unconsolidated entities,
income taxes and minority interest |
|
|
(12,143 |
) |
|
|
(19,333 |
) |
|
|
(10 |
) |
Equity in earnings of unconsolidated entities |
|
|
573 |
|
|
|
560 |
|
|
|
27 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and minority interest |
|
|
(11,570 |
) |
|
|
(18,773 |
) |
|
|
17 |
|
Income tax expense |
|
|
463 |
|
|
|
170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before minority interest |
|
|
(12,033 |
) |
|
|
(18,943 |
) |
|
|
17 |
|
Minority interest |
|
|
(550 |
) |
|
|
(1,384 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(11,483 |
) |
|
$ |
(17,559 |
) |
|
$ |
17 |
|
|
|
|
|
|
|
|
|
|
|
Earnings per share information: |
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share basic and diluted |
|
$ |
(0.44 |
) |
|
$ |
(0.80 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding- basic and diluted |
|
|
26,336,343 |
|
|
|
21,883,589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions per common share |
|
$ |
.8925 |
|
|
$ |
.4875 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the condensed consolidated and combined financial statements.
3
EDUCATION REALTY TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except share and per share data)
Unaudited
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Three months ended |
|
|
|
September 30, 2006 |
|
|
September 30, 2005 |
|
Revenues: |
|
|
|
|
|
|
|
|
Student housing leasing revenue |
|
$ |
19,520 |
|
|
$ |
20,145 |
|
Student housing food service revenue |
|
|
895 |
|
|
|
893 |
|
Other leasing revenue |
|
|
3,709 |
|
|
|
|
|
Third-party development services |
|
|
856 |
|
|
|
791 |
|
Third-party management services |
|
|
653 |
|
|
|
511 |
|
Operating expense reimbursements |
|
|
2,146 |
|
|
|
1,474 |
|
|
|
|
|
|
|
|
Total revenues |
|
|
27,779 |
|
|
|
23,814 |
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
Student housing leasing operations |
|
|
13,422 |
|
|
|
13,570 |
|
Student housing food service operations |
|
|
844 |
|
|
|
878 |
|
General and administrative |
|
|
2,872 |
|
|
|
2,561 |
|
Depreciation and amortization |
|
|
9,205 |
|
|
|
8,236 |
|
Reimbursable operating expenses |
|
|
2,146 |
|
|
|
1,474 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
28,489 |
|
|
|
26,719 |
|
|
|
|
|
|
|
|
Operating loss |
|
|
(710 |
) |
|
|
(2,905 |
) |
|
|
|
|
|
|
|
Nonoperating expenses: |
|
|
|
|
|
|
|
|
Interest expense |
|
|
7,551 |
|
|
|
4,782 |
|
Amortization of deferred financing costs |
|
|
281 |
|
|
|
252 |
|
Interest income |
|
|
(101 |
) |
|
|
(146 |
) |
|
|
|
|
|
|
|
Total nonoperating expenses |
|
|
7,731 |
|
|
|
4,888 |
|
|
|
|
|
|
|
|
Loss before equity in earnings of unconsolidated entities,
income taxes and minority interest |
|
|
(8,441 |
) |
|
|
(7,793 |
) |
Equity in earnings of unconsolidated entities |
|
|
148 |
|
|
|
332 |
|
|
|
|
|
|
|
|
Loss before income taxes and minority interest |
|
|
(8,293 |
) |
|
|
(7,461 |
) |
Income tax expense |
|
|
381 |
|
|
|
340 |
|
|
|
|
|
|
|
|
Net loss before minority interest |
|
|
(8,674 |
) |
|
|
(7,801 |
) |
Minority interest |
|
|
(485 |
) |
|
|
(617 |
) |
|
|
|
|
|
|
|
Net loss |
|
$ |
(8,189 |
) |
|
$ |
(7,184 |
) |
|
|
|
|
|
|
|
Earnings per share information: |
|
|
|
|
|
|
|
|
Loss per share basic and diluted |
|
$ |
(0.31 |
) |
|
$ |
(0.33 |
) |
|
|
|
|
|
|
|
Weighted average common shares outstanding- basic and diluted |
|
|
26,390,417 |
|
|
|
21,923,244 |
|
|
|
|
|
|
|
|
Distributions per common share |
|
$ |
.2975 |
|
|
$ |
.2975 |
|
|
|
|
|
|
|
|
See
accompanying notes to the condensed consolidated and combined financial statements.
4
EDUCATION REALTY TRUST, INC. AND
SUBSIDIARIES AND EDUCATION REALTY TRUST PREDECESSOR
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Education Realty Trust, Inc. |
|
|
EDR Predecessor |
|
|
|
Consolidated |
|
|
Combined |
|
|
|
Nine months |
|
|
Nine months |
|
|
January 1 |
|
|
|
ended |
|
|
ended |
|
|
through |
|
|
|
September 30, |
|
|
September 30, |
|
|
January 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2005 |
|
|
|
(Unaudited) |
|
(Unaudited) |
|
|
|
|
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(11,483 |
) |
|
$ |
(17,559 |
) |
|
$ |
17 |
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
27,445 |
|
|
|
23,387 |
|
|
|
246 |
|
Deferred tax expense |
|
|
249 |
|
|
|
|
|
|
|
|
|
(Gain) loss on disposal of assets |
|
|
(10 |
) |
|
|
424 |
|
|
|
|
|
Amortization of deferred financing costs |
|
|
834 |
|
|
|
582 |
|
|
|
14 |
|
Amortization of unamortized debt premiums/discounts |
|
|
(413 |
) |
|
|
(213 |
) |
|
|
|
|
Distributions from unconsolidated entities |
|
|
658 |
|
|
|
740 |
|
|
|
|
|
Noncash compensation expense related to PIUs and restricted stock |
|
|
622 |
|
|
|
4,631 |
|
|
|
|
|
Equity in earnings of unconsolidated entities |
|
|
(573 |
) |
|
|
(560 |
) |
|
|
(27 |
) |
Minority interest |
|
|
(550 |
) |
|
|
(1,384 |
) |
|
|
|
|
Change in operating assets and liabilities (net of acquisitions) |
|
|
3,001 |
|
|
|
4,951 |
|
|
|
(92 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
19,780 |
|
|
|
14,999 |
|
|
|
158 |
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Property acquisitions, net of cash acquired |
|
|
(112,694 |
) |
|
|
(187,360 |
) |
|
|
(25 |
) |
Deferred acquisition costs and earnest money deposits |
|
|
(468 |
) |
|
|
(4,283 |
) |
|
|
|
|
Purchase of corporate furniture and fixtures |
|
|
(63 |
) |
|
|
(1,058 |
) |
|
|
|
|
Restricted cash |
|
|
(2,593 |
) |
|
|
(3,073 |
) |
|
|
(2,348 |
) |
Insurance proceeds on property loss |
|
|
184 |
|
|
|
175 |
|
|
|
|
|
Investment in student housing properties |
|
|
(3,669 |
) |
|
|
(4,077 |
) |
|
|
|
|
Investment in joint ventures |
|
|
(1,021 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(120,324 |
) |
|
|
(199,676 |
) |
|
|
(2,373 |
) |
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Payment of mortgage notes |
|
|
(1,402 |
) |
|
|
(115,419 |
) |
|
|
(98 |
) |
Borrowings of other long-term debt |
|
|
50,000 |
|
|
|
|
|
|
|
|
|
Debt issuance costs |
|
|
(1,350 |
) |
|
|
(3,155 |
) |
|
|
|
|
Borrowing/repayment of line of credit, net |
|
|
20,800 |
|
|
|
1,498 |
|
|
|
|
|
Loan to unitholder |
|
|
|
|
|
|
(5,996 |
) |
|
|
|
|
Proceeds from offering |
|
|
|
|
|
|
419,600 |
|
|
|
|
|
Payment of offering costs |
|
|
(125 |
) |
|
|
(26,963 |
) |
|
|
|
|
Dividends and distributions paid |
|
|
(25,133 |
) |
|
|
(11,721 |
) |
|
|
|
|
Repayment of notes payable affiliate |
|
|
|
|
|
|
(485 |
) |
|
|
|
|
Redemption of minority interest |
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
42,782 |
|
|
|
257,359 |
|
|
|
(98 |
) |
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
(57,762 |
) |
|
|
72,682 |
|
|
|
(2,313 |
) |
Cash and cash equivalents, beginning of period |
|
|
61,662 |
|
|
|
1 |
|
|
|
2,883 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
3,900 |
|
|
$ |
72,683 |
|
|
$ |
570 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
21,501 |
|
|
$ |
11,726 |
|
|
$ |
471 |
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid |
|
$ |
855 |
|
|
$ |
133 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of noncash activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid offering costs charged against equity |
|
$ |
|
|
|
$ |
2,218 |
|
|
$ |
|
|
Prepaid acquisition costs |
|
|
4,718 |
|
|
|
|
|
|
|
|
|
Units issued in connection with acquisitions |
|
|
|
|
|
|
26,340 |
|
|
|
|
|
Warrants issued |
|
|
|
|
|
|
375 |
|
|
|
|
|
Debt assumed in property acquisitions net of premium |
|
|
|
|
|
|
444,955 |
|
|
|
|
|
Redemption of minority interest to satisfy loan to unitholder |
|
|
6,116 |
|
|
|
|
|
|
|
|
|
See accompanying notes to the condensed consolidated and combined financial statements
5
EDUCATION REALTY TRUST, INC. AND SUBSIDIARIES AND
EDUCATION REALTY TRUST PREDECESSOR
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
(Unaudited)
1. Organization and description of business
Education Realty Trust, Inc. (the Trust) was organized in the state of Maryland on July 12,
2004 and commenced operations as a real estate investment trust (REIT) effective with the initial
public offering (the Offering) that was completed on January 31, 2005. Under the Trusts Articles
of Incorporation, as amended, the Trust is authorized to issue up to 200 million shares of common
stock and 50 million shares of preferred stock, each having a par value of $0.01 per share.
The Trust was formed to succeed to the business of a group of entities collectively referred
to herein as the Education Realty Trust Predecessor (the EDR Predecessor). The EDR Predecessor
was not a legal entity, but rather a combination of certain real estate entities under common
management. The EDR Predecessor consisted of the following limited liability companies and limited
partnerships:
|
|
|
Allen & OHara Education Services, LLC (AOES), a Tennessee limited
liability company performing student housing management activities. |
|
|
|
|
Allen & OHara Development Company, LLC (AODC), a limited liability
company and formerly a wholly owned subsidiary of AOES, providing
development consulting services for third party student housing
properties. |
|
|
|
|
Allen & OHara Educational Properties LLC, a limited liability
company, previously holding the ownership interests in the student
housing property referred to as The Gables Apartments (The Gables). |
|
|
|
|
Education Properties Trust, LLC (EPT), a Delaware limited liability
company, owned and managed the following four garden-style student
housing properties through four separate wholly-owned limited
liability companies: |
|
|
|
Players Club Apartments, Tallahassee, Florida |
|
|
|
|
The Reserve at Athens, Athens, Georgia |
|
|
|
|
The Reserve at Clemson, Clemson, South Carolina |
|
|
|
|
NorthPointe Apartments, Tucson, Arizona |
|
|
|
C Station, LLC, a Tennessee limited liability company, owned and
operated one garden-style student housing property referred to as
College Station. |
|
|
|
|
University Towers Raleigh, LLC, a North Carolina limited liability
company, owned a student housing property referred to as University
Towers. |
Paul O. Bower (the Promoter) formed the Trust with the intent to effect the Offering of the
common stock of the Trust. Concurrent with the Offering, the Trust contributed the net proceeds
from the offering for 100% of the general partnership interests and a majority of the limited
partnership interests in a newly formed majority-owned Delaware limited partnership, Education
Realty Operating Partnership, LP (the Operating Partnership). The Operating Partnership together
with Allen & OHara Education Services, Inc. (the taxable REIT subsidiary or TRS), and the
partners and members of the affiliated partnerships and limited liability companies of the EDR
Predecessor, engaged in the formation transactions described in Note 2.
The Operating Partnership owns, directly or indirectly, interests in student housing
communities located near major universities in the United States. The Trust also provides real
estate facility management, development and other advisory services through subsidiaries of the
Operating Partnership to third parties and to joint ventures in which the Trust is invested.
The Trust is subject to the risks involved with the ownership and operations of residential
real estate near major universities throughout the United States. These include, among others, the
risks normally associated with changes in the demand for housing by students at the related
universities, competition for tenants, creditworthiness of tenants, changes in tax laws, interest
rate levels, the availability of financing, and potential liability under environmental and other
laws.
6
2. The offering, the formation transactions and the private placement
The Trust completed the initial public offering (the Offering) of its common stock on
January 31, 2005. The Trust sold 21,850,000 shares of common stock, including 2,850,000 shares
related to the full exercise of the over-allotment option by the underwriters of the Offering, at a
price of $16.00 per share. The Offering raised net proceeds of approximately $320,400, after
underwriting discounts and offering expenses of approximately $29,200. The Trust contributed the
net proceeds of the Offering for 100% of the general partnership interests and a majority of the
limited partnership interests in the Operating Partnership.
Concurrent with the Offering the Operating Partnership acquired directly or indirectly the EDR
Predecessor entities for $36,500 in cash, the issuance of $18,300 in Operating Partnership units
and the assumption of $81,500 of debt. The Operating Partnership also acquired 14 properties
referred to as the JPI portfolio simultaneous with the Offering. The purchase price approximated
$401,975. The Operating Partnership assumed total first mortgage debt of $311,500, and repaid
$93,360 with the use of the net proceeds of the Offering. Additionally the Operating Partnership
issued warrants approximating $375 in value and Operating Partnership units approximating $7,995 in
estimated value. The acquisition of the EDR Predecessor and the JPI portfolio is referred to herein
as the Formation Transactions.
On September 30, 2005, the Trust completed a private placement of 4,375,000 shares of its
common stock at a price of $16.00 per share (the Private Placement). The Private Placement raised
net proceeds of approximately $67,000, after offering expenses of approximately $3,000. These
shares were registered with the Securities and Exchange Commission on January 25, 2006. The
proceeds were used to acquire the 13 student housing properties from Place Properties, L.P. (Place
Portfolio) on January 6, 2006 discussed in Note 8.
3. Summary of significant accounting policies
Basis of presentation and principles of consolidation and combination
The accompanying consolidated and combined financial statements have been prepared on the
accrual basis of accounting in conformity with accounting principles generally accepted in the
United States (GAAP). The accompanying consolidated financial statements of the Trust represent
the assets and liabilities and operating results of the Trust and its majority owned subsidiaries.
The Trust, as the sole general partner of the Operating Partnership, has the responsibility
and discretion in the management and control of the Operating Partnership, and the limited partners
of the Operating Partnership, in such capacity, have no authority to transact business for, or
participate in the management activities of the Operating Partnership. Accordingly, the Trust
accounts for the Operating Partnership using the consolidation method.
The accompanying combined financial statements of the EDR Predecessor for the period January
1, 2005 through January 30, 2005 represent operating results of the entities comprising the EDR
Predecessor. The historical combined financial statements of the EDR Predecessor are presented as
the Promoter, either directly or indirectly through his previous ownership in AOES, managed the EDR
Predecessor prior to the Trust acquiring those interests in connection with the Formation
Transactions.
All intercompany balances and transactions have been eliminated in the accompanying
consolidated and combined financial statements.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period
presentation. Certain overhead costs were previously included in student housing leasing operations
expense in the statement of operations in the prior year interim financial statements. These costs
were reclassified to general and administrative expense to conform to the way the business is
managed. The costs totaled $1,004 and $2,130 for the three and nine months ended September 30,
2005, respectively.
Interim financial information
The accompanying unaudited interim financial statements include all adjustments, consisting
only of normal recurring adjustments, that in the opinion of management are necessary for a fair
presentation of the Trusts and EDR Predecessors financial position, results of operations and
cash flows for such periods. Because of the seasonal nature of the business, the operating results
and cash flows are not necessarily indicative of results that may be expected for any other interim
periods or for the full fiscal year. These financial statements should be read in conjunction with
the Trusts consolidated financial statements and related notes, together with the Trusts annual
report on Form 10-K for the year ended December 31, 2005, filed with the Securities and Exchange
Commission.
