EDUCAITON REALTY TRUST
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2006
Or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
For
the transition period from to
Commission file number: 001-32417
Education Realty Trust, Inc.
(Exact Name of Registrant as Specified in Its Charter)
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Maryland
(State or other jurisdiction of
incorporation or organization)
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20-1352180
(I.R.S. Employer
Identification No.) |
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530 Oak Court Drive, Suite 300,
Memphis Tennessee
(Address of principal executive offices)
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38117
(Zip Code) |
Registrants telephone number, including area code:
(901) 259-2500
Securities registered pursuant to section 12(b) of the Act:
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Title of class
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Name of exchange on which registered |
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Common Stock, $.01 par value per share
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New York Stock Exchange |
Securities registered pursuant to section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or 15(d) of the Act. Yes o No þ
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 twelve months
(or for such shorter period that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes o No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
Indicate by check mark if the registrant is a shell company (as defined by Rule 12b-2 of the
Act). Yes o No þ
As of June 30, 2006 the aggregate market value of the registrants common stock held by
non-affiliates of the registrant was $439,800, based on the closing sale price as reported on the
New York Stock Exchange.
As of March 9, 2007, the Registrant had 27,386,537 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant incorporates by reference portions of its Definitive Proxy Statement for the
2007 Annual Meeting of Stockholders into Part III of this Form 10-K to the extent stated herein.
EDUCATION REALTY TRUST, INC.
Form 10-K
Year Ended December 31, 2006
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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements, including discussion and
analysis of the financial condition of Education Realty Trust, Inc., our anticipated capital
expenditures required to complete projects, amounts of anticipated cash distributions to our
stockholders in the future and other matters. These forward-looking statements are not historical
facts but are the intent, belief or current expectations of our management based on their knowledge
and understanding of the business and industry. Words such as anticipates, expects, intends,
plans, believes, seeks, estimates and variations of these words and similar expressions are
intended to identify forward-looking statements. These statements are not guarantees of future
performance and are subject to risks, uncertainties and other factors, some of which are beyond our
control, are difficult to predict and could cause actual results to differ materially from those
expressed or forecasted in the forward-looking statements.
Forward-looking statements that were true at the time made may ultimately prove to be
incorrect or false. You are cautioned to not place undue reliance on forward-looking statements,
which reflect our managements view only as of the date of this Annual Report. We undertake no
obligation to update or revise forward-looking statements to reflect changed assumptions, the
occurrence of unanticipated events or changes to future operating results. Factors that could cause
actual results to differ materially from any forward-looking statements made in this Annual Report
include changes in general economic conditions, changes in real estate conditions, construction
costs that may exceed estimates, construction delays, increases in interest rates, lease-up risks,
inability to obtain new tenants upon the expiration of existing leases, and the potential need to
fund tenant improvements or other capital expenditures out of operating cash flow. The
forward-looking statements should be read in light of these factors and the factors identified in
Item 1A Risk Factors below.
PART I
Item 1. Business.
(Dollars in thousands, except selected property information and share data)
Our Company
Education
Realty Trust, Inc., which we refer to as EDR or the Trust, is a self-managed and self-advised real estate
investment trust, or REIT, organized in July 2004 to acquire, own and manage high quality student
housing communities located near university campuses. We were formed to continue and expand upon
the student housing business of Allen & OHara, Inc., or
the EDR Predecessor, a company with over 40
years of experience as an owner, manager and developer of student housing. As of December 31, 2006,
we own 40 student housing communities located in 17 states containing 26,019 beds in 7,953
apartment units located near 33 universities. As of December 31, 2006, we provide third-party
management services for 17 student housing communities located in 9 states containing 9,193 beds in
3,017 apartment units at 13 universities. We also provide third-party development consulting
services on student housing development projects mostly for universities.
Initial Public Offering and Formation Transactions
On
January 31, 2005, or the Closing Date, we sold 21,850,000 shares of our common stock at an
offering price of $16.00 per share, including the sale of 2,850,000 shares in connection with the
full exercise of the over-allotment option by the underwriters of our
initial public offering, or the
Offering. Simultaneous with the Offering, we completed our formation transactions, which
included the contribution of the student housing business of the EDR Predecessor and its
subsidiaries, purchase of the related minority interests in the EDR Predecessor and its
subsidiaries and the acquisition of 14 student housing communities previously owned by JPI
Investment Company, L.P. and its affiliates, or JPI. The net proceeds of the Offering after
expenses were approximately $320,400.
Following the closing of our Offering and our formation transactions, substantially all of our
assets are held by, and we have conducted substantially all of our activities through Education
Realty Operating Partnership, LP, our Operating Partnership, and its wholly owned subsidiaries,
Allen & OHara Education Services, Inc., which we refer to as our Management Company and Allen &
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OHara Development Company, LLC, which we refer to as our Development Company. The majority of our
operating expenses are borne by our Operating Partnership, our Management Company or our
Development Company, as the case may be.
We are the sole general partner of our Operating Partnership. As a result, our board of
directors effectively directs all of our Operating Partnerships affairs. We own 95.8% of the
outstanding partnership units of our Operating Partnership, and 3.3% of the partnership units of
our Operating Partnership are held by the former owners of our initial properties and assets
including members of our management team. Some of our officers also own an indirect interest in our
Operating Partnership, which we refer to as profits interest units, which is held through
ownership of units in Education Realty Limited Partner, LLC, a Delaware limited liability company
controlled by us and that holds 0.9% of the aggregate interests in our Operating Partnership.
Since the Closing Date, University Towers Operating Partnership, LP, or the University Towers
Partnership, which is our affiliate, has held, owned and operated our University Towers property
located in Raleigh, North Carolina. We own 67% of the units in the University Towers Partnership,
and 33% of the University Towers Partnership is held by the former owners of our initial properties
and assets including members of our management team.
REIT Status and Taxable REIT Subsidiary
We have elected to be taxed as a real estate investment trust, or REIT, for federal income tax
purposes. With the exception of income from our taxable REIT subsidiary or TRS, income earned
under the REIT is not subject to income taxes. In order to qualify as a REIT, a specified
percentage of our gross income must be derived from real property sources, which would generally
exclude our income from providing development and management services to third parties as well as
our income from certain services afforded to our student-tenants. In order to avoid realizing such
income in a manner that would adversely affect our ability to qualify as a REIT, we provide some
services through our Management Company and our Development Company, with our Management Company
electing, together with us, to be treated as our TRS. Our Management Company is wholly owned and
controlled by our Operating Partnership, and our Management Company wholly owns our Development
Company. Our Development Company is a disregarded entity for federal income tax purposes and all
assets owned and earned by our Development Company are deemed to be owned and earned by our
Management Company.
Business and Growth Strategy
Our primary business objectives are to maximize cash flow available for distribution to our
stockholders, and to achieve sustainable long-term growth in cash flow per share in order to
maximize long-term stockholder value. We intend to achieve these objectives by (i) acquiring
student housing communities nationwide that meet our focused investment criteria, (ii) maximizing
revenues from operations of our owned properties through proactive and goal-oriented property
management strategies, (iii) building our third-party business of management services and
development consulting services and (iv) selectively developing properties for our own account.
Acquisition Strategy
We seek to acquire high quality, well-designed and well-located properties, with a focus on
off-campus garden-style communities with modern floor plans and amenities. Our ideal acquisition
targets generally are located in markets that have stable or increasing student populations and an
insufficient supply of student housing. We also seek to acquire investments in student housing
communities that possess sound market fundamentals but are under-performing and would benefit from
renovation and/or improved property management. We consider the following property and market
factors to identify potential property acquisitions:
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campus reputation; |
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competitive admissions criteria; |
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limited number of on-campus beds and limited plans for expansion; |
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distance of property from campus; |
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property unit mix; |
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competition; |
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significant out-of-state enrollment; |
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operating performance; |
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potential for improved management; |
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ownership and capital structure; |
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presence of desired amenities; |
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maintenance of the property; |
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access to a university-sponsored or public transportation line; and |
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parking availability. |
After we identify a potential student housing acquisition, a due diligence team consisting of
in-house personnel and third parties, such as outside legal counsel, environmental consultants,
structural engineers, and investment bankers, conducts detailed due diligence to assess the
potential investment.
Our senior management team has developed long-standing relationships with developers, owners
and brokers of student housing properties that allow us to identify and capitalize on acquisition
opportunities. As a result, we have generated an internal database of contacts that we use to
identify and evaluate acquisition candidates. We are continuously active in identifying and
analyzing potential student housing acquisitions. As a result of our intensive due diligence review
and selective criteria, we determine to pursue or complete only a portion of these identified
potential acquisitions following our submission of a non-binding purchase offer. In addition to the
initial properties that we acquired on the Closing Date, we acquired an additional five properties
in individual transactions throughout 2005. The five transactions had an aggregate purchase price
of approximately $119,800 including the assumption of mortgage debt totaling $48,700. In January
2006, we acquired 13 student housing properties referred to as the Place Portfolio for a purchase
price of $205,000 including the assumption of mortgage debt of $98,660 and in June 2006, we also
acquired the Players Club property in Statesboro, Georgia for a purchase price of $12,900.
Furthermore, in 2006 our senior management team utilized existing relationships with equity
investors to acquire University Village Towers in Riverside, California, The Reserve on Stinson in
Norman, Oklahoma and Fontainebleu in Santa Barbara, California through joint venture arrangements.
Under the joint venture agreements we hold a minority ownership interest in the properties and earn
a fee for the management of the properties. This strategy enables us to diversify our portfolio by
expanding into geographic markets where we are not currently present with less capital requirements
than if we acquired the properties on our own. We expect to continue pursuing these types of
arrangements in the future.
Operating Strategy
We seek to maximize funds from the operations of the student housing communities that we own
and manage through the following operational strategies.
Maximize property profitability. We seek to maximize property-level profitability through the
use of cost control systems and our focused on-site management personnel. Some of our specific cost
control initiatives include:
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establishing internal controls and procedures for cost control consistently throughout our communities; |
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operating with flat property-level management structures, minimizing multiple layers of management; |
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negotiating utility and service-level pricing arrangements with national and regional vendors and
requiring corporate-level approval of service agreements for each community; and |
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conducting an annual assessment of the costs and effectiveness of each of our marketing strategies in
order to place greater emphasis on lower cost/high-impact initiatives. |
Proactive marketing practices. We have developed and implemented proactive marketing practices
to enhance the visibility of our student housing communities and to optimize our occupancy rates.
We thoroughly study our competitors, our residents and university policies affecting enrollment and
housing. Based on our findings at each property, we formulate a marketing and sales plan for each
academic leasing period. We intend to continue to market our properties to students, parents and
universities by emphasizing student-oriented living areas, state-of-the-art technology
infrastructure, a wide variety of amenities and services and close proximity to the campus.
