UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) | ||
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended September 30, 2016
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to
Commission file number 001-32417
Education Realty Trust, Inc.
Education Realty Operating Partnership, LP
(Exact Name of Registrant as Specified in Its Charter)
Maryland | 20-1352180 | |
Delaware | 20-1352332 | |
(State or Other Jurisdiction of Incorporation or Organization) | (IRS Employer Identification No.) | |
999 South Shady Grove Road, Suite 600 Memphis, Tennessee | 38120 | |
(Address of Principal Executive Offices) | (Zip Code) | |
Registrant’s Telephone Number, Including Area Code (901) 259-2500
Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
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.
Education Realty Trust, Inc. Yes x No o
Education Realty Operating Partnership, LP Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Education Realty Trust, Inc. Yes x No o
Education Realty Operating Partnership, LP Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Education Realty Trust, Inc.
Large accelerated filer x | Accelerated filer o | |
Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o | |
Education Realty Operating Partnership, LP
Large accelerated filer o | Accelerated filer o | |
Non-accelerated filer x (Do not check if a smaller reporting company) | Smaller reporting company o | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Education Realty Trust, Inc. Yes o No x
Education Realty Operating Partnership, LP Yes o No x
As of October 28, 2016, Education Realty Trust, Inc. had 73,075,461 shares of common stock outstanding.
EXPLANATORY NOTE
This report combines the reports on Form 10-Q for the quarterly period ended September 30, 2016 of Education Realty Trust, Inc. and Education Realty Operating Partnership, LP. Unless stated otherwise or the context otherwise requires, references to “EdR” mean only Education Realty Trust, Inc., a Maryland corporation, and references to "EROP" mean only Education Realty Operating Partnership, LP, a Delaware limited partnership. References to the "Trust," "we," "us," or "our" mean collectively EdR, EROP and those entities/subsidiaries owned or controlled by EdR and/or EROP. References to the "Operating Partnership" mean collectively EROP and those entities/subsidiaries owned or controlled by EROP. The following chart illustrates our corporate structure:
The general partner of EROP is Education Realty OP GP, Inc. (the “OP GP”), an entity that is indirectly wholly-owned by EdR. As of September 30, 2016, OP GP held an ownership interest in EROP of less than 1%. The limited partners of EROP are Education Realty OP Limited Partner Trust, a wholly-owned subsidiary of EdR, and other limited partners consisting of former members of management. The OP GP, as the sole general partner of EROP, has the responsibility and discretion in the management and control of the Operating Partnership, and the limited partners of EROP, in such capacity, have no authority to transact business for, or participate in the management activities of the Operating Partnership. Management operates EdR and the Operating Partnership as one business. The management of EdR consists of the same members as the management of the Operating Partnership.
The Trust is structured as an umbrella partnership real estate investment trust (“UPREIT”) and EdR contributes all net proceeds from its various equity offerings to the Operating Partnership. In return for those contributions, EdR receives an equal number of partnership units of EROP (the “OP Units”). Contributions of properties to the Trust can be structured as tax-deferred transactions through the issuance of OP Units. Holders of OP Units may tender their OP Units for redemption by the Operating Partnership in exchange for cash equal to the market price of EdR's common stock at the time of redemption or, at EdR's option, for shares of EdR's common stock. Pursuant to the partnership agreement of EROP, the number of shares to be issued upon the redemption of OP Units is equal to the number of OP Units being redeemed. Additionally, for every one share of common stock offered and sold by EdR for cash, EdR must contribute the net proceeds to EROP and, in return, EROP will issue one OP Unit to EdR.
The Trust believes that combining the quarterly reports on Form 10-Q of EdR and the Operating Partnership into this single report provides the following benefits:
• | enhances investors’ understanding of the Trust by enabling investors to view the business of EdR and the Operating Partnership as a whole in the same manner as management views and operates the business; |
• | eliminates duplicative disclosure and provides a more streamlined and readable presentation since a substantial portion of the disclosure applies to both EdR and the Operating Partnership; and |
• | creates time and cost efficiencies through the preparation of one combined report instead of two separate reports. |
EdR consolidates the Operating Partnership for financial reporting purposes, and EdR essentially has no assets or liabilities other than its investment in the Operating Partnership. Therefore, the assets and liabilities of EdR and the Operating Partnership are the same on their respective financial statements. However, the Trust believes it is important to understand the few differences between EdR and the Operating Partnership in the context of how the entities operate as a consolidated company. All of the Trust's property ownership, development and related business operations are conducted through the Operating Partnership. EdR also issues public equity from time to time and guarantees certain debt of EROP. EdR does not have any indebtedness, as all debt is incurred by the Operating Partnership. The Operating Partnership holds all of the assets of the Trust, including the Trust’s ownership interests in its joint ventures. The Operating Partnership conducts the operations of the business and is structured as a partnership with no publicly traded equity. Except for the net proceeds from EdR’s equity offerings, which are contributed to the capital of EROP in exchange for OP Units on the basis of one share of common stock for one OP Unit, the Operating Partnership generates all remaining capital required by the Trust's business, including as a result of the incurrence of indebtedness. These sources include, but are not limited to, the Operating Partnership’s working capital, net cash provided by operating activities, borrowings under its credit facilities, proceeds from mortgage indebtedness and debt issuances, and proceeds received from the disposition of certain properties. Noncontrolling interests, stockholders’ equity, and partners’ capital are the main areas of difference between the condensed consolidated financial statements of the Trust and those of the Operating Partnership. The noncontrolling interests in the Operating Partnership’s financial statements consist of the interests of unaffiliated partners in various consolidated joint ventures. The noncontrolling interests in the Trust's financial statements include the same noncontrolling interests at the Operating Partnership level. The differences between stockholders’ equity and partners’ capital result from differences in the type of equity issued by EdR and the Operating Partnership.
To help investors understand the significant differences between the Trust and the Operating Partnership, this report provides separate condensed consolidated financial statements for the Trust and the Operating Partnership. A single set of consolidated notes to such financial statements is presented that includes separate discussions for the Trust and the Operating Partnership when applicable (for example, noncontrolling interests, stockholders’ equity or partners’ capital, earnings per share or unit, etc.). A combined Management’s Discussion and Analysis of Financial Condition and Results of Operations section is also included that presents discrete information related to each entity, as applicable.
In order to highlight the differences between the Trust and the Operating Partnership, the separate sections in this report for the Trust and the Operating Partnership specifically refer to the Trust and the Operating Partnership. In the sections that combine disclosure of the Trust and the Operating Partnership, this report refers to actions or holdings as being actions or holdings of the Trust. Although the Operating Partnership is generally the entity that directly or indirectly enters into contracts and joint ventures and holds assets and debt, reference to the Trust is appropriate because the Trust operates its business through the Operating Partnership. The separate discussions of the Trust and the Operating Partnership in this report should be read in conjunction with each other to understand the results of the Trust on a consolidated basis and how management operates the Trust.
Education Realty Trust, Inc.