7
Use of estimates
The preparation of financial statements in accordance with GAAP requires making estimates and
assumptions. Such estimates and assumptions affect the reported amounts of assets and liabilities,
as well as the disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Cash and cash equivalents
All highly liquid investments with a maturity of three months or less when purchased are
considered cash equivalents. Restricted cash is excluded from cash for the purpose of preparing the
consolidated and combined statements of cash flows. The Trust maintains cash balances in various
banks. At times the amounts of cash may exceed the $100,000 amount the FDIC insures. The Trust does
not believe it is exposed to any significant credit risk on cash and cash equivalents.
Restricted cash
Restricted cash includes escrow accounts held by lenders for the purpose of paying taxes,
insurance, principal and interest, and to fund capital improvements.
Distributions
The Trust pays regular quarterly cash distributions to shareholders. These distributions are
determined quarterly by the Board based on the operating results, economic conditions, capital
expenditure requirements, the Internal Revenue Codes REIT annual distribution requirements,
leverage covenants imposed by our revolving credit facility and other debt documents, and any other
matters the Board deems relevant.
Student housing properties
Land, land improvements, buildings and improvements, and furniture, fixtures and equipment are
recorded at cost. Buildings and improvements are depreciated over 30 to 40 years, land improvements
are depreciated over 15 years and furniture, fixtures, and equipment are depreciated over estimated
useful lives ranging from 3 to 7 years. Depreciation is computed using the straight-line method for
financial reporting purposes.
Acquisitions of student housing properties are accounted for utilizing the purchase method in
accordance with Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations, and accordingly, the results of operations are included in the results of operations
from the respective dates of acquisition. Pre-acquisition costs, which include legal and
professional fees and other third party costs related directly to the acquisition of the property,
are accounted for as part of the purchase price. Independent appraisals, estimates of cash flows,
and valuation techniques are used to allocate the purchase price of acquired property between land,
land improvements, buildings and improvements, furniture, fixtures and equipment and other
identifiable intangibles such as amounts related to in-place leases.
Management assesses impairment of long-lived assets in accordance with SFAS No. 144,
Accounting for the Impairment and Disposal of Long-lived Assets. SFAS No. 144 requires that
long-lived assets to be held and used be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. In accordance
with SFAS No. 144, management uses an estimate of future undiscounted cash flows of the related
asset over the remaining life in measuring whether the assets are recoverable. As of September 30,
2006, management determined that no indicators of impairment existed.
Investment in unconsolidated joint ventures and limited liability companies
The Operating Partnership accounts for its investments in unconsolidated joint ventures and
limited liability companies using the equity method whereby the cost of an investment is adjusted
for the share of equity in earnings of the respective investment reduced by distributions received.
The earnings and distributions of the unconsolidated joint ventures and limited liability companies
are allocated based on each owners respective ownership interests.
Deferred financing costs
Deferred financing costs represent costs incurred in connection with acquiring debt
facilities. These costs are amortized over the terms of the related debt using a method that
approximates the effective interest method.
Offering and Private Placement costs
Specific incremental costs directly attributable to the Offering and the Private Placement
were deferred and charged against the gross proceeds. Accordingly, underwriting commissions and
other stock issuance costs are reflected as a reduction of additional paid-in capital.
8
Debt premiums/discounts
Differences between the estimated fair value of debt and the principal value of debt assumed
in connection with student housing property acquisitions are amortized over the term of the related
debt as an offset to interest using the effective interest method.
Income taxes
The Trust has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as
amended (the Code). The Trust is generally not subject to federal income tax to the extent that
it distributes at least 90% of its taxable income for each tax year to its shareholders. REITs are
subject to a number of organizational and operational requirements. If the Trust fails to qualify
as a REIT in any taxable year, the Trust will be subject to federal income tax (including any
applicable alternative minimum tax) on its taxable income and property and to federal income and
excise taxes on its undistributed income.
The Trust has elected to treat its management company, AOES, as a taxable REIT subsidiary
(TRS). The TRS is subject to federal, state and local income taxes. AOES manages the Trusts
non-REIT activities.
Earnings per share
The Trust calculates earnings per share in accordance with SFAS No. 128, Earnings Per Share.
Basic earnings per share is calculated by dividing net earnings available to common shares by
weighted average common shares outstanding. Diluted earnings per share is calculated similarly,
except that it includes the dilutive effect of the assumed exercise of potentially dilutive
securities. At September 30, 2006, the following potentially dilutive securities were outstanding,
but were not included in the computation of diluted earnings per share because the effects of their
inclusion would be anti-dilutive:
|
|
|
|
|
Operating Partnership units |
|
|
914 |
|
University Towers Operating Partnership units |
|
|
270 |
|
Restricted Stock (unvested shares) |
|
|
120 |
|
Profits Interest Units |
|
|
260 |
|
|
|
|
|
Total potentially dilutive securities |
|
|
1,564 |
|
|
|
|
|
A reconciliation of the numerators and denominators for the basic and diluted earnings per
share computations is not required due to the fact the effect of the inclusion of all potentially
dilutive securities would be anti-dilutive when computing diluted earnings per share; thus, the
computation for both basic and diluted earnings per share is the same.
Goodwill and other intangible assets
The Trust accounts for its goodwill and other intangible assets under SFAS No. 142, Goodwill
and Other Intangible Assets. Goodwill is tested annually for impairment, and is tested for
impairment more frequently if events and circumstances indicate that the assets might be impaired.
An impairment loss is recognized to the extent that the carrying amount exceeds the assets fair
value.
Minority interests
Minority interests in the Operating Partnership represent limited partnership interests in the
form of operating partnership units and profit interest units. Income is allocated to minority
interests based on weighted average percentage ownership each fiscal quarter.
Revenue recognition
The Trust recognizes revenue related to leasing activities at the student housing properties
owned by the Trust, management fees related to managing third party student housing properties,
development consulting fees related to the general oversight of third party student housing
development and operating expense reimbursements for payroll and related expenses incurred by third
party student housing properties managed by the Trust.
Student housing leasing revenue Student housing leasing revenue is comprised of all revenue
related to the leasing activities at the student housing properties and includes revenues from the
leasing of space, from parking lot rentals, and from providing certain ancillary services. This
revenue is reflected in student housing leasing revenue in the accompanying consolidated and
combined statements of operations. Students are required to execute lease contracts with payment
schedules that vary from single to monthly payments. Generally, the Trust requires each executed
leasing contract to be accompanied by a nonrefundable application fee and a signed parental
guarantee. Receivables are recorded when billed, revenues and related lease incentives and
nonrefundable application fees are recognized on a straight-line basis over the term of the
contracts. The Trust has no contingent rental contracts except as noted below related to other
leasing revenue. At certain student housing facilities the Trust offers parking lot rentals to the
tenants. The related revenues are recognized on a straight-line basis over the term of the related
agreement.
9
Student housing food service revenue The Trust provides food service to an unaffiliated
secondary boarding school through a contract covering a nine-month period. The contract requires a
flat weekly fee and the related revenues are recognized on a straight-line basis over the contract
period. Additionally, the Trust maintains a dining facility at University Towers, which offers meal
plans to the tenants as well as dining to other third party customers. The meal plans typically
require upfront payment by the tenant covering the school semester and the related revenue is
recognized on a straight-line basis over the corresponding semester.
Other leasing revenue Other leasing revenue relates to our leasing of the 13 properties we
acquired from Place Properties (Place) discussed in Note 8. Simultaneous with the acquisition of
the 13 properties, the Trust leased the assets to Place and receives base monthly rent of $1,145
and has the right to receive Additional Rent annually if the properties exceed certain criteria
defined in the lease agreement. Base rent is recognized on a straight line basis over the lease
term and Additional Rent is recognized only upon satisfaction of the defined criteria.
Third-party development consulting services revenue The Trust provides
development-consulting services in an agency capacity with third parties whereby the fee is
determined based upon the total construction costs. Total fees vary from 3-5% of the total
estimated costs and we typically receive a portion of the fees up front. These fees, including the
upfront fee, are recognized using the percentage of completion method in proportion to the contract
costs incurred by the owner over the course of the construction phases of the respective projects.
Third-party management revenue The Trust enters into management contracts to manage third
party student housing facilities. Management revenues are recognized when earned in accordance with
each management contract. Incentive management fees are recognized when the incentive criteria have
been met.
Operating expense reimbursement revenue The Trust pays certain payroll and related costs
related to the operations of third party student housing properties that are managed by the Trust.
Under the terms of the related management agreements, the third party property owners reimburse
these costs. The amounts billed to the third party owners are recognized as revenue in accordance
with Emerging Issues Task Force No. 01-14, Income Statement Characterization of Reimbursements
Received for Out of Pocket Expenses Incurred.
Recent accounting pronouncements
In December 2004, SFAS No. 153, Exchange of Nonmonetary Assets, was issued. SFAS No. 153
amends APB Opinion No. 29, Accounting for Nonmonetary Transactions to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial substance. That exception required that
some nonmonetary exchanges be recorded on a carryover basis versus SFAS No. 153, which requires an
entity record a nonmonetary exchange at fair value and recognize any gain or loss if the
transaction has commercial substance. The standard specifies that a nonmonetary exchange has
commercial substance if the future cash flows of the entity are expected to change significantly as
a result of the exchange. SFAS No. 153 is effective the fiscal year beginning January 1, 2006. The
adoption of SFAS No. 153 had no material impact on the Trusts consolidated financial condition or
results of operations.
In December 2004, the Financial Accounting Standards Board (FASB) issued Statement No. 123
(revised December 2004), Share-Based Payment (Statement 123(R)). Statement 123(R) replaces FASB
Statement No. 123, Accounting for Stock-Based
Compensation, and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. Statement 123(R) will require compensation costs
related to share-based payment transactions to be recognized in the financial statements. With
limited exceptions, the amount of compensation cost will be measured based on the grant-date fair
value of the equity instruments issued. Compensation cost will be recognized over the period that
an employee provides service in exchange for the award. Statement 123(R) is effective as of the
beginning of the first annual reporting period that begins after June 15, 2005. The adoption of
Statement 123(R) as of January 1, 2006 had no material impact on the Trusts consolidated financial
condition or results of operations. See Note 9 for further discussion of share based compensation
plans.
In June 2005, the FASB ratified EITF 04-5: Determining Whether a General Partner, or the
General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited
Partners Have Certain Rights (EITF 04-5). EITF 04-5 provides a framework for determining whether
a general partner is required to consolidate limited partners. The new framework is significantly
different than the guidance in SOP 78-9 and would make it more difficult for a general partner to
overcome the presumption that it controls the limited partnership, requiring the limited partner to
have substantive kick-out or participating rights. Kick-out rights are the right to dissolve or
liquidate the partnership or to otherwise remove the general partner without cause and
participating rights are the right to effectively participate in significant decisions made in the
ordinary course of the partnerships business. EITF 04-5 became effective immediately for all newly
formed limited partnerships and existing limited partnerships which
are modified. The guidance became effective for existing limited partnerships which are not modified the beginning of the
first reporting period in fiscal years beginning after December 15, 2005. The adoption of EITF 04-5
had no material impact on the Trusts consolidated financial condition or results of operations.
10
In March 2005, the FASB issued Interpretation No. 47, Accounting for Conditional Asset
Retirement Obligations-an interpretation of FASB Statement No. 143 (Interpretation 47).
Interpretation 47 clarifies that the term conditional asset retirement obligation as used in FASB
Statement No. 143, Accounting for Asset Retirement Obligations, (Statement 143) refers to a
legal obligation to perform an asset retirement activity in which the timing and/or method of
settlement are conditional on a future event that may or may not be within the control of the
entity. Interpretation 47 is effective no later than the end of fiscal years ending after December
15, 2005, (December 31, 2005, for calendar-year enterprises). The adoption of Interpretation 47 had
no material impact on the Trusts consolidated financial condition or results of operations.
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, an Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in a companys financial statements and prescribes a
recognition threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. The Interpretation
also provides guidance on description, classification, interest and penalties, accounting in
interim periods, disclosure and transition. FIN 48 becomes effective on January 1, 2007. The Trust
is currently evaluating the impact of adopting FIN 48 on its consolidated financial position and
results of operations.
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No.
108 (SAB 108), which becomes effective for fiscal years
ending after November 15, 2006. SAB 108 provides guidance on
the consideration of the effects of prior period misstatements in quantifying current year
misstatements for the purpose of a materiality assessment. SAB 108 requires an entity to evaluate
the impact of correcting all misstatements, including both the carryover and reversing effects of
prior year misstatements, on current year financial statements. If a misstatement is material to
the current year financial statements, the prior year financial statements should also be
corrected, even though such revision was, and continues to be, immaterial to the prior year
financial statements. Correcting prior year financial statements for immaterial errors would not
require previously filed reports to be amended. Such correction should be made in the current
period filings. The Trust is currently evaluating the impact of adopting SAB 108 on its
consolidated financial position and results of operations.
In September 2006, the FASB issued SFAS 157, Fair Value Measurements. SFAS 157 does not
address what to measure at fair value; instead, it addresses how to measure fair value. SFAS
157 applies (with limited exceptions) to existing standards that require assets or liabilities to
be measured at fair value. SFAS 157 establishes a fair value hierarchy, giving the highest priority
to quoted prices in active markets and the lowest priority to unobservable data and requires new
disclosures for assets and liabilities measured at fair value based on their level in the
hierarchy. SFAS 157 is effective for financial statements issued for fiscal years beginning after
November 15, 2007. The Trust is currently evaluating the impact of adopting SFAS 157 on its
consolidated financial position and results of operations.
4. Investments in unconsolidated entities
As of September 30, 2006 and December 31, 2005, the Trust had investments, directly or
indirectly, in the following unconsolidated joint ventures and limited liability companies that are
accounted for under the equity method:
|
|
|
Salisbury Student Apartment Developers Joint Venture, 33% owned by AOES |
|
|
|
|
Salisbury Student Apartment Developers LLC, a Maryland limited liability company, 33% owned by the Promoter |
|
|
|
|
University of Louisville Apartment Developers LLC, a Kentucky limited liability company, 50% owned by the Promoter |
|
|
|
|
Hines/AOES LLC, an Alabama limited liability company, 50% owned by AOES |
|
|
|
|
National Development/Allen & OHara CUPA, LLC, a Pennsylvania limited liability company, 50% owned by Allen &
OHara Development Company, LLC (AODC) |
|
|
|
|
National Development/Allen & OHara Lock Haven, LLC, a Pennsylvania limited liability company, 50% owned by AODC |
|
|
|
|
National Development/Allen & OHara Clarion, LLC, a Pennsylvania limited liability company, 50% owned by AODC |
|
|
|
|
Allen & OHara National Development Bloomsburg LLC, a Pennsylvania limited liability company, 50% owned by AODC |
|
|
|
|
Allen & OHara / Academic Privatization LLC, a Tennessee limited liability company, 50% owned by AODC |
11
On May 1, 2006 the Trust invested in the following unconsolidated joint ventures and limited
liability companies which are accounted for under the equity method:
|
|
|
University Village-Greensboro LLC, a Delaware limited liability company, 25% owned by EDR Greensboro |
|
|
|
|
AODC/CPA, LLC, a Delaware limited liability company, 50% owned by AODC |
On September 15, 2006, the Trust obtained a 10% interest in WEDR Riverside Investors V, LLC, a
Delaware limited liability company, which is accounted for under the equity method.
These entities primarily provide development consulting services to third party student
housing owners in an agency capacity. The following is a summary of financial information for the
unconsolidated joint ventures and limited liability companies for the nine months ended September
30, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Results of Operations: |
|
|
|
|
|
|
|
|
Revenues |
|
$ |
1,418 |
|
|
$ |
1,230 |
|
Net income |
|
|
1,104 |
|
|
|
1,197 |
|
Equity in earnings of unconsolidated entities |
|
$ |
573 |
|
|
$ |
587 |
|
5. Debt
Notes payable and credit facility
At December 31, 2004, the Operating Partnership had a Business Loan Agreement (the
Agreement) with a financial institution with an outstanding balance of $497. All outstanding
amounts under the Agreement were paid off on January 31, 2005 with proceeds of the Offering.
The EDR Predecessor also had a demand note payable to the Promoter that allowed it to borrow
up to $600. The note had an outstanding balance of $485 at December 31, 2004, and was paid in full
on January 31, 2005 as part of the Formation Transactions.