Develop and retain personnel. We staff each student housing community that we own or manage
with a full-service on-site property management team. Each of our property management teams
includes community assistants who plan activities and interact with students, enhancing their
college experiences. We have developed policies and procedures to train each team of on-site
employees and to provide each team with full corporate-based support for each essential operating
function. To retain employees, we have developed an incentive-based compensation structure that is
available to all of our on-site personnel.
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Maintain and develop strategic relationships. We seek to maintain and establish relationships
with universities. We believe that establishing and maintaining relationships with universities is
important to the ongoing success of our business. We believe that these relationships will continue
to provide us with referrals to enhance our leasing efforts, opportunities for additional
acquisitions of student housing communities and contracts for third-party services.
Third-Party Services
In addition to managing our owned student housing communities, we also provide management and
development consulting services for third-party owners of student housing. Universities and
third-party owners are increasingly turning to the private sector for assistance in developing and
managing their student housing properties. We perform third-party services in order to enhance our
reputation with universities and to benefit our primary goal of owning high quality student housing
communities. We perform third-party services for student housing communities serving some of the
nations most prominent systems of higher education, including the University of North Carolina,
the University of Illinois, the California State University System and the Pennsylvania State
System of Higher Education.
In order to comply with the rules applicable to our status as a REIT, we provide our
third-party services through our Management Company and our Development Company. Unlike the income
earned from our properties, under the REIT, the income earned by our Management Company and our
Development Company is subject to regular federal income tax and state and local income tax where
applicable.
Third-party management services
We provide third-party management services for student housing communities owned by
educational institutions, charitable foundations and others. Our management services typically
cover all aspects of operations, including residence life and student development, marketing,
leasing administration, strategic relationships, information systems and accounting services, and
are comparable to the services that we provide for our owned properties. We typically provide these
services pursuant to multi-year management contracts that have an initial term between five and ten
years. We believe that providing these services allows us to increase cash flow with little
incremental cost by leveraging our existing management expertise and infrastructure.
For the year ended December 31, 2006 our fees from third-party management services (excluding
operating expense reimbursements) represented 2.5% of our revenues. The following table presents
certain summary information regarding the student housing communities that we managed for other
owners as of December 31, 2006:
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Property |
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# of Beds |
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# of Units |
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On-campus properties |
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University Park Calhoun
Street Apartments |
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University of Cincinnati |
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747 |
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288 |
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Reinhard Villages |
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Clarion University of Pennsylvania |
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656 |
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180 |
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University Park |
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Salisbury University (Maryland) |
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576 |
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145 |
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Bettie Johnson Hall |
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University of Louisville |
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490 |
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224 |
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University Village |
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California State University San Marcos |
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471 |
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126 |
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Normal Hills Apartments |
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Alabama A&M University |
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448 |
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240 |
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Herman & Heddy Kurz Hall |
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University of Louisville |
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402 |
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224 |
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Arlington Park Apartments |
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University of Northern Colorado |
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396 |
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180 |
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University Park Phase II |
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Salisbury University (Maryland) |
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312 |
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108 |
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Billy Minardi Hall |
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University of Louisville |
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38 |
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20 |
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Blazer Hall |
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University of Alabama Birmingham |
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753 |
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190 |
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Community Park |
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University of Louisville |
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358 |
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101 |
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Total on-campus |
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5,647 |
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2,026 |
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Off-campus properties |
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Granville Towers |
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University of North Carolina at Chapel Hill |
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1,321 |
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363 |
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Illini Tower |
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University of Illinois at Champaign |
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725 |
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206 |
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Honeysuckle Apartments |
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Bloomsburg University of Pennsylvania |
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407 |
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104 |
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Evergreen Commons |
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Lock Haven University of Pennsylvania |
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408 |
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108 |
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Campus Village |
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University of Colorado Denver |
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685 |
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210 |
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Total off-campus |
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3,546 |
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991 |
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Totals (for both on- and off-campus) |
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9,193 |
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3,017 |
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Third-party development consulting services
We provide third-party development consulting services primarily to universities seeking to
modernize their on-campus student housing communities. Our development consulting services
typically include the following:
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market analysis and evaluation of housing needs and options; |
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cooperation with university in architectural design; |
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negotiation of ground lease, development agreement, construction contract, architectural contract and bond documents; |
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oversight of architectural design process; |
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coordination of governmental and university plan approvals; |
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oversight of construction process; |
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design, purchase and installation of furniture; |
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pre-opening marketing to students; and |
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obtaining final approvals of construction. |
By providing these services, we are able to observe emerging trends in student housing
development and market acceptance of unit and community amenities. Our development consulting
services also benefit us by providing us with opportunities to obtain additional third-party
property management contracts. Of the eleven student housing communities with respect to which we
have provided velopment-consulting services in the past five years, the property owners have
awarded us contracts for third-party management services for ten of those student housing
communities. For the year ended December 31, 2006, our fees from development consulting services,
excluding operating expense reimbursements, represented 3.4% of our revenues.
Over the past six years, we provided development consulting services to clients for projects
totaling over $400,000 in value. We are currently providing development services at Slippery Rock
University of Pennsylvania, California University of Pennsylvania, Indiana University of
Pennsylvania, The University of North Carolina Greensboro, The University of Michigan, and The
University of Alabama Tuscaloosa pursuant to signed definitive contracts. The aggregate project
cost of these six projects is approximately $230,500. Additionally, we are providing
pre-development, construction and management consulting services on new projects or additional
phases at Oregon Institute of Technology, West Chester University of Pennsylvania, Slippery Rock
University of Pennsylvania, The University of Alabama Tuscaloosa and Indiana University of
Pennsylvania, but have not yet entered into definitive contracts for the projects. In aggregate,
these total approximately $240,000 in project costs. We typically are notified that we have been
awarded development consulting services projects on the basis of a competitive award process and
thereafter begin to work on the project. In the case of tax exempt bond financed projects,
definitive contracts are not executed until bond closing.
Our Operations
We staff each of our owned and managed student housing communities with a full-service
property management team. We typically staff each property with one Community Manager, a
marketing/leasing manager, a student accounts manager, a resident services director, a maintenance
supervisor, one on-site resident Community Assistant for each 50-85 students and general office
staff. Each property management team markets, leases and manages the community with a focus on
maximizing its profitability. In addition, each property management team is trained to provide
social and developmental opportunities for students, enhancing the students college experiences as
well as the desirability of our communities.
We have developed policies and procedures to carefully select and develop each team of on-site
employees and to provide each team with full corporate-based support for each essential operating
area, including lease administration, sales/marketing, community and university relations, student
life administration, maintenance and loss prevention, accounting, human resources/benefits
administration and information systems. The corporate level personnel responsible for each of these
areas support each Community Managers leadership role, and are available as a resource to the
Community Managers around the clock.
Residence Life and Student Development
Our corporate director of residence life and student personnel development designs and directs
our residence life program. Our
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programs are developed at the corporate level and implemented at each community by our Community
Assistants, together with our other on-site personnel. We provide educational, social and
recreational activities designed to help students achieve academic goals, promote respect and
harmony throughout the community, and help bridge interaction with the respective university.
Examples of our residence life and student development programs include:
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community-building and social activities geared to university-related events, holidays, public safety and education; |
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study and attention skills counseling; |
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career development, resume writing and employment search skill training; |
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sponsorship of intramural sport teams, academic clubs and alumni-based activities; |
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parent and resident appreciation events; |
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community service activities including recycling, blood drives, food drives and student volunteer committees; |
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lectures focused on social issues, including effective communication, multi-cultural awareness and substance abuse; |
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university outreach activities; and |
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voter registration, enrollment and education. |
The Community Assistants perform key roles in the administrative functioning of the community
and interface with students through constructive programs, activities and listening to student
interests and concerns. Our on-site leadership selects students to serve as Community Assistants
who meet criteria established by our corporate director of residence life and student personnel
development.
Marketing
We begin our annual marketing campaign by thoroughly segmenting the student population,
attending each of the primary universities where our student housing communities are located, and
compiling market surveys of comparable student apartment properties. With this information in hand,
we formulate a marketing/sales strategy that consists of a renewal campaign for current residents
and a broader campaign directed at the eligible student population. We assess university
regulations regarding housing requirements to avoid targeting markets in which significant numbers
of students are not eligible to live off-campus until they achieve certain credit hour levels.
We begin our renewal campaign between November and January of each year. Signage, direct
mailings to the students and their parents, appreciation parties and staff selling incentives are
key elements of the renewal campaign. The Community Assistant team plays a key role in
communicating the renewal message throughout their assigned property area. We use a database of
current resident demographic data to direct sales information to primary feeder high schools,
particularly where new freshmen are eligible to live off-campus. Other database criteria include
gender, high school location, prior apartment community, academic class standing, field of study
and activity preferences.
We appeal to the greater university population through theme-based newspaper advertising
campaigns, open house activities, housing fairs conducted by the university and, where effective,
web-based advertising. Our Community Assistant staff targets certain university-sponsored on-campus
events to distribute handouts displaying our logo and offering incentives to visit our sales
center. Wherever possible, our student housing communities appear on university websites in
listings of off-campus housing options, together with banner advertising where available.
Leasing
Our standard lease begins in August and runs for approximately 11.5 months, ending July 31 or
early August to coincide with the universitys fall academic term. The primary exception to our
standard lease term is University Towers, which we generally rent on nine-month academic year
leases. Our standard lease is an agreement between the student and parental guarantor, and the
specific student housing community. All leases are for individual bedrooms with rights to share
common areas within the unit and throughout the community. The individual lease is a strong
selling attraction as it limits a students liability to the rental for one bedroom instead of
burdening the student with shared liability for the entire unit rental amount.
We lease our units by floor plan type using internally-generated occupancy spreadsheets to
maximize full leasing of entire units, avoiding spotty vacancies particularly in the four-bedroom
units. We offer roommate-matching services to facilitate full occupancy. We develop wait lists and
monitor popular floor plans that fill to capacity early in the leasing season. If any fully vacant
units remain
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available after the beginning of any academic semester, we seek to lease such units on a temporary
basis to university-related visitors and our tenants parents and family members, or keep them
available for future leasing to students.
Unlike conventional apartment communities that have monthly recurring move-outs and renewals,
our student housing community occupancies remain stable throughout the academic year, but must be
entirely re-leased at the beginning of each academic calendar. Because of the nature of leasing to
students, we are highly dependent upon the success of our marketing and leasing efforts during the
annual leasing season, generally November through August. Our leasing staff undergoes intensive
annual professional training to maximize the success of our leasing efforts.
