As of November 4, 2010, the latest practicable date, the Registrant had outstanding 58,607,420 shares of common stock, $.01 par value per share.

 

 

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Item 1. Financial Statements.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share and per share data)

		September 30, 2010				December 31, 2009
		(Unaudited)
ASSETS
Assets:
Student housing properties, net		$	708,496			$	749,884
Assets under development			446				—
Corporate office furniture, net			869				1,118
Cash and cash equivalents			27,960				31,169
Restricted cash			6,488				4,579
Student contracts receivable, net			379				386
Receivable from affiliate			—				18
Management fee receivable from third party			395				277
Goodwill and other intangibles, net			3,070				3,073
Other assets			21,663				14,109
Total assets		$	769,766			$	804,613
LIABILITIES AND EQUITY
Liabilities:
Mortgage and construction loans, net of unamortized premium/discount		$	398,087			$	406,365
Accounts payable			287				235
Accrued expenses			19,721				11,423
Deferred revenue			14,499				10,346
Total liabilities			432,594				428,369
Commitments and contingencies (see Note 6)			—				—
Redeemable noncontrolling interests			10,035				11,079
Equity:
Education Realty Trust, Inc. stockholders’ equity:
Common stock, $.01 par value per share, 200,000,000 shares authorized, 58,347,249 and 56,705,605 shares issued and outstanding at September 30, 2010 and December 31, 2009, respectively			584				567
Preferred stock, $0.01 par value per share, 50,000,000 shares authorized, no shares issued and outstanding			—				—
Additional paid-in capital			415,429				410,455
Accumulated deficit			(88,876	)			(48,636	)
Total Education Realty Trust, Inc. stockholders’ equity			327,137				362,386
Noncontrolling interest			—				2,779
Total equity			327,137				365,165
Total liabilities and equity		$	769,766			$	804,613

 

See accompanying notes to the condensed consolidated financial statements.

 

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except share and per share data)

(Unaudited)

		Nine months				Nine months
		ended				ended
		September 30,				September 30,
		2010				2009
Revenues:
Student housing leasing revenue		$	84,628			$	82,962
Other leasing revenue			77				—
Third-party development consulting services			1,675				5,275
Third-party management services			2,335				2,370
Operating expense reimbursements			11,017				7,749
Total revenues			99,732				98,356
Operating expenses:
Student housing leasing operations			44,702				44,491
General and administrative			11,661				11,738
Depreciation and amortization			22,592				21,501
Loss on impairment			33,610				—
Reimbursable operating expenses			10,101				7,749
Total operating expenses			122,666				85,479
Operating income (loss)			(22,934	)			12,877
Nonoperating expenses:
Interest expense			16,653				18,825
Amortization of deferred financing costs			974				749
Interest income			(402	)			(334	)
Gain on extinguishment of debt			—				(830	)
Total nonoperating expenses			17,225				18,410
Loss before equity in losses of unconsolidated entities, income taxes and discontinued operations			(40,159	)			(5,533	)
Equity in losses of unconsolidated entities			(242	)			(6	)
Loss before income taxes and discontinued operations			(40,401	)			(5,539	)
Income tax expense			268				1,203
Loss from continuing operations			(40,669	)			(6,742	)
Loss from discontinued operations			—				(21	)
Net loss			(40,669	)			(6,763	)
Less: Net loss attributable to the noncontrolling interest			(429	)			(43	)
Net loss attributable to Education Realty Trust, Inc.		$	(40,240	)		$	(6,720	)
Earnings per share information:
Loss attributable to Education Realty Trust, Inc. common stockholders per share — basic and diluted:
Continuing operations		$	(0.70	)		$	(0.19	)
Discontinued operations			—				—
Net loss attributable to Education Realty Trust, Inc. common stockholders per share		$	(0.70	)		$	(0.19	)
Weighted average shares of common stock outstanding – basic			57,120,291				35,013,814
Weighted average shares of common stock outstanding – diluted			57,120,291				35,013,814
Amounts attributable to Education Realty Trust, Inc. – common stockholders:
Loss from continuing operations, net of tax		$	(40,240	)		$	(6,700	)
Loss from discontinued operations, net of tax			—				(20	)
Net loss		$	(40,240	)		$	(6,720	)
Distributions per share of common stock		$	0.1500			$	0.3075

See accompanying notes to the condensed consolidated financial statements.

 

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except share and per share data)

(Unaudited)