Education Realty Operating Partnership, LP
Form 10-Q
For the Quarter Ended September 30, 2016
Table of Contents
Page Number | |||
PART I - FINANCIAL INFORMATION | |||
Item 1. Condensed Consolidated Financial Statements of Education Realty Trust, Inc. and Subsidiaries: | |||
Condensed Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015 | |||
Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) for the three and nine months ended September 30, 2016 and 2015 | |||
Condensed Consolidated Statements of Changes in Equity for the nine months ended September 30, 2016 and 2015 | |||
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015 | |||
Condensed Consolidated Financial Statements of Education Realty Operating Partnership, LP and Subsidiaries: | |||
Condensed Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015 | |||
Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) for the three and nine months ended September 30, 2016 and 2015 | |||
Condensed Consolidated Statements of Changes in Partners' Capital and Noncontrolling Interests for the nine months ended September 30, 2016 and 2015 | |||
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015 | |||
Notes to Condensed Consolidated Financial Statements | |||
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. | |||
Item 3. Quantitative and Qualitative Disclosures About Market Risk. | |||
Item 4. Controls and Procedures. | |||
PART II - OTHER INFORMATION | |||
Item 1. Legal Proceedings. | |||
Item 1A. Risk Factors. | |||
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. | |||
Item 3. Defaults Upon Senior Securities. | |||
Item 4. Mine Safety Disclosures. | |||
Item 5. Other Information. | |||
Item 6. Exhibits. | |||
Signatures. | |||
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)
(Unaudited)
September 30, 2016 | December 31, 2015 | ||||||
Assets: | |||||||
Collegiate housing properties, net | $ | 2,125,140 | $ | 1,774,796 | |||
Assets under development | 162,336 | 117,384 | |||||
Cash and cash equivalents | 115,486 | 33,742 | |||||
Restricted cash | 7,492 | 9,784 | |||||
Other assets | 72,870 | 66,125 | |||||
Total assets | $ | 2,483,324 | $ | 2,001,831 | |||
Liabilities: | |||||||
Mortgage and construction loans, net of unamortized premium and deferred financing costs | $ | 61,847 | $ | 204,511 | |||
Unsecured revolving credit facility | — | — | |||||
Unsecured term loan, net of unamortized deferred financing costs | 186,706 | 186,518 | |||||
Unsecured senior notes, net of unamortized deferred financing costs | 247,873 | 247,678 | |||||
Accounts payable and accrued expenses | 125,421 | 85,670 | |||||
Deferred revenue | 30,981 | 19,024 | |||||
Total liabilities | 652,828 | 743,401 | |||||
Commitments and contingencies (see Note 7) | — | — | |||||
Redeemable noncontrolling interests | 11,033 | 13,560 | |||||
Equity: | |||||||
Common stock, $0.01 par value per share, 200,000,000 shares authorized, 73,047,395 and 56,879,003 shares issued and outstanding as of September 30, 2016 and December 31, 2015, respectively | 730 | 569 | |||||
Preferred shares, $0.01 par value per share, 50,000,000 shares authorized, no shares issued and outstanding | — | — | |||||
Additional paid-in capital | 1,813,980 | 1,263,603 | |||||
Retained earnings (accumulated deficit) | — | (21,998 | ) | ||||
Accumulated other comprehensive loss | (8,312 | ) | (5,475 | ) | |||
Total Education Realty Trust, Inc. stockholders’ equity | 1,806,398 | 1,236,699 | |||||
Noncontrolling interests | 13,065 | 8,171 | |||||
Total equity | 1,819,463 | 1,244,870 | |||||
Total liabilities and equity | $ | 2,483,324 | $ | 2,001,831 | |||
See accompanying notes to the condensed consolidated financial statements.
1
EDUCATION REALTY TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)
(Amounts in thousands, except per share data)
(Unaudited)
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Revenues: | |||||||||||||||
Collegiate housing leasing revenue | $ | 61,877 | $ | 54,725 | $ | 193,750 | $ | 168,842 | |||||||
Third-party development consulting services | 778 | 490 | 1,728 | 1,531 | |||||||||||
Third-party management services | 965 | 865 | 2,556 | 2,698 | |||||||||||
Operating expense reimbursements | 2,605 | 2,109 | 6,710 | 6,571 | |||||||||||
Total revenues | 66,225 | 58,189 | 204,744 | 179,642 | |||||||||||
Operating expenses: | |||||||||||||||
Collegiate housing leasing operations | 32,512 | 28,444 | 83,567 | 75,452 | |||||||||||
Development and management services | 2,716 | 3,019 | 7,965 | 8,228 | |||||||||||
General and administrative | 2,701 | 1,434 | 8,889 | 6,632 | |||||||||||
Depreciation and amortization | 22,336 | 17,828 | 58,951 | 49,605 | |||||||||||
Ground lease expense | 3,224 | 2,938 | 8,829 | 7,956 | |||||||||||
Other operating income | (1,100 | ) | — | (1,100 | ) | — | |||||||||
Reimbursable operating expenses | 2,605 | 2,109 | 6,710 | 6,571 | |||||||||||
Total operating expenses | 64,994 | 55,772 | 173,811 | 154,444 | |||||||||||
Operating income | 1,231 | 2,417 | 30,933 | 25,198 | |||||||||||
Nonoperating (income) expenses: | |||||||||||||||
Interest expense | 3,811 | 6,223 | 12,109 | 17,615 | |||||||||||
Amortization of deferred financing costs | 443 | 520 | 1,380 | 1,527 | |||||||||||
Interest income | (155 | ) | (39 | ) | (429 | ) | (144 | ) | |||||||
Loss on extinguishment of debt | 475 | — | 10,611 | — | |||||||||||
Total nonoperating expenses | 4,574 | 6,704 | 23,671 | 18,998 | |||||||||||
Income (loss) before equity in losses of unconsolidated entities, income taxes and gain on sale of collegiate housing properties | (3,343 | ) | (4,287 | ) | 7,262 | 6,200 | |||||||||
Equity in losses of unconsolidated entities | (480 | ) | (427 | ) | (617 | ) | (823 | ) | |||||||
Income (loss) before income taxes and gain on sale of collegiate housing properties | (3,823 | ) | (4,714 | ) | 6,645 | 5,377 | |||||||||
Income tax expense | 84 | 157 | 224 | 325 | |||||||||||
Income (loss) before gain on sale of collegiate housing properties | (3,907 | ) | (4,871 | ) | 6,421 | 5,052 | |||||||||
Gain on sale of collegiate housing properties | — | — | 23,956 | — | |||||||||||
Net income (loss) | (3,907 | ) | (4,871 | ) | 30,377 | 5,052 | |||||||||
Less: Net loss attributable to the noncontrolling interests | (374 | ) | (151 | ) | (414 | ) | (86 | ) | |||||||
Net income (loss) attributable to Education Realty Trust, Inc. | $ | (3,533 | ) | $ | (4,720 | ) | $ | 30,791 | $ | 5,138 | |||||
See accompanying notes to the condensed consolidated financial statements.
2
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Comprehensive income (loss): | |||||||||||||||
Net income (loss) | $ | (3,907 | ) | $ | (4,871 | ) | $ | 30,377 | $ | 5,052 | |||||
Other comprehensive income (loss): | |||||||||||||||
Gain (loss) on cash flow hedging derivatives | 1,651 | (3,081 | ) | (2,837 | ) | (3,429 | ) | ||||||||
Comprehensive income (loss) | (2,256 | ) | (7,952 | ) | 27,540 | 1,623 | |||||||||
Less: Comprehensive loss attributable to the noncontrolling interests | (374 | ) | (151 | ) | (414 | ) | (86 | ) | |||||||
Comprehensive income (loss) attributable to Education Realty Trust, Inc. | $ | (1,882 | ) | $ | (7,801 | ) | $ | 27,954 | $ | 1,709 | |||||
Earnings per share information: | |||||||||||||||
Net income (loss) attributable to Education Realty Trust, Inc. common stockholders per share – basic and diluted | $ | (0.05 | ) | $ | (0.10 | ) | $ | 0.45 | $ | 0.11 | |||||
Distributions per share of common stock | $ | 0.38 | $ | 0.37 | $ | 1.12 | $ | 1.09 | |||||||
Weighted average common shares outstanding: | |||||||||||||||
Weighted average common shares outstanding – basic | 73,205 | 48,526 | 67,979 | 48,406 | |||||||||||
Weighted average common shares outstanding – diluted | 73,205 | 48,526 | 68,281 | 48,726 | |||||||||||
See accompanying notes to the condensed consolidated financial statements.