We typically require rent to be paid in 12 equal monthly payments throughout the lease term,
with the first installment due on July 1. Residents of University Towers and residence halls that
we manage for third parties typically pay their annual rent in two installments on July 1 and
December 1. We replace contracted students who fail to pay the first installment with students on
our waiting list or from walk-in traffic while the market is still active with students seeking
housing at the commencement of the academic year.
Strategic Relationships
We assign high priority to establishing and nurturing relationships with the administration of
each of the primary universities where our student housing communities are located. Our corporate
staff establishes this network, and on-site management then sustains it with follow-up by corporate
staff during routine visits to the community. As a result of our strategic relationships,
universities often refer their students to our properties, thus enhancing our leasing effort
throughout the year. These networks create goodwill for our student housing communities throughout
the university administration, including departments of admissions, student affairs, public safety,
athletics and international affairs.
Most universities promote off-campus housing alternatives to their student population. It is
our intention to be among the most preferred off-campus residences and for universities to include
our communities in listings and literature provided to students. We seek to obtain student mailing
lists and to be featured in Internet-based student housing listings wherever permitted by the
institution and incorporate these initiatives into our marketing efforts. Our Community Managers
make scheduled personal visits with academic departments to further our community exposure at this
level.
Our senior management team has developed long-standing relationships with developers, owners
and brokers of student housing properties that allow us to identify and capitalize on acquisition
opportunities. As a result, we have generated an internal database of contacts that we use to
identify and evaluate acquisition candidates. As it is our intention to develop a diverse portfolio
of student housing communities we also develop strategic relationships with equity investors in
order to pursue acquisitions through joint venture arrangements. Acquisitions, through joint
venture arrangements, allow us to obtain a minority interest in student housing communities in
geographic markets where we are not currently present with less capital than if we acquired the
properties on our own.
Competition
Competition from universities
We compete for student tenants with the owners of on-campus student housing, which is
generally owned by educational institutions or charitable foundations. Educational institutions can
generally avoid real estate taxes and borrow funds at lower interest rates, while we and other
private sector operators pay full real estate tax rates and have higher borrowing costs. The
competitive advantages of on-campus student housing also include its physical proximity to the
university campus and captive student body. Many universities have policies requiring students to
live in their on-campus facilities during their freshman year.
On-campus housing is limited, however, and most universities are able to house only a small
percentage of their students. As a result, educational institutions depend upon, and may serve as
referral sources for, private providers of off-campus housing. In addition, off-campus housing
facilities tend to offer more relaxed rules and regulations than on-campus properties and therefore
tend to be more appealing to students. Off-campus student housing offers freedom from restrictions
such as quiet hours or gender visitation limitations, and is especially appealing to upperclassmen
who are transitioning towards their independence.
Competition from private owners
We compete with several regional and national owner-operators of off-campus student housing,
including two publicly-traded competitors, GMH Communities Trust (GCT) and American Campus
Communities, Inc. (ACC). We also compete with privately held developers and other real estate firms
and in a number of markets with smaller local owner-operators. Currently, the industry is
fragmented with no participant holding a dominant market share. We believe that a number of other
large national companies with substantial financial resources may be potential entrants in the
student housing business. The entry of one or more of these companies
8
could increase competition for students and for the acquisition, management and development of
student housing properties.
Employees
At December 31, 2006 we had approximately 1,065 employees, including:
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990 on-site employees, including 453 Community Assistants; |
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15 persons in our property management services department; |
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11 persons in our development consulting services department; and |
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49 executive, corporate administration and financial personnel. |
Our senior management team has over 190 years of collective experience working together in the
EDR Predecessors student housing business.
Our management teams in-depth knowledge of the student housing industry results from hands-on
experiences. Several of our executive officers began their careers as student-tenant employees or
Community Managers responsible for managing individual student housing communities. This history of
working together demonstrates our management teams extensive experience in the student housing
industry:
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Key Employees |
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Title |
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Number of Years |
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Paul O. Bower |
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Chairman, Chief Executive Officer and President |
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37 |
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Craig L. Cardwell |
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President of Allen & OHara Education Services, Inc. |
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35 |
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Thomas J. Hickey |
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Senior Vice President of Allen
& OHara Education Services, Inc. |
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34 |
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Wallace L. Wilcox |
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Vice President of Construction |
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26 |
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William W. Harris |
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Senior Vice President of Development |
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24 |
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Thomas Trubiana |
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Senior Vice President and Chief
Investment Officer |
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18 |
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Susan B. Arrison |
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Vice President of Human Resources |
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16 |
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Randall H. Brown |
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Executive Vice President and Chief
Financial Officer |
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7 |
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NYSE Certifications
Our CEO certified to the New York Stock Exchange in 2006 that we were in compliance with the
NYSE listing standards. Our CEO and CFO have executed the certification required by section 302 of
the Sarbanes-Oxley Act of 2002, which is contained herein as an exhibit to this Form 10-K for the
fiscal year ended December 31, 2006.
Code of Business Conduct and Ethics
We have adopted a Code of Business Conduct and Ethics that applies to all employees. It is
available in the corporate governance section of our investor website at
www.educationrealty.com .
Available Information
EDR files annual and periodic reports with the Securities and Exchange Commission, or the SEC.
All filings made by EDR with the SEC may be copied or read at the SECs Public Reference Room at
100 F Street NE, Washington, DC 20549. Information on the operation of the Public Reference Room
may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that
contains reports, proxy and information statements, and other information regarding issuers that
file electronically with the SEC as the Company does. The website is http://www.sec.gov.
Additionally, a copy of this Annual Report on Form 10-K, along with EDRs Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K and any amendments to the aforementioned filings, are
available on EDRs website free of charge. The filings can be found on the SEC Filings page. EDRs
website also contains its Corporate Governance Guidelines, Code of Business Conduct and Ethics
9
and the charters of the committees of the Board of Directors. These items can also be found on the
Corporate Governance page. EDRs website address is www.educationrealty.com. Reference to the
Companys website does not constitute incorporation by reference of the information contained on
the site and should not be considered part of this document. All of the aforementioned materials
may also be obtained free of charge by contacting the Investor Relations Department at Education
Realty Trust, Inc., 530 Oak Court Drive, Suite 300, Memphis, Tennessee 38117.
Item 1A. Risk Factors
Risks related to our properties and our business
Our results of operations are subject to the following risks
inherent in the student housing industry: annual leasing cycle,
concentrated lease-up period, seasonal cash flows and increased risk
of student defaults during the summer months of a twelve-month lease.
We generally lease our properties under 11.5 month leases, but we may also lease for terms of
nine months or less. As a result, we may experience significantly reduced cash flows during the
summer months at properties leased for terms shorter than twelve months. In addition, students
leasing under twelve-month leases may be more likely to default in their rental payments during the
summer months. Although we typically require a students parents to guarantee the students lease,
we may have to spend considerable effort and expense in pursuing payment upon a defaulted lease,
and our efforts may not be successful. Furthermore, all of our properties must be entirely
re-leased each year, exposing us to increased leasing risk. In addition, we are subject to
increased leasing risk on properties that we acquire that we have not previously managed due to our
lack of experience leasing those properties and unfamiliarity with their leasing cycles. Student
housing communities are typically leased during a limited leasing season that begins in February
and ends in August of each year. We are therefore highly dependent on the effectiveness of our
marketing and leasing efforts and personnel during this season. Prior to the commencement of each
new lease period, mostly during the first two weeks of August but also during September at some
communities, we prepare the units for new incoming tenants. Other than revenue generated by
in-place leases for returning tenants, we do not generally recognize lease revenue during this
period referred to as Turn as we have no leases in place. In addition, during Turn we incur
significant expenses making our units ready for occupancy, which we recognize immediately. This
lease Turn period results in seasonality in our operating results during the third quarter of each
year.
Our use of debt financing reduces cash available for
distribution and may expose us to the risk of default under our debt
obligations.
Our charter and bylaws impose no limitation on the amount of debt we may incur. Our debt
service obligations expose us to the risk of default and reduce (or eliminate) cash resources that
are available to operate our business. On March 30, 2006, we amended and restated our revolving
credit facility and the Operating Partnership entered into a $50,000 senior unsecured term loan.
The amended credit facility has substantially the same terms as the original facility, including
$100,000 of availability and customary affirmative and negative covenants. The amount available to
us and our ability to borrow from time to time under this facility is subject to certain conditions
and the satisfaction of specified financial covenants, which include limiting distributions to our
stockholders. If the income generated by our properties and other assets fails to cover our debt
service, we would be forced to reduce or eliminate distributions to our stockholders and may
experience losses. Our level of debt and the operating limitations imposed on us by our debt
agreements could have significant adverse consequences, including the following:
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we may be unable to borrow additional funds as needed or on favorable terms; |
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we may be unable to refinance our indebtedness at maturity or the refinancing terms may be less
favorable than the terms of our original indebtedness; |
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we may be forced to dispose of one or more of our properties, possibly on disadvantageous terms; |
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we may default on our payment or other obligations as a result of insufficient cash flow or
otherwise, and the lenders or mortgagees may foreclose on our properties that secure their
loans and receive an assignment of rents and leases; and |
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foreclosures could create taxable income without accompanying cash proceeds, a circumstance
that could hinder our ability to meet the REIT distribution requirements. |
We face significant competition from university-owned student
housing and from other private student housing communities located
within close proximity to universities.
Many students prefer on-campus housing to off-campus housing because of the closer physical
proximity to campus and
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integration of on-campus facilities into the academic community. Universities can generally avoid
real estate taxes and borrow funds at lower interest rates, while we and other private-sector
operators pay full real estate tax rates and have higher borrowing costs. Consequently,
universities often can offer more convenient and/or less expensive student housing than we can,
which can adversely affect our occupancy and rental rates.
We also compete with other national and regional owner-operators of off-campus student housing
in a number of markets as well as with smaller local owner-operators. There are a number of
purpose-built student housing properties that compete directly with us located near or in the same
general vicinity of many of our student housing communities. Such competing student housing
communities may be newer than our student housing communities, located closer to campus, charge
less rent, possess more attractive amenities, or offer more services, shorter lease terms or more
flexible leases. The construction of competing properties or decreases in the general levels of
rents for housing in competing properties could adversely affect our rental income.
We believe that a number of other large national companies may be potential entrants in the
student housing business. In some cases, these potential competitors possess substantially greater
financial and marketing resources than we do. The entry of one or more of these companies could
increase competition for student tenants and for the acquisition, development and management of
other student housing communities.
We may not be able to recover our costs for our development consulting services.
We typically are awarded development consulting services business on the basis of a
competitive award process, but definitive contracts are typically not executed until the formal
approval of the transaction by the institutions governing body at the completion of the process.