The Operating Partnership obtained a revolving credit facility on January 31, 2005 from
JPMorgan Chase Bank, N.A. and UBS Loan Finance LLC as co-lead managers. Those entities are
affiliates of J.P. Morgan Securities Inc. and UBS Securities LLC, which were underwriters of the
Offering. The revolving credit facility originally had availability in the amount of $75 million
and was subsequently increased to $100 million on April 4, 2005.
On March 30, 2006 the Operating Partnership amended and restated the revolving credit facility
(the Amended Revolver) dated January 31, 2005 and entered into a senior unsecured term loan
facility (the Term Loan) in the amount of $50 million. The Trust serves as the guarantor for any
funds borrowed by the Operating Partnership under the Amended Revolver and the Term Loan.
Additionally, the Amended Revolver is secured in a manner consistent with the original agreement
whereby such security generally consists of a cross-collateralized, first mortgage lien on all
unmortgaged properties. The Term Loan is not directly secured by a lien but has the benefit of a
negative pledge on the equity interest in the mortgaged properties. The Amended Revolver and the
Term Loan have a term of three years and mature on March 31, 2009, provided that the Operating
Partnership may extend the maturity date for one year subject to certain conditions. At September
30, 2006, there was $20.8 million outstanding under the Amended Revolver and $50 million
outstanding under the Term Loan. The Term Loan requires interest only payments through maturity.
Availability under the Operating Partnerships Amended Revolver is limited to a borrowing
base availability consistent with the original agreement. The borrowing base availability is equal
to the lesser of (i) 65% of the property asset value (as defined in the amended credit agreement)
of the properties securing the facility and (ii) the loan amount which would produce a debt service
coverage ratio of no less than 1.30, with debt service based on the greater of two different sets
of conditions specified in the amended credit agreement.
The Operating Partnerships Amended Revolver and Term Loan contain customary affirmative and
negative covenants and do contain financial covenants that, among other things, require the Trust
and its subsidiaries to maintain certain minimum ratios of EBITDA (earnings before payment or
charges of interest, taxes, depreciation, amortization or extraordinary items) as compared to
interest expense and total fixed charges. The financial covenants also include consolidated net
worth and leverage ratio tests.
The Trust is prohibited from making distributions that exceed $1.20 per share unless prior to
and after giving effect to such action the total leverage ratio is less than or equal to 60%. The
amount of restricted payments permitted may be increased as long as either of the following
conditions is met: (a) after giving effect to the increased restricted payment, the total leverage
ratio shall remain less than or equal to 60%; or (b) the increased restricted payment, when
considered along with all other restricted payments for the last 3 quarters, does not exceed (i)
100% of funds from operations for the applicable period through and including December 31, 2006,
and (ii) 95% of funds from operations for the applicable period thereafter.
The interest rate per annum applicable to the Amended Revolver is, at the Operating
Partnerships option, equal to a base rate or LIBOR plus an applicable margin based upon our
leverage. The interest rate per annum applicable to the Term Loan is, at the Operating
Partnerships option, equal to a base rate plus 1.25% or LIBOR plus 2.75%.
12
Mortgage debt
In conjunction with the Formation Transactions, the Operating Partnership assumed total fixed
rate mortgage debt of $392,998 with an average interest rate of approximately 5.5%. Concurrent with
the closing of the Formation Transactions, the Operating Partnership paid off $115,221 of the
assumed debt. In connection with managements decision to prepay certain debt obligations, the
Trust recognized a charge of $1,084 in February 2005.
In connection with the 2005 acquisitions described in Note 8 the Operating Partnership assumed
an additional $48,726 of fixed rate mortgage debt with a weighted average interest rate of 6.49%.
In January 2006, the Operating Partnership assumed $98,700 of mortgage debt with a fixed interest
rate of 6.439% in connection with the acquisition of the Place Portfolio.
At September 30, 2006, the Trust had outstanding mortgage indebtedness of $425,180 (net of
unamortized debt premium of $2,454). The scheduled maturities of outstanding mortgage indebtedness
at September 30, 2006 are as follows:
|
|
|
|
|
Fiscal Year Ending |
|
|
|
|
2006 (3 months ended December 31, 2006) |
|
$ |
1,101 |
|
2007 |
|
|
60,158 |
|
2008 |
|
|
26,481 |
|
2009 |
|
|
285,049 |
|
2010 |
|
|
888 |
|
2011 |
|
|
947 |
|
Thereafter |
|
|
48,102 |
|
|
|
|
|
Total |
|
|
422,726 |
|
Unamortized debt premium |
|
|
2,454 |
|
|
|
|
|
Outstanding at September 30, 2006, net of unamortized premium |
|
$ |
425,180 |
|
|
|
|
|
At September 30, 2006, the outstanding mortgage debt had a weighted average interest rate of
5.85% and carried an average term to maturity of 2.9 years.
13
6. Segments
Business segments are defined by their distinct customer base and service provided. Three
reportable segments have been identified: student housing leasing, third-party development
consulting services and third-party management services. Management evaluates each segments
performance based on net operating income, which is defined as income before depreciation,
amortization, interest expense and equity in earnings of unconsolidated entities. Intercompany fees
are reflected at the contractually stipulated amounts. The accounting policies of the reportable
segments are the same as those described in the summary of significant accounting policies. The
following table represents segment information for the nine months ended September 30, 2006 and the
combined results of operations for Education Realty Trust, Inc. (post offering) and the EDR
Predecessor (pre Offering) for the nine months ended September 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2006 |
|
|
Nine months ended September 30, 2005(1) |
|
|
|
|
|
|
|
Third-Party |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third-Party |
|
|
|
|
|
|
|
|
|
|
|
|
Student |
|
|
Development |
|
|
Third-Party |
|
|
|
|
|
|
|
|
|
|
Student |
|
|
Development |
|
|
Third-Party |
|
|
|
|
|
|
|
|
|
Housing |
|
|
Consulting |
|
|
Management |
|
|
|
|
|
|
|
|
|
|
Housing |
|
|
Consulting |
|
|
Management |
|
|
|
|
|
|
|
|
|
Leasing |
|
|
Services |
|
|
Services |
|
|
Adjustments |
|
|
Total |
|
|
Leasing |
|
|
Services |
|
|
Services |
|
|
Adjustments |
|
|
Total |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student housing
leasing revenue |
|
$ |
63,421 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
63,421 |
|
|
$ |
52,832 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
52,832 |
|
Student housing
food service
revenue |
|
|
2,670 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,670 |
|
|
|
2,603 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,603 |
|
Other leasing
revenue |
|
|
10,577 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,577 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third-party
development
consulting services |
|
|
|
|
|
|
2,283 |
|
|
|
|
|
|
|
|
|
|
|
2,283 |
|
|
|
|
|
|
|
973 |
|
|
|
|
|
|
|
|
|
|
|
973 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third-party
management revenue |
|
|
|
|
|
|
|
|
|
|
2,051 |
|
|
|
|
|
|
|
2,051 |
|
|
|
|
|
|
|
|
|
|
|
1,258 |
|
|
|
|
|
|
|
1,258 |
|
Intersegment
revenues |
|
|
|
|
|
|
|
|
|
|
2,657 |
|
|
|
(2,657 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,862 |
|
|
|
(1,862 |
) |
|
|
|
|
Operating expense
reimbursements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,891 |
|
|
|
5,891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,209 |
|
|
|
4,209 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
76,668 |
|
|
|
2,283 |
|
|
|
4,708 |
|
|
|
3,234 |
|
|
|
86,893 |
|
|
|
55,435 |
|
|
|
973 |
|
|
|
3,120 |
|
|
|
2,347 |
|
|
|
61,875 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student housing
leasing operations |
|
|
32,159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,159 |
|
|
|
27,306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,306 |
|
Student housing
food service
operations |
|
|
2,427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,427 |
|
|
|
2,449 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,449 |
|
General and
administrative |
|
|
|
|
|
|
1,601 |
|
|
|
3,653 |
|
|
|
|
|
|
|
5,254 |
|
|
|
|
|
|
|
1,413 |
|
|
|
3,055 |
|
|
|
|
|
|
|
4,468 |
|
Intersegment
expenses |
|
|
2,657 |
|
|
|
|
|
|
|
|
|
|
|
(2,657 |
) |
|
|
|
|
|
|
1,862 |
|
|
|
|
|
|
|
|
|
|
|
(1,862 |
) |
|
|
|
|
Reimbursable
operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,891 |
|
|
|
5,891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,209 |
|
|
|
4,209 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating
expenses |
|
|
37,243 |
|
|
|
1,601 |
|
|
|
3,653 |
|
|
|
3,234 |
|
|
|
45,731 |
|
|
|
31,617 |
|
|
|
1,413 |
|
|
|
3,055 |
|
|
|
2,347 |
|
|
|
38,432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating
income (loss) |
|
|
39,425 |
|
|
|
682 |
|
|
|
1,055 |
|
|
|
|
|
|
|
41,162 |
|
|
|
23,818 |
|
|
|
(440 |
) |
|
|
65 |
|
|
|
|
|
|
|
23,443 |
|
Nonoperating
expenses(2) |
|
|
48,751 |
|
|
|
(16 |
) |
|
|
|
|
|
|
|
|
|
|
48,735 |
|
|
|
36,574 |
|
|
|
(6 |
) |
|
|
(9 |
) |
|
|
|
|
|
|
36,559 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss)
before equity in
earnings of
unconsolidated
entities, income
taxes and minority
interest |
|
|
(9,326 |
) |
|
|
698 |
|
|
|
1,055 |
|
|
|
|
|
|
|
(7,573 |
) |
|
|
(12,756 |
) |
|
|
(434 |
) |
|
|
74 |
|
|
|
|
|
|
|
(13,116 |
) |
Equity in earnings
of unconsolidated
entities |
|
|
(14 |
) |
|
|
587 |
|
|
|
|
|
|
|
|
|
|
|
573 |
|
|
|
|
|
|
|
587 |
|
|
|
|
|
|
|
|
|
|
|
587 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss)
before taxes and
minority
interest(4) |
|
$ |
(9,340 |
) |
|
$ |
1,285 |
|
|
$ |
1,055 |
|
|
$ |
|
|
|
$ |
(7,000 |
) |
|
$ |
(12,756 |
) |
|
$ |
153 |
|
|
$ |
74 |
|
|
$ |
|
|
|
$ |
(12,529 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment
assets (3) |
|
$ |
830,263 |
|
|
$ |
2,256 |
|
|
$ |
5,220 |
|
|
$ |
|
|
|
$ |
837,739 |
|
|
$ |
641,612 |
|
|
$ |
1,300 |
|
|
$ |
5,445 |
|
|
$ |
|
|
|
$ |
648,357 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The segment information presented for the nine months ended
September 30, 2005 represents the combined results of operations
for Education Realty Trust, Inc. (post Offering) and the EDR
Predecessor (pre Offering). |
|
(2) |
|
Nonoperating expenses include interest expense, interest income
and exit fees on early payment of debt, amortization of deferred
financing costs, depreciation, and amortization of intangibles. |
|
(3) |
|
Significant increases in segment assets related to student housing
leasing from that presented at December 31, 2005 include the
acquisition of the Place Portfolio as described in Note 2 and Note
8 and the acquisition of Statesboro as discussed in Note 8. |
|
(4) |
|
The following is a reconciliation of the reportable segments net
loss before income taxes and minority interest to the
Trusts consolidated net loss before income taxes and
minority interest: |
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Net loss before income taxes and minority interest for reportable segments |
|
$ |
(7,000 |
) |
|
$ |
(12,529 |
) |
Unallocated corporate amounts: |
|
|
|
|
|
|
|
|
Noncash compensation charge for PIUs and restricted stock |
|
|
(591 |
) |
|
|
(4,631 |
) |
Other corporate expenses |
|
|
(3,979 |
) |
|
|
(1,596 |
) |
|
|
|
|
|
|
|
Net loss before income taxes and minority interest |
|
$ |
(11,570 |
) |
|
$ |
(18,756 |
) |
|
|
|
|
|
|
|
14
The following table represents segment information for the three months ended September 30, 2006
and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2006 |
|
|
Three months ended September 30, 2005 |
|
|
|
|
|
|
|
Third-Party |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third-Party |
|
|
|
|
|
|
|
|
|
|
|
|
Student |
|
|
Development |
|
|
Third-Party |
|
|
|
|
|
|
|
|
|
|
Student |
|
|
Development |
|
|
Third-Party |
|
|
|
|
|
|
|
|
|
Housing |
|
|
Consulting |
|
|
Management |
|
|
|
|
|
|
|
|
|
|
Housing |
|
|
Consulting |
|
|
Management |
|
|
|
|
|
|
|
|
|
Leasing |
|
|
Services |
|
|
Services |
|
|
Adjustments |
|
|
Total |
|
|
Leasing |
|
|
Services |
|
|
Services |
|
|
Adjustments |
|
|
Total |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student housing
leasing revenue |
|
$ |
19,520 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
19,520 |
|
|
$ |
20,145 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
20,145 |
|
Student housing
food service
revenue |
|
|
895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
895 |
|
|
|
893 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
893 |
|
Other leasing
revenue |
|
|
3,709 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,709 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third-party
development
consulting services |
|
|
|
|
|
|
856 |
|
|
|
|
|
|
|
|
|
|
|
856 |
|
|
|
|
|
|
|
791 |
|
|
|
|
|
|
|
|
|
|
|
791 |
|
Third-party
management revenue |
|
|
|
|
|
|
|
|
|
|
653 |
|
|
|
|
|
|
|
653 |
|
|
|
|
|
|
|
|
|
|
|
511 |
|
|
|
|
|
|
|
511 |
|
Intersegment
revenues |
|
|
|
|
|
|
|
|
|
|
874 |
|
|
|
(874 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
809 |
|
|
|
(809 |
) |
|
|
|
|
Operating expense
reimbursements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,146 |
|
|
|
2,146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,474 |
|
|
|
1,474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
24,124 |
|
|
|
856 |
|
|
|
1,527 |
|
|
|
1,272 |
|
|
|
27,779 |
|
|
|
21,038 |
|
|
|
791 |
|
|
|
1,320 |
|
|
|
665 |
|
|
|
23,814 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student housing
leasing operations |
|
|
13,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,422 |
|
|
|
13,570 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,570 |
|
Student housing
food service
operations |
|
|
844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
844 |
|
|
|
878 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
878 |
|
General and
administrative |
|
|
|
|
|
|
616 |
|
|
|
1,382 |
|
|
|
|
|
|
|
1,998 |
|
|
|
|
|
|
|
693 |
|
|
|
1,573 |
|
|
|
|
|
|
|
2,266 |
|
Intersegment
expenses |
|
|
874 |
|
|
|
|
|
|
|
|
|
|
|
(874 |
) |
|
|
|
|
|
|
809 |
|
|
|
|
|
|
|
|
|
|
|
(809 |
) |
|
|
|
|
Reimbursable
operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,146 |
|
|
|
2,146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,474 |
|
|
|
1,474 |
|
Total operating
expenses |
|
|
15,140 |
|
|
|
616 |
|
|
|
1,382 |
|
|
|
1,272 |
|
|
|
18,410 |
|
|
|
15,257 |
|
|
|
693 |
|
|
|
1,573 |
|
|
|
665 |
|
|
|
18,188 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating
income (loss) |
|
|
8,984 |
|
|
|
240 |
|
|
|
145 |
|
|
|
|
|
|
|
9,369 |
|
|
|
5,781 |
|
|
|
98 |
|
|
|
(253 |
) |
|
|
|
|
|
|
5,626 |
|
Nonoperating
expenses(1) |
|
|
16,579 |
|
|
|
(16 |
) |
|
|
|
|
|
|
|
|
|
|
16,563 |
|
|
|
12,901 |
|
|
|
(6 |
) |
|
|
(9 |
) |
|
|
|
|
|
|
12,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss)
before equity in
earnings of
unconsolidated
entities, income
taxes and minority
interest |
|
|
(7,595 |
) |
|
|
256 |
|
|
|
145 |
|
|
|
|
|
|
|
(7,194 |
) |
|
|
(7,120 |
) |
|
|
104 |
|
|
|
(244 |
) |
|
|
|
|
|
|
(7,260 |
) |
Equity in earnings
of unconsolidated
entities |
|
|
(14 |
) |
|
|
162 |
|
|
|
|
|
|
|
|
|
|
|
148 |
|
|
|
|
|
|
|
332 |
|
|
|
|
|
|
|
|
|
|
|
332 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss)
before taxes and
minority
interest(2) |
|
$ |
(7,609 |
) |
|
$ |
418 |
|
|
$ |
145 |
|
|
$ |
|
|
|
$ |
(7,046 |
) |
|
$ |
(7,120 |
) |
|
$ |
436 |
|
|
$ |
(244 |
) |
|
$ |
|
|
|
$ |
(6,928 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Nonoperating expenses include interest expense, interest income
and exit fees on early payment of debt, amortization of deferred
financing costs, depreciation, and amortization of intangibles. |
|
(2) |
|
The following is a reconciliation of the reportable segments net
loss before income taxes and minority interest to the
Trusts consolidated net loss before income taxes and
minority interest: |
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Net loss before income taxes and minority interest for reportable segments |
|
$ |
(7,046 |
) |
|
$ |
(6,928 |
) |
Unallocated corporate amounts: |
|
|
|
|
|
|
|
|
Noncash compensation charge for PIUs and restricted stock |
|
|
(63 |
) |
|
|
(257 |
) |
Other corporate expenses |
|
|
(1,184 |
) |
|
|
(276 |
) |
|
|
|
|
|
|
|
Net loss before income taxes and minority interest |
|
$ |
(8,293 |
) |
|
$ |
(7,461 |
) |
|
|
|
|
|
|
|
15
7. Commitments and contingencies
In connection with the acquisition of the JPI portfolio discussed in Note 2, the Operating
Partnership entered into an agreement to provide to the seller a revolving loan commitment secured
by a pledge of the Operating Partnership units (499,688 units) issued to the seller in the purchase
transaction. On April 10, 2006, the seller exchanged 400,632 Operating Partnership units (minority
interest) in full satisfaction of the $5,996 note receivable and accrued interest of $120. The
redemption of minority interest was recorded in accordance with SFAS No. 141, Business
Combinations. The seller was released from the pledge of the remaining 99,056 Operating
Partnership units. On April 26, 2006, the seller converted the remaining units to the Trusts
common stock.