		Three months				Three months
		ended				ended
		September 30,				September 30,
		2010				2009
Revenues:
Student housing leasing revenue		$	26,583			$	25,682
Other leasing revenue			77				—
Third-party development consulting services			334				2,559
Third-party management services			762				738
Operating expense reimbursements			7,152				3,523
Total revenues			34,908				32,502
Operating expenses:
Student housing leasing operations			18,056				18,392
General and administrative			3,325				3,903
Depreciation and amortization			7,701				7,227
Loss on impairment			33,610				—
Reimbursable operating expenses			6,236				3,523
Total operating expenses			68,928				33,045
Operating loss			(34,020	)			(543	)
Nonoperating expenses:
Interest expense			5,524				6,323
Amortization of deferred financing costs			306				230
Interest income			(174	)			(180	)
Total nonoperating expenses			5,656				6,373
Loss before equity in losses of unconsolidated entities, income taxes and discontinued operations			(39,676	)			(6,916	)
Equity in losses of unconsolidated entities			(328	)			(152	)
Loss before income taxes and discontinued operations			(40,004	)			(7,068	)
Income tax expense			444				513
Loss from continuing operations			(40,448	)			(7,581	)
Loss from discontinued operations			—				(3	)
Net loss			(40,448	)			(7,584	)
Less: Net loss attributable to the noncontrolling interest			(628	)			(200	)
Net loss attributable to Education Realty Trust, Inc.		$	(39,820	)		$	(7,384	)
Earnings per share information:
Loss attributable to Education Realty Trust, Inc. common stockholders per share — basic and diluted:
Continuing operations		$	(0.69	)		$	(0.15	)
Discontinued operations			—				—
Net loss attributable to Education Realty Trust, Inc. common stockholders per share		$	(0.69	)		$	(0.15	)
Weighted average shares of common stock outstanding – basic			57,719,401				47,932,410
Weighted average shares of common stock outstanding – diluted			57,719,401				47,932,410
Amounts attributable to Education Realty Trust, Inc. – common stockholders:
Loss from continuing operations, net of tax		$	(39,820	)		$	(7,381	)
Loss from discontinued operations, net of tax			—				(3	)
Net loss		$	(39,820	)		$	(7,384	)
Distributions per share of common stock		$	0.0500			$	0.1025

See accompanying notes to the condensed consolidated financial statements.

 

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CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Amounts in thousands, except share data)

(Unaudited)

 

		Common Stock								Additional
										Paid-In				Accumulated				Noncontrolling
		Shares				Amount				Capital				Deficit				Interest				Total
Balance, December 31, 2008			28,475,855			$	285			$	308,356			$	(41,381	)		$	2,918			$	270,178
Common stock issued:
To officers and directors			8,000				—				34				—				—				34
Proceeds from issuances, net of offering costs			28,175,000				282				115,851				—				—				116,133
Amortization of restricted stock			26,994				—				453				—				—				453
Cash dividends			—				—				(11,656	)			—				(85	)			(11,741	)
PIUs forfeited			—				—				30				—				(30	)			—
PIUs issued			—				—				—				—				13				13
Net loss			—				—				—				(6,720	)			(14	)			(6,734	)
Balance, September 30, 2009			56,685,849			$	567			$	413,068			$	(48,101	)		$	2,802			$	368,336
Balance, December 31, 2009			56,705,605			$	567			$	410,455			$	(48,636)			$	2,779			$	365,165
Common stock issued:
To officers and directors			34,000				—				336				—				—				336
To retire PIUs			50,826				1				196				—				—				197
Proceeds from issuances, net of offering costs			1,508,628				16				10,229				—				—				10,245
Amortization of restricted stock			48,190				—				474				—				—				474
PIUs forfeited and redeemed			—				—				2,286				—				(2,767)				(481	)
Cash dividends			—				—				(8,547	)			—				(22)				(8,569	)
Net income (loss)			—				—				—				(40,240	)			10				(40,230	)
Balance, September 30, 2010			58,347,249			$	584			$	415,429			$	(88,876	)		$	—			$	327,137

See accompanying notes to the condensed consolidated financial statements.

 

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

		Nine months				Nine months
		ended				ended
		September 30,				September 30,
		2010				2009
Operating activities:
Net loss		$	(40,669	)		$	(6,763	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization			22,592				21,501
Depreciation included in discontinued operations			—				25
Deferred tax (benefit) expense			(667	)			143
Loss (gain)  on disposal of assets			20				(3	)
Loss on impairment			33,610				—
Gain on extinguishment of debt			—				(830	)
Amortization of deferred financing costs			974				749
Loss (gain) on interest rate cap			258				(237	)
Amortization of unamortized debt premiums/discounts			(298	)			(304	)
Distributions of earnings from unconsolidated entities			995				294
Noncash compensation expense related to stock-based incentive awards			583				509
Equity in losses of unconsolidated entities			242				6
Change in operating assets and liabilities			8,357				14,355
Net cash provided by operating activities			25,997				29,445
Investing activities:
Purchase of corporate furniture and fixtures			(64	)			(85	)
Restricted cash			(1,909	)			(2,347	)
Investment in student housing properties			(14,518	)			(16,102	)
Proceeds from sale of student housing properties			—				154
Payments on notes receivable			2,078				—
Loan to participating development			(7,231	)			—
Insurance proceeds received from property damage			—				224
Investment in assets under development			(446	)			(22,676	)
Investment in unconsolidated entities			(40	)			(384	)
Net cash used in investing activities			(22,130	)			(41,216	)
Financing activities:
Payment of mortgage and construction notes			(7,979	)			(2,162	)
Borrowings under mortgage notes and construction loans			—				17,815
Borrowings under the Amended Revolver			—				1,000
Repayments under the Amended Revolver			—				(33,900	)
Payment of offering costs			(148	)			(6,428	)
Debt refund (issuance) costs			6				(588	)
Proceeds from refund of defeasance costs			—				830
Proceeds from common stock offering			10,385				122,561
Redemption of noncontrolling interests			(167	)			—
Dividends and distributions paid to common and restricted stockholders			(8,547	)			(11,656	)
Dividends and distributions paid to noncontrolling interests			(626	)			(764	)
Net cash (used in) provided by financing activities			(7,076	)			86,708
Net (decrease) increase in cash and cash equivalents			(3,209	)			74,937
Cash and cash equivalents, beginning of period			31,169				9,003
Cash and cash equivalents, end of period		$	27,960			$	83,940

 

See accompanying notes to the condensed consolidated financial statements.