In the intervening period, we may incur significant pre-development and other costs in the
expectation that the development consulting services contract will be executed. These costs
generally range from $300,000 to $500,000 and typically include architects fees to design the
property and contractors fees to price the construction. We typically seek to enter into a
reimbursement agreement with the institution that requires the institution to provide a guarantee
of our advances. However, we may not be successful in negotiating such an agreement. In addition,
if an institutions governing body does not ultimately approve our selection and the underlying
terms of a pending development, we may not be able to recover these costs from the institution. In
addition, when we are awarded development consulting business, we generally receive 50% of our fees
at the time the project is financed, and the remainder is generally paid in monthly installments
thereafter. As a result, the recognition and timing of revenues will, among other things differ
from the timing of payments and be contingent upon the project owners successful structuring and
closing of the project financing as well as the timing of construction.
We may be unable to take advantage of certain disposition
opportunities because of additional costs we have agreed to pay if we
sell certain of our properties in taxable transactions for a period
of five years.
On the Closing Date, we issued University Towers Partnership units for our interest in
University Towers. So long as the contributing owners of such property hold at least 25% of the
University Towers Partnership units that they received on the Closing Date, we have agreed to
maintain certain minimum amounts of debt on the properties so as to avoid triggering gain to the
contributing owners. If we fail to do this, we will owe to the contributing owners the amount of
taxes that they incur. In each case, the amount of tax is computed assuming the highest federal and
state rates. As a result, these agreements may preclude us from selling the restricted properties
at the optimal time.
We rely on our relationships with universities, and changes in
university personnel and/or policies could adversely affect our
operating results.
In some cases, we rely on our relationships with universities for referrals of prospective
tenants or for mailing lists of prospective tenants and their parents. The failure to maintain good
relationships with personnel at these universities could therefore have a material adverse effect
on us. If universities refuse to make their lists of prospective student-tenants and their parents
available to us or increase the costs of these lists, the increased costs or failure to obtain such
lists could also have a material adverse effect on us.
We may be adversely affected by a change in university admission policies. For example, if a
university reduces the number of student admissions, the demand for our properties may be reduced
and our occupancy rates may decline. In addition, universities may institute a policy that a
certain class of students, such as freshmen, must live in a university-owned facility, which would
also reduce the demand for our properties. While we may engage in marketing efforts to compensate
for such policy changes, we may not be able to effect such marketing efforts prior to the
commencement of the annual lease-up period or at all.
Our growth will be dependent upon our ability to acquire and/or
develop, lease, integrate and manage additional student housing
communities successfully.
11
We cannot assure you that we will be able to identify real estate investments that meet our
investment criteria, that we will be successful in completing any acquisition we identify or that
any acquisition we complete will produce a return on our investment.
Our future growth will be dependent upon our ability to successfully acquire new properties on
favorable terms, which may be adversely affected by the following significant risks:
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we may be unable to acquire a desired property at all or at a desired purchase price because of competition
from other purchasers of student housing; |
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many of our future acquisitions are likely to be dependent on external financing, and we may be unable to
finance an acquisition on favorable terms or at all; |
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we may be required to incur significant capital expenditures to improve or renovate acquired properties; |
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we may be unable to quickly and efficiently integrate new acquisitions, particularly acquisitions of
portfolios of properties, into our existing operations; |
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market conditions may result in higher than expected vacancy rates and lower than expected rental rates; and |
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we may acquire properties subject to liabilities but without any recourse, or with only limited recourse,
to the sellers, or with liabilities that are unknown to us, such as liabilities for undisclosed
environmental contamination, claims by tenants, vendors or other persons dealing with the former owners of
the properties and claims for indemnification by members, directors, officers and others indemnified by the
former owners of the properties. |
As we acquire additional properties, we will be subject to risks associated with managing new
properties, including lease-up and integration risks. Newly acquired properties may not perform as
expected, and newly acquired properties may have characteristics or deficiencies unknown to us at
the time of acquisition.
Risks related to the real estate industry
Our performance and the value of our real estate assets are
subject to risks associated with real estate assets and with the real
estate industry.
Our ability to make distributions to our stockholders depends on our ability to generate cash
revenues in excess of expenses, scheduled debt service obligations and capital expenditure
requirements. Events and conditions generally applicable to owners and operators of real property
that are beyond our control may decrease cash available for distribution and the value of our
properties.
These events include:
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local oversupply of student housing units, increased competition or reduction in demand for student housing; |
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inability to collect rent from tenants; |
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vacancies or our inability to lease beds on favorable terms; |
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increased operating costs, including insurance premiums, utilities, and real estate taxes; |
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costs of complying with changes in governmental regulations; |
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the relative illiquidity of real estate investments; |
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changing student demographics; |
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national, regional and local economic conditions; and |
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rising interest rates. |
We have limited time to perform due diligence on many of our
acquired properties, which could subject us to significant unexpected
liabilities and under-performance of the acquired properties.
When we enter into an agreement to acquire a property, we often have limited time to complete
our due diligence prior to acquiring the property. Because our internal resources are limited, we
may rely on third parties to conduct a portion of our due
12
diligence. To the extent these third parties or we underestimate or fail to identify risks and
liabilities associated with the properties we acquire, we may incur unexpected liabilities, or the
property may fail to perform in accordance with our projections. If, during the due diligence
phase, we do not accurately assess the value of and liabilities associated with a particular
property, we may pay a purchase price that exceeds the current fair value of the assets. As a
result, material goodwill and other intangible assets would be recorded, which could result in
significant charges to earnings in future periods. These charges, in addition to the financial
impact of significant liabilities that we may assume, could seriously harm our financial and
operating results, as well as our ability to pay dividends.
Certain losses may not be covered by insurance.
We carry insurance covering comprehensive liability, fire, earthquake, terrorism, business
interruption, vandalism and malicious mischief, extended coverage perils, physical loss perils,
commercial general liability, personal injury, workers compensation, business, automobile, errors
and omissions, employee dishonesty, employment practices liability and rental loss with respect to
all of the properties in our portfolio and the operation of our Management Company and Development
Company. We also carry insurance covering flood (when the property is located in whole or in
material part in a designated flood plain area) on some of our properties. We believe the policy
specifications and insured limits are appropriate and adequate given the relative risk of loss, the
cost of the coverage and industry practice. There are, however, certain types of losses (such as
property damage from riots or wars, employment discrimination losses, punitive damage awards, or
acts of God) that may be either uninsurable or not economically insurable. Some of our policies are
subject to large deductibles or co-payments and policy limits that may not be sufficient to cover
losses. In addition, we may discontinue earthquake, terrorism or other insurance on some or all of
our properties in the future if the cost of premiums for these policies exceeds, in our judgment,
the value of the coverage discounted for the risk of loss. If we experience a loss that is
uninsured or that exceeds policy limits, we could lose the capital invested in the damaged
properties as well as the anticipated future cash flows from those properties. In addition, if the
damaged properties are subject to recourse indebtedness, we would continue to be liable for the
indebtedness, even if these properties were irreparably damaged.
Future terrorist attacks in the United States could harm the demand for and the value of our student housing communities.
Future terrorist attacks in the United States, such as the attacks that occurred in New York
and Washington, D.C. on September 11, 2001, and other acts of terrorism or war, or threats of the
same, could harm the demand for and the value of our properties. A decrease in demand in our
markets would make it difficult for us to renew or re-lease our properties at rates equal to or
above historical rates.
Terrorist attacks also could directly affect the value of our properties through damage,
destruction, loss or increased security costs, and the availability or cost of insurance for such
acts. If we receive casualty proceeds, we may not be able to reinvest such proceeds profitably or
at all, and we may be forced to recognize taxable gain on the affected property.
We could incur significant costs related to government regulation and private litigation over environmental matters.
Under various environmental laws, including the Comprehensive Environmental Response,
Compensation and Liability Act, or CERCLA, a current or previous owner or operator of real property
may be liable for contamination resulting from the release or threatened release of hazardous or
toxic substances or petroleum at that property, and an entity that arranges for the disposal or
treatment of a hazardous or toxic substance or petroleum at another property may be held jointly
and severally liable for the cost to investigate and clean up such property or other affected
property. Such parties are known as potentially responsible parties, or PRPs. Environmental laws
often impose liability without regard to whether the owner or operator knew of, or was responsible
for, the presence of the contaminants, and the costs of any required investigation or cleanup of
these substances can be substantial. PRPs are liable to the government as well as to other PRPs who
may have claims for contribution. The liability is generally not limited under such laws and could
exceed the propertys value and the aggregate assets of the liable party. The presence of
contamination or the failure to remediate contamination at our properties also may expose us to
third-party liability for personal injury or property damage, or adversely affect our ability to
sell, lease or develop the real property or to borrow using the real property as collateral. We do
not carry environmental insurance on any of the properties in our portfolio.
Environmental laws also impose ongoing compliance requirements on owners and operators of real
property. Environmental laws potentially affecting us address a wide variety of matters, including,
but not limited to, asbestos-containing building materials, storage tanks, storm water and
wastewater discharges, lead-based paint, wetlands and hazardous wastes. Failure to comply with
these laws could result in fines and penalties and/or expose us to third-party liability. Some of
our properties may have conditions that are subject to these requirements, and we could be liable
for such fines or penalties and/or liable to third parties for those conditions.
We could be exposed to liability and remedial costs related to environmental matters.
Certain properties in our portfolio may contain, or may have contained, asbestos-containing
building materials, or ACBMs. Environmental laws require that ACBMs be properly managed and
maintained, and may impose fines and penalties on building
13
owners and operators for failure to comply with these requirements. Also, certain properties may
contain, or may have contained, or are adjacent to or near other properties that have contained or
currently contain storage tanks for the storage of petroleum products or other hazardous or toxic
substances. These operations create a potential for the release of petroleum products or other
hazardous or toxic substances. Certain properties in our portfolio contain, or may have contained,
elevated radon levels. Third parties may be permitted by law to seek recovery from owners or
operators for property damage and/or personal injury associated with exposure to contaminants,
including, but not limited to, petroleum products, hazardous or toxic substances and asbestos
fibers. Also, some of the properties may contain regulated wetlands that can delay or impede
development or require costs to be incurred to mitigate the impact of any disturbance. Absent
appropriate permits, we can be held responsible for restoring wetlands and be required to pay fines
and penalties.
Some of the properties in our portfolio may contain microbial matter such as mold and mildew.
The presence of microbial matter could adversely affect our results of operations. In addition, if
any property in our portfolio is not properly connected to a water or sewer system, or if the
integrity of such systems are breached, or if water intrusion into our buildings otherwise occurs,
microbial matter or other contamination can develop. When excessive moisture accumulates in
buildings or on building materials, mold growth may occur, particularly if the moisture problem
remains undiscovered or is not addressed over a period of time. Some molds may produce airborne
toxins or irritants. If this were to occur, we could incur significant remedial costs and we may
also be subject to material private damage claims and awards. Concern about indoor exposure to mold
has been increasing, as exposure to mold may cause a variety of adverse health effects and
symptoms, including allergic or other reactions. If we become subject to claims in this regard, it
could materially and adversely affect us and our future insurability for such matters.