3
EDUCATION REALTY TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Amounts in thousands, except shares)
(Unaudited)
Common Stock | Additional Paid-In Capital | Retained Earnings (Accumulated Deficit) | Accumulated Other Comprehensive Loss | Noncontrolling Interests | Total | |||||||||||||||||||||
Shares | Amount | |||||||||||||||||||||||||
Balance, December 31, 2014 | 47,999,427 | $ | 480 | $ | 1,034,683 | $ | (41,909 | ) | $ | (4,465 | ) | $ | 3,029 | $ | 991,818 | |||||||||||
Proceeds from issuance of common stock, net of offering costs | 339,557 | 4 | 11,699 | — | — | — | 11,703 | |||||||||||||||||||
Amortization of restricted stock and long-term incentive plan awards | 10,807 | — | 1,429 | — | — | — | 1,429 | |||||||||||||||||||
Common stock issued to officers and directors | 12,300 | — | 408 | — | — | — | 408 | |||||||||||||||||||
Cash dividends | — | — | (52,602 | ) | — | — | (163 | ) | (52,765 | ) | ||||||||||||||||
Contributions from noncontrolling interests | — | — | — | — | — | 2,913 | 2,913 | |||||||||||||||||||
Adjustments to reflect redeemable noncontrolling interests at fair value | — | — | 422 | — | — | — | 422 | |||||||||||||||||||
Comprehensive income (loss) | — | — | — | 5,138 | (3,429 | ) | (100 | ) | 1,609 | |||||||||||||||||
Balance, September 30, 2015 | 48,362,091 | $ | 484 | $ | 996,039 | $ | (36,771 | ) | $ | (7,894 | ) | $ | 5,679 | $ | 957,537 | |||||||||||
Balance, December 31, 2015 | 56,879,003 | $ | 569 | $ | 1,263,603 | $ | (21,998 | ) | $ | (5,475 | ) | $ | 8,171 | $ | 1,244,870 | |||||||||||
Proceeds from issuance of common stock, net of offering costs | 16,151,647 | 161 | 625,146 | — | — | — | 625,307 | |||||||||||||||||||
Amortization of restricted stock and long-term incentive plan awards | 5,945 | — | 2,201 | — | — | — | 2,201 | |||||||||||||||||||
Common stock issued to officers and directors | 10,800 | — | 450 | — | — | — | 450 | |||||||||||||||||||
Cash dividends | — | — | (66,844 | ) | (8,793 | ) | — | (125 | ) | (75,762 | ) | |||||||||||||||
Contributions from noncontrolling interests | — | — | — | — | — | 13,502 | 13,502 | |||||||||||||||||||
Purchase of noncontrolling interests | — | — | (8,442 | ) | — | — | (8,237 | ) | (16,679 | ) | ||||||||||||||||
Adjustments to reflect redeemable noncontrolling interests at fair value | — | — | (2,134 | ) | — | — | — | (2,134 | ) | |||||||||||||||||
Comprehensive income (loss) | — | — | — | 30,791 | (2,837 | ) | (246 | ) | 27,708 | |||||||||||||||||
Balance, September 30, 2016 | 73,047,395 | $ | 730 | $ | 1,813,980 | $ | — | $ | (8,312 | ) | $ | 13,065 | $ | 1,819,463 | ||||||||||||
See accompanying notes to the condensed consolidated financial statements.
4
EDUCATION REALTY TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Nine months ended September 30, | |||||||
2016 | 2015 | ||||||
Operating activities: | |||||||
Net income | $ | 30,377 | $ | 5,052 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Depreciation and amortization | 58,951 | 49,605 | |||||
Loss on disposal of assets | 69 | — | |||||
Gain on sale of collegiate housing properties | (23,956 | ) | — | ||||
Noncash rent expense related to the straight-line adjustment for long-term ground leases | 3,556 | 3,596 | |||||
Loss on extinguishment of debt | 10,611 | — | |||||
Amortization of deferred financing costs | 1,380 | 1,527 | |||||
Amortization of unamortized debt premiums | (49 | ) | (632 | ) | |||
Distributions of earnings from unconsolidated entities | 249 | 233 | |||||
Noncash compensation expense related to stock-based incentive awards | 2,978 | 2,032 | |||||
Equity in losses of unconsolidated entities | 617 | 823 | |||||
Change in operating assets and liabilities (net of acquisitions) | 14,839 | 4,001 | |||||
Net cash provided by operating activities | 99,622 | 66,237 | |||||
Investing activities: | |||||||
Property acquisitions | (267,425 | ) | (57,876 | ) | |||
Purchase of corporate assets | (1,029 | ) | (728 | ) | |||
Restricted cash | 2,292 | (100 | ) | ||||
Investment in collegiate housing properties | (19,407 | ) | (11,517 | ) | |||
Proceeds from sale of collegiate housing properties | 94,951 | — | |||||
Advances under notes receivable | — | (2,069 | ) | ||||
Collections on notes receivable | 1,667 | — | |||||
Earnest money deposits | (400 | ) | (335 | ) | |||
Investment in assets under development | (213,518 | ) | (138,165 | ) | |||
Distributions from unconsolidated entities | 266 | 692 | |||||
Investments in unconsolidated entities | — | (575 | ) | ||||
Net cash used in investing activities | (402,603 | ) | (210,673 | ) | |||
See accompanying notes to the condensed consolidated financial statements.
5
Nine months ended September 30, | |||||||
2016 | 2015 | ||||||
Financing activities: | |||||||
Payment of mortgage and construction loans | (183,687 | ) | (67,799 | ) | |||
Borrowings under construction loans | 40,963 | 51,875 | |||||
Debt issuance costs | (607 | ) | (756 | ) | |||
Debt extinguishment costs | (10,290 | ) | — | ||||
Borrowings on line of credit | — | 199,000 | |||||
Repayments of line of credit | — | (2,000 | ) | ||||
Proceeds from issuance of common stock | 625,242 | 10,881 | |||||
Payment of offering costs | (766 | ) | (221 | ) | |||
Purchase and return of equity to noncontrolling interests | (19,589 | ) | — | ||||
Contributions from noncontrolling interests | 10,540 | 2,936 | |||||
Dividends and distributions paid to common and restricted stockholders | (75,637 | ) | (52,602 | ) | |||
Dividends and distributions paid to noncontrolling interests | (462 | ) | (881 | ) | |||
Repurchases of common stock for payments of restricted stock tax withholding | (315 | ) | (213 | ) | |||
Redemption of OP Units for cash | (667 | ) | — | ||||
Net cash provided by financing activities | 384,725 | 140,220 | |||||
Net increase (decrease) in cash and cash equivalents | 81,744 | (4,216 | ) | ||||
Cash and cash equivalents, beginning of period | 33,742 | 18,385 | |||||
Cash and cash equivalents, end of period | $ | 115,486 | $ | 14,169 | |||
Supplemental disclosure of cash flow information: | |||||||
Interest paid, net of amounts capitalized | $ | 9,854 | $ | 15,561 | |||
Income taxes paid | $ | 238 | $ | 32 | |||
Supplemental disclosure of noncash activities: | |||||||
Redemption of redeemable noncontrolling interests from unit holder to shares of common stock | $ | 938 | $ | 960 | |||
Capital expenditures in accounts payable and accrued expenses related to developments | $ | 30,022 | $ | 21,371 | |||
See accompanying notes to the condensed consolidated financial statements.
6
EDUCATION REALTY OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except unit data)
(Unaudited)
September 30, 2016 | December 31, 2015 | ||||||
Assets: | |||||||
Collegiate housing properties, net | $ | 2,125,140 | $ | 1,774,796 | |||
Assets under development | 162,336 | 117,384 | |||||
Cash and cash equivalents | 115,486 | 33,742 | |||||
Restricted cash | 7,492 | 9,784 | |||||
Other assets | 72,870 | 66,125 | |||||
Total assets | $ | 2,483,324 | $ | 2,001,831 | |||
Liabilities: | |||||||
Mortgage and construction loans, net of unamortized premium and deferred financing costs | $ | 61,847 | $ | 204,511 | |||
Unsecured revolving credit facility | — | — | |||||
Unsecured term loans, net of unamortized deferred financing costs | 186,706 | 186,518 | |||||
Unsecured senior notes, net of unamortized deferred financing costs | 247,873 | 247,678 | |||||
Accounts payable and accrued expenses | 125,421 | 85,670 | |||||
Deferred revenue | 30,981 | 19,024 | |||||
Total liabilities | 652,828 | 743,401 | |||||
Commitments and contingencies (see Note 7) | — | — | |||||
Redeemable limited partner units | 8,326 | 8,312 | |||||
Redeemable noncontrolling interests | 2,707 | 5,248 | |||||
Partners' capital: | |||||||
General partner - 6,920 units outstanding as of September 30, 2016 and December 31, 2015 | 183 | 184 | |||||
Limited partners - 73,040,475 and 56,872,083 units issued and outstanding as of September 30, 2016 and December 31, 2015, respectively | 1,814,527 | 1,241,990 | |||||
Accumulated other comprehensive loss | (8,312 | ) | (5,475 | ) | |||
Total partners' capital | 1,806,398 | 1,236,699 | |||||
Noncontrolling interests | 13,065 | 8,171 | |||||
Total partners' capital | 1,819,463 | 1,244,870 | |||||
Total liabilities and partners' capital | $ | 2,483,324 | $ | 2,001,831 | |||
See accompanying notes to the condensed consolidated financial statements.