Additionally in connection with the acquisition of the JPI portfolio, the Trust became aware
of a June 2001 notification from the United States Department of Justice of an on-going
investigation regarding possible violations of the American Disabilities Act of 1990 and the Fair
Housing Amendments Act of 1988. The notification included one of the student housing properties
acquired from JPI. In October 2002 the investigations were delayed for an undetermined period of
time and therefore such has not been fully resolved. Management does not believe the resolution of
this matter will result in a material adverse effect on the Trusts consolidated financial
condition or results of operations.
In conjunction with the closing of the acquisition of a student housing property at the
University of Florida the Operating Partnership entered into a letter of credit agreement. The
letter of credit remains outstanding in the amount of $1,500 at September 30, 2006 and is secured
by the Operating Partnerships existing revolving credit facility.
On May 10, 2006, the Operating Partnership guaranteed $23,200 of construction debt held by
University Village-Greensboro LLC in order to receive a 25% ownership stake in the venture with
College Park Apartments. The construction debt is expected to be refinanced in September of 2008
after construction is complete and the student housing community is occupied. The Operating
Partnership will not guarantee the debt after the construction loan is refinanced.
The Trust also has various operating lease commitments for corporate office space, furniture
and technology equipment.
As owners and operators of real estate, environmental laws impose ongoing compliance
requirements on the Trust. The Trust is not aware of any environmental matters or liabilities with
respect to the student housing properties that would have a material adverse effect on the Trusts
consolidated financial condition or results of operations.
In the normal course of business, the Trust is subject to claims, lawsuits, and legal
proceedings. While it is not possible to ascertain the ultimate outcome of such matters, in
managements opinion, the liabilities, if any, in excess of amounts provided or covered by
insurance, are not expected to have a material adverse effect on our financial position, results of
operations or liquidity.
8. Acquisition of real estate investments
During 2005 the Operating Partnership acquired the entities comprising the EDR Predecessor
(including student housing properties) and the 14 student housing properties comprising the JPI
Portfolio in connection with the Formation Transactions discussed in Note 2. The Operating
Partnership also acquired five additional student housing properties during fiscal 2005 (the 2005
acquisitions) for an aggregate purchase price of $119,700, including the assumption of mortgage
debt with a contract value of $48,700.
16
On January 1, 2006, the Operating Partnership acquired the 13 student housing properties
referred to as the Place Portfolio for a combination of cash, partnership units and assumed debt.
The cash contribution totaled approximately $105,200. The Operating Partnership also issued 36,954
Operating Partnership units valued at approximately $500 , and assumed liabilities of $800 and
interest-only mortgage debt of approximately $98,700. A summary follows of the estimated fair
values of the assets acquired and the liabilities assumed as of the date of the acquisition:
|
|
|
|
|
|
|
Preliminary allocation |
|
|
|
Place Portfolio |
|
Current assets and restricted cash |
|
$ |
2,376 |
|
Student housing properties |
|
|
202,227 |
|
Other |
|
|
570 |
|
|
|
|
|
Total assets acquired |
|
|
205,173 |
|
Current liabilities |
|
|
(855 |
) |
Mortgage debt assumed net of premium/discount |
|
|
(98,660 |
) |
Acquisition costs |
|
|
(7,446 |
) |
|
|
|
|
Purchase price |
|
$ |
98,212 |
|
|
|
|
|
On June 15, 2006, the Operating Partnership acquired Players Club, an off-campus collegiate
community located near Georgia Southern University in Statesboro, Georgia (Statesboro), for
$12,900 in cash and assumed liabilities. The Operating Partnership used the Amended Revolver to
fund the purchase. A summary follows of the estimated fair values of the assets acquired and the
liabilities assumed as of the date of the acquisition:
|
|
|
|
|
|
|
Preliminary allocation |
|
|
|
Statesboro |
|
Current assets and restricted cash |
|
$ |
77 |
|
Student housing properties |
|
|
12,703 |
|
Other |
|
|
159 |
|
|
|
|
|
Total assets acquired |
|
|
12,939 |
|
Current liabilities |
|
|
(115 |
) |
Mortgage debt assumed net of premium/discount |
|
|
|
|
Acquisition costs |
|
|
(65 |
) |
|
|
|
|
Purchase price |
|
$ |
12,759 |
|
|
|
|
|
The purchase price allocations related to the Place Portfolio and Statesboro acquisitions are
considered preliminary and changes are expected as additional information becomes available.
Management expects to continue its process of refining and finalizing our purchase accounting
estimates and assumptions during 2006 and as a result these preliminary purchase price allocations
are subject to change.
The results of operations for each acquisition have been included in the accompanying
consolidated statements of operations from the respective acquisition dates. The following pro
forma financial information for the nine months ending September 30, 2006 gives effect to the
Statesboro acquisition as if it occurred on January 1, 2006 and for the nine months ended September
30, 2005 gives effect to the Statesboro acquisition, the Place Portfolio acquisition, the Formation
Transactions, the 2005 acquisitions and the Private Placement as if the transactions had occurred
on January 1, 2005:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, 2006 |
|
|
September 30, 2005 |
|
Pro forma revenue |
|
$ |
87,876 |
|
|
$ |
85,001 |
|
Pro forma net loss |
|
$ |
(11,061 |
) |
|
$ |
(18,320 |
) |
Loss per share |
|
$ |
(0.42 |
) |
|
$ |
(0.70 |
) |
All pro forma financial information presented in this note is unaudited and is not necessarily
indicative of the results that actually would have occurred if the properties were purchased at the
beginning of the respective reporting period.
9. Incentive plan
The Trust adopted the Education Realty Trust, Inc. 2004 Incentive Plan (the Plan) effective
upon the closing of the Offering. The Plan provides for the grant of stock options, restricted
stock units, stock appreciation rights, other stock-based incentive awards, and
17
profits interest units to employees, directors and other key persons providing services to the
Company. The Trust has reserved 800,000 shares of its common stock for issuance pursuant to the
Plan, subject to adjustments for changes in the Trusts capital structure, including share splits,
dividends and recapitalizations. The number of shares reserved under the Plan is also subject to an
annual adjustment, beginning on January 1, 2006, so that the total number of shares reserved under
the Plan is equal to 4% of the aggregate number of shares outstanding on the last day of the
preceding fiscal year; provided that such annual increase generally may not exceed 80,000 shares.
Effective January 1, 2006, the Trust adopted the provisions of SFAS No. 123 (R) using the
modified prospective transition method. This pronouncement requires that compensation costs related
to share-based payments be recognized in financial statements. Prior to January 1, 2006, the Trust
applied the provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. Total compensation cost recognized in general and administrative expense
in the accompanying consolidated statements of operations for the nine months ended September 30,
2006 and 2005 was approximately $600 and $4,600, respectively. The adoption of SFAS No. 123 (R) had
no impact on the accompanying financial statements other than the reclassification of unearned
compensation of $2,470 to additional paid-in capital for the prior period presented.
In 2005, the Trust issued 180,000 shares of restricted stock under the Plan, to certain of its
executive officers, which will vest ratably over five years. The Trust also issued an additional
6,000 shares during 2005 to its independent directors, which were fully vested as of December 31,
2005. During the nine months ended September 30, 2006, the Trust issued 4,000 shares to its
executive officers and 2,000 shares to its independent directors. The 2006 issuances vested
immediately. A restricted stock award is an award of the Trusts common stock that is subject to
restrictions on transferability and other restrictions as the Trusts compensation committee
determines in its sole discretion on the date of grant. The restrictions may lapse over a specified
period of employment or the satisfaction of pre-established criteria as our compensation committee
may determine. Except to the extent restricted under the award agreement, a participant awarded
restricted shares will have all of the rights of a stockholder as to those shares, including,
without limitation, the right to vote and the right to receive dividends or distributions on the
shares. Restricted stock is generally taxed at the time of vesting. At September 30, 2006, unearned
compensation totaled $2,000 and will be recorded as expense over the applicable vesting
period. The value is determined based on the market value of the Trusts common stock on the grant
date. During the nine months ended September 30, 2006 and 2005,
compensation expense of $500
for both periods, was recognized in the accompanying consolidated statement of operations, related
to the vesting of restricted stock.
Additionally, the Trust granted 245,000 profits interest units in 2005 simultaneous with and
subsequent to the completion of the Offering that vested immediately and resulted in a compensation
charge (reflected in general and administrative expense) of $4,100 in the accompanying
consolidated statements of operations for the nine months ended
September 30, 2005. Profits interest units, or PIUs, are units in a limited
liability company controlled by the Trust that holds a special class of partnership interests in
the Operating Partnership. Each PIU will be deemed equivalent to an award of one share of the
Trusts common stock and will entitle the owner of such unit to receive the same quarterly per unit
distributions as one common unit of the Operating Partnership. This treatment with respect to
quarterly distributions is similar to the expected treatment of restricted stock awards, which will
generally receive full dividends whether vested or not. PIUs will not initially have full parity
with common units of the Operating Partnership with respect to liquidating distributions. Upon the
occurrence of specified capital equalization events, PIUs may, over time, achieve full or partial
parity with common units of the Operating Partnership for all purposes, and could accrete to an
economic value equivalent to the Trusts common stock on a one-for-one basis. If such parity is
reached, vested PIUs may be exchanged into an equal number of the Trusts shares of common stock at
any time. However, there are circumstances under which full parity would not be reached. Until such
parity is reached, the value that may be realized for vested PIUs will be less than the value of an
equal number of shares of the Trusts common stock, if there is any value at all. The grant or
vesting of PIUs is not expected to be a taxable transaction to recipients. Conversely, we will not
receive any tax deduction for compensation expense from the grant of PIUs. PIUs are treated as
minority interests in the accompanying consolidated financial statements at an amount equal to the
holders ownership percentage of the net equity of the Operating Partnership.
A summary of incentive plan activity for the nine months ended September 30, 2006 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted |
|
|
|
|
|
|
PIU's |
|
|
Stock |
|
|
Total |
|
Outstanding at December 31, 2005 |
|
|
245,000 |
|
|
|
186,000 |
|
|
|
431,000 |
|
Granted |
|
|
12,500 |
|
|
|
|
|
|
|
12,500 |
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2006 |
|
|
257,500 |
|
|
|
186,000 |
|
|
|
443,500 |
|
Granted |
|
|
|
|
|
|
4,000 |
|
|
|
4,000 |
|
Redeemed |
|
|
(2,500 |
) |
|
|
|
|
|
|
(2,500 |
) |
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2006 |
|
|
255,000 |
|
|
|
190,000 |
|
|
|
445,000 |
|
Granted |
|
|
5,000 |
|
|
|
2,000 |
|
|
|
7,000 |
|
Outstanding at September 30, 2006 |
|
|
260,000 |
|
|
|
192,000 |
|
|
|
452,000 |
|
|
|
|
|
|
|
|
|
|
|
Vested at September 30, 2006 |
|
|
260,000 |
|
|
|
71,883 |
|
|
|
331,883 |
|
|
|
|
|
|
|
|
|
|
|
18
10. Subsequent events
On October 10, 2006 our board of directors declared a third quarter distribution of $0.205 per
share of common stock for the quarter ending on September 30, 2006. The distribution is payable on
November 7, 2006 to stockholders of record at the close of business on October 24, 2006.
On October 16, 2006 the Trust issued 54,083 shares of common stock under the direct stock
purchase and dividend reinvestment plan. The common stock was issued at a price of $14.7925 per
share.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with the financial statements and notes
thereto appearing elsewhere in this Quarterly Report. Certain statements contained in this filing
are forward-looking statements within the meaning of the Private Securities Litigation Reform Act
of 1995, including but not limited to statements related to plans for future acquisitions, our
business and investment strategy, market trends and projected capital expenditures. When used in
this report, the words expect, anticipate, intend, plan, believe, seek, estimate,
would, could, should, and similar expressions are generally intended to identify
forward-looking statements. You should not place undue reliance on these forward-looking
statements, which reflect our opinions only as of the date of this Quarterly Report. We assume no
obligation to update or supplement forward-looking statements that become untrue because of
subsequent events. Forward-looking statements are subject to risks, uncertainties and other factors
that could cause actual results to differ materially from future results expressed or implied by
such forward-looking statements. For further information about these and other factors that could
affect our future results, please see the Item 1A. Risk Factors in our Annual Report on Form
10-K for the year ended December 31, 2005. Investors are cautioned that any forward-looking
statements are not guarantees of future performance and involve risks and uncertainties, and that
actual results may differ materially from those contemplated by such forward-looking statements.
We were formed to continue and expand upon the student housing business of Allen & OHara,
Inc. and its affiliates (the Predecessor), which commenced in 1964. We commenced operations upon
the completion of our initial public offering (the Offering) and formation transactions (the
Formation Transactions), which occurred on January 31, 2005 (the Closing Date). Substantially
all of our assets are held by, and we conduct substantially all of our activities through,
Education Realty Operating Partnership, LP (our Operating Partnership), Allen & OHara Education
Services, Inc. (our Management Company) and Allen & OHara Development Company, LLC (our
Development Company), each of which are direct or indirect subsidiaries of us.
The historical operations prior to the Closing Date that are described in this report refer to
the operations of the Predecessor. We have described our operations in this report as if the
historical operations of the Predecessor were conducted by us. As a result, and due to substantial
growth through acquisition and other IPO related activities, our results of operations for the nine
months ended September 30, 2006 are not comparable to our results of operations for the nine months
ended September 30, 2005. Where appropriate, the following discussion includes an analysis of the
completion of the Offering and certain matters that have occurred following the completion of the
Offering.
Overview
We are a self-managed and self-advised real estate investment trust (REIT) engaged in the
ownership, acquisition and management of high quality student housing communities. We also provide
student housing development consulting services to universities, charitable foundations and others.
We believe that we are one of the largest private owners, developers and managers of high-quality
student housing communities in the United States in terms of both total beds owned and under
management.
We earn income from rental payments we receive as a result of our ownership of student housing
properties. We also earn income by performing property management services and development
consulting services for third parties through our Management Company and Development Company,
respectively. While we manage 68% of the properties we own, we will not recognize any fee income
from their management on a consolidated basis. We have elected to be taxed as a REIT for federal
income tax purposes.
Our Business Segments
We define business segments by their distinct customer base and service provided. Management
has identified three reportable segments: student housing leasing, third-party development
consulting services and third-party management services. We evaluate each segments performance
based on net operating income, which is defined as income before depreciation, amortization,
interest expense and equity in earnings of unconsolidated entities. The accounting policies of the
reportable segments are described in more detail in the
19
summary of significant accounting policies in the notes to the financial statements appearing
elsewhere in this Quarterly Report. Inter-company fees are reflected at the contractually
stipulated amounts.