Independent environmental consultants conduct Phase I environmental site assessments on all of
our acquisitions. Phase I environmental site assessments are intended to evaluate information
regarding the environmental condition of the surveyed property and surrounding properties based
generally on visual observations, interviews and certain publicly available databases. These
assessments do not typically take into account all environmental issues including, but not limited
to, testing of soil or groundwater or the possible presence of asbestos, lead-based paint, radon,
wetlands or mold. The results of these assessments are addressed and could result in either a
cancellation of the purchase, the requirement of the seller to remediate issues, or additional
costs on our part to remediate the issue.
None of the previous site assessments revealed any past or present environmental liability
that we believe would be material to us. However, the assessments may have failed to reveal all
environmental conditions, liabilities or compliance concerns. Material environmental conditions,
liabilities or compliance concerns may have arisen after the assessments were conducted or may
arise in the future; and future laws, ordinances or regulations may impose material additional
environmental liability.
We cannot assure you that costs of future environmental compliance will not affect our ability
to make distributions or that such costs or other remedial measures will not be material to us.
We may incur significant costs complying with the Americans with Disabilities Act and similar laws.
Under the Americans with Disabilities Act of 1990, or the ADA, all public accommodations must
meet federal requirements related to access and use by disabled persons. Additional federal, state
and local laws also may require modifications to our properties, or restrict our ability to
renovate our properties. For example, the Fair Housing Amendments Act of 1988, or FHAA, requires
apartment properties first occupied after March 13, 1990 to be accessible to the handicapped. We
have not conducted an audit or investigation of all of our properties to determine our compliance
with present ADA requirements. Noncompliance with the ADA or FHAA could result in the imposition of
fines or an award for damages to private litigants and also could result in an order to correct any
non-complying feature. We cannot predict the ultimate amount of the cost of compliance with the
ADA, FHAA or other legislation. If we incur substantial costs to comply with the ADA, FHAA or any
other legislation, we could be materially and adversely affected.
In June 2001, the United States Department of Justice, or DOJ, notified JPI of an on-going
investigation regarding possible violations of the ADA and the FHAA at various residential
properties developed by JPI, mostly multi-family apartment communities. Of the 14 student housing
communities we acquired from JPI on the Closing Date, one property is included in those reviewed by
the DOJ to date. The DOJ has reviewed the property plans for this property but has not issued a
report regarding its review. In October 2002, the DOJ indicated that the investigations were being
delayed for an undetermined period of time. This investigation has not been resolved and, at this
point, no conclusion can be reached regarding what will be required to conclude it or whether it
will result in a dispute or legal proceedings with the DOJ. Noncompliance with the ADA and the FHAA
could result in the imposition of injunctive relief, fines, awards of damages to private litigants
or additional capital expenditures to remedy such noncompliance. We are unable to predict the
outcome of the DOJs investigation related to the JPI portfolio.
We may incur significant costs complying with other regulations.
14
The properties in our portfolio are subject to various federal, state and local regulatory
requirements, such as state and local fire and life safety requirements. If we fail to comply with
these various requirements, we might incur governmental fines or be liable for private actions for
money damages. Furthermore, existing requirements could change and require us to make significant
unanticipated expenditures that would materially and adversely affect us.
Our potential participation in joint ventures presents additional risks.
We may co-invest with third parties through partnerships, joint ventures or other entities,
acquiring non-controlling interests in or sharing responsibility for managing the affairs of a
property, partnership, joint venture or other entity. In such event, we will not have sole
decision-making authority regarding the property, partnership, joint venture or other entity.
Investments in partnerships, joint ventures or other entities may, under certain circumstances,
involve risks not present were a third party not involved, including the possibility that partners
or co-venturers may become bankrupt or fail to fund their share of required capital contributions.
Partners or co-venturers also may have economic or other business interests or goals that are
inconsistent with our business interests or goals and may be in a position to take actions contrary
to our preferences, policies or objectives. Such investments also will have the potential risk of
our reaching impasses with our partners or co-venturers on key decisions, such as a sale, because
neither we nor the partner or co-venturer would have full control over the partnership or joint
venture. Disputes between us and partners or co-venturers may result in litigation or arbitration
that would increase our expenses and prevent our management team from focusing its time and effort
exclusively on our business. In addition, we may in some circumstances be liable for the actions of
our third-party partners or co-venturers.
Illiquidity of real estate investments could significantly
impede our ability to respond to adverse changes in the performance
of our properties.
Because real estate investments are relatively illiquid, our ability to promptly sell one or
more properties in our portfolio in response to changing economic, financial and investment
conditions is limited. The real estate market is affected by many factors, such as general economic
conditions, availability of financing, interest rates and other factors, including supply and
demand, that are beyond our control. We cannot predict whether we will be able to sell any property
for the price or on the terms set by us or whether any price or other terms offered by a
prospective purchaser would be acceptable to us. We also cannot predict the length of time needed
to find a willing purchaser and to close the sale of a property.
We may be required to expend funds to correct defects or to make improvements before a
property can be sold. We cannot ensure that we will have funds available to correct those defects
or to make those improvements. In acquiring a property, we may agree to transfer restrictions that
materially restrict us from selling that property for a period of time or impose other
restrictions, such as a limitation on the amount of debt that can be placed or repaid on that
property. These transfer restrictions would impede our ability to sell a property even if we deem
it necessary or appropriate.
Risks related to our organization and structure
To maintain our REIT status, we may be forced to limit the activities of our Management Company.
To maintain our status as a REIT, no more than 20% of the value of our total assets may
consist of the securities of one or more taxable REIT subsidiaries, such as our Management Company.
Some of our activities, such as our third-party management, development consulting and food
services, must be conducted through our Management Company and Development Company for us to
maintain our REIT qualification. In addition, certain non-customary services such as cleaning,
transportation, security and, in some cases, parking, must be provided by a taxable REIT subsidiary
or an independent contractor. If the revenues from such activities create a risk that the value of
our Management Company, based on revenues or otherwise, approaches the 20% threshold, we will be
forced to curtail such activities or take other steps to remain under the 20% threshold. Because
the 20% threshold is based on value, it is possible that the Internal Revenue Service, or IRS,
could successfully contend that the value of our Management Company exceeds the 20% threshold even
if our Management Company accounts for less than 20% of our consolidated revenues, income or cash
flow, in which case our status as a REIT could be jeopardized.
We will depend heavily on the availability of equity and debt capital to fund our business.
In order to maintain our qualification as a REIT, we are required under the Internal Revenue
Code of 1986, as amended, which we refer to as the Code, to distribute annually at least 90% of our
REIT taxable income, determined without regard to distributions paid and excluding any net capital
gain. To the extent that we satisfy this distribution requirement, but distribute less than 100% of
our net taxable income, including any net capital gains, we will be subject to federal corporate
income tax on our undistributed taxable income. In addition, we will be subject to a 4%
nondeductible excise tax if the actual amount that we pay out to our shareholders in a calendar
year is less than a minimum amount specified under federal tax laws. Because of these distribution
requirements, REITs are
15
largely unable to fund capital expenditures, such as acquisitions, renovations, development and
property upgrades from operating cash flow. Consequently, we will be largely dependent on the
public equity and debt capital markets and private lenders to provide capital to fund our growth
and other capital expenditures. We may not be able to obtain this financing on favorable terms or
at all. Our access to equity and debt capital depends, in part, on:
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general market conditions; |
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our current debt levels and the number of properties subject to encumbrances; |
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our current performance and the markets perception of our growth potential; |
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our cash flow and cash distributions; and |
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the market price per share of our common stock. |
If we cannot obtain capital from third-party sources, we may not be able to acquire properties
when strategic opportunities exist, satisfy our debt service obligations or make the cash
distributions to our stockholders, including those necessary to maintain our qualification as a
REIT.
Our charter contains restrictions on the ownership and transfer of our stock.
Our charter provides that, subject to certain exceptions, no person or entity may beneficially
own, or be deemed to own by virtue of the applicable constructive ownership provisions of the Code,
more than 9.8% (by value, by number of shares or by voting power, whichever is more restrictive) of
the outstanding shares of our common stock or more than 9.8% (by value, by number of shares or by
voting power, whichever is more restrictive) of all our outstanding shares, including both common
and preferred stock. We refer to this restriction as the ownership limit. Generally, if a
beneficial owner of our shares exceeds the ownership limit, such owner will be effectively divested
of all ownership rights with respect to shares exceeding the limit and may suffer a loss on his or
her investment.
The constructive ownership rules under the Code are complex and may cause stock owned actually
or constructively by a group of related individuals and/or entities to be owned constructively by
one individual or entity. As a result, the acquisition of less than 9.8% of our stock (or the
acquisition of an interest in an entity that owns, actually or constructively, our stock) by an
individual or entity, could, nevertheless cause that individual or entity, or another individual or
entity, to own constructively in excess of 9.8% of our outstanding stock and thereby subject
certain shares to the ramifications of exceeding the ownership limit. Our charter, however, permits
exceptions to be made to this limitation if our board of directors determines that such exceptions
will not jeopardize our tax status as a REIT. This ownership limit could delay, defer or prevent a
change of control or other transaction that might otherwise result in a premium price for our
common stock or otherwise be in the best interest of our stockholders.
Certain tax and anti-takeover provisions of our charter and bylaws may inhibit a change of our control.
Certain provisions contained in our charter and bylaws and the Maryland General Corporation
Law may discourage a third party from making a tender offer or acquisition proposal to us, or could
delay, defer or prevent a change in control or the removal of existing management. These provisions
also may delay or prevent our stockholders from receiving a premium for their shares of common
stock over then-prevailing market prices. These provisions include:
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the REIT ownership limit described above; |
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authorization of the issuance of our preferred shares with
powers, preferences or rights to be determined by our board
of directors; |
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the right of our board of directors, without a stockholder
vote, to increase our authorized shares and classify or
reclassify unissued shares; and |
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advance notice requirements for stockholder nomination of
directors and for other proposals to be presented at
stockholder meetings. |
The Maryland business statutes also impose potential restrictions on a change of control of our Company.
Various Maryland laws may have the effect of discouraging offers to acquire us, even if the
acquisition would be advantageous to our stockholders. Our bylaws exempt us from some of those
laws, such as the control share acquisition provisions, but our board of directors can change our
bylaws at any time to make these provisions applicable to us.
16
We have the right to change some of our policies that may be important to our stockholders without stockholder consent.