7
EDUCATION REALTY OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)
(Amounts in thousands, except per unit data)
(Unaudited)
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Revenues: | |||||||||||||||
Collegiate housing leasing revenue | $ | 61,877 | $ | 54,725 | $ | 193,750 | $ | 168,842 | |||||||
Third-party development consulting services | 778 | 490 | 1,728 | 1,531 | |||||||||||
Third-party management services | 965 | 865 | 2,556 | 2,698 | |||||||||||
Operating expense reimbursements | 2,605 | 2,109 | 6,710 | 6,571 | |||||||||||
Total revenues | 66,225 | 58,189 | 204,744 | 179,642 | |||||||||||
Operating expenses: | |||||||||||||||
Collegiate housing leasing operations | 32,512 | 28,444 | 83,567 | 75,452 | |||||||||||
Development and management services | 2,716 | 3,019 | 7,965 | 8,228 | |||||||||||
General and administrative | 2,701 | 1,434 | 8,889 | 6,632 | |||||||||||
Depreciation and amortization | 22,336 | 17,828 | 58,951 | 49,605 | |||||||||||
Ground lease expense | 3,224 | 2,938 | 8,829 | 7,956 | |||||||||||
Other operating income | (1,100 | ) | — | (1,100 | ) | — | |||||||||
Reimbursable operating expenses | 2,605 | 2,109 | 6,710 | 6,571 | |||||||||||
Total operating expenses | 64,994 | 55,772 | 173,811 | 154,444 | |||||||||||
Operating income | 1,231 | 2,417 | 30,933 | 25,198 | |||||||||||
Nonoperating (income) expenses: | |||||||||||||||
Interest expense | 3,811 | 6,223 | 12,109 | 17,615 | |||||||||||
Amortization of deferred financing costs | 443 | 520 | 1,380 | 1,527 | |||||||||||
Interest income | (155 | ) | (39 | ) | (429 | ) | (144 | ) | |||||||
Loss on extinguishment of debt | 475 | — | 10,611 | — | |||||||||||
Total nonoperating expenses | 4,574 | 6,704 | 23,671 | 18,998 | |||||||||||
Income (loss) before equity in losses of unconsolidated entities, income taxes and gain on sale of collegiate housing properties | (3,343 | ) | (4,287 | ) | 7,262 | 6,200 | |||||||||
Equity in losses of unconsolidated entities | (480 | ) | (427 | ) | (617 | ) | (823 | ) | |||||||
Income (loss) before income taxes and gain on sale of collegiate housing properties | (3,823 | ) | (4,714 | ) | 6,645 | 5,377 | |||||||||
Income tax expense | 84 | 157 | 224 | 325 | |||||||||||
Income (loss) before gain on sale of collegiate housing properties | (3,907 | ) | (4,871 | ) | 6,421 | 5,052 | |||||||||
Gain on sale of collegiate housing properties | — | — | 23,956 | — | |||||||||||
Net income (loss) | (3,907 | ) | (4,871 | ) | 30,377 | 5,052 | |||||||||
Less: Net loss attributable to the noncontrolling interests | (360 | ) | (133 | ) | (511 | ) | (119 | ) | |||||||
Net income (loss) attributable to Education Realty Operating Partnership L.P. | $ | (3,547 | ) | $ | (4,738 | ) | $ | 30,888 | $ | 5,171 | |||||
See accompanying notes to the condensed consolidated financial statements.
8
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Comprehensive income (loss): | |||||||||||||||
Net income (loss) | $ | (3,907 | ) | $ | (4,871 | ) | $ | 30,377 | $ | 5,052 | |||||
Other comprehensive income (loss): | |||||||||||||||
Gain (loss) on cash flow hedging derivatives | 1,651 | (3,081 | ) | (2,837 | ) | (3,429 | ) | ||||||||
Comprehensive income (loss) | (2,256 | ) | (7,952 | ) | 27,540 | 1,623 | |||||||||
Less: Comprehensive loss attributable to the noncontrolling interests | (360 | ) | (133 | ) | (511 | ) | (119 | ) | |||||||
Comprehensive income (loss) attributable to unitholders | $ | (1,896 | ) | $ | (7,819 | ) | $ | 28,051 | $ | 1,742 | |||||
Earnings per unit information: | |||||||||||||||
Net income (loss) attributable to unitholders – basic and diluted | $ | (0.05 | ) | $ | (0.10 | ) | $ | 0.45 | $ | 0.11 | |||||
Distributions per unit | $ | 0.38 | $ | 0.37 | $ | 1.12 | $ | 1.09 | |||||||
Weighted average units outstanding: | |||||||||||||||
Weighted average units outstanding – basic | 73,399 | 48,775 | 68,182 | 48,657 | |||||||||||
Weighted average units outstanding – diluted | 73,399 | 48,775 | 68,281 | 48,726 | |||||||||||
See accompanying notes to the condensed consolidated financial statements.
9
EDUCATION REALTY OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL AND NONCONTROLLING INTERESTS
(Amounts in thousands, except units)
(Unaudited)
General Partner | Limited Partners | Accumulated Other Comprehensive Loss | Noncontrolling Interests | Total | |||||||||||||||||||||
Units | Amount | Units | Amount | ||||||||||||||||||||||
Balance, December 31, 2014 | 6,920 | $ | 191 | 47,992,507 | $ | 993,063 | $ | (4,465 | ) | $ | 3,029 | $ | 991,818 | ||||||||||||
Vesting of restricted stock and restricted stock units | — | — | 12,300 | 408 | — | — | 408 | ||||||||||||||||||
Issuance of units in exchange for contributions of equity offering proceeds and redemption of units | — | — | 339,557 | 11,703 | — | — | 11,703 | ||||||||||||||||||
Amortization of restricted stock and long-term incentive plan awards | — | — | 10,807 | 1,429 | — | — | 1,429 | ||||||||||||||||||
Distributions | — | (8 | ) | — | (52,594 | ) | — | (163 | ) | (52,765 | ) | ||||||||||||||
Contributions from noncontrolling interests | — | — | — | — | — | 2,913 | 2,913 | ||||||||||||||||||
Adjustments to reflect redeemable noncontrolling interests at fair value | — | — | — | 422 | — | — | 422 | ||||||||||||||||||
Comprehensive income (loss) | — | 1 | — | 5,137 | (3,429 | ) | (100 | ) | 1,609 | ||||||||||||||||
Balance, September 30, 2015 | 6,920 | $ | 184 | 48,355,171 | $ | 959,568 | $ | (7,894 | ) | $ | 5,679 | $ | 957,537 | ||||||||||||
Balance, December 31, 2015 | 6,920 | $ | 184 | 56,872,083 | $ | 1,241,990 | $ | (5,475 | ) | $ | 8,171 | $ | 1,244,870 | ||||||||||||
Vesting of restricted stock and restricted stock units | — | — | 10,800 | 450 | — | — | 450 | ||||||||||||||||||
Issuance of units in exchange for contributions of equity offering proceeds and redemption of units | — | — | 16,151,647 | 625,307 | — | — | 625,307 | ||||||||||||||||||
Amortization of restricted stock and long-term incentive plan awards | — | — | 5,945 | 2,201 | — | — | 2,201 | ||||||||||||||||||
Distributions | — | (3 | ) | — | (75,634 | ) | — | (125 | ) | (75,762 | ) | ||||||||||||||
Contributions from noncontrolling interests | — | — | — | — | — | 13,502 | 13,502 | ||||||||||||||||||
Purchase of noncontrolling interests | — | — | — | (8,442 | ) | — | (8,237 | ) | (16,679 | ) | |||||||||||||||
Adjustments to reflect redeemable noncontrolling interests at fair value | — | — | — | (2,134 | ) | — | — | (2,134 | ) | ||||||||||||||||
Comprehensive income (loss) | — | 2 | — | 30,789 | (2,837 | ) | (246 | ) | 27,708 | ||||||||||||||||
Balance, September 30, 2016 | 6,920 | $ | 183 | 73,040,475 | $ | 1,814,527 | $ | (8,312 | ) | $ | 13,065 | $ | 1,819,463 | ||||||||||||
See accompanying notes to the condensed consolidated financial statements.