 

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		Nine months				Nine months
		ended				ended
		September 30,				September 30,
		2010				2009
Supplemental disclosure of cash flow information:
Interest paid		$	16,438			$	18,989
Income taxes paid		$	224			$	695
Supplemental disclosure of noncash activities:
Note receivable received in connection with sale of student housing property		$	—			$	2,300

See accompanying notes to the condensed consolidated financial statements.

 

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NOTES TO CONDENSED CONSOLIDATED 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 Trust’s 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 operates primarily through a majority-owned Delaware limited partnership, Education Realty Operating Partnership, LP (the “Operating Partnership”). The Operating Partnership owns, directly or indirectly, interests in collegiate 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 the following subsidiaries of the Operating Partnership:

•

Allen & O’Hara Education Services, Inc. (“AOES”), a Delaware corporation performing collegiate student housing management activities.

•

Allen & O’Hara Development Company, LLC (“AODC”), a Delaware limited liability company providing development consulting services for third party collegiate student housing communities.

The Trust is subject to the risks involved with the ownership and operation of residential real estate near major universities throughout the United States. The risks include, among others, those 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.

2. Summary of significant accounting policies

Basis of presentation and principles of consolidation

The accompanying condensed consolidated 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 condensed 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.

All intercompany balances and transactions have been eliminated in the accompanying condensed consolidated financial statements.

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 Trust’s 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 Trust’s consolidated financial statements and related notes, included in the Trust’s Annual Report on Form 10-K for the year ended December 31, 2009, filed with the Securities and Exchange Commission (the “SEC”).

 

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Use of estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions are used by management in determining the recognition of third-party development consulting services revenue under the percentage of completion method, useful lives of student housing assets, the valuation of goodwill, the initial valuations and underlying allocations of purchase price in connection with student property acquisitions, the determination of fair value for impairment assessments, and in the recording of the allowance for doubtful accounts. Actual results could differ from those estimates.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation.  In the condensed consolidated statements of operations, food service revenue had previously been presented separately from student housing leasing revenue. The reclassification of food service revenue to student housing leasing revenue was not material to our condensed consolidated financial statements and had no impact on our previously reported net income, changes in equity, financial position or net cash flows from operations.

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 condensed consolidated statements of cash flows. The Trust maintains cash balances in various banks. At times, the amounts of cash may exceed the amount the Federal Deposit Insurance Corporation (“FDIC”) insures.  As of September 30, 2010, the Trust had $26,274 of cash on deposit that was uninsured by the FDIC or in excess of the FDIC limits.

Restricted cash

Restricted cash includes escrow accounts held by lenders for the purposes of paying taxes, insurance, principal and interest and funding capital improvements.

Distributions

The Trust pays regular quarterly cash distributions to stockholders. These distributions are determined quarterly by the Board of Directors (“Board”) based on the operating results, economic conditions, capital expenditure requirements, the REIT annual distribution requirements of the Internal Revenue Code of 1986, as amended (the “Code”), 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 15 to 40 years, land improvements are depreciated over 15 years and furniture, fixtures, and equipment are depreciated over 3 to 7 years. Depreciation is computed using the straight-line method for financial reporting purposes over the estimated useful life.

 

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Acquired student housing communities’ results of operations are included in the Trust’s results of operations from the respective dates of acquisition.  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 identifiable intangibles such as amounts related to in-place leases. On January 1, 2009, the Trust adopted the authoritative guidance issued by the Financial Accounting Standards Board (“FASB”), which prospectively changed the requirements for how an acquirer recognizes and measures the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired.  The guidance also enhanced the disclosures to enable the evaluation of the nature and financial effects of the business combination and requires that pre-acquisition costs be expensed as incurred.  Pre-acquisition costs, which include legal and professional fees and other third-party costs related directly to the acquisition of a community, were accounted for as part of the purchase price prior to the adoption of the guidance issued by the FASB.

Management assesses impairment of long-lived assets to be held and used whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Management uses an estimate of future undiscounted cash flows of the related asset based on its intended use to determine whether the carrying value is recoverable. If the Trust determines that the carrying value of an asset is not recoverable, the fair value of the asset is estimated and an impairment loss is recorded to the extent the carrying value exceeds estimated fair value. Management estimates fair value using discounted cash flow models, market appraisals if available, and other market participant data. During the nine months ended September 30, 2010, management determined that the carrying value of nine different student housing communities may not be recoverable due to a decline in estimated net operating income and/or the potential sale of these assets. The fair value of these properties was estimated and management recorded an impairment loss of $33,610 in the accompanying condensed consolidated statement of operations.