Our major policies, including our policies with respect to investments, leverage, financing,
growth, debt and capitalization, are determined by our board of directors or those committees or
officers to whom our board of directors has delegated that authority. Our board of directors also
establishes the amount of any distributions that we make to our stockholders. Our board of
directors may amend or revise the foregoing policies, our distribution payment amounts and other
policies from time to time without a stockholder vote. Accordingly, our stockholders may not have
control over changes in our policies.
The ability of our board of directors to revoke our REIT
election without stockholder approval may cause adverse consequences
to our stockholders.
Our charter provides that our board of directors may revoke or otherwise terminate our REIT
election, without the approval of our stockholders, if it determines that it is no longer in our
best interests to continue to qualify as a REIT. If we cease to qualify as a REIT, we would become
subject to federal income tax on our taxable income and would no longer be required to distribute
most of our taxable income to our stockholders, which may have adverse consequences on the total
return to our stockholders.
Our rights and the rights of our stockholders to take action against our directors and officers are limited.
Maryland law provides that a director or officer has no liability in that capacity if he or
she performs his or her duties in good faith, in a manner he or she reasonably believes to be in
our best interests and with the care that an ordinarily prudent person in a like position would use
under similar circumstances. In addition, our charter eliminates our directors and officers
liability to us and our stockholders for money damages except for liability resulting from actual
receipt of an improper benefit in money, property or services or active and deliberate dishonesty
established by a final judgment and that is material to the cause of action. Our bylaws require us
to indemnify directors and officers for liability resulting from actions taken by them in those
capacitates to the maximum extent permitted by Maryland law. As a result, our stockholders and we
may have more limited rights against our directors and officers than might otherwise exist under
common law. In addition, we may be obligated to fund the defense costs incurred by our directors
and officers.
Our success depends on key personnel whose continued service is not guaranteed.
We depend upon the services of our key personnel, particularly Paul O. Bower, our Chairman,
Chief Executive Officer and President, Randall H. Brown, our Executive Vice President and Chief
Financial Officer, and Craig L. Cardwell, our President of Allen & OHara Education Services, Inc.
Messrs. Bower and Cardwell each have been in the student housing business for over 30 years, and
each of them has developed a network of contacts and a reputation that attracts business and
investment opportunities and assists us in negotiations with universities, lenders and industry
personnel. In addition, Mr. Brown possesses detailed knowledge of and experience with our financial
and ancillary support operations that are critical to our operations and financial reporting
obligations as a public company. We will continue to need to attract and retain qualified
additional senior executive officers as we grow our business. The loss of the services of any of
our senior executive officers, or our inability to recruit and retain qualified personnel could
have a material adverse effect on our business and financial results.
Federal income tax risks
Failure to qualify as a REIT would have significant adverse consequences to us and the value of our stock.
We intend to operate in a manner that will allow us to qualify as a REIT for federal income
tax purposes under the Code. We have not requested and do not plan to request a ruling from the IRS
that we qualify as a REIT. If we lose our REIT status, we will face serious tax consequences that
could substantially reduce the funds available for distribution to our stockholders for each of the
years involved because:
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we would not be allowed a deduction for distributions to stockholders in computing our taxable income, and such
amounts would be subject to federal income tax at regular corporate rates; |
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we also could be subject to the federal alternative minimum tax and possibly increased state and local taxes; and |
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unless we are entitled to relief under applicable statutory provisions, we could not elect to be taxed as a REIT
for four taxable years following the year during which we were disqualified. |
In addition, if we fail to qualify as a REIT, we will not be required to make distributions to
stockholders, and all distributions to stockholders will be subject to tax as ordinary income to
the extent of our current and accumulated earnings and profits. As a result of
17
all these factors, our failure to qualify as a REIT also could impair our ability to expand our
business and raise capital, and would adversely affect the value of our common stock.
Qualification as a REIT involves the application of highly technical and complex Code
provisions for which there are only limited judicial and administrative interpretations. The
complexity of these provisions and of the applicable Treasury Regulations that have been
promulgated under the Code is greater in the case of a REIT that, like us, holds its assets through
a partnership or a limited liability company. The determination of various factual matters and
circumstances not entirely within our control may affect our ability to qualify as a REIT. In order
to qualify as a REIT, we must satisfy a number of requirements, including requirements regarding
the composition of our assets and two gross income tests: (a) at least 75% of our gross income in
any year must be derived from qualified sources, such as rents from real property, mortgage
interest, distributions from other REITs and gains from sale of such assets, and (b) at least 95%
of our gross income must be derived from sources meeting the 75% income test above, and other
passive investment sources, such as other interest and dividends and gains from sales of
securities. Also, we must make distributions to stockholders aggregating annually at least 90% of
our REIT taxable income, excluding any net capital gains. In addition, new legislation,
regulations, administrative interpretations or court decisions may adversely affect our investors,
our ability to qualify as a REIT for federal income tax purposes or the desirability of an
investment in a REIT relative to other investments.
We may be subject to federal and state income taxes that would harm our financial condition.
Even if we qualify and maintain our status as a REIT, we may become subject to federal income
taxes and related state taxes. For example, if we have net income from a sale of dealer property or
inventory, or, if our Management Company enters into agreements with us or our tenants on a basis
that is determined to be other than an arms length basis, that income will be subject to a 100%
penalty tax. If we believe that a sale of a property might be treated as a prohibited transaction,
we will attempt to structure a sale through a taxable REIT subsidiary, in which case the gain from
the sale would be subject to corporate income tax but not the 100% prohibited transaction tax. We
cannot assure you, however, that the IRS would not assert successfully that sales of properties
that we make directly, rather than through a taxable REIT subsidiary, were sales of dealer
property or inventory, in which case the 100% penalty tax will apply. In addition, we may not be
able to make sufficient distributions to avoid corporate income tax and the 4% excise tax on
undistributed income. We may also be subject to state and local taxes on our income or property,
either directly or at the level of our Operating Partnership or the University Towers Partnership
or at a level of the other entities through which we indirectly own our properties that would
aversely affect our operating results.
An investment in our common stock has various tax risks,
including the treatment of distributions in excess of earnings and
the inability to apply passive losses against distributions.
Distributions in excess of current and accumulated earnings and profits, to the extent that
they exceed the adjusted basis of an investors common stock, will be treated as long-term capital
gain (or short-term capital gain if the shares have been held for less than one year). Any gain or
loss realized upon a taxable disposition of shares by a stockholder who is not a dealer in
securities will be treated as a long-term capital gain or loss if the shares have been held for
more than one year, and otherwise will be treated as short-term capital gain or loss. Distributions
that we properly designate as capital gain distributions will be treated as taxable to stockholders
as gains (to the extent that they do not exceed our actual net capital gain for the taxable year)
from the sale or disposition of a capital asset held for greater than one year. Distributions we
make and gain arising from the sale or exchange by a stockholder of shares of our stock will not be
treated as passive income, meaning stockholders generally will not be able to apply any passive
losses against such income or gain.
Future distributions may include a significant portion as a return of capital.
Our distributions may exceed the amount of our income as a REIT. If so, the excess
distributions will be treated as a return of capital to the extent of the stockholders basis in
our stock, and the stockholders basis in our stock will be reduced by such amount. To the extent
distributions exceed a stockholders basis in our stock, the stockholder will recognize capital
gain, assuming the stock is held as a capital asset.
Item 1B.
Unresolved Staff Comments.
None.
Item 2. Properties.
General
As of December 31, 2006, our properties consisted of 40 communities located in 17 states
containing 26,019 beds in 7,953
18
apartment units located near 33 universities. On January 6, 2006 we completed the acquisition of
the 13 collegiate student housing communities with a combined total of 5,894 beds from Place
Properties, L.P. of Atlanta, Georgia. Under terms of the transaction, Place Properties sold its
owned portfolio to the Operating Partnership and then leased back the properties and will operate
them with the existing management teams under a renewable, initial five-year lease agreement with
the Trust.
Thirty-nine of our 40 properties are modern apartment communities, with clusters of low-rise
buildings that consist of student housing units with private bedrooms and one or more bathrooms
centered around a common area consisting of a fully furnished living room, dining room and
fully-equipped kitchen. University Towers is a high-rise residence hall that has a cafeteria on the
premises and no individual kitchens in the units. We provide food services through our Management
Company to residents of University Towers. Our student housing communities typically contain a
swimming pool, recreational facilities and common areas, and each bedroom has individualized locks,
high-speed Internet access and telephone and cable television connections.