10
EDUCATION REALTY OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Nine months ended September 30, | |||||||
2016 | 2015 | ||||||
Operating activities: | |||||||
Net income | $ | 30,377 | $ | 5,052 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Depreciation and amortization | 58,951 | 49,605 | |||||
Loss on disposal of assets | 69 | — | |||||
Gain on sale of collegiate housing properties | (23,956 | ) | — | ||||
Noncash rent expense related to the straight-line adjustment for long-term ground leases | 3,556 | 3,596 | |||||
Loss on extinguishment of debt | 10,611 | — | |||||
Amortization of deferred financing costs | 1,380 | 1,527 | |||||
Amortization of unamortized debt premiums | (49 | ) | (632 | ) | |||
Distributions of earnings from unconsolidated entities | 249 | 233 | |||||
Noncash compensation expense related to stock-based incentive awards | 2,978 | 2,032 | |||||
Equity in losses of unconsolidated entities | 617 | 823 | |||||
Change in operating assets and liabilities (net of acquisitions) | 14,839 | 4,001 | |||||
Net cash provided by operating activities | 99,622 | 66,237 | |||||
Investing activities: | |||||||
Property acquisitions | (267,425 | ) | (57,876 | ) | |||
Purchase of corporate assets | (1,029 | ) | (728 | ) | |||
Restricted cash | 2,292 | (100 | ) | ||||
Investment in collegiate housing properties | (19,407 | ) | (11,517 | ) | |||
Proceeds from sale of collegiate housing properties | 94,951 | — | |||||
Advances under notes receivable | — | (2,069 | ) | ||||
Collections on notes receivable | 1,667 | — | |||||
Earnest money deposits | (400 | ) | (335 | ) | |||
Investment in assets under development | (213,518 | ) | (138,165 | ) | |||
Distributions from unconsolidated entities | 266 | 692 | |||||
Investments in unconsolidated entities | — | (575 | ) | ||||
Net cash used in investing activities | (402,603 | ) | (210,673 | ) | |||
Financing activities: | |||||||
Payment of mortgage and construction loans | (183,687 | ) | (67,799 | ) | |||
Borrowings under construction loans | 40,963 | 51,875 | |||||
Debt issuance costs | (607 | ) | (756 | ) | |||
Debt extinguishment costs | (10,290 | ) | — | ||||
Borrowings on line of credit | — | 199,000 | |||||
Repayments of line of credit | — | (2,000 | ) | ||||
Proceeds from issuance of common units in exchange for contributions | 625,242 | 10,881 | |||||
Payment of offering costs | (766 | ) | (221 | ) | |||
Purchase and return of equity to noncontrolling interests | (19,589 | ) | — | ||||
See accompanying notes to the condensed consolidated financial statements.
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Nine months ended September 30, | |||||||
2016 | 2015 | ||||||
Contributions from noncontrolling interests | 10,540 | 2,936 | |||||
Distributions paid on unvested restricted stock and long-term incentive plan awards | (288 | ) | (138 | ) | |||
Distributions paid to unitholders | (75,349 | ) | (52,464 | ) | |||
Distributions paid to noncontrolling interests | (462 | ) | (881 | ) | |||
Repurchases of units for payments of restricted stock tax withholding | (315 | ) | (213 | ) | |||
Redemption of OP Units for cash | (667 | ) | — | ||||
Net cash provided by financing activities | 384,725 | 140,220 | |||||
Net increase (decrease) in cash and cash equivalents | 81,744 | (4,216 | ) | ||||
Cash and cash equivalents, beginning of period | 33,742 | 18,385 | |||||
Cash and cash equivalents, end of period | $ | 115,486 | $ | 14,169 | |||
Supplemental disclosure of cash flow information: | |||||||
Interest paid, net of amounts capitalized | $ | 9,854 | $ | 15,561 | |||
Income taxes paid | $ | 238 | $ | 32 | |||
Supplemental disclosure of noncash activities: | |||||||
Redemption of redeemable noncontrolling interests from unit holder to shares of common stock | $ | 938 | $ | 960 | |||
Capital expenditures in accounts payable and accrued expenses related to developments | $ | 30,022 | $ | 21,371 | |||
See accompanying notes to the condensed consolidated financial statements.
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EDUCATION REALTY TRUST, INC. AND SUBSIDIARIES
EDUCATION REALTY OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization and description of business
Education Realty Trust, Inc. ("EdR" and, collectively with its consolidated subsidiaries, the “Trust”) was organized in the state of Maryland on July 12, 2004 and commenced operations effective with the initial public offering that was completed on January 31, 2005. Through the Trust's controlling interest in both the sole general partner and the majority owning limited partner of Education Realty Operating Partnership L.P. ("EROP" and, collectively with its consolidated subsidiaries, the "Operating Partnership"), the Trust is one of the largest developers, owners and managers of collegiate housing communities in the United States in terms of beds owned and under management. The Trust is a self-administered and self-managed real estate investment trust ("REIT") that is publicly traded on the New York Stock Exchange under the ticker symbol "EDR." Under the 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 sole general partner of EROP is Education Realty OP GP, Inc. (“OP GP”), an entity that is indirectly wholly-owned by EdR. As of September 30, 2016, OP GP held an ownership interest in EROP of less than 1%. The limited partners of EROP are Education Realty OP Limited Partner Trust, a wholly-owned subsidiary of EdR, and other limited partners consisting of former members of management. OP GP, as the sole general partner of EROP, has the responsibility and discretion in the management and control of EROP, and the limited partners of EROP, in such capacity, have no authority to transact business for, or participate in the management activities of EROP. Management operates the Trust and the Operating Partnership as one business. The management of the Trust consists of the same members as the management of the Operating Partnership. EdR consolidates the Operating Partnership for financial reporting purposes, and EdR does not have significant assets other than its investment in the Operating Partnership. Therefore, the assets and liabilities of the Trust and the Operating Partnership are the same on their respective financial statements. Unless otherwise indicated, the accompanying Notes to the Condensed Consolidated Financial Statements apply to both the Trust and the Operating Partnership.
The Trust also provides real estate facility management, development and other advisory services through one of our taxable REIT subsidiaries ("TRS"), EDR Management Inc. (our “Management Company”), a Delaware corporation performing collegiate housing management activities. EDR Development LLC (our “Development Company”), a Delaware limited liability company and wholly owned subsidiary of the Management Company providing development consulting services for third-party collegiate housing communities, is a disregarded entity for federal income tax purposes and all assets owned and income earned by our Development Company are deemed to be owned and earned by our Management Company.
2. Summary of significant accounting policies
Basis of presentation
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.
All intercompany balances and transactions have been eliminated in the accompanying condensed consolidated financial statements.
Principles of consolidation
In February 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-02, Consolidation (Topic 810) ("ASU 2015-02"), which amends the consolidation requirements in ASC 810, Consolidation, and makes changes to both the variable interest model and the voting model of consolidation. Under ASU 2015-02, companies will need to reevaluate whether an entity meets the criteria to be considered a variable interest entity (“VIE”) or whether the consolidation of an entity should be assessed under the voting model. All legal entities are subject to reevaluation under the revised consolidation model. Specifically, ASU 2015-02 modifies the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities, and eliminates the presumption in the previous
13
voting model that a general partner should consolidate a limited partnership or similar entity unless the presumption can be overcome. ASU 2015-02 was effective for the Trust and the Operating Partnership as of January 1, 2016. The adoption of the new standard did not result in the consolidation of entities not previously consolidated or the deconsolidation of any entities previously consolidated.