When a student housing community has met the criteria to be classified as held for sale, the fair value less cost to sell such asset is estimated. If the fair value less cost to sell the asset is less than the carrying amount of the asset, an impairment charge is recorded for the estimated loss. Depreciation expense is no longer recorded once a student housing community has met the held for sale criteria. Operations of student housing communities that are sold or classified as held for sale are recorded as part of discontinued operations for all periods presented.

Repairs, maintenance and major improvements

The costs of ordinary repairs and maintenance are charged to operations when incurred. Major improvements that extend the life of an asset 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 the Trust to maintain a reserve account for future repairs and capital expenditures. These amounts are classified as restricted cash as the funds are not available for current use.

Investment in unconsolidated entities

The Operating Partnership accounts for its investments in unconsolidated joint ventures, limited liability companies and limited partnerships using the equity method whereby the cost of an investment is adjusted for the Trust’s share of earnings of the respective investment reduced by distributions received. The earnings and distributions of the unconsolidated joint ventures, limited liability companies and limited partnerships are allocated based on each owner’s respective ownership interests. These investments are classified as other assets in the accompanying condensed consolidated balance sheets.

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. Deferred financing costs, net of amortization, are included in other assets in the accompanying condensed consolidated balance sheets.

Common stock issuances and offering costs

Specific incremental costs directly attributable to the issuance of common stock are charged against the gross proceeds of the related issuance. Accordingly, underwriting commissions and other stock issuance costs are reflected as a reduction of additional paid-in capital in the accompanying condensed consolidated statement of changes in equity.

 

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On June 2, 2010, the Trust entered into two equity distribution agreements.  Pursuant to the terms and conditions of the agreements, the Trust may issue and sell shares of its common stock having an aggregate offering amount of up to $50,000. Sales of the common stock will depend upon market conditions and other factors to be determined by the Trust and may be made in transactions that are deemed to be “at-the-market” offerings as defined in Rule 415 under the Securities Act of 1933, as amended. The Trust has no obligation to sell any of the common stock, and may at any time suspend offers under the agreements or terminate the agreements. As of September 30, 2010, the Trust had sold 1,502,400 shares of common stock under the equity distribution program for net proceeds of approximately $10,347.  

On May 19, 2010, the Trust’s stockholders approved the Education Realty Trust, Inc. Employee Stock Purchase Plan (the “ESPP”) which became effective on July 1, 2010. Pursuant to the ESPP, all employees of the Trust are eligible to make periodic purchases of common stock through payroll deductions.  Subject to the discretion of the compensation committee of the board of directors, the purchase price per share of common stock purchased by employees under the ESPP is 85% of the fair market value on the applicable purchase date.  The Trust reserved 300,000 shares of common stock for sale under the ESPP.  The aggregate cost of the ESPP (generally the 15% discount on the shares purchased) is recorded by the Trust as a period expense. Total compensation expense relating to the ESPP was $6 for the three months ended September 30, 2010.

On July 28, 2009, the Trust completed a follow-on common stock offering, selling 28,175,000 shares of the Trust’s common stock, including 3,675,000 shares issued as a result of the exercise of the underwriters’ overallotment option in full at closing, at a price of $4.35 per share to the public.  The offering generated gross proceeds of approximately $122,561.  The net proceeds to the Trust, after the underwriting discount and other expenses of the offering were approximately $116,133.

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 expense using the effective interest method.

Income taxes

The Trust qualifies as a REIT under the Code. The Trust is generally not subject to federal, state and local income taxes on any of its taxable income that it distributes if it distributes at least 90% of its taxable income for each tax year to its stockholders and meets certain other requirements. 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, state and local income taxes (including any applicable alternative minimum tax) on its taxable 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 Trust’s non-REIT activities which include management services and development services, which are provided through AODC. Deferred tax assets and liabilities are recognized based on the difference between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates in effect in the years in which those temporary differences are expected to reverse.

The Trust had no unrecognized tax benefits as of September 30, 2010 and 2009.  As of September 30, 2010, the Trust did not expect to record any unrecognized tax benefits.  The Trust, and its subsidiaries, file federal and state income tax returns. As of September 30, 2010, open tax years generally include tax years for 2006, 2007, 2008 and 2009. The Trust’s policy is to include interest and penalties related to unrecognized tax benefits in general and administrative expenses.  At September 30, 2010 and 2009, the Trust had no interest or penalties recorded related to unrecognized tax benefits.

 

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Noncontrolling interests

On January 1, 2009, the Trust adopted the authoritative guidance issued by the FASB that changed the accounting and reporting for noncontrolling interests. The guidance established the accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interests, changes in a parent’s ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated.  The guidance also established disclosure requirements to clearly distinguish between the interests of the parent and the interests of the noncontrolling owners. The units of limited partnership of the Operating Partnership (“Operating Partnership Units”), units of limited partnership of University Towers Operating Partnership, LP (“University Towers Operating Partnership Units”)  and profits interest units (“PIU”) (see Note 9) are now referred to as noncontrolling interests (formerly minority interests).