Our owned student housing communities typically have the following characteristics:
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located in close proximity to university campuses (within two miles or less); |
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average age of approximately 7 years; |
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designed specifically for students with modern unit plans and amenities; and |
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supported by our long-standing Community Assistant program and other
student-oriented activities and services that enhance the college
experience. |
Properties
The following tables provide certain summary information about our owned properties as of December 31, 2006 and 2005:
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|
Year Ended |
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|
December 31, 2006 |
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|
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|
|
Average |
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|
Monthly |
|
|
Revenue per |
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|
|
|
|
Year |
|
|
Acquisition |
|
# of |
|
|
# of |
|
|
Occupancy |
|
|
Total |
|
|
Available |
|
Name |
|
Primary University Served |
|
Built |
|
|
Date |
|
Beds |
|
|
Units |
|
|
Rate(1) |
|
|
Revenue |
|
|
Bed(2) |
|
|
|
|
|
|
|
|
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|
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(In thousands) |
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Owned and Operated |
|
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|
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|
|
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|
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|
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|
NorthPointe |
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University of Arizona |
|
|
1999 |
|
|
Jan 05 |
|
|
912 |
|
|
|
300 |
|
|
|
89.1 |
% |
|
$ |
294 |
|
|
$ |
323 |
|
The Reserve at
Athens |
|
University of Georgia |
|
|
1999 |
|
|
Jan 05 |
|
|
612 |
|
|
|
200 |
|
|
|
99.4 |
|
|
|
228 |
|
|
|
373 |
|
The Reserve at
Clemson |
|
Clemson University |
|
|
1999 |
|
|
Jan 05 |
|
|
590 |
|
|
|
177 |
|
|
|
92.7 |
|
|
|
190 |
|
|
|
322 |
|
Players Club |
|
Florida State University |
|
|
1994 |
|
|
Jan 05 |
|
|
336 |
|
|
|
84 |
|
|
|
94.4 |
|
|
|
128 |
|
|
|
380 |
|
The Gables |
|
Western Kentucky University |
|
|
1996 |
|
|
Jan 05 |
|
|
290 |
|
|
|
73 |
|
|
|
96.2 |
|
|
|
86 |
|
|
|
298 |
|
College Station |
|
Augusta State University |
|
|
1989 |
|
|
Jan 05 |
|
|
203 |
|
|
|
61 |
|
|
|
63.1 |
|
|
|
35 |
|
|
|
174 |
|
University Towers |
|
North Carolina State University |
|
|
1989 |
|
|
Jan 05 |
|
|
953 |
|
|
|
251 |
|
|
|
82.9 |
|
|
|
432 |
(4) |
|
|
453 |
(4) |
The Pointe at South
Florida |
|
University of South Florida |
|
|
1999 |
|
|
Jan 05 |
|
|
1,002 |
|
|
|
336 |
|
|
|
97.0 |
|
|
|
397 |
|
|
|
397 |
|
Commons at Knoxville |
|
University of Tennessee |
|
|
1999 |
|
|
|
|
|
708 |
|
|
|
211 |
|
|
|
97.3 |
|
|
|
291 |
|
|
|
411 |
|
The Commons |
|
Florida State University |
|
|
1997 |
|
|
Jan 05 |
|
|
732 |
|
|
|
252 |
|
|
|
93.4 |
|
|
|
252 |
|
|
|
345 |
|
The Reserve on
Perkins |
|
Oklahoma State University |
|
|
1999 |
|
|
Jan 05 |
|
|
732 |
|
|
|
234 |
|
|
|
91.1 |
|
|
|
210 |
|
|
|
287 |
|
The Reserve at Star
Pass |
|
University of Arizona |
|
|
2001 |
|
|
Jan 05 |
|
|
1,020 |
|
|
|
336 |
|
|
|
93.0 |
|
|
|
333 |
|
|
|
327 |
|
The Pointe at
Western |
|
Western Michigan University |
|
|
2000 |
|
|
Jan 05 |
|
|
876 |
|
|
|
324 |
|
|
|
96.6 |
|
|
|
331 |
|
|
|
378 |
|
College
Station at
W. Lafayette |
|
Purdue University |
|
|
2000 |
|
|
Jan 05 |
|
|
960 |
|
|
|
336 |
|
|
|
91.0 |
|
|
|
315 |
|
|
|
328 |
|
Commons on Kinnear |
|
The Ohio State University |
|
|
2000 |
|
|
Jan 05 |
|
|
502 |
|
|
|
166 |
|
|
|
95.6 |
|
|
|
231 |
|
|
|
460 |
|
The Pointe |
|
Pennsylvania State University |
|
|
1999 |
|
|
Jan 05 |
|
|
984 |
|
|
|
294 |
|
|
|
96.7 |
|
|
|
357 |
|
|
|
363 |
|
The Reserve at
Columbia |
|
University of Missouri |
|
|
2000 |
|
|
Jan 05 |
|
|
676 |
|
|
|
260 |
|
|
|
90.4 |
|
|
|
243 |
|
|
|
359 |
|
The Reserve on
Frankford |
|
Texas Tech University |
|
|
1997 |
|
|
Jan 05 |
|
|
737 |
|
|
|
243 |
|
|
|
90.2 |
|
|
|
246 |
|
|
|
334 |
|
19
|
|
|
|
|
|
|
|
|
|
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|
|
|
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|
|
|
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|
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006 |
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|
|
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|
|
|
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|
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|
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|
|
Average |
|
|
Monthly |
|
|
Revenue per |
|
|
|
|
|
Year |
|
|
Acquisition |
|
# of |
|
|
# of |
|
|
Occupancy |
|
|
Total |
|
|
Available |
|
Name |
|
Primary University Served |
|
Built |
|
|
Date |
|
Beds |
|
|
Units |
|
|
Rate(1) |
|
|
Revenue |
|
|
Bed(2) |
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
The Village on
Tharpe |
|
Florida State University |
|
|
1995 |
|
|
Jan 05 |
|
|
1,554 |
|
|
|
486 |
|
|
|
95.4 |
|
|
|
520 |
|
|
|
334 |
|
The Lofts |
|
University of Central Florida |
|
|
2002 |
|
|
Jan 05 |
|
|
730 |
|
|
|
254 |
|
|
|
97.5 |
|
|
|
407 |
|
|
|
558 |
|
The Reserve on West
31st |
|
University of Kansas |
|
|
1998 |
|
|
Jan 05 |
|
|
720 |
|
|
|
192 |
|
|
|
92.6 |
|
|
|
216 |
|
|
|
299 |
|
Campus Creek |
|
University of Mississippi |
|
|
2004 |
|
|
Feb 05 |
|
|
636 |
|
|
|
192 |
|
|
|
92.9 |
|
|
|
251 |
|
|
|
394 |
|
Pointe West |
|
University of South Carolina |
|
|
2003 |
|
|
Mar 05 |
|
|
480 |
|
|
|
144 |
|
|
|
99.2 |
|
|
|
180 |
|
|
|
375 |
|
Campus Lodge |
|
University of Florida |
|
|
2001 |
|
|
Jun 05 |
|
|
1,116 |
|
|
|
360 |
|
|
|
95.8 |
|
|
|
567 |
|
|
|
508 |
|
College Grove |
|
Middle Tennessee State University |
|
|
1998 |
|
|
Apr 05 |
|
|
864 |
|
|
|
240 |
|
|
|
96.8 |
|
|
|
260 |
|
|
|
301 |
|
The Reserve on
South College |
|
Auburn University |
|
|
1999 |
|
|
Jul 05 |
|
|
576 |
|
|
|
180 |
|
|
|
95.0 |
|
|
|
184 |
|
|
|
319 |
|
Players Club |
|
Georgia Southern University |
|
|
1993 |
|
|
Jun 06 |
|
|
624 |
|
|
|
214 |
|
|
|
79.6 |
|
|
|
102 |
|
|
|
281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total owned and
operated |
|
|
|
|
1998 |
(3) |
|
|
|
|
20,125 |
|
|
|
6,400 |
|
|
|
93.3% |
(3) |
|
|
7,286 |
|
|
|
367 |
(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned
and Leased Properties(5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Troy Place |
|
Troy State University |
|
|
2000 |
|
|
Jan 06 |
|
|
408 |
|
|
|
108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Jacksonville Place |
|
Jacksonville State University |
|
|
2000 |
|
|
Jan 06 |
|
|
504 |
|
|
|
132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Macon Place |
|
Macon State College |
|
|
1999 |
|
|
Jan 06 |
|
|
336 |
|
|
|
84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Clayton Place |
|
Clayton College & State University |
|
|
1999 |
|
|
Jan 06 |
|
|
854 |
|
|
|
221 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
River Place |
|
State University of West Georgia |
|
|
2000 |
|
|
Jan 06 |
|
|
504 |
|
|
|
132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Murray Place |
|
Murray State University |
|
|
2000 |
|
|
Jan 06 |
|
|
408 |
|
|
|
108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cape Place |
|
Southeast Missouri State University |
|
|
2000 |
|
|
Jan 06 |
|
|
360 |
|
|
|
96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Clemson Place |
|
Clemson University |
|
|
1998 |
|
|
Jan 06 |
|
|
288 |
|
|
|
96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Martin Place |
|
University of Tennesse at Martin |
|
|
2000 |
|
|
Jan 06 |
|
|
384 |
|
|
|
96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Berkeley Place |
|
Clemson University |
|
|
1999 |
|
|
Jan 06 |
|
|
480 |
|
|
|
132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrollton Place |
|
State University of West Georgia |
|
|
1998 |
|
|
Jan 06 |
|
|
336 |
|
|
|
84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Statesboro Place |
|
Georgia Southern University |
|
|
1999 |
|
|
Jan 06 |
|
|
528 |
|
|
|
132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Western Place |
|
Western Kentucky University |
|
|
2000 |
|
|
Jan 06 |
|
|
504 |
|
|
|
132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total owned and leased properties |
|
|
|
|
1999 |
(3) |
|
|
|
|
5,894 |
|
|
|
1,553 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total owned properties |
|
|
|
|
1999 |
(3) |
|
|
|
|
26,019 |
|
|
|
7,953 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Average of the physical month-end occupancy rates. |
|
(2) |
|
Monthly revenue per available bed for 2006 is equal to total revenue for the year ended December 31, 2006
divided by the sum of the design beds (including staff and model beds) at the property each month. For
properties acquired during the year , monthly revenue per available bed equals total revenue for the
period subsequent to acquisition through December 31, 2006 divided by the sum of the design beds
(including staff and model beds) at the property each month. |
|
(3) |
|
Represents average for all properties in portfolio. |
|
(4) |
|
Revenues and revenue per available bed for University Towers excludes revenue from food service operations. |