The Trust accounts for interests in partnerships, joint ventures and other similar entities in which it holds an ownership interest in accordance with the amended guidance. The Trust first evaluates whether each entity is a VIE. Under the VIE model, the Trust consolidates an entity when it has control to direct the activities of the VIE and where it is determined to be the primary beneficiary. Under the voting interest model, the Trust consolidates an entity when it controls the entity through the ownership of a majority voting interest.
Upon adoption, the Operating Partnership and certain properties that have noncontrolling interests (see Note 8) became VIEs as the limited partners of these entities lack substantive kick-out rights and substantive participating rights. The Trust continues to consolidate these entities as the primary beneficiary because it directs the activities that most significantly impact the economic performance of the VIEs and has an obligation to absorb potentially significant losses or the right to receive potentially significant benefits of the VIEs. EdR has the power and economic exposure through the rights held by OP GP as it relates to the Operating Partnership, while EROP has power and economic exposure through its role as the property manager and equity interest holder of certain properties with noncontrolling interests (see Note 8).
All of the Trust's property ownership, development and related business operations are conducted through the Operating Partnership. See the assets and liabilities of the Operating Partnership in the accompanying condensed consolidated financial statements.
Interim financial information
The accompanying unaudited interim condensed consolidated 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, 2015, as filed with the Securities and Exchange Commission (the "SEC") on February 29, 2016.
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 periods. Actual results could differ from those estimates.
Notes receivable
On August 26, 2013, the Trust provided a $0.5 million promissory loan to College Park Apartments, Inc. ("CPA"), the Trust's partner in the unconsolidated joint venture University Village-Greensboro LLC (see Note 5), at an interest rate of 10% per annum and a maturity date of August 1, 2020. Under the loan, CPA can make one draw per calendar quarter. As of September 30, 2016 and December 31, 2015, the outstanding balance was $0.5 million for both periods. The loan is secured by CPA's interest in the joint venture.
On March 20, 2015, the Trust provided a $1.7 million promissory loan to Concord Eastridge, Inc, the Trust's partner in the joint venture at Roosevelt Point, at an interest rate equal to 2% plus the London InterBank Offered Rate ("LIBOR") per annum compounded monthly and a maturity date of March 1, 2017. The loan was secured by Concord Eastridge's interest in the joint venture. As of December 31, 2015, $1.7 million was outstanding. In February 2016, the Trust acquired Concord Eastridge, Inc.'s remaining partnership interest for $4.9 million in cash. The outstanding promissory loan was repaid in full at closing.
14
Collegiate 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.
The Trust capitalizes interest based on the weighted average interest costs of total debt, and internal development costs while developments are ongoing, as assets under development. When the property opens, these costs, along with other direct costs of the development, are transferred into the applicable asset category and depreciation commences.
Acquired collegiate 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 other 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. Acquisition costs are expensed as incurred and are included in general and administrative expenses in the accompanying condensed consolidated statements of income and comprehensive income.
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, 2016 and 2015, there were no impairment losses recognized.
When a collegiate 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 collegiate housing community has met the held for sale criteria. Dispositions that represent a strategic shift in the business will qualify for treatment as discontinued operations. The property dispositions during the nine months ended September 30, 2016 did not qualify for treatment as discontinued operations and, as a result, the operations of the properties are included in continuing operations in the accompanying condensed consolidated statements of income and comprehensive income.
During August 2016, the Trust committed and finalized plans to demolish and redevelop the off-campus community Players Club, which serves Florida State University. Redevelopment and construction costs are expected to be $37.5 million, with construction beginning in May 2017 subsequent to the current leasing cycle. Depreciation estimates were revised to reflect the shortened remaining useful life. The Trust recorded $1.2 million of accelerated depreciation during the three and nine months ended September 30, 2016 related to the change in estimate. The impact on net income attributable to EdR common stockholders per share - basic and diluted for the three and nine month periods ending September 30, 2016 is $0.02. For the year ended December 31, 2016, the Trust estimates recording accelerated depreciation of $3.0 million ($1.8 million estimated for the three months ending December 31, 2016) with an additional $3.0 million of accelerated depreciation to be recorded in 2017.
Redeemable noncontrolling interests (the Trust) / redeemable limited partners (EROP)
The Trust follows the guidance issued by the FASB regarding the classification and measurement of redeemable securities. The Trust classifies redeemable noncontrolling interests, which include redeemable interests in consolidated joint ventures and units of limited partnership interest in University Towers Operating Partnership, LP and in the Operating Partnership in the mezzanine section of the accompanying condensed consolidated balance sheets.
In the accompanying condensed consolidated balance sheets of the Operating Partnership, the redeemable units of limited partnership in the Operating Partnership are classified as redeemable limited partners and the redeemable interests in consolidated joint ventures and units of limited partnership in University Towers Operating Partnership, LP are classified as redeemable noncontrolling interests. The redeemable noncontrolling interest units / redeemable limited partner units are adjusted to the greater of carrying value or fair market value based on the price per share of EdR's common stock at the end of each respective reporting period.
15
Common stock issuances and offering costs
Specific incremental costs directly attributable to the issuance of EdR 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 statements of changes in equity.
The Trust is structured as an umbrella partnership REIT ("UPREIT") and contributes all proceeds from its various equity offerings to EROP. For every one share of common stock offered and sold by EdR for cash, EdR must contribute the net proceeds to EROP and, in return, EROP will issue one OP Unit to EdR.
During October 2014, the Trust entered into distribution agreements in connection with the establishment of an at-the-market equity offering program ("ATM Program") pursuant to which EdR could, from time to time, sell a maximum of $150.0 million in additional shares of its common stock. The Trust sold approximately 2.3 million shares under these distribution agreements during the nine months ended September 30, 2016 and received net proceeds of approximately $93.5 million. The Trust sold 0.3 million shares under these distribution agreements during the nine months ended September 30, 2015 and received net proceeds of $10.6 million.
On January 15, 2016, the Trust completed a follow-on equity offering of approximately 6.3 million shares of EdR common stock. The Trust received approximately $215.1 million in net proceeds from the offering after deducting the underwriting discount and other offering expenses payable by the Trust. Of the total net proceeds, approximately $108.5 million was used to pay off $98.2 million of fixed rate mortgage debt bearing an average effective interest rate of 5.4% and $10.3 million of prepayment penalties associated with the early extinguishment of debt.
On March 24, 2016, EdR issued approximately 0.5 million shares of its common stock for a total of approximately $20.0 million pursuant to the direct stock purchase component of the Amended and Restated Dividend Reinvestment and Direct Stock Purchase Plan.
On May 2, 2016, the Trust entered into distribution agreements in connection with the establishment of a new ATM Program pursuant to which EdR could, from time to time, sell a maximum of $300.0 million in additional shares of its common stock. The Trust sold approximately 7.0 million shares under these distribution agreements during the nine months ended September 30, 2016 and received net proceeds of approximately $296.2 million.
On August 1, 2016, the Trust entered into equity distribution agreements to establish a new ATM Program whereby EdR is authorized to sell a maximum of $300.0 million in shares of its common stock. Under these agreements, EdR may make sales of common stock through at-the-market transactions or pursuant to forward sales agreements (the “Forward Agreements”) with certain counterparties. In connection with any Forward Agreement, the relevant forward purchaser will borrow from third parties, and through the relevant sales agent, sell a number of shares of EdR common stock underlying the particular Forward Agreement. The Trust does not initially receive any proceeds from any sale of borrowed shares. During the three months ended September 30, 2016, the Trust entered into six Forward Agreements to sell an aggregate of 4.5 million shares of common stock at a weighted average initial forward price of $43.74 per share, net of offering fees and discounts. The final sales price and proceeds to be received by the Trust from the sales under each Forward Agreement will be determined on the applicable date of settlement, with adjustments during the term of the contract for dividends as well as for a daily interest factor that varies with changes in the federal funds rate. The Trust generally has the ability to determine the dates and method of settlement, subject to certain conditions and the right of the counterparty to accelerate settlement under certain circumstances. The Trust currently expects to fully physically settle each Forward Agreement on one or more dates specified by the Trust prior to the maturity date of the applicable Forward Agreement, in which case the Trust expects to receive aggregate net cash proceeds at settlement equal to the number of shares of common stock underlying the applicable Forward Agreement multiplied by the relevant forward sale price. However, subject to certain exceptions, the Trust may also elect, in its discretion, to cash settle or net share settle a particular Forward Agreement, in which case the Trust may not receive any proceeds (in the case of cash settlement) or will not receive any proceeds (in the case of net share settlement), and the Trust may owe cash (in the case of cash settlement) or shares of EdR (in the case of net share settlement) to the relevant counterparty. Settlement of each Forward Agreement currently in place will occur on one or more dates not later than December 29, 2017. The Trust accounts for shares of EdR common stock reserved for issuance upon settlement of each Forward Agreement as equity. Before the issuance of shares of EdR common stock, if any, upon physical or net share settlement of the Forward Agreements, the Trust expects that the shares issuable upon settlement of the Forward Agreements will be reflected in its diluted earnings per share calculations using the treasury stock method. Under this method, the number of shares of EdR common stock used in calculating diluted earnings per share is deemed to be increased by the excess, if any, of the number of shares of common stock that would be issued upon full physical settlement of the Forward Agreements over the number of shares of common stock that could be purchased by the Company in the open market (based on the average market price during the period) using the proceeds receivable upon full
16
physical settlement (based on the adjusted forward sale price at the end of the reporting period). If and when the Trust physically or net share settles any Forward Agreement, the delivery of shares of our common stock would result in an increase in the number of shares outstanding and dilution to basic earnings per share.