 

In connection with the adoption, the Trust also considered the guidance issued by the FASB regarding the classification and measurement of redeemable securities.  The Operating Partnership Units and the University Towers Operating Partnership Units are redeemable at the option of the holder and essentially have the same characteristics as common stock as they participate in net income and distributions. Accordingly, the Trust determined that the Operating Partnership Units and the University Towers Operating Partnership Units met the requirements to be classified outside of permanent equity and are therefore classified as redeemable noncontrolling interests in the accompanying condensed consolidated balance sheets and net income attributable to noncontrolling interests in the accompanying condensed consolidated statement of operations.  The value of redeemable noncontrolling interests is reported at the greater of fair value or historical cost at the end of each reporting period.

 

The PIUs were determined to be noncontrolling interests that were not redeemable and accordingly these amounts were reclassified to equity in the accompanying condensed consolidated balance sheets and statements of changes in equity.  The PIU holder’s share of income or loss is reported in the accompanying condensed consolidated statements of operations as net income attributable to noncontrolling interests. During June 2010, all of the outstanding PIUs were redeemed by the Trust for $167 of cash and 50,826 shares of common stock that had a market value of $314 (see Note 9).

Earnings per share

Basic earnings per share is calculated by dividing net earnings available to shares of common stock by weighted average shares of common stock outstanding. Diluted earnings per share is calculated similarly, except that it includes the dilutive effect of the assumed exercise of potentially dilutive securities. Beginning January 1, 2009, the Trust adopted the authoritative guidance regarding the determination of whether certain instruments are participating securities.  All unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are to be included in the computation of earnings per share under the two-class method.  This resulted in shares of unvested restricted stock being included in the computation of basic earnings per share for all periods presented. The adoption did not have a material impact on the condensed consolidated financial statements.

As of September 30, 2010 and 2009, 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:

		2010				2009
Operating Partnership units			903,738				913,738
University Towers Operating Partnership units			207,257				207,257
Profits Interest Units			—				277,500
Total potentially dilutive securities			1,110,995				1,398,495

A reconciliation of the numerators and denominators for the basic and diluted earnings per share computation is not presented, as the Trust reported a loss from continuing operations for all periods presented, and therefore 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.

 

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Goodwill and other intangible assets

Goodwill is tested annually for impairment as of December 31, 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 asset’s fair value. The accumulated impairment loss recorded by the Trust as of December 31, 2008 is $388. No additional impairment has been recorded through September 30, 2010. The carrying value of goodwill was $3,070 at September 30, 2010 and December 31, 2009, of which $2,149 was recorded on the management services segment and $921 was recorded on the development consulting services segment.  Goodwill is not subject to amortization.  Other intangible assets generally include in-place leases and management contracts acquired in connection with acquisitions and are amortized over the estimated life of the lease/contract term. There were no other intangible assets at September 30, 2010 and $3 at December 31, 2009.

Comprehensive income

The Trust follows the authoritative guidance issued by the FASB relating to the reporting and display of comprehensive income and its components. For all periods presented, comprehensive income is equal to net income.

Revenue recognition

The Trust recognizes revenue related to leasing activities at the student housing communities owned by the Trust, management fees related to managing third-party student housing communities, development consulting fees related to the general oversight of third-party student housing development and operating expense reimbursements for payroll and related expenses incurred for third-party student housing communities managed by the Trust.

Student housing leasing revenue — Student housing leasing revenue is comprised of all activities related to leasing and operating the student housing communities and includes revenues from leasing apartments by the bed, food services, parking lot rentals and providing certain ancillary services. This revenue is reflected in student housing leasing revenue in the accompanying condensed consolidated statements of operations. Students are required to execute lease contracts with payment schedules that vary from annual to monthly payments. Generally, the Trust requires each executed leasing contract to be accompanied by a signed parental guarantee. Receivables are recorded when billed. Revenues and related lease incentives and nonrefundable application and service fees are recognized on a straight-line basis over the term of the contracts. 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.

Other leasing revenue — On August 1, 2010, the Trust leased the student housing community known as Collegiate Village located in Macon, Georgia to Macon State College (“MSC”) for monthly rent of $30 for a period of one year.  MSC will operate and manage the property while the lease is in place.  MSC has the option to renew the lease for one additional year or has the option to purchase the property for $7,500 plus the cost of capital improvements made at the request of MSC.  The purchase option can be exercised at any time between February 28, 2011 and July 31, 2011. During the nine months ended September 30, 2010, the Trust recognized $77 in other leasing revenue related to the lease.

Third-party development 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 the Trust typically receives a portion of the fees up front. These fees, including the up-front fee, are recognized using the percentage of completion method in proportion to the contract costs incurred by the owner over the course of construction of the respective projects.  Occasionally, the development consulting contracts include a provision whereby the Trust can participate in project savings resulting from successful cost management efforts. These revenues are recognized once all contractual terms have been satisfied and no future performance requirements exist. This typically occurs after construction is complete.  For the nine months ended September 30, 2010 and 2009, there was no revenue and $1,224 of revenue recognized related to cost savings agreements on development projects, respectively.