Student Housing Leasing
Student housing leasing revenue represented approximately 94.6% of our revenue, excluding
operating expense reimbursements, for the nine months ended September 30, 2006. Our revenue related
to food service operations at two locations is included in this segment. Additionally we include
other leasing revenue related to the Place Portfolio lease in this segment.
Unlike multi-family housing where apartments are leased by the unit, student-housing
communities are typically leased by the bed on an individual lease liability basis. Individual
lease liability limits each residents liability to his or her own rent without liability for a
roommates rent. A parent or guardian is required to execute each lease as a guarantor unless the
resident provides adequate proof of income. The number of lease contracts that we administer is
therefore equivalent to the number of beds occupied instead of the number of apartment units.
Due to our predominantly furnished private bedroom accommodations, the high level of
student-oriented amenities offered at our communities and the individual lease liability, we
believe our properties can typically command higher per-unit and per-square foot rental rates than
most multi-family properties in the same geographic markets. We are also typically able to command
higher rental rates than on-campus student housing, which tend to offer properties with fewer
amenities.
Substantially all of our leases commence mid-August and terminate the last day of July. These
dates coincide with the commencement of the universities fall academic term and typically
terminate at the completion of the subsequent summer school session. As such, we are required to
re-lease each property in its entirety each year, resulting in significant turnover in our tenant
population from year to year. For the lease terms starting in 2005 and 2006 approximately 69.9% and
68.3%, respectively, of our beds were leased to students who were first-time residents at our
properties. As a result, we are highly dependent upon the effectiveness of our marketing and
leasing efforts during the annual leasing season that typically begins in February and ends in
August of each year. Our properties occupancy rates are therefore relatively stable with a slight
decline during the August to July lease year but are susceptible to fluctuation at the commencement
of each new academic year.
During the first two weeks of August, prior to the commencement of each new lease period, we
prepare the units for the new incoming tenants. We do not generally recognize lease revenue during
this period, as we have no leases in place. In addition, during this turnover period we incur
significant expenses, which we immediately recognize, making our units ready for occupancy during
the month of August. Consequently, our August lease turnover results in seasonality in our
operating results during the third quarter of each year.
Third-Party Management Services
Revenue from our third-party management services, excluding operating expense reimbursements,
represented approximately 2.6% of our revenue for the nine months ended September 30, 2006. These
revenues are typically derived from multi-year management agreements, under which management fees
are typically 3-5% of leasing revenue. These agreements typically have an initial term of five to
ten years with a renewal option for an additional five years. As part of the management agreements,
there are certain payroll and related expenses we pay on behalf of the third-party property owners.
These costs are included in reimbursable operating expenses and are required to be reimbursed to us
by the third-party property owners. We recognize the expense and revenue related to these
reimbursements when incurred. These operating expenses are wholly reimbursable and therefore not
considered by our management when analyzing the operating performance of our third-party management
services business.
Third-Party Development Consulting Services
Revenue from our third-party development consulting services, excluding operating expense
reimbursements, represented 2.8% of our revenue for the nine months ended September 30, 2006. Fees
for these services are typically 3-5% of the total project cost and are payable over the life of
the project, which is typically one to two years in length. At times we will pay pre-development
expenses such as architectural fees and permits if such are required prior to the projects
financing being in place. We typically obtain a guarantee from the owner for repayment of these
project costs. We typically incur costs that are reimbursable by the project. We recognize these
costs as expense when incurred, while the reimbursement revenue is not recognized until the
consulting contract is awarded or reimbursements are otherwise guaranteed by the customer. These
operating expenses are wholly reimbursable and therefore not considered by our management when
analyzing the operating performance of our third-party development consulting services business.
20
We periodically enter into joint venture arrangements whereby we provide development
consulting services to third-party student housing owners in an agency capacity. We recognize our
portion of the earnings in each joint venture based on our ownership interest, which is reflected
as equity in earnings of unconsolidated entities after net operating income in our statement of
operations. Our revenue and operating expenses could fluctuate from period to period based on the
extent we utilize joint venture arrangements to provide third-party development consulting
services.
The amount and timing of future revenues from development consulting services will be
contingent upon our ability to successfully compete in public universities competitive procurement
processes, our ability to successfully structure financing of these projects, and our ability to
ensure completion of construction within agreed construction timelines and budgets. To date, all of
our third-party development projects have completed construction in time for their targeted
occupancy dates.
Trends and Outlook
Rents and Occupancy
We expect the general trends of increased university enrollment and limited availability of
on-campus housing to continue for the foreseeable future, providing us with continued opportunities
to maximize revenues through increased occupancy and/or rental rates in our owned portfolio. We
manage our properties to maximize revenues, which are primarily determined by two components:
rental rates and occupancy rates. We customarily adjust rental rates in order to maximize revenues,
which in some cases results in a lower occupancy rate, but in most cases results in stable or
increasing revenues from the property. As a result, a decrease in occupancy rates may be offset by
an increase in rental rates and may not be material to our operations.
Integration Costs Related to the Acquisition of Additional Properties
Our acquisition of 14 properties previously owned by JPI Investment Company, L.P. and its
affiliates (JPI) on the Closing Date and our acquisition of an additional five properties since
the Closing Date, two of which were acquired during the first quarter ending March 31, 2005, two
were acquired in the third quarter ended September 30, 2005, and one was acquired in July 2005 have
resulted in over 70% of our portfolio being new to the company and our management style in 2005.
Additionally, we added a property in June of 2006. Although the company assumed management of the
acquired properties ahead of schedule, additional costs, including operating inefficiencies, were
experienced through the end of 2005 while fully assimilating the properties into our operating
style. The growth in our portfolio has also required us to add additional regional management and
corresponding support staff in our corporate office.
General and Administrative Costs
As a result of becoming a public company in January 2005, we experienced significant increases
in legal and accounting costs, director fees, costs related to communicating with stockholders,
including ongoing communications and distribution of proxy statements in connection with
stockholder meetings, and other costs that are unique to being a public company. We expect
additional increases in 2006 as a result of costs associated with formulating and documenting our
internal control systems and implementation of the Sarbanes Oxley Act of 2002. For the nine months
ended September 30, 2006 these costs totaled approximately $638.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States (GAAP) requires management to make estimates and assumptions in
certain circumstances that affect amounts reported in our financial statements and related notes.
In preparing these financial statements, management has utilized all available information,
including its past history, industry standards and the current economic environment, among other
factors, in forming its estimates and judgments of certain amounts included in the financial
statements, giving due consideration to materiality. The ultimate outcome anticipated by management
in formulating its estimates may not be realized. Application of the critical accounting policies
below involves the exercise of judgment and use of assumptions as to future uncertainties and, as a
result, actual results could differ from these estimates. 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.
Student Housing Leasing Revenue Recognition
Student housing leasing revenue is comprised of all revenue related to the leasing activities
at our student housing properties and includes revenues from the leasing of space, parking lot
rentals and certain ancillary services. Revenue from our food service operations is also included
in this segment. Additionally we include other leasing revenue related to the Place Portfolio lease
in this segment.
21
Students are required to execute lease contracts with payment schedules that vary from single
to monthly payments. Generally, a nonrefundable application fee, a nonrefundable service fee and a
notarized parental guarantee must accompany each executed contract. Receivables are recorded when
due, and leasing revenues and related lease incentives and nonrefundable application and service
fees are recognized on a straight-line basis over the term of the contracts. Balances are
considered past due when payment is not received on the contractual due date. Allowances for
doubtful accounts are established by management when it is determined that collection is doubtful.
Student Housing Food Service Revenue Recognition
The Trust provides food service to an unaffiliated secondary boarding school through a
contract covering a nine-month period. The contract requires a flat weekly fee and the related
revenues are recognized on a straight-line basis over the contract period. Additionally, the Trust
maintains a dining facility at University Towers, which offers meal plans to the tenants as well as
dining to other third party customers. The meal plans typically require upfront payment by the
tenant covering the school semester and the related revenue is recognized on a straight-line basis
over the corresponding semester.
Other Leasing Revenue Recognition
Other leasing revenue relates to our leasing of 13 properties we acquired from Place
Properties (Place). Simultaneous with the acquisition of the 13 properties, the Trust leased the
assets to Place and receives base monthly rent of $1,145 and has the right to receive Additional
Rent annually if the properties exceed certain criteria defined in the lease agreement. Base rent
is recognized on a straight line basis over the lease term and Additional Rent is recognized only
upon satisfaction of the defined criteria.
Revenue and Cost Recognition of Third-Party Development Consulting Services
Costs associated with the pursuit of third-party development consulting contracts are expensed
as incurred until we have been notified of a contract award or reimbursement is otherwise
guaranteed by the customer. At such time, the reimbursable portion of such costs is recorded as a
receivable. Development consulting revenues are recognized using the percentage of completion
method as determined by construction costs incurred relative to the total estimated construction
costs. Costs associated with development consulting services are expensed as incurred. We generally
receive a significant percentage of our fees for development consulting services upon closing of
the project financing, a portion of the fee over the construction period, and the balance upon
substantial completion of construction. Because revenue from these services is recognized for
financial reporting purposes utilizing the percentage of completion method, differences occur
between amounts received and revenues recognized. Differences also occur between amounts recognized
for tax purposes and those recognized from financial reporting purposes. Because, as a REIT, we
will be required to distribute 90% of our taxable income, our distribution requirement with respect
to our income from third-party services may exceed that reflected as net income for financial
reporting purposes from such activities.
We periodically enter into joint venture arrangements whereby we provide
development-consulting services to third-party student housing owners in an agency capacity. We
recognize our portion of the earnings in each joint venture based on our ownership interest, which
is reflected after net operating income in our statement of operations as equity in earnings of
unconsolidated entities. Our revenue and operating expenses could fluctuate from period to period
based on the extent we utilize joint venture arrangements to provide third-party development
consulting services.
Student Housing Property Acquisitions
Land, land improvements, buildings and improvements, furniture, fixtures and equipment are
recorded at cost. Buildings and improvements are depreciated over 30 to 40 years, land improvements
are depreciated over 15 years and furniture, fixtures and equipment are depreciated over estimated
lives ranging from 3 to 7 years. Depreciation is computed using the straight-line method for
financial reporting purposes. Property acquisitions initiated subsequent to June 30, 2001 are
accounted for utilizing the purchase method in accordance with Statement of Financial Accounting
Standards (SFAS) No. 141, Business Combinations. Pre-acquisition costs, including legal and
professional fees and other third-party costs related directly to the acquisition of the property,
are accounted for as part of the purchase price. We have used independent appraisals obtained at
the time of the original acquisition by the owners of the properties we are acquiring in our
formation transactions, estimates of cash flows and valuation techniques to allocate the purchase
price of acquired property between land, land improvements, buildings and improvements, equipment
and other identifiable intangibles such as amounts related to in-place leases.
Repairs and Maintenance
The costs of ordinary repairs and maintenance are charged to operations when incurred. Major
improvements that extend the life of an asset beyond one year are capitalized and depreciated over
the remaining useful life of the asset. Planned major repair,
maintenance and improvement projects are capitalized when performed. In some circumstances the lenders require us
to maintain a reserve account for future repairs and capital expenditures. These amounts are not
available for current use.
22
Long Lived Assets Impairment
Periodically, management is required to assess whether there are any indicators that our real
estate properties may be impaired. A propertys value is considered impaired if managements
estimate of the aggregate future cash flows (undiscounted and without interest charges) to be
generated by the property is less than the carrying value of the property. These estimates of cash
flows are based on factors
such as expected future operating income, trends and prospects, as well as the effects of demand,
competition and other factors. To the extent impairment has occurred, the loss will be measured as
the excess of the carrying amount of the property over the fair value of the property, thereby
reducing our net income.
Recently Issued Accounting Pronouncements
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty
in Income Taxes, an Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies
the accounting for uncertainty in income taxes recognized in a companys financial statements and
prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. The Interpretation also provides guidance on description, classification,
interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 becomes
effective on January 1, 2007. The Trust is currently evaluating the impact of adopting FIN 48 on its
consolidated financial position and results of operations.
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108 (SAB 108), which
becomes effective for fiscal years ending after November 15, 2006. SAB 108 provides guidance on the consideration of the effects of prior
period misstatements in quantifying current year misstatements for the purpose of a materiality
assessment. SAB 108 requires an entity to evaluate the impact of correcting all misstatements, including
both the carryover and reversing effects of prior year misstatements, on current year financial
statements. If a misstatement is material to the current year financial statements, the prior year financial
statements should also be corrected, even though such revision was, and continues to be, immaterial to the prior
year financial statements. Correcting prior year financial statements for immaterial errors would not require
previously filed reports to be amended. Such correction should be made in the current period filings. The Trust is
currently evaluating the impact of adopting SAB 108 on its consolidated financial position and results of operations.
In
September 2006, the FASB issued SFAS 157, Fair Value Measurements, SFAS 157 does not address
what to measure at fair value; instead, it addresses how to measure fair value. SFAS 157 applies (with limited
exceptions) to existing standards that require assets or liabilities to be measured at fair
value. SFAS 157 establishes a fair value hierarchy, giving the highest priority to quoted prices in active
markets and the lower priority in unobservable data and requires new disclosures for assets and liabilities
measured at fair value based on their level in the hierarchy. SFAS 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007. The Trust is currently evaluating the impact
of adopting SFAS 157 on its consolidated financial position and results of operations.