Income taxes
EdR qualifies as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"). EdR 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 REIT taxable income for each tax year to its stockholders and meets certain other requirements. If EdR fails to qualify as a REIT for any taxable year, EdR 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 certain of its subsidiaries, including the Management Company, as TRSs. A TRS is subject to federal, state and local income taxes. The Management Company provides management services and through the Development Company, provides development services, which if directly provided by the Trust would jeopardize EdR’s REIT status. 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, 2016 and December 31, 2015. The Trust and its subsidiaries file federal and state income tax returns. As of September 30, 2016, open tax years generally included tax years for 2013, 2014 and 2015. The Trust’s policy is to include interest and penalties related to unrecognized tax benefits in general and administrative expenses. For each of the nine months ended September 30, 2016 and 2015, the Trust had no interest or penalties recorded related to unrecognized tax benefits.
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 carrying value of 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 is $0.4 million. No additional impairment has been recorded through September 30, 2016. The carrying value of goodwill was $3.1 million as of September 30, 2016 and December 31, 2015, of which $2.1 million was recorded on the management services segment and $0.9 million was recorded on the development consulting services segment. Goodwill is not subject to amortization. Other intangible assets generally include in-place leases acquired in connection with acquisitions and are amortized over the estimated life of the lease/contract term. The carrying value of other intangible assets was $8.5 million and $0.2 million as of September 30, 2016 and December 31, 2015, respectively.
Investment in unconsolidated entities
The Trust accounts for its investments in unconsolidated joint ventures using the equity method whereby the costs of an investment are 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 are allocated based on each owner’s respective ownership interests. These investments are classified as other assets or accrued expenses, depending on whether the distributions exceed the Trust’s contributions and share of earnings in the joint ventures, in the accompanying condensed consolidated balance sheets (see Note 5).
Earnings per share
Earnings per Share - The Trust
Basic earnings per share is calculated by dividing net income available to common stockholders by weighted average shares of common stock outstanding, including outstanding units in the Operating Partnership designated as LTIP Units ("LTIP Units"). Diluted earnings per share is calculated similarly, except that it includes the dilutive effect of the assumed exercise of potentially dilutive securities and the shares issuable upon settlement of the Forward Agreements using the treasury stock method. The Trust follows 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 included in the computation of earnings per share under the two-class method. This results in shares of unvested restricted stock and LTIP Units being included in the computation of basic earnings per share for all periods presented.
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Earnings per OP Unit - EROP
Basic earnings per unit is calculated by dividing net income available to unitholders by the weighted average number of OP Units and LTIP Units outstanding. Diluted earnings per unit is calculated similarly, except that it includes the dilutive effect of the assumed exercise of potentially dilutive securities and the shares issuable upon settlement of the Forward Agreements using the treasury stock method. EROP follows the authoritative guidance regarding the determination of whether certain instruments are participating securities.
Recent accounting pronouncements
In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments" ("ASU 2016-15"). ASU 2016-15 addresses eight specific cash flow issues and intends to reduce the diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows and will be applied retrospectively. This guidance is effective for annual periods beginning after December 15, 2017, including interim periods within that reporting period, with early adoption is permitted. The Trust is currently evaluating the impact of this guidance.
In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”), which changes certain aspects of accounting for share-based payments to employees, including the accounting for income taxes, forfeitures, and statutory withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 is effective for annual reporting periods beginning after December 15, 2016 and interim periods within those annual periods. Early adoption is permitted in any interim or annual period. If adopted in an interim period, any adjustments should be reflected as of the beginning of the fiscal year. The Trust early adopted the amendments during the three months ended September 30, 2016 effective as of January 1, 2016 as permitted by the ASU. The amendments were applied using a combination of the modified retrospective transition method, retrospective application or prospectively depending on the applicable amendment being adopted. The adoption of ASU 2016-09 did not have a material impact on the accompanying condensed consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) ("ASU 2016-02"), which requires a lessee to recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, and interim periods within those years, on a modified prospective basis. The Trust is currently evaluating the impact of this guidance.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"), as amended by ASU 2015-04 to defer the effective date. The guidance outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including the guidance on real estate derecognition for most transactions. ASU 2014-09 provides that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. ASU 2014-09 will be effective for annual reporting periods beginning after December 15, 2017, and interim periods within those years and permits the use of either the retrospective or cumulative effect transition method. Early adoption is permitted for annual reporting periods beginning after December 15, 2016. Since the issuance of ASU 2014-09, the FASB has issued ASU 2016-08 that is intended to improve the understandability of the implementation guidance regarding principal versus agent considerations and has issued ASU 2016-10 to clarify the identification of performance obligations and the implementation guidance related to licensing. The effective dates of these amendments are the same as ASU 2014-09. The Trust is currently evaluating the provisions of this guidance.
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3. Acquisition and development of real estate investments
Acquisition of collegiate housing properties
2016 Acquisitions
During the nine months ended September 30, 2016, the Trust completed the following five collegiate housing property acquisitions:
Name | Primary University Served | Acquisition Date | # of Beds | # of Units | Contract Price (in thousands) | |||||||||
Lokal | Colorado State University, Colorado | March 2016 | 194 | 79 | $ | 24,600 | ||||||||
The Hub at Madison | University of Wisconsin, Wisconsin | May 2016 | 1,038 | 341 | $ | 188,500 | ||||||||
Pura Vida Place | Colorado State University, Colorado | August 2016 | 100 | 52 | $ | 12,000 | ||||||||
Carriage House | Colorado State University, Colorado | August 2016 | 94 | 54 | $ | 12,000 | ||||||||
Urbane | University of Arizona, Arizona | September 2016 | 311 | 104 | $ | 50,000 | ||||||||
Combined acquisition costs for these purchases were $0.3 million and are included in general and administrative expenses in the accompanying condensed consolidated statements of income and comprehensive income for the nine months ended September 30, 2016. These acquisitions were funded from proceeds of the sale of 605 West (see Note 4), the follow-on equity offering completed in January 2016 (see Note 2) and shares sold under the ATM program (see Note 2).