On July 14, 2010, the Trust entered into definitive agreements for the development, financing and management of a $60,700, 20-story, 572-bed graduate student housing complex at the Science + Technology Park at Johns Hopkins Medical Institute.  The Trust will develop and manage the building which will be constructed on land owned by Johns Hopkins University and leased to a subsidiary of East Baltimore Development, Inc., a nonprofit partnership of private and public entities dedicated to Baltimore’s urban revitalization. Under terms of the agreements, the Trust will (a) receive development and construction oversight fees and reimbursement of pre-development expenses, (b) invest in the form of an $18,000 second mortgage, (c) receive a $3,000 fee for providing a repayment guarantee of the construction first mortgage, and (d) receive a 10-year management contract. At September 30, 2010, the note receivable for the second mortgage had a balance of $7,231 and is recorded in other assets in the accompanying condensed consolidated balance sheet. Due to its financing commitments to the project along with other factors, the Trust will not recognize the development services revenue, guarantee fee revenue and interest income earned on the second mortgage until the second mortgage is repaid.

 

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Third-party management services 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 reimbursements — The Trust pays certain payroll and related costs to operate third-party student housing communities 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.

Costs related to development consulting services

Costs associated with the pursuit of third-party development consulting contracts are expensed as incurred, until such time that management has been notified of a contract award. At such time, the reimbursable costs are recorded as receivables and are reflected as other assets in the accompanying condensed consolidated balance sheets.

Costs directly associated with internal development projects are capitalized as part of the cost of the project.

Recent accounting pronouncements

In May 2009, the FASB issued new authoritative guidance on subsequent events.  The new guidance is intended to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Specifically, this standard sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date.  This guidance is effective for financial statements issued for fiscal years and interim periods beginning after June 15, 2009 and is applied prospectively.  The Trust adopted this authoritative guidance during the three months ended September 30, 2009. In February 2010, the FASB amended the authoritative guidance on subsequent events to remove the requirement for SEC filers to disclose the date through which an entity has evaluated subsequent events. The new guidance is effective upon issuance and had no impact on the Trust’s consolidated financial statements.

In June 2009, the FASB issued guidance to establish only two levels of GAAP, authoritative and nonauthoritative. The FASB Accounting Standards Codification (the “Codification”) is the source of authoritative, nongovernmental GAAP, except for rules and interpretive releases of the SEC, which are sources of authoritative GAAP for SEC registrants. All other nongrandfathered, non-SEC accounting literature not included in the Codification is nonauthoritative. This standard is effective for financial statements issued for fiscal years and interim periods ending after September 15, 2009.  As the Codification was not intended to change or alter existing GAAP, it did not have any impact on the consolidated financial statements.

In June 2009, the FASB issued authoritative guidance to improve financial reporting by enterprises involved with variable interest entities. The new guidance is effective for financial statements issued for fiscal years beginning after November 15, 2009, with early adoption prohibited. The adoption had no impact on the Trust’s consolidated financial statements.

In January 2010, the FASB updated the authoritative guidance for accounting and reporting for decreases in ownership of a subsidiary. The updated guidance clarifies the scope of the guidance related to a decrease in ownership provisions and expands the disclosures related to the deconsolidation of a subsidiary or group of assets. The updated guidance is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2009.  The adoption had no impact on the Trust’s consolidated financial statements.

 

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3. Investments in unconsolidated entities

As of September 30, 2010, the Trust had investments, directly or indirectly, in the following active unconsolidated joint ventures and limited liability companies that are accounted for under the equity method:

•

University Village-Greensboro LLC, a Delaware limited liability company, 25% owned by the Operating Partnership

•

WEDR Riverside Investors V, LLC, a Delaware limited liability company, 10% owned by the Operating Partnership

•

APF EDR, LP, a Delaware limited partnership, 10% owned by the Operating Partnership

•

APF EDR Food Services LP, a Delaware limited partnership, 10% owned by the Operating Partnership

•

WEDR Stinson Investors V, LLC, a Delaware limited liability company, 10% owned by the Operating Partnership

The following is a summary of financial information for the Trust’s unconsolidated joint ventures, limited liability companies and limited partnerships for the nine months ended September 30, 2010 and 2009:

		2010				2009
Results of Operations:
Revenues		$	10,659			$	11,718
Net loss			(2,856	)			(753	)
Equity in earnings (losses) of unconsolidated entities		$	(242	)		$	(6	)

These entities primarily own collegiate student housing communities which are managed by the Trust.  As of September 30, 2010 and December 31, 2009, the Trust’s investment in unconsolidated entities totaled $252 and $1,450, respectively.  The decline in the Trust’s investment in unconsolidated entities is primarily due to the sale of the majority of the assets of the APF EDR, LP and APF EDR Food Services LP joint ventures during the three months ended September 30, 2010.  The Trust recognized $137 as its portion of the loss on the sale of assets as part of equity in losses of unconsolidated entities in the condensed consolidated statement of operations and recorded its share of the proceeds from the sale in the amount of $676 as a distribution in the condensed consolidated financial statements.

4. Debt

Revolving credit facility

On November 20, 2009, the Operating Partnership entered into a Second Amended and Restated Credit Agreement (the “Second Amended Revolver”). The Second Amended Revolver amended and restated the existing secured revolving credit facility dated March 30, 2006 (the “Amended Revolver”).  The previous facility had a maximum availability of $100,000 and was scheduled to mature on March 30, 2010.  The Second Amended Revolver has a maximum availability of $95,000 and within the first two years of the agreement may be expanded to a total of $150,000 upon satisfaction of certain conditions.