Results of Operations for the Nine Months Ended September 30, 2006 and 2005
The following table presents the results of operations for Education Realty Trust, Inc. for
the nine months ended September 30, 2006 and the combined results of operations for Education
Realty Trust, Inc. (post Offering) and the EDR Predecessor (pre Offering) for the nine months ended
September 30, 2005 (in thousands):
|
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|
|
|
Nine months ended September 30, 2006 |
|
|
Nine months ended September 30, 2005(1) |
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|
|
Third-Party |
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
Third-Party |
|
|
|
|
|
|
|
|
|
|
|
|
Student |
|
|
Development |
|
|
Third-Party |
|
|
|
|
|
|
|
|
|
|
Student |
|
|
Development |
|
|
Third-Party |
|
|
|
|
|
|
|
|
|
Housing |
|
|
Consulting |
|
|
Management |
|
|
|
|
|
|
|
|
|
|
Housing |
|
|
Consulting |
|
|
Management |
|
|
|
|
|
|
|
|
|
Leasing |
|
|
Services |
|
|
Services |
|
|
Adjustments |
|
|
Total |
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|
Leasing |
|
|
Services |
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|
Services |
|
|
Adjustments |
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Total |
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Revenues: |
|
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|
|
|
|
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|
|
|
|
|
|
|
|
Student housing leasing
revenue |
|
$ |
63,421 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
63,421 |
|
|
$ |
52,832 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
52,832 |
|
Student housing food
service revenue |
|
|
2,670 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,670 |
|
|
|
2,603 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,603 |
|
Other leasing revenue |
|
|
10,577 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,577 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third-party development
consulting services |
|
|
|
|
|
|
2,283 |
|
|
|
|
|
|
|
|
|
|
|
2,283 |
|
|
|
|
|
|
|
973 |
|
|
|
|
|
|
|
|
|
|
|
973 |
|
Third-party management
revenue |
|
|
|
|
|
|
|
|
|
|
2,051 |
|
|
|
|
|
|
|
2,051 |
|
|
|
|
|
|
|
|
|
|
|
1,258 |
|
|
|
|
|
|
|
1,258 |
|
Intersegment revenues |
|
|
|
|
|
|
|
|
|
|
2,657 |
|
|
|
(2,657 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,862 |
|
|
|
(1,862 |
) |
|
|
|
|
Operating expense
reimbursements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,891 |
|
|
|
5,891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,209 |
|
|
|
4,209 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
76,668 |
|
|
|
2,283 |
|
|
|
4,708 |
|
|
|
3,234 |
|
|
|
86,893 |
|
|
|
55,435 |
|
|
|
973 |
|
|
|
3,120 |
|
|
|
2,347 |
|
|
|
61,875 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student housing leasing
operations |
|
|
32,159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,159 |
|
|
|
27,306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,306 |
|
Student housing food
service operations |
|
|
2,427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,427 |
|
|
|
2,449 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,449 |
|
General and administrative |
|
|
|
|
|
|
1,601 |
|
|
|
3,653 |
|
|
|
|
|
|
|
5,254 |
|
|
|
|
|
|
|
1,413 |
|
|
|
3,055 |
|
|
|
|
|
|
|
4,468 |
|
Intersegment expenses |
|
|
2,657 |
|
|
|
|
|
|
|
|
|
|
|
(2,657 |
) |
|
|
|
|
|
|
1,862 |
|
|
|
|
|
|
|
|
|
|
|
(1,862 |
) |
|
|
|
|
Reimbursable operating
expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,891 |
|
|
|
5,891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,209 |
|
|
|
4,209 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
37,243 |
|
|
|
1,601 |
|
|
|
3,653 |
|
|
|
3,234 |
|
|
|
45,731 |
|
|
|
31,617 |
|
|
|
1,413 |
|
|
|
3,055 |
|
|
|
2,347 |
|
|
|
38,432 |
|
Net operating income
(loss) |
|
|
39,425 |
|
|
|
682 |
|
|
|
1,055 |
|
|
|
|
|
|
|
41,162 |
|
|
|
23,818 |
|
|
|
(440 |
) |
|
|
65 |
|
|
|
|
|
|
|
23,443 |
|
Nonoperating expenses(2) |
|
|
48,751 |
|
|
|
(16 |
) |
|
|
|
|
|
|
|
|
|
|
48,735 |
|
|
|
36,574 |
|
|
|
(6 |
) |
|
|
(9 |
) |
|
|
|
|
|
|
36,559 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before
equity in earnings of
unconsolidated entities,
income taxes and minority
interest |
|
|
(9,326 |
) |
|
|
698 |
|
|
|
1,055 |
|
|
|
|
|
|
|
(7,573 |
) |
|
|
(12,756 |
) |
|
|
(434 |
) |
|
|
74 |
|
|
|
|
|
|
|
(13,116 |
) |
Equity in earnings of
unconsolidated entities |
|
|
(14 |
) |
|
|
587 |
|
|
|
|
|
|
|
|
|
|
|
573 |
|
|
|
|
|
|
|
587 |
|
|
|
|
|
|
|
|
|
|
|
587 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before
taxes and minority interest(3) |
|
$ |
(9,340 |
) |
|
$ |
1,285 |
|
|
$ |
1,055 |
|
|
$ |
|
|
|
$ |
(7,000 |
) |
|
$ |
(12,756 |
) |
|
$ |
153 |
|
|
$ |
74 |
|
|
$ |
|
|
|
$ |
(12,529 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The segment information presented for the nine months ended September 30, 2005 represents the combined results of operations for Education Realty Trust, Inc. (post Offering) and
EDR Predecessor (pre Offering). |
|
(2) |
|
Nonoperating expenses include interest expense, interest income and exit fees on early payment of debt, amortization of deferred financing costs, depreciation, and amortization of
intangibles. |
|
(3) |
|
The following is a reconciliation of the reportable
segments net loss before income taxes and minority interest to the Trusts consolidated net loss before
income taxes and minority interest: |
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Net loss before income taxes and minority interest for reportable segments |
|
$ |
(7,000 |
) |
|
$ |
(12,529 |
) |
Unallocated corporate amounts: |
|
|
|
|
|
|
|
|
Noncash compensation charge for PIUs and restricted stock |
|
|
(591 |
) |
|
|
(4,631 |
) |
Other corporate expenses |
|
|
(3,979 |
) |
|
|
(1,596 |
) |
|
|
|
|
|
|
|
Net loss before income taxes and minority interest |
|
$ |
(11,570 |
) |
|
$ |
(18,756 |
) |
|
|
|
|
|
|
|
23
Student housing leasing
Overall average physical occupancy and average Revenue per Available Bed (RevPAB) for the
nine months ended September 30, 2006 and 2005 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months |
|
|
Nine months |
|
|
|
|
|
|
ended |
|
|
ended |
|
|
|
|
|
|
September |
|
|
September |
|
|
|
|
|
|
30, 2006 |
|
|
30, 2005 |
|
|
Difference |
|
Occupancy |
|
|
|
|
|
|
|
|
|
|
|
|
Physical (1) |
|
|
92.4 |
% |
|
|
91.1 |
% |
|
|
1.3 |
% |
Economic (2) |
|
|
89.2 |
% |
|
|
88.2 |
% |
|
|
1.0 |
% |
NarPAB (3) |
|
$ |
332 |
|
|
$ |
329 |
|
|
$ |
3 |
|
Other income per avail. bed (4) |
|
$ |
24 |
|
|
$ |
27 |
|
|
$ |
(3 |
) |
RevPAB (5) |
|
$ |
356 |
|
|
$ |
356 |
|
|
$ |
|
|
Operating expense per bed (6) |
|
$ |
181 |
|
|
$ |
183 |
|
|
$ |
(2 |
) |
Operating margin |
|
|
49.3 |
% |
|
|
48.5 |
% |
|
|
0.8 |
% |
Design Beds (7) |
|
|
178,005 |
|
|
|
148,852 |
|
|
|
29,153 |
|
(1) |
|
Physical occupancy represents a weighted average of the month end occupancies for the respective period. |
|
(2) |
|
Economic occupancy represents the effective occupancy calculated by taking net apartment rent accounted for on a GAAP basis for the respective
period divided by market rent for the respective period. |
|
(3) |
|
NarPAB represents GAAP net apartment rent for the respective period divided by the sum of the design beds in the portfolio for each of the
included months. Does not include food service revenue or other leasing revenue. |
|
(4) |
|
Represents other GAAP-based income for the respective period divided by the sum of the design beds in the portfolio for each of the included
months. Other income includes service/app fees, late fees, termination fees, parking fees, transfer fees, damage recovery, utility recovery,
and other misc. |
|
(5) |
|
Represents total revenue (net apartment rent plus other income) for the respective period divided by the sum of the design beds in the
portfolio for each of the included months. |
|
(6) |
|
Represents property-level operating expense excluding overhead allocation, depreciation and amortization divided by the sum of the design beds
for each of the included months. |
|
(7) |
|
Represents the sum of the monthly design beds in the portfolio during the period, excluding Place properties. |
24
Revenue from student housing leasing was $76,668 for the nine months ended September 30, 2006.
This represents an increase of $21,233 from the same period in 2005. The 38.3% increase in revenue
is attributable to a significant increase in beds by way of acquisition and the addition of other
leasing revenue related to the 13 property Place Portfolio lease discussed below. Aggregate design
beds for the nine months ended September 30, 2006 increased 29,153 beds or 19.6% over the same
period last year to 178,005 beds. At current RevPAB rates this acquisition driven increase in beds
represents about $10,400 of the increased revenue for the nine months ended September 30, 2006. In
January 2006 we completed the acquisition of a 13 property portfolio from Place Properties.
Simultaneous with the acquisition we entered into a lease agreement under which Place Properties
leases and operates the properties. Other leasing revenue related to the lease back contributed
$10,577 of revenue in the first nine months of 2006, including the
recognition of Additional Rent, as defined in the lease
agreement,
of $274 during the three months ended September 30, 2006.
Operating expenses at our student housing communities increased $4,853 to $32,159 for the nine
months ended September 30, 2006. Expense growth of approximately $5,300 is attributable to
increased beds by way of acquisition as discussed above. The growth driven increase in expenses
was offset by $480 representing an approximate $2.7 reduction in expense per bed for the
period. Significant improvement in turn costs and lower bad debt expense along with other
improvements combined to more than offset higher utility costs for the period. Intersegment
expenses, which represent management fees paid to our management company increased almost $800 as a
result of more beds under management and higher revenue.
The net impact of the growth in revenue and expenses noted above was a 65.5% rise in net
operating income for the segment to $39,425 for the nine months ended September 30, 2006. As noted,
a majority of the growth came through acquisition and an increase in operating margins, which rose
from 43.0% to 51.4% for the segment. The operating margin of our owned and operated properties,
which excludes the 13 properties leased to Place Properties, improved from 48.5% to 49.3%.
Third-party development consulting services
The following table represents the development consulting projects that were active during the
nine months ended September 30, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized Earnings |
Project |
|
Beds |
|
Fee Type |
|
2006 |
|
2005 |
|
Difference |
|
Slippery Rock University Phase I
|
|
|
1,390 |
|
|
Development fee
|
|
$ |
1,264 |
|
|
$ |
406 |
|
|
$ |
858 |
|
Indiana University of Pennsylvania
|
|
|
734 |
|
|
Development fee
|
|
|
422 |
|
|
|
|
|
|
|
422 |
|
University of Michigan
|
|
|
849 |
|
|
Development fee
|
|
|
459 |
|
|
|
|
|
|
|
459 |
|
Auraria Higher Education System
|
|
|
685 |
|
|
Development fee
|
|
|
|
|
|
|
146 |
|
|
|
(146 |
) |
Calhoun Street
|
|
|
|
|
|
Purchasing fee
|
|
|
|
|
|
|
306 |
|
|
|
(306 |
) |
University of North Carolina Greensboro
|
|
|
600 |
|
|
Construction
oversight fee
|
|
|
45 |
|
|
|
|
|
|
|
45 |
|
University of Louisville Phase III
|
|
|
359 |
|
|
Construction
oversight fee
|
|
|
57 |
|
|
|
13 |
|
|
|
44 |
|
University of Alabama Birmingham
|
|
|
753 |
|
|
Construction
oversight fee
|
|
|
36 |
|
|
|
102 |
|
|
|
(66 |
) |
|
|
|
|
|
|
|
|
|
Third-party development consulting services
|
|
|
|
|
|
|
|
$ |
2,283 |
|
|
$ |
973 |
|
|
$ |
1,310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
California University of Pennsylvania Phase IV
|
|
|
447 |
|
|
Development fee
|
|
$ |
|
|
|
$ |
65 |
|
|
$ |
(65 |
) |
California University of Pennsylvania Phase V
|
|
|
354 |
|
|
Development fee
|
|
|
225 |
|
|
|
|
|
|
$ |
225 |
|
University of North Carolina Greensboro
|
|
|
600 |
|
|
Development fee
|
|
|
105 |
|
|
|
|
|
|
|
105 |
|
Bloomsburg University
|
|
|
407 |
|
|
Development fee
|
|
|
|
|
|
|
239 |
|
|
|
(239 |
) |
University of Louisville Phase III
|
|
|
359 |
|
|
Development fee
|
|
|
124 |
|
|
|
29 |
|
|
|
95 |
|
University of Alabama Birmingham
|
|
|
753 |
|
|
Development fee
|
|
|
133 |
|
|
|
227 |
|
|
|
(94 |
) |
Other
|
|
|
|
|
|
Development fee
|
|
|
|
|
|
|
27 |
|
|
|
(27 |
) |
|
|
|
|
|
|
|
|
|
Equity in earnings of unconsolidated entities
|
|
|
|
|
|
|
|
$ |
587 |
|
|
$ |
587 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third-party development consulting services revenue increased by $1,310 to $2,283
for the nine months ended September 30, 2006. During the first nine months of 2006 we were engaged
in four active development projects representing 3,658 beds and recognized construction oversight
fees on an additional 3 projects. During the same period in 2005 we were only in the beginning
stages of two projects, recognized $306 of purchasing fees related to a third project, and
recognized construction oversight fees on another two project. The increased volume in development
consulting revenue is mainly due to an increase in the number of projects being managed by our
development subsidiary (AODC) but also represents a shift in the percentage of new projects AODC
contracts directly. In previous years
25
the majority of our development services were contracted through joint venture relationships with
the profits from those services being recognized through equity in earnings of unconsolidated
entities.
Equity in earnings of unconsolidated entities remained flat at $587 for each of the nine
months ended September 30, 2006 and 2005. During both nine month periods there were four projects
underway that represented 2,066 and 1,966 beds for 2006 and 2005, respectively.
General and administrative costs in the third-party development consulting services segment
increased $188 to $1,601 for the nine months ended September 30, 2006. This increase is a result of
the higher volume of development projects and increases in staffing and corporate overhead
allocated to the segment.
Third-party management services
Third-party management services revenue increased by $1,588 to $4,708 for the nine months
ended September 30, 2006. Growth in our owned portfolio period over period contributed to $795 of
the increase by way of intersegment revenue. Aggregate design beds in our owned portfolio for the
nine months ended September 30, 2006 were 178,005 which is an increase of 29,153 aggregate beds
from the same period in the prior year. Third-party management fee revenue increased $793 to $2,051
for the nine months ended September 30, 2006. This increase was primarily the result of the opening
of three new managed properties in August and September of 2005 and the addition of a new
management contract in September 2005. In addition one development community opened early in May
2006 and our management company subsidiary earned approximately $100 in preopening management
support fees related to two communities while under development. Minor fees received during the
nine months of 2006 from two development properties that opened in August 2006 were offset by the
loss of one management contract June 2006.
General and administrative costs for our third-party management services segment increased
$598 to $3,653 for the nine months ended September 30, 2006. The increase reflects incremental
salaries and costs related to the additional management contracts and intersegment management
revenue volume noted above.
Nonoperating expenses
Nonoperating expenses increased $12,176 to $48,735 for the nine months ended September 30,
2006. The increase is driven by approximately $9,500 of additional interest expense and $3,700 of
additional depreciation and amortization related mainly to the acquisition of the 13 properties
from Place properties in January 2006 and a full nine months of expense in the current period
related to acquisitions made during 2005. These increases were partially offset by a $1,100 decline
in amortization of deferred financing costs as a result of prepayment penalties on early retirement
of debt that was incurred in the first quarter of 2005. We anticipate continued increases in
interest expense in 2006 over 2005 as a result of recent and anticipated acquisition as well as the
potential of continued increases in interest rates.
Other corporate expenses
Other corporate expenses represent general and administrative expenses that are not allocated
to the third-party development consulting and third-party management services segments.
Intersegment management fees are charged to the student housing leasing segment so it is not
allocated any corporate expenses. For the nine months ended September 30, 2006 other corporate
expenses were $3,979, an increase of $2,383 over the prior year. The increase is a result of
approximately $638 related to the first year costs of implementing the Sarbanes-Oxley Act of 2002
as well as increased payroll and other expenses resulting from changes necessary to appropriately
support growth and the requirements of being a public company, including compliance with
Sarbanes-Oxley.
Noncash compensation expense for the nine months ended September 30, 2006 was $591 compared to
$4,631 for the nine months ended September 30, 2005. Noncash compensation includes the amortization
of restricted stock awards over their vesting period and the applicable cost of any awards that
were immediately vested upon date of grant. The decrease of $4,040 from 2005 is due to a one-time
charge related to our Offering that occurred in January 2005 when fully vested awards were granted.