Due to the timing of the completion of the acquisitions, work is still ongoing to determine the fair value of the assets and liabilities as of the respective acquisition dates, and as a result, the following amounts are preliminary. Below is the preliminary allocation of the purchase price to the fair values of assets acquired and liabilities assumed as of the date of the acquisition (in thousands):
Lokal | The Hub at Madison | Pura Vida Place | Carriage House | Urbane | Total | |||||||||||||||||||
Collegiate housing property | $ | 23,371 | $ | 189,291 | $ | 10,976 | $ | 11,037 | $ | 46,203 | $ | 280,878 | ||||||||||||
In-place leases | 1,131 | 4,129 | 1,024 | 963 | 3,780 | 11,027 | ||||||||||||||||||
Other assets | 3 | 87 | 5 | 4 | 18 | 117 | ||||||||||||||||||
Current liabilities | (148 | ) | (7,442 | ) | (144 | ) | (67 | ) | (584 | ) | (8,385 | ) | ||||||||||||
Total net assets acquired | $ | 24,357 | $ | 186,065 | $ | 11,861 | $ | 11,937 | $ | 49,417 | $ | 283,637 | ||||||||||||
The $3.5 million difference between the contracted price of $287.1 million and the net assets set forth in the table above includes contingent consideration estimated at $5.3 million representing additional purchase price related to future operating performance of the applicable property and future tax assessments. Of this amount, $3.1 million was paid out subsequent to the acquisition. At September 30, 2016, the remaining contingent consideration of $1.0 million was determined based on the probability of achieving of certain operating performance metrics; the estimated range of possible outcomes is between $0.0 million and $1.0 million. During the three months ended September 30, 2016, a $1.1 million adjustment was recorded in other operating income to reduce the contingent consideration liability to estimated fair value based on the range of possible outcomes. The remaining difference between the contracted price and the net assets set forth above represents working capital and other liabilities that were not part of the contractual purchase price, but were acquired.
In connection with the acquisition of Urbane, the Trust formed a limited liability company to acquire an interest in the legal entity owning the collegiate housing property. In addition to the $10.0 million capital contribution, the Trust advanced $23.6 million to the seller. Under the terms of the agreement, the Trust has a call exercisable on September 8, 2017 to acquire the remaining ownership interest from the seller and the seller similarly has a put to sell their interests to the Trust. The exercise price is substantially fixed and the exercise dates are within one month of each other. The Trust evaluated the LLC as a VIE and
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determined they were the primary beneficiary because it directs the activities that most significantly impact the economic performance of the entity. Therefore the Trust has consolidated the VIE from the date of acquisition.
Additionally, the Trust has evaluated the put and call arrangement related to the acquisition and determined the noncontrolling interests represent a liability as the Trust has the risks and rewards of owning the noncontrolling interests because of the substantially fixed exercise prices and stated exercise dates and therefore the economic substance is a financing arrangement. The Trust has recorded the liability at the present value of the fixed price settlement amount ($16.4 million reflected in accounts payable and accrued expenses) and will accrete the liability to the fixed price over the contractual term. Accordingly, no earnings have been attributed to noncontrolling interests in the accompanying condensed consolidated statement of net income and comprehensive income.
The unaudited pro forma information had the acquisition date been January 1, 2015 is as follows (in thousands, except per share and per unit amounts):
Nine months ended September 30, | ||||||||
2016 (1) | 2015 (2) | |||||||
Total revenue attributable to the Trust and EROP | $ | 209,479 | $ | 182,185 | ||||
Net income attributable to the Trust | $ | 26,020 | $ | 3,461 | ||||
Net income per share attributable to common shareholders - basic and diluted | $ | 0.38 | $ | 0.07 | ||||
Net income attributable to EROP | $ | 26,105 | $ | 3,482 | ||||
Net income per unit attributable to unitholders - basic and diluted | $ | 0.38 | $ | 0.07 | ||||
(1) As Urbane first opened for the 2016/2017 lease year (September 2016), supplemental pro forma revenue and net income information is not available for the period January 1, 2015 - September 30, 2015.
(2) As the Lokal and the Hub at Madison first opened for the 2015/2016 lease year (August 2015), supplemental pro forma revenue and net income information only includes two months of operations.
2015 Acquisitions
During the year ended December 31, 2015, the Trust completed the following two collegiate housing property acquisitions:
Acquisition | Contract Price | |||||||||||
Name | Primary University Served | Date | # of Beds | # of Units | (in thousands) | |||||||
The Commons on Bridge | University of Tennessee Knoxville, Tennessee | June 2015 | 150 | 51 | $ | 9,700 | ||||||
The Province at Boulder | University of Colorado Boulder, Colorado | Sept. 2015 | 317 | 84 | $ | 48,800 | ||||||
Below is the allocation of the purchase price to the fair values of assets acquired and liabilities assumed as of the date of acquisition (in thousands):
The Commons on Bridge | The Province at Boulder | Total | |||||||||
Collegiate housing properties | $ | 9,624 | $ | 48,522 | $ | 58,146 | |||||
In-place leases | 76 | 278 | 354 | ||||||||
Other assets | 5 | 85 | 90 | ||||||||
Current liabilities | (338 | ) | (376 | ) | (714 | ) | |||||
Total net assets acquired | $ | 9,367 | $ | 48,509 | $ | 57,876 | |||||
The $0.6 million difference between contracted price of $58.5 million and the net assets set forth in the table above represents working capital and other liabilities that were not part of the contractual purchase price, but were acquired.
In connection with the acquisition of the The Province at Boulder, the Trust entered into a reverse Section 1031 like-kind exchange agreement with a third party intermediary, which, for a maximum of 180 days, allowed the Trust to defer for tax purposes gains on the sale of other properties identified and sold within this period. Until the earlier of the termination of the exchange agreements or 180 days after the respective acquisition date, the third party intermediary is the legal owner of the
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property; however, the Trust controlled the activities that most significantly impact the property and retained all of the economic benefits and risks associated with the property. Therefore, at the date of the acquisition, it was determined that the Trust was the primary beneficiary of this VIE and consolidated the property and its operations as of the respective acquisition date. As of December 31, 2015, this VIE had total assets of $48.6 million and liabilities of $0.3 million. The reverse Section 1031 like-kind exchange was completed during March 2016 in connection with the sale of 605 West (see Note 4). The Trust is now the legal owner of The Province at Boulder.
The unaudited pro forma financial information had the acquisition date for the 2015 acquisitions been January 1, 2014 of the respective year as follows and is not indicative of results that would have occurred or which may occur (in thousands, except per share and per unit amounts):
Nine months ended September 30, | ||||||||
2015 | 2014 | |||||||
Total revenue attributable to the Trust and EROP | $ | 182,238 | $ | 160,311 | ||||
Net income attributable to the Trust | $ | 6,210 | $ | 24,767 | ||||
Net income per share attributable to common shareholders - basic | $ | 0.13 | $ | 0.60 | ||||
Net income per share attributable to common shareholders - diluted | $ | 0.13 | $ | 0.59 | ||||
Net income attributable to EROP | $ | 6,248 | $ | 25,024 | ||||
Net income per unit attributable to unitholders - basic and diluted | $ | 0.13 | $ | 0.60 | ||||
A summary of actual revenue and net income from the 2016 and 2015 property acquisitions included in the accompanying condensed consolidated statements of income and comprehensive income since the respective dates of acquisition is as follows (in thousands):
Nine months ended September 30, | ||||||||
2016 | 2015 | |||||||
2016 Acquisitions | ||||||||
Revenue | $ | 4,890 | $ | — | ||||
Net income | $ | 2,873 | $ | — | ||||
2015 Acquisitions | ||||||||
Revenue | $ | 3,712 | $ | 492 | ||||
Net income | $ | 2,458 | $ | 324 | ||||
Development of collegiate housing properties
During the nine months ended September 30, 2016, the Trust completed the development of the following communities which opened for the 2016/2017 lease year. The costs incurred as of September 30, 2016 for the owned communities represent the balance capitalized in collegiate housing properties, net as of September 30, 2016 (dollars in thousands):
Name | Primary University Served | Bed Count | Costs Incurred as of September 30, 2016 | Internal Development Costs Capitalized | Interest Costs Capitalized | Internal Development Costs Capitalized | Interest Costs Capitalized | ||||||||||||||||||
Nine months ended September 30, 2016 | Three months ended September 30, 2016 | ||||||||||||||||||||||||
Holmes Hall and Boyd Hall | University of Kentucky | 1,141 | $ | 85,520 | $ | 339 | $ | 1,900 | $ | 178 | $ | 479 | |||||||||||||
Retreat at Blacksburg - Phase I & II | Virginia Tech | 829 | 64,523 | 143 | 709 | 69 | 155 | ||||||||||||||||||
Retreat at Oxford - Phase II | University of Mississippi | 350 | 26,745 | 58 | 590 | 19 | 141 | ||||||||||||||||||
Total | 2,320 | $ | 176,788</ | ||||||||||||||||||||||