Availability under the Second Amended Revolver is limited to a “borrowing base availability” equal to the lesser of (i) 60% of the property asset value (as defined in the agreement) of the properties securing the Second Amended Revolver and (ii) the loan amount which would produce a debt service coverage ratio of no less than 1.40. As of September 30, 2010, our borrowing base was $43,347, we had no amounts outstanding under the Second Amended Revolver and we had a letter of credit outstanding of $1,500 (see Note 6); thus, our remaining borrowing base availability was $41,847.

The Trust serves as the guarantor for any funds borrowed by the Operating Partnership under the Second Amended Revolver. Additionally, the Second Amended Revolver is secured by a cross-collateralized, first mortgage lien on five otherwise unmortgaged properties. The Second Amended Revolver matures on November 20, 2012, provided that the Operating Partnership may extend the maturity date for one year subject to certain conditions. The interest rate per annum applicable to the Second Amended Revolver is, at the Operating Partnership’s option, equal to a base rate or London InterBank Offered Rate (“LIBOR”) plus an applicable margin based upon our leverage.

 

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The Second Amended Revolver contains customary affirmative and negative covenants and contains 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. As of September 30, 2010, the Trust was in compliance with all covenants discussed above.

The Trust is prohibited from making distributions unless either of the following conditions is met: (a) after giving effect to the distribution, the total leverage ratio is less than or equal to 65% prior to November 20, 2012, and less than or equal to 60% thereafter; or (b) the distribution, when considered along with all other distributions for the last three quarters, does not exceed 90% of funds from operations for the applicable period.

During the year ended December 31, 2009, the Trust used $30,600 of the proceeds received in connection with the follow-on common stock offering that was conducted in July 2009 (see Note 2) to repay the outstanding balance of the Amended Revolver.

Mortgage and construction debt

At September 30, 2010, the Trust had outstanding mortgage and construction indebtedness of $397,588 (excluding unamortized debt premium of $499).  $23,794 relates to construction debt that is disclosed below and $132,078 pertains to outstanding mortgage debt that is secured by the underlying student housing properties or leaseholds bearing interest at fixed rates ranging from 4.92% to 6.97%.  The remaining $241,716 of the outstanding mortgage indebtedness relates to the Fannie Mae master secured credit facility that the Trust entered into on December 31, 2008 and expanded on December 2, 2009 (the “Master Secured Credit Facility”).  $48,816 of the outstanding amount under the Master Secured Credit Facility bears interest at variable rates based on the 30-day LIBOR plus an applicable margin. This variable rate debt had a weighted average interest rate of 3.64% as of September 30, 2010. The remaining outstanding balance of $192,900 bears interest at a weighted average fixed rate of 5.88%. 

In order to hedge the interest rate risk associated with the variable rate loans under the Master Secured Credit Facility, the Operating Partnership purchased an interest rate cap from the Royal Bank of Canada on December 22, 2008 for $120.  The notional amount of the cap is $49,874, the cap will terminate on December 31, 2013 and the cap rate is 7.0% per annum.  The Operating Partnership has chosen not to designate the cap as a hedge and will recognize all gains or losses associated with this derivative instrument in earnings. The fair value of the interest rate cap is determined using available market information or other appropriate valuation methodologies and is classified as level 2 as defined in the authoritative guidance. At September 30, 2010 and December 31, 2009, the cap had a value of $28 and $286, respectively, and is classified in other assets in the accompanying condensed consolidated balance sheets.

At September 30, 2010, we had borrowed $10,688 and $4,281 on construction loans with availability of $11,000 and $12,285, respectively, related to the development of a wholly owned student apartment community near Southern Illinois University (Carbondale) (see Note 7). The loans bear interest equal to LIBOR plus 110 and 200 basis point margins, respectively, and were interest only through June 14, 2010. On June 14, 2010, the Trust paid down $5,013 of the outstanding construction debt and extended the maturity date until June 28, 2012. Going forward, a debt service coverage ratio calculated annually on a rolling 12 months basis, of not less than 1.25 to 1, must be maintained with principal and interest being repaid on a monthly basis.

At September 30, 2010, the Trust had $8,826 outstanding on a $14,300 construction loan related to the development of a wholly-owned student apartment community at Syracuse University (see Note 7). The loan bears interest equal to LIBOR plus a 110 basis point margin and is interest only through September 29, 2011. Commencing with the quarter ended June 30, 2011, and annually thereafter, a debt service coverage ratio calculated on a rolling 12 month basis, of not less than 1.25 to 1, must be maintained in order to extend the loan until September 29, 2013, with principal and interest being repaid on a monthly basis.

The scheduled maturities of outstanding mortgage and construction indebtedness at September 30, 2010 are as follows:

 

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Fiscal Year Ending
2010 (3 months ending December 31, 2010)		$	1,112
2011			13,367
2012			83,067
2013			33,028
2014			100,115
Thereafter			166,899
Total			397,588
Unamortized debt premium			499
Outstanding at September 30, 2010, net of unamortized premiums		$	398,087

At September 30, 2010, the outstanding mortgage and construction debt had a weighted average interest rate of 5.37% and carried a weighted average term to maturity of 4.46 years.