26
Results of Operations for the Three Months Ended September 30, 2006 and 2005
The following table presents the results of operations for Education Realty Trust, Inc. for
the three months ended September 30, 2006 and 2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2006 |
|
|
Three months ended September 30, 2005 |
|
|
|
|
|
|
|
Third-Party |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third-Party |
|
|
|
|
|
|
|
|
|
|
|
|
Student |
|
|
Development |
|
|
Third-Party |
|
|
|
|
|
|
|
|
|
|
Student |
|
|
Development |
|
|
Third-Party |
|
|
|
|
|
|
|
|
|
Housing |
|
|
Consulting |
|
|
Management |
|
|
|
|
|
|
|
|
|
|
Housing |
|
|
Consulting |
|
|
Management |
|
|
|
|
|
|
|
|
|
Leasing |
|
|
Services |
|
|
Services |
|
|
Adjustments |
|
|
Total |
|
|
Leasing |
|
|
Services |
|
|
Services |
|
|
Adjustments |
|
|
Total |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student housing
leasing revenue |
|
$ |
19,520 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
19,520 |
|
|
$ |
20,145 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
20,145 |
|
Student housing
food service
revenue |
|
|
895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
895 |
|
|
|
893 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
893 |
|
Other leasing
revenue |
|
|
3,709 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,709 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third-party
development
consulting services |
|
|
|
|
|
|
856 |
|
|
|
|
|
|
|
|
|
|
|
856 |
|
|
|
|
|
|
|
791 |
|
|
|
|
|
|
|
|
|
|
|
791 |
|
Third-party
management revenue |
|
|
|
|
|
|
|
|
|
|
653 |
|
|
|
|
|
|
|
653 |
|
|
|
|
|
|
|
|
|
|
|
511 |
|
|
|
|
|
|
|
511 |
|
Intersegment
revenues |
|
|
|
|
|
|
|
|
|
|
874 |
|
|
|
(874 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
809 |
|
|
|
(809 |
) |
|
|
|
|
Operating expense
reimbursements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,146 |
|
|
|
2,146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,474 |
|
|
|
1,474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
24,124 |
|
|
|
856 |
|
|
|
1,527 |
|
|
|
1,272 |
|
|
|
27,779 |
|
|
|
21,038 |
|
|
|
791 |
|
|
|
1,320 |
|
|
|
665 |
|
|
|
23,814 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student housing
leasing operations |
|
|
13,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,422 |
|
|
|
13,570 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,570 |
|
Student housing
food service
operations |
|
|
844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
844 |
|
|
|
878 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
878 |
|
General and
administrative |
|
|
|
|
|
|
616 |
|
|
|
1,382 |
|
|
|
|
|
|
|
1,998 |
|
|
|
|
|
|
|
693 |
|
|
|
1,573 |
|
|
|
|
|
|
|
2,266 |
|
Intersegment
expenses |
|
|
874 |
|
|
|
|
|
|
|
|
|
|
|
(874 |
) |
|
|
|
|
|
|
809 |
|
|
|
|
|
|
|
|
|
|
|
(809 |
) |
|
|
|
|
Reimbursable
operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,146 |
|
|
|
2,146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,474 |
|
|
|
1,474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating
expenses |
|
|
15,140 |
|
|
|
616 |
|
|
|
1,382 |
|
|
|
1,272 |
|
|
|
18,410 |
|
|
|
15,257 |
|
|
|
693 |
|
|
|
1,573 |
|
|
|
665 |
|
|
|
18,188 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating
income (loss) |
|
|
8,984 |
|
|
|
240 |
|
|
|
145 |
|
|
|
|
|
|
|
9,369 |
|
|
|
5,781 |
|
|
|
98 |
|
|
|
(253 |
) |
|
|
|
|
|
|
5,626 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonoperating
expenses(1) |
|
|
16,579 |
|
|
|
(16 |
) |
|
|
|
|
|
|
|
|
|
|
16,563 |
|
|
|
12,901 |
|
|
|
(6 |
) |
|
|
(9 |
) |
|
|
|
|
|
|
12,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss)
before equity in
earnings of
unconsolidated
entities, income
taxes and minority
interest |
|
|
(7,595 |
) |
|
|
256 |
|
|
|
145 |
|
|
|
|
|
|
|
(7,194 |
) |
|
|
(7,120 |
) |
|
|
104 |
|
|
|
(244 |
) |
|
|
|
|
|
|
(7,260 |
) |
Equity in earnings
of unconsolidated
entities |
|
|
(14 |
) |
|
|
162 |
|
|
|
|
|
|
|
|
|
|
|
148 |
|
|
|
|
|
|
|
332 |
|
|
|
|
|
|
|
|
|
|
|
332 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss)
before taxes and
minority interest(2) |
|
$ |
(7,609 |
) |
|
$ |
418 |
|
|
$ |
145 |
|
|
$ |
|
|
|
$ |
(7,046 |
) |
|
$ |
(7,120 |
) |
|
$ |
436 |
|
|
$ |
(244 |
) |
|
$ |
|
|
|
$ |
(6,928 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Nonoperating expenses include interest expense, interest income
and exit fees on early payment of debt, amortization of deferred
financing costs, depreciation, and amortization of intangibles. |
|
(2) |
|
The following is a reconciliation of the reportable segments
net loss before income taxes and minority interest to the
Trusts consolidated net loss before income taxes and
minority interest. |
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Net loss before income taxes and minority interest for reportable segments |
|
$ |
(7,046 |
) |
|
$ |
(6,928 |
) |
Unallocated corporate amounts: |
|
|
|
|
|
|
|
|
Noncash compensation charge for PIUs and restricted stock |
|
|
(63 |
) |
|
|
(257 |
) |
Other corporate expenses |
|
|
(1,184 |
) |
|
|
(276 |
) |
|
|
|
|
|
|
|
|
Net loss before income taxes and minority interest |
|
$ |
(8,293 |
) |
|
$ |
(7,461 |
) |
|
|
|
|
|
|
|
|
27
Student housing leasing
Overall average physical occupancy and average Revenue per Available Bed (RevPAB) for the
three months ended September 30, 2006 and 2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months |
|
|
Three months |
|
|
|
|
|
|
ended |
|
|
ended |
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
Difference |
|
Occupancy |
|
|
|
|
|
|
|
|
|
|
|
|
Physical (1) |
|
|
92.0 |
% |
|
|
92.0 |
% |
|
|
|
% |
Economic (2) |
|
|
80.8 |
% |
|
|
82.8 |
% |
|
|
(2.0 |
)% |
NarPAB (3) |
|
$ |
298 |
|
|
$ |
304 |
|
|
$ |
(6 |
) |
Other income per avail. bed (4) |
|
$ |
25 |
|
|
$ |
41 |
|
|
$ |
(16 |
) |
RevPAB (5) |
|
$ |
323 |
|
|
$ |
345 |
|
|
$ |
(22 |
) |
Operating expense per bed (6) |
|
$ |
222 |
|
|
$ |
232 |
|
|
$ |
(10 |
) |
Operating margin |
|
|
31.2 |
% |
|
|
32.6 |
% |
|
|
(1.4 |
)% |
Design Beds (7) |
|
|
60,375 |
|
|
|
58,503 |
|
|
|
1,872 |
|
(1) |
|
Physical occupancy represents a weighted average of the month end occupancies for the respective period. |
|
(2) |
|
Economic occupancy represents the effective occupancy calculated by taking net apartment rent accounted for
on a GAAP basis for the respective period divided by market rent for the respective period. |
|
(3) |
|
NarPAB represents GAAP net apartment rent for the respective period divided by the sum of the design beds in
the portfolio for each of the included months. Does not include food service revenue or other leasing
revenue. |
|
(4) |
|
Represents other GAAP-based income for the respective period divided by the sum of the design beds in the
portfolio for each of the included months. Other income includes service/app fees, late fees, termination
fees, parking fees, transfer fees, damage recovery, utility recovery, and other misc. |
|
(5) |
|
Represents total revenue (net apartment rent plus other income) for the respective period divided by the sum
of the design beds in the portfolio for each of the included months. |
|
(6) |
|
Represents property-level operating expense excluding overhead allocation, depreciation and amortization
divided by the sum of the design beds for each of the included months. |
|
(7) |
|
Represents the sum of the monthly design beds in the portfolio during the period, excluding Place properties. |
Revenue from student housing leasing was $24,124 for the three months ended
September 30, 2006. This represents an increase of $3,086 or 14.7% from the same period in 2005.
The majority of the increase is represented by other leasing revenue of $3,709, related to the
leasing of 13 properties to Place Properties in January 2006. This increase in other leasing
revenue was partially offset by a $600 decline in student leasing revenue. The decline in student
leasing revenue represents the aggregate of an approximate $600 reduction in damage billing revenue
in 2006 and an approximate $1,000 reduction due to lease term changes at certain acquired
properties that resulted in a slight increase in the vacancy days during the turn period in August
2006. The lease term changes did not impact the annual economic value
of the leases, but only impacted the timing of revenue recognition. Both of these declines were minimized by an approximate $500 increase as a result of higher
rates and a $600 increase driven by acquisition growth that is evidenced by a 1,872 increase in our
aggregate design beds quarter over quarter.
Operating expenses at our student housing communities decreased $117 to $15,140 for the three
months ended September 30, 2006. The additional 1,872 of aggregate beds due to acquisition
accounted for an approximate $415 increase quarter over quarter, while higher intersegment expenses
related to those same beds accounted for an increase of $65. These increases were more than offset
by lower costs per bed in the current quarter, including turn costs per bed that improved on a
same-community basis from $140 per bed for the quarter ended September 30, 2005 to $124 per bed for
the same period in 2006.
The net impact of the growth in revenue and decline in expenses noted above was a 55.4% rise
in net operating income for the segment to $8,984 for the three months ended September 30, 2006. As
noted a majority of the growth came from the 13 property acquisition from Place Properties in
January 2006, which drove operating margins up from 27.5% to 37.2% for the segment. However,
operating margins at our owned and operated properties, which excludes the 13 properties leased to
Place Properties, was down 140 basis points to 31.2%, lower student housing leasing
revenue outweighed the improvement in operating expenses, which went from $232 per bed for the
quarter ended September 30, 2005 to $222 per bed in the current quarter.
28
Third-party development consulting services
Third-party development consulting services revenue increased by $65 to $856 for the three
months ended September 30, 2006. The increase is a result of higher project volume in the third
quarter of 2006 compared to 2005. During the third quarter of 2006 we were engaged in three active
development projects representing 2,973 beds and recognized construction oversight fees on three
additional projects. During the same period in 2005 we were only participating directly in two
projects, recognized $306 of purchasing fees related to a third project and recognized construction
oversight fees on two additional projects.
Equity in earnings of unconsolidated entities decreased $170 to $162 for the three months
ended September 30, 2006. The decline reflects a general shift to providing development consulting
services directly to the customer rather than utilizing joint venture relationships. In the third
quarter 2005 we had four active projects through joint ventures where as we only had two continuing
projects in the third quarter of 2006 and two projects that were completed during the quarter.
General and administrative costs in the third-party development consulting services segment
remained relatively flat at $616 for the three months ended September 30, 2006 compared to $693 for
the same period in 2005.
Third-party management services
Third-party management services revenues increased by $207 to $1,527 for the three months
ended September 30, 2006. Growth in our owned portfolio quarter over quarter contributed to $65 of
the increase by way of intersegment revenue. Aggregate design beds in our owned portfolio for the
three months ended September 30, 2006 were 60,375 which is an increase of 1,872 aggregate beds from
the same period in the prior year. Third-party management fee revenue increased $142 to $653 for
the three months ended September 30, 2006. Approximately $100 of the increase relates to management
support fees earned on two development projects during the preopening and preleasing phases of each
project. The remaining increase is a result of a full quarter of revenue in 2006 on three new
managed properties that opened in August and September of 2005, the addition of a new management
contract in September 2005, the opening of a development community in May 2006, and the opening of
two additional development properties in August of 2006 offset by the loss of one management
contract in June 2006.
General and administrative costs for our third-party management services segment declined $191
to $1,382 for the three months ended September 30, 2006 as a result of lower travel and other costs
in the period.
Nonoperating expenses
Nonoperating expenses increased $3,677 to $16,563 for the three months ended September 30,
2006. The increase is driven by approximately $2,800 of additional interest expense and $950 of
additional depreciation and amortization related mainly to the acquisition of the 13 properties
from Place Properties in January 2006. We anticipate continued increases in interest expense in
2006 over 2005 as a result of recent and anticipated acquisitions as well as the potential of
continued increases in interest rates.
Other corporate expenses
Other corporate expenses for the three months ended September 30, 2006 were $1,184 compared to
$276 for the same period in 2005. The increase is a result of approximately $200 related to the
first year costs of implementing Sarbanes-Oxley, about $310 of additional payroll costs, $70 of
additional depreciation and amortization as well as increased other expenses resulting from changes
necessary to appropriately support growth and the requirements of being a public company. Noncash
compensation expense decreased $194 to $63 for the three months ended September 30, 2006 primarily
due to the timing of awards.
Funds from Operations
As defined by the National Association of Real Estate Investment Trusts (NAREIT), funds from
operations (FFO) represents net income (loss) computed in accordance with GAAP, excluding gains
(or losses) from sales of property, plus real estate related depreciation and amortization and
after adjustments for unconsolidated partnerships and joint ventures. Adjustments for
unconsolidated partnerships and joint ventures will be calculated to reflect funds from operations
on the same basis. We present FFO because we consider it an important supplemental measure of our
operating performance and believe it is frequently used by securities analysts, investors and other
interested parties in the evaluation of REITs, many of which present FFO when reporting their
results. FFO is intended to exclude GAAP historical cost depreciation and amortization of real
estate and related assets, which assumes that the value of real estate diminishes ratably over
time. Historically, however, real estate values have risen or fallen with market conditions.
Because FFO excludes depreciation and amortization unique to real estate, gains and losses from
property dispositions and extraordinary items, it provides a performance measure that, when
compared year over year, reflects the impact to operations from trends in occupancy rates, rental
rates, operating costs, development activities and interest costs, providing perspective not
immediately apparent from net income.
29
We compute FFO in accordance with standards established by the Board of Governors of NAREIT in
its March 1995 White Paper (as
amended in November 1999 and April 2002), which may differ from the methodology for calculating FFO
utilized by other equity REITs and, accordingly, may not be comparable to such other REITs.
Further, FFO does not represent amounts available for managements discretionary use because of
needed capital replacement or expansion, debt service obligations or other commitments and
uncertainties. FFO should not be considered as an alternative to net income (loss) (computed in
accordance with GAAP) as an indicator of our financial performance or to cash flow from operating
activities (computed in accordance with GAAP) as an indicator of our liquidity, nor is it
indicative of funds available to fund our cash needs, including our ability to make distributions.
The following table presents a reconciliation of our FFO to our net loss for the three and
nine months ended September 30, 2006 and 2005 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Net loss |
|
$ |
(8,189 |
) |
|
$ |
(7,184 |
) |
|
$ |
(11,483 |
) |
|
$ |
(17,559 |
) |
Plus student housing property
depreciation and amortization of lease
intangibles |
|
|
9,111 |
|
|
|
8,159 |
|
|
|
27,179 |
|
|
|
23,438 |
|
Plus equity portion of real estate
depreciation and amortization on equity
investees |
|
|
5 |
|
|
|
|
|
|
|
5 |
|
|
|
|
|
Plus minority interest expense/(benefit) |
|
|
(485 |
) |
|
|
(617 |
) |
|
|
(550 |
) |
|
|
(1,384 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds from operations |
|
$ |
442 |
|
|
$ |
358 |
|
|
$ |
15,151 |
|
|
$ |
4,495 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidity and Capital Resources
Revolving Credit Facility and Other Short Term Loans
On March 31, 2006 the Operating Partnership amended and restated the revolving
credit facility (the Amended Revolver) dated January 31, 2005 in the amount of $100 million and
entered into a senior unsecured term loan facility (the Term Loan) in the amount of $50,000. The
Trust serves as the guarantor for any funds borrowed by the Operating Partnership under the Amended
Revolver and the Term Loan. Additionally, the Amended Revolver is secured by a cross
collateralized, fist mortgage lien on all mortgaged properties. The Term Loan is not directly
secured by a lien but has the benefit of a negative pledge on the equity interest in the mortgaged
properties. The Amended Revolver and Term Loan have a term of three years and mature on March 31,
2009, provided that the Operating Partnership may extend the maturity date for one year subject to
certain conditions. At September 30, 2006, there was $20,800 outstanding under the Amended Revolver
and $50,000 outstanding under the Term Loan. The Term Loan is interest only; hence, the entire
outstanding balance of $50,000 is due on the maturity date.
Availability under the Operating Partnerships Amended Revolver is limited to a borrowing
base availability equal to the lesser of (i) 65% of the property asset value of the properties
securing the facility and (ii) the loan amount which would produce a debt service coverage ratio of
no less than 1.30, with debt service based on the greater of two different sets of conditions
specified in the amended credit agreement.
The Operating Partnerships Amended Revolver and Term Loan contain customary affirmative and
negative covenants and do contain financial covenants that, among other things, require the Trust
and its subsidiaries to maintain certain minimum ratios of EBITDA (earnings before payment or
charges of interest, taxes, depreciation, amortization or extraordinary items) as compared to
interest expense and total fixed charges. The financial covenants also include consolidated net
worth and leverage ratio tests.
The Trust is prohibited from making distributions that exceed $1.20 per share unless prior to
and after giving effect to such action the total leverage ratio is less than or equal to 60%. The
amount of restricted payments permitted may be increased as long as either of the following
conditions is met: (a) after giving effect to the increased Restricted Payment, the Total Leverage
Ratio shall remain less than or equal to 60%; or (b) the increased Restricted Payment, when
considered along with all other restricted payments for the last 3 quarters, does not exceed (i)
100% of Funds From Operations for the applicable period through and including December 31, 2006,
and (ii) 95% of Funds From Operations for the applicable period thereafter.
The interest rate per annum applicable to the Amended Revolver is, at the Operating
Partnerships option, equal to a base rate or LIBOR plus an applicable margin based upon our
leverage. The interest rate per annum applicable to the Term Loan is, at the Operating
Partnerships option, equal to a base rate plus 1.25% or LIBOR plus 2.75%.
30
Liquidity outlook and capital requirements
At September 30, 2006 we had $3,900 of cash, a decrease of approximately $57,762 from December
31, 2005. This decrease is a result of funding the purchase of the 13 property portfolio from Place
Properties in January 2006. In addition to the decline in cash balances we added approximately
$169,460 of debt during the first nine months of 2006 due to the assumption of $98,660 of mortgage
debt in the Place Properties acquisition as well as $70,800 drawn on our line of credit and term
loan to completely fund the Place Properties acquisition, our June 15th acquisition of The Players
Club community in Statesboro, GA, and certain working capital needs.
Our current liquidity needs include funds for distributions to our stockholders, including
those required to maintain our REIT status and satisfy our current distribution policy, funds for
capital expenditures, funds for debt repayment and, potentially, funds for new property
acquisitions. We expect to meet our short-term liquidity requirements generally through net cash
provided by operations with the exception of distributions which for the remainder of the year are
anticipated to slightly outpace funds from operations. We expect our long-term liquidity
requirements to be satisfied through cash generated by operations and external sources of debt and
equity capital, including public capital markets as well as private sources of capital. To the
extent that we are unable to maintain our revolving credit facility or an equivalent source of debt
financing, we will be more reliant upon the public and private capital markets to meet our
long-term liquidity needs.
During the third quarter the SEC declared effective our newly established dividend
reinvestment and direct stock purchase plan. The plan allows existing investors to reinvest
dividends and allows both existing and new investors to purchase shares of EDR directly from the
company at a discount. The plan provides us with another avenue to quickly and continually raise
smaller amounts of capital.
Based on our closing share price of $14.76 on September 30, 2006 our total enterprise value
was $902,318. With total debt outstanding on September 30, 2006 of $493,526 our current debt to
total enterprise value was 54.7%. We believe our current capital structure and current FFO targets
along with the $79,200 remaining availability under our Amended Revolver leaves us with sufficient
liquidity and access to financing to fund current working capital needs and make future student
housing investments. Current market conditions and rising interest rates are expected to make
additional capital more expensive for us and could impact our access to the capital markets. There
can be no assurance that we will be able to obtain financing under satisfactory conditions or that
we will make any investments in additional properties.
We intend to invest in additional properties only as suitable opportunities arise. In the
short term, we intend to fund acquisitions with working capital and borrowings under our $100
million revolving credit facility. We intend to finance property acquisitions over the longer term
with the proceeds from additional issuances of common or preferred stock, debt financing and
issuances of units of our Operating Partnership.
We anticipate that our existing working capital and cash from operations will be adequate to
meet our liquidity requirements for at least the next three months.
Predevelopment expenditures
Our third-party development consulting activities have historically required us to fund
predevelopment expenditures such as architectural fees, permits, and deposits. Because the closing
of a development projects financing is often subject to third-party delay, we cannot always
predict accurately the liquidity needs of these activities. We frequently incur these
predevelopment expenditures before a financing commitment has been obtained and, accordingly, bear
the risk of the loss of these predevelopment expenditures if financing cannot ultimately be
arranged on acceptable terms. We typically obtain from the project owner a guarantee of repayment
of these predevelopment expenditures, but no assurance can be given that we would be successful in
collecting the amount guaranteed in the event that a project financing is not obtained. In the
event that we develop properties for ownership by the Trust our exposure and capital requirements
related to development activities will increase dramatically.
Long-term liquidity requirements
Our long-term liquidity requirements consists primarily of funds necessary to pay scheduled
debt maturities, renovations, expansion and other non-recurring capital expenditures that need to
be made periodically to our properties. We expect to meet these needs through existing working
capital, cash provided by operations, additional borrowings under our Amended Revolver, and the
issuance of equity instruments, including common stock, or additional or replacement debt, if
market conditions permit. We believe these sources of capital will be sufficient to provide for our
long-term capital needs.
Our Amended Revolver and Term Loan are material sources to satisfy our long-term liquidity
requirements. As such compliance with their financial and operating debt covenants is material to
our liquidity. Non-compliance with the covenants would have a material adverse effect on our
financial condition and liquidity.
31
Contractual obligations
The following table summarizes our contractual obligations as of September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than |
|
|
1-3 |
|
|
3-5 |
|
|
After 5 |
|
|
|
|
|
|
1 Year |
|
|
Years |
|
|
Years |
|
|
Years |
|
|
Total |
|
|
|
(In thousands) |
|
Contractual Obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Debt Obligations(1) |
|
$ |
21,901 |
|
|
$ |
421,688 |
|
|
$ |
1,835 |
|
|
$ |
48,102 |
|
|
$ |
493,526 |
|
Contractual Interest Obligations(2) |
|
|
6,479 |
|
|
|
67,080 |
|
|
|
6,373 |
|
|
|
2,454 |
|
|
|
82,386 |
|
Operating Lease Obligations(3) |
|
|
125 |
|
|
|
1,783 |
|
|
|
1,510 |
|
|
|
|
|
|
|
3,418 |
|
Capital Reserve Obligations(4) |
|
|
1,646 |
|
|
|
3,032 |
|
|
|
1,302 |
|
|
|
1,170 |
|
|
|
7,150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
30.151 |
|
|
$ |
493,583 |
|
|
$ |
11,020 |
|
|
$ |
51,726 |
|
|
$ |
586,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes required monthly principal amortization and amounts due at maturity on first mortgage
debt secured by student housing properties and principal amortization on the Amended Revolver
and the Term Loan. The first mortgage debt does not include $2,454 of
unamortized debt premium. |
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(2) |
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Includes contractual interest payments. |
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(3) |
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Includes future minimum lease commitments under operating lease obligations. |
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(4) |
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Includes future annual contributions to the capital reserve as required by certain mortgage debt. |
At September 30, 2006, the outstanding mortgage debt had a weighted average
interest rate of 5.85% and carried an average term to maturity of 2.9 years.
In addition to mortgage debt we had $50,000 outstanding on a three year variable rate term
loan and $20,800 outstanding on the Amended Revolver. The average interest rate on the term loan
and line of credit at September 30, 2006 was 7.83%.
As of September 30, 2006, thirteen of our properties were unencumbered by mortgage debt. Seven
of these thirteen properties have, however, been pledged as collateral against any borrowing under
our $100,000 credit facility.
Distributions
We are required to distribute 90% of our REIT taxable income (excluding capital gains) on an
annual basis in order to qualify as a REIT for federal income tax purposes. Accordingly, we intend
to make, but are not contractually bound to make, regular quarterly distributions to holders of our
common stock. All such distributions are at the discretion of our board of directors. We may be
required to use borrowings under our revolving credit facility, if necessary, to meet REIT
distribution requirements and maintain our REIT status. We consider market factors and our
performance in addition to REIT requirements in determining distribution levels.
On October 10, 2006 our board of directors declared a third quarter distribution of $0.205 per
share of common stock for the quarter ending on September 30, 2006. The distribution is payable on
November 7, 2006 to stockholders of record at the close of business on October 24, 2006.
Off-Balance Sheet Arrangements
On May 10, 2006, the Operating Partnership guaranteed $23,200 of construction debt held by
University Village-Greensboro LLC in order to receive a 25% ownership stake in the venture with
College Park Apartments. The construction debt is expected to be refinanced in September of 2008
after construction is complete and the student housing community is occupied. The Operating
Partnership will not guarantee the debt after the construction loan is refinanced.
Inflation
Our student housing leases typically do not have terms that extend beyond 12 months.
Accordingly, although on a short-term basis we would be required to bear the impact of rising costs
resulting from inflation, we have the opportunity to raise rental rates at least annually to offset
such rising costs. However, our ability to raise rental rates may be limited by a weak economic
environment, increased competition from new student housing in our primary markets or a reduction
in student enrollment at our principal universities.
32
Recent Developments
On October 10, 2006 our board of directors declared a third quarter distribution of $0.205 per
share of common stock for the quarter
ending on September 30, 2006. The distribution is payable on November 7, 2006 to stockholders of
record at the close of business on October 24, 2006.
On October 16, 2006 the Trust issued 54,083 shares of common stock under the direct stock
purchase and dividend reinvestment plan. The common stock was issued at a price of $14.7925 per
share.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Our future income, cash flows and fair values relevant to financial instruments are dependent
upon prevailing market interest rates. Market risk refers to the risk of loss from adverse changes
in market prices and interest rates. The Trusts interest rate risk objective is to limit the
impact of interest rate fluctuations on earnings and cash flows and to lower its overall borrowing
costs. To achieve this objective, the Trust manages its exposure to fluctuations in market interest
rates for its borrowings through the use of fixed rate debt instruments to the extent that
reasonably favorable rates are obtainable.
For fixed rate debt, interest rate changes affect the fair market value but do not impact net
income to common shareholders or cash flows. Conversely, for floating rate debt, interest changes
generally do not affect the fair market value but do impact net income to common stockholders and
cash flows, assuming other factors are held constant. At September 30, 2006 we had fixed rate debt
of $422,726. Holding other variables constant a 100 basis point increase in interest rates would
cause an $10,800 decline in the fair value for our fixed rate debt. Conversely, a 100 basis point
decrease in interest rates would cause an $11,272 increase in the fair value of our fixed rate
debt. At September 30, 2006, all of the outstanding principal amounts of our mortgage notes payable
on the properties we own have fixed interest rates with a weighted average rate of 5.85% and an
average term to maturity of 2.9 years.
At September 30, 2006, we had a $50,000 variable rate term loan and $20,800 drawn on the
Amended Revolver. The interest rate per annum applicable to the Amended Revolver is, at the
Operating Partnerships option, equal to a base rate or LIBOR plus an applicable margin based upon
our leverage. The interest rate per annum applicable to the term loan is, at the Operating
Partnerships option, equal to a base rate plus 1.25% or LIBOR plus 2.75%. For the three and nine
months ended September 30, 2006, the term loan had average
interest rates of 7.83% and 7.38%,
respectively. Holding other variables constant a 100 basis point increase in interest rates would
cause a $708 decrease annually in net income available to our common stockholders and a 100 basis
point decrease in interest rates would cause a $708 increase annually in net income available to
our common stockholders.
Approximately 86% of the Trusts outstanding debt was subject to fixed rates at September 30,
2006. We may in the future use derivative financial instruments to manage, or hedge, interest rate
risks related to such variable rate borrowings. We do not, and do not expect to, use derivatives
for trading or speculative purposes, and we expect to enter into contracts only with major
financial institutions .
Item 4. Controls and Procedures.
Managements Evaluation of Disclosure Controls and Procedures
The Trust maintains disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the Trusts filings under the Securities Exchange Act of
1934 (the Exchange Act) is recorded, processed, summarized and reported within the time periods
specified in the SECs rules and forms, and to ensure that such information is accumulated and
communicated to the Companys management, including its Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required disclosure.
Our management, with the participation of our principal executive officer and financial
officers, has evaluated the effectiveness of the design and operation of the Trusts disclosure
controls and procedures pursuant to Rule 13a-15(e) and 15d-15(e) of the Exchange Act. Based on
their evaluation as of September 30, 2006, our Chief Executive Officer and Chief Financial Officer
have concluded that the Trusts disclosure controls and procedures are effective in timely alerting
them to material information relating to the Company that is required to be included in the Trusts
Exchange Act filings.
Changes in Internal Control Over Financial Reporting
During the period covered by this quarterly report on Form 10-Q, there have not been any
changes to our internal control over financial reporting that have materially affected, or are
reasonably likely to affect, our internal control over financial reporting.
In connection with the requirements of Section 404 of the Sarbanes Oxley Act of 2002, we are
in the process of reviewing, documenting and testing our systems of internal control over financial
reporting in order to provide the basis for our evaluation and report on these systems as of the
end of our fiscal year.
33
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
In the normal course of business, we are subject to claims, lawsuits, and legal proceedings.
While it is not possible to ascertain the ultimate outcome of such matters, in managements
opinion, the liabilities, if any, in excess of amounts provided or covered by insurance, are not
expected to have a material adverse effect on our financial position, results of operations or
liquidity.
Item 1A. Risk factors
The discussion of the Trusts business and operations should be read together with the risk
factors contained in Item 1A of our annual report on Form 10-K for the year ended December 31,
2005, which describes various risks and uncertainties to which we are or may be subject. These
risks and uncertainties have the potential to affect the Trusts business, financial condition,
results of operations, cash flows and prospects in a material adverse manner. As of September 30,
2006, there have been no material changes to the risk factors set forth in the Trusts annual
report for the year ended December 31, 2005.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the three months ended September 30, 2006, we issued 2,000 restricted shares, which
vested immediately upon issue, to our independent board members and 5,000 profits interest units to
various employees of the Trust at the discretion of our Board. The issuance of such shares was made
in reliance upon an exemption from registration under section 4(2) of the Securities Act.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits.
The exhibits listed on the accompanying Exhibit Index are filed or incorporated by reference (as
stated therein) as part of this Quarterly Report on Form 10-Q.
34
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.
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EDUCATION REALTY TRUST, INC.
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Date: November 13, 2006 |
By /s/ Paul O. Bower
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Paul O. Bower |
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President, Chief Executive Officer and
Chairman of the Board of Directors
(Principal Executive Officer) |
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Date: November 13, 2006 |
By /s/ Randall H. Brown
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Randall H. Brown |
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Executive Vice President, Chief Financial
Officer, Treasurer and Secretary
(Principal Financial Officer) |
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Date: November 13, 2006 |
By /s/ J. Drew Koester
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J. Drew Koester |
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Vice President and Chief Accounting Officer
(Principal Accounting Officer) |
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35
EXHIBIT INDEX
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3.1 |
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Second Articles of Amendment and Restatement of Education
Realty Trust, Inc. (Incorporated by reference to Exhibit 3.1
to the Companys Amendment No. 2 to its Registration
Statement on Form S-11 (File No. 333-1192364), filed on
December 10, 2004.) |
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3.2 |
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Bylaws of Education Realty Trust, Inc. (Incorporated by
reference to Exhibit 3.2 to the Companys Registration
Statement on Form S-11 (File No. 333-119264), filed on
September 24, 2004.) |
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4.1 |
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Form of Certificate for Common Stock of Education Realty
Trust, Inc. (Incorporated by reference to Exhibit 4.1 to the
Companys Amendment No. 5 to its Registration Statement on
Form S-11 (File No. 333-1192364), filed on January 24,
2005.) |
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4.2 |
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Form of Education Realty Trust, Inc. Common Stock Purchase
Warrant dated January 31, 2005, issued to JPI Investment
Company, L.P. (Incorporated by reference to Exhibit 4.2 to
the Companys Registration Statement on Form S-11 (File No.
333-119264), filed on September 24, 2004.) |
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4.3 |
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Form of Registration Rights Agreement dated January 31,
2005, by and among Education Realty Trust, Inc., Education
Realty Operating Partnership, LP, JPI Investment Company,
L.P. and the unit holders whose names are set forth on the
signature pages thereto. (Incorporated by reference to
Exhibit 4.3 to the Companys Registration Statement on Form
S-11 (File No. 333-119264), filed on September 24, 2004.) |
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10.1** |
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Form of Restricted Stock Award Agreement (Filed as Exhibit
10.1 to the Registrants Current Report on Form 8-K filed on
August 17, 2006 and incorporated herein by reference). |
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Exhibit 31.1
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Certification of Principal Executive Officer pursuant to
Rule 13a-14(a) of the Securities Exchange Act, as amended. |
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Exhibit 31.2
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Certification of Principal Financial Officer pursuant to
Rule 13a-14(a) of the Securities Exchange Act, as amended. |
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Exhibit 32.1*
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Section 906 Certification of Chief Executive Officer |
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Exhibit 32.2*
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Section 906 Certification of Chief Financial Officer |
* |
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In accordance with Release No. 34-47986, this Exhibit is hereby
furnished to the SEC as an accompanying document and is not deemed
filed for purposes of Section 18 of the Securities Exchange Act of
1934 or otherwise subject to the liabilities of that Section, nor
shall it be deemed incorporated by reference into any filing under the
Securities Act of 1933. |
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** |
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Management contract or compensatory plan or arrangement. |