5. Segments

The Trust defines business segments by their distinct customer base and service provided. The Trust has identified three reportable segments: student housing leasing, development-consulting services and management services. Management evaluates each segment’s performance based on net operating income, which is defined as income before depreciation, amortization, impairment losses, interest expense (income), gains (losses) on extinguishment of debt, equity in earnings of unconsolidated entities, and noncontrolling interests. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Intercompany fees are reflected at the contractually stipulated amounts. Discontinued operations are not included in segment reporting as management addresses these items on a corporate level. The following table represents segment information for the nine months ended September 30, 2010 and 2009:

		Nine Months Ended September 30, 2010																				Nine Months Ended September 30, 2009
		Student				Development																Student				Development
		Housing				Consulting				Management												Housing				Consulting				Management
		Leasing				Services				Services				Eliminations				Total				Leasing				Services				Services				Eliminations				Total
Segment revenues:
Student housing leasing revenue		$	84,628			$	—			$	—			$	—			$	84,628			$	82,962			$	—			$	—			$	—			$	82,962
Other leasing revenue			77				—				—				—				77				—				—				—				—				—
Third-party development consulting services			—				1,777				—				(102)				1,675				—				5,275				—				—				5,275
Third-party management services			—				—				2,335				—				2,335				—				—				2,370				—				2,370
Intersegment revenues			—				—				3,328				(3,328	)			—				—				1,128				3,289				(4,417	)			—
Operating expense reimbursements			—				916				—				10,101				11,017				—				—				—				7,749				7,749
Total segment revenues			84,705				2,693				5,663				6,671				99,732				82,962				6,403				5,659				3,332				98,356
Segment operating expenses:
Student housing leasing operations			44,702				—				—				—				44,702				44,491				—				—				—				44,491
General and administrative			—				2,071				5,561				(63	)			7,569				—				2,402				5,488				(96	)			7,794
Intersegment expenses			3,328				—				—				(3,328	)			—				3,289				—				—				(3,289	)			—
Reimbursable operating expenses			—				—				—				10,101				10,101				—				—				—				7,749				7,749
Total segment operating expenses			48,030				2,071				5,561				6,710				62,372				47,780				2,402				5,488				4,364				60,034
Net operating income (loss) (1)		$	36,675			$	622			$	102			$	(39	)		$	37,360			$	35,182			$	4,001			$	171			$	(1,032	)		$	38,322
Total segment assets, as of September 30, 2010 and December 31, 2009 (2)		$	726,393			$	6,197			$	4,682			$	—			$	737,272			$	766,655			$	3,742			$	5,535			$	—			$	775,932

 

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(1)	The following is a reconciliation of the reportable segments’ net operating income to the Trust’s consolidated loss before income taxes and discontinued operations for the nine months ended September 30:

		2010				2009
Net operating income for reportable segments		$	37,360			$	38,322
Other unallocated general and administrative expenses			(4,092	)			(3,944	)
Depreciation and amortization			(22,592	)			(21,501	)
Loss on impairment			(33,610	)			—
Interest expense			(16,653	)			(18,825	)
Amortization of deferred financing costs			(974	)			(749	)
Interest income			402				334
Gain on extinguishment of debt			—				830
Equity in losses of unconsolidated entities			(242	)			(6	)
Income (loss) before income taxes and discontinued operations		$	(40,401	)		$	(5,539	)

 

(2)

The decrease in segment assets related to student housing leasing is primarily related to the impairment charge of $33,610 taken in September of 2010.  The increase in segment assets related to development consulting services is primarily due to an increase in cash related to the collection of reimbursable project costs.

The following table represents segment information for the three months ended September 30, 2010 and 2009:

		Three Months Ended September 30, 2010																				Three Months Ended September 30, 2009
		Student				Development																Student				Development
		Housing				Consulting				Management												Housing				Consulting				Management
		Leasing				Services				Services				Eliminations				Total				Leasing				Services				Services				Eliminations				Total
Segment revenues:
Student housing leasing revenue		$	26,583			$	—			$	—			$	—			$	26,583			$	25,682			$	—			$	—			$	—			$	25,682
Other leasing revenue			77				—				—				—				77				—				—				—				—				—
Third-party development consulting services			—				436				—				(102	)			334				—				2,559				—				—				2,559
Third-party management services			—				—				762				—				762				—				—				738				—				738
Intersegment revenues			—				—				1,132				(1,132	)			—				—				80				1,103				(1,183	)			—
Operating expense reimbursements			—				916				—				6,236				7,152				—				—				—				3,523				3,523
Total segment revenues			26,660				1,352				1,894				5,002				34,908				25,682				2,639				1,841				2,340				32,502
Segment operating expenses:
Student housing leasing operations			18,056				—				—				—				18,056				18,392				—				—				—				18,392
General and administrative			—				451				1,644				(63	)			2,032				—				921				1,809				(15	)			2,715
Intersegment expenses			1,132				—				—				(1,132	)			—				1,103				—