|
(5) |
|
EDR does not operate the Place Portfolio, and therefore no
operating statistics are presented. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Monthly |
|
|
Revenue per |
|
|
|
|
|
Year |
|
|
Acquisition |
|
# of |
|
|
# of |
|
|
Occupancy |
|
|
Total |
|
|
Available |
|
Name |
|
Primary University Served |
|
Built |
|
|
Date |
|
Beds |
|
|
Units |
|
|
Rate(1) |
|
|
Revenue |
|
|
Bed(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
NorthPointe |
|
University of Arizona |
|
|
1999 |
|
|
Jan 05 |
|
|
912 |
|
|
|
300 |
|
|
|
89.7 |
% |
|
$ |
301 |
|
|
$ |
330 |
|
The Reserve at
Athens |
|
University of Georgia |
|
|
1999 |
|
|
Jan 05 |
|
|
612 |
|
|
|
200 |
|
|
|
95.6 |
|
|
|
214 |
|
|
|
350 |
|
The Reserve at
Clemson |
|
Clemson University |
|
|
1999 |
|
|
Jan 05 |
|
|
590 |
|
|
|
177 |
|
|
|
95.4 |
|
|
|
186 |
|
|
|
316 |
|
Players Club |
|
Florida State University |
|
|
1994 |
|
|
Jan 05 |
|
|
336 |
|
|
|
84 |
|
|
|
96.1 |
|
|
|
125 |
|
|
|
372 |
|
The Gables |
|
Western Kentucky University |
|
|
1996 |
|
|
Jan 05 |
|
|
290 |
|
|
|
73 |
|
|
|
89.2 |
|
|
|
81 |
|
|
|
278 |
|
College Station |
|
Augusta State University |
|
|
1989 |
|
|
Jan 05 |
|
|
203 |
|
|
|
61 |
|
|
|
74.4 |
|
|
|
42 |
|
|
|
207 |
|
University Towers |
|
North Carolina State University |
|
|
1989 |
|
|
Jan 05 |
|
|
953 |
|
|
|
251 |
|
|
|
73.9 |
|
|
|
432 |
(4) |
|
|
453 |
(4) |
The Pointe at South
Florida |
|
University of South Florida |
|
|
1999 |
|
|
Jan 05 |
|
|
1,002 |
|
|
|
336 |
|
|
|
96.1 |
|
|
|
411 |
|
|
|
442 |
|
Commons at Knoxville |
|
University of Tennessee |
|
|
1999 |
|
|
Jan 05 |
|
|
708 |
|
|
|
211 |
|
|
|
94.8 |
|
|
|
281 |
|
|
|
396 |
|
The Commons |
|
Florida State University |
|
|
1997 |
|
|
Jan 05 |
|
|
732 |
|
|
|
252 |
|
|
|
95.1 |
|
|
|
257 |
|
|
|
351 |
|
The Reserve on
Perkins |
|
Oklahoma State University |
|
|
1999 |
|
|
Jan 05 |
|
|
732 |
|
|
|
234 |
|
|
|
92.9 |
|
|
|
216 |
|
|
|
295 |
|
The Reserve at Star
Pass |
|
University of Arizona |
|
|
2001 |
|
|
Jan 05 |
|
|
1,020 |
|
|
|
336 |
|
|
|
93.1 |
|
|
|
325 |
|
|
|
319 |
|
The Pointe at
Western |
|
Western Michigan University |
|
|
2000 |
|
|
Jan 05 |
|
|
876 |
|
|
|
324 |
|
|
|
95.3 |
|
|
|
342 |
|
|
|
391 |
|
College
Station at
W. Lafayette |
|
Purdue University |
|
|
2000 |
|
|
Jan 05 |
|
|
960 |
|
|
|
336 |
|
|
|
91.8 |
|
|
|
298 |
|
|
|
311 |
|
Commons on Kinnear |
|
The Ohio State University |
|
|
2000 |
|
|
Jan 05 |
|
|
502 |
|
|
|
166 |
|
|
|
95.8 |
|
|
|
234 |
|
|
|
465 |
|
The Pointe |
|
Pennsylvania State University |
|
|
1999 |
|
|
Jan 05 |
|
|
984 |
|
|
|
294 |
|
|
|
93.2 |
|
|
|
363 |
|
|
|
369 |
|
The Reserve at
Columbia |
|
University of Missouri |
|
|
2000 |
|
|
Jan 05 |
|
|
676 |
|
|
|
260 |
|
|
|
96.9 |
|
|
|
275 |
|
|
|
406 |
|
The Reserve on
Frankford |
|
Texas Tech University |
|
|
1997 |
|
|
Jan 05 |
|
|
737 |
|
|
|
243 |
|
|
|
86.9 |
|
|
|
252 |
|
|
|
342 |
|
The Village on
Tharpe |
|
Florida State University |
|
|
1995 |
|
|
Jan 05 |
|
|
1,554 |
|
|
|
486 |
|
|
|
94.7 |
|
|
|
533 |
|
|
|
343 |
|
The Lofts |
|
University of Central Florida |
|
|
2002 |
|
|
Jan 05 |
|
|
730 |
|
|
|
254 |
|
|
|
96.3 |
|
|
|
404 |
|
|
|
553 |
|
The Reserve on West
31st |
|
University of Kansas |
|
|
1998 |
|
|
Jan 05 |
|
|
720 |
|
|
|
192 |
|
|
|
89.8 |
|
|
|
215 |
|
|
|
299 |
|
Campus Creek |
|
University of Mississippi |
|
|
2004 |
|
|
Feb 05 |
|
|
636 |
|
|
|
192 |
|
|
|
88.6 |
|
|
|
218 |
|
|
|
377 |
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Monthly |
|
|
Revenue per |
|
|
|
|
|
Year |
|
|
Acquisition |
|
# of |
|
|
# of |
|
|
Occupancy |
|
|
Total |
|
|
Available |
|
Name |
|
Primary University Served |
|
Built |
|
|
Date |
|
Beds |
|
|
Units |
|
|
Rate(1) |
|
|
Revenue |
|
|
Bed(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Pointe West |
|
University of South Carolina |
|
|
2003 |
|
|
Mar 05 |
|
|
480 |
|
|
|
144 |
|
|
|
96.2 |
|
|
|
147 |
|
|
|
337 |
|
Campus Lodge |
|
University of Florida |
|
|
2001 |
|
|
Jun 05 |
|
|
1,116 |
|
|
|
360 |
|
|
|
92.8 |
|
|
|
349 |
|
|
|
491 |
|
College Grove |
|
Middle Tennessee State University |
|
|
1998 |
|
|
Apr 05 |
|
|
864 |
|
|
|
240 |
|
|
|
94.7 |
|
|
|
187 |
|
|
|
297 |
|
The Reserve on
South College |
|
Auburn University |
|
|
1999 |
|
|
Jul 05 |
|
|
576 |
|
|
|
180 |
|
|
|
92.4 |
|
|
|
90 |
|
|
|
287 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Owned
and Operated |
|
|
|
|
1998 |
(3) |
|
|
|
|
19,501 |
|
|
|
6,186 |
|
|
|
92.2% |
(3) |
|
$ |
6,778 |
|
|
$ |
366 |
(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Average of the physical month-end occupancy rates for the period subsequent to acquisition through December 31, 2005. |
|
(2) |
|
Monthly revenue per available bed for 2005 is equal to total revenue for the period subsequent to acquisition
through December 31, 2005 divided by the sum of the design beds (including staff and model beds) at the property
each month. |
|
(3) |
|
Represents average for all properties in portfolio. |
|
(4) |
|
Revenues and revenue per available bed for University Towers excludes revenue from food service operations. |
Mortgage Indebtedness
The following table contains summary information concerning the mortgage debt encumbering our
properties as of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding |
|
|
Contractual |
|
|
|
|
|
|
|
|
|
December 31, |
|
|
Fixed |
|
|
Maturity |
|
|
|
|
Property |
|
2006 |
|
|
Interest Rate |
|
|
Date |
|
|
Amortization |
|
University Towers |
|
$ |
23,563 |
|
|
|
6.77 |
% |
|
|
3/1/2008 |
|
|
30 Year |
The Reserve at Clemson |
|
|
11,651 |
|
|
|
6.63 |
% |
|
|
5/1/2007 |
|
|
30 Year |
The Gables |
|
|
4,433 |
|
|
|
5.50 |
% |
|
|
11/1/2013 |
|
|
30 Year |
NorthPointe |
|
|
18,312 |
|
|
|
6.63 |
% |
|
|
5/1/2007 |
|
|
30 Year |
The Pointe at S. Florida |
|
|
23,779 |
|
|
|
5.48 |
% |
|
|
7/7/2009 |
|
|
30 Year |
The Pointe at Western |
|
|
21,490 |
|
|
|
5.48 |
% |
|
|
7/7/2009 |
|
|
30 Year |
The Lofts |
|
|
26,500 |
|
|
|
3.49 |
% |
|
|
4/5/2007 |
|
|
30 Year |
The Reserve on Perkins/The Commons at Knoxville |
|
|
31,838 |
|
|
|
5.48 |
% |
|
|
7/7/2009 |
|
|
30 Year |
The Pointe at Penn State/The Reserve at Star Pass |
|
|
50,482 |
|
|
|
5.48 |
% |
|
|
7/7/2009 |
|
|
30 Year |
Campus Lodge |
|
|
36,854 |
|
|
|
6.97 |
% |
|
|
5/1/2012 |
|
|
30 Year |
Pointe West |
|
|
10,986 |
|
|
|
4.92 |
% |
|
|
8/1/2014 |
|
|
30 Year |
College Station at W. Lafayette |
|
|
14,725 |
|
|
|
5.48 |
% |
|
|
7/7/2009 |
|
|
30 Year |
The Commons on Kinnear |
|
|
14,625 |
|
|
|
5.48 |
% |
|
|
7/7/2009 |
|
|
30 Year |
The Reserve at Frankford |
|
|
14,426 |
|
|
|
5.48 |
% |
|
|
7/7/2009 |
|
|
30 Year |
The Reserve at Columbia |
|
|
19,301 |
|
|
|
5.48 |
% |
|
|
7/7/2009 |
|
|
30 Year |
Troy Place |
|
|
9,440 |
|
|
|
6.44 |
% |
|
|
12/9/2009 |
|
|
30 Year |
Jacksonville Place |
|
|
11,120 |
|
|
|
6.44 |
% |
|
|
12/9/2009 |
|
|
30 Year |
Macon Place |
|
|
7,440 |
|
|
|
6.44 |
% |
|
|
12/9/2009 |
|
|
30 Year |
Clayton Place |
|
|
24,540 |
|
|
|
6.44 |
% |
|
|
12/9/2009 |
|
|
30 Year |
River Place |
|
|
13,680 |
|
|
|
6.44 |
% |
|
|
12/9/2009 |
|
|
30 Year |
Murray Place |
|
|
6,800 |
|
|
|
6.44 |
% |
|
|
12/9/2009 |
|
|
30 Year |
Cape Place |
|
|
8,520 |
|
|
|
6.44 |
% |
|
|
12/9/2009 |
|
|
30 Year |
Clemson Place |
|
|
8,160 |
|
|
|
6.44 |
% |
|
|
12/9/2009 |
|
|
30 Year |
Martin Place |
|
|
8,960 |
|
|
|
6.44 |
% |
|
|
12/9/2009 |
|
|
30 Year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt /weighted average rate |
|
$ |
421,625 |
|
|
|
5.85 |
% |
|
|
|
|
|
|
|
|
Unamortized premium |
|
|
2,308 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans net of unamortized premium |
|
|
423,933 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Less current portion of long-term debt |
|
|
(60,158 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt, net of current portion |
|
$ |
363,775 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average interest rate of this mortgage indebtedness is 5.85% and 5.67%
at December 31, 2006 and 2005, respectively. Each of these mortgages is a non-recourse obligation
subject to customary exceptions and has 30-year amortization. The loans generally do not allow
prepayment prior to maturity. However, prepayment is allowed in certain cases subject to prepayment
penalties.
21
Item 3. Legal Proceedings.
In the normal course of business, we are subject to claims, lawsuits, and legal proceedings.
While it is not possible to ascertain the ultimate outcome of such matters, in managements
opinion, the liabilities, if any, in excess of amounts provided or covered by insurance, are not
expected to have a material adverse effect on our financial position, results of operations or
liquidity.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our common stock began trading on the New York Stock Exchange under the symbol EDR on
January 26, 2005. The initial public offering price of our common stock on such date was $16.00 per
share. There were approximately 659 holders of record out of the 27,386,537 shares outstanding on
March 9, 2007. On the same day, our common stock closed at $14.65. The following table provides
information on the high and low prices for our common stock on the NYSE and the dividends declared
since our initial public offering on January 31, 2005 through December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions |
|
|
High |
|
Low |
|
Declared |
Period from January 31, 2005 through March 31, 2005 |
|
|
17.66 |
|
|
|
16.00 |
|
|
|
|
|
Three months ended June 30, 2005 |
|
|
18.75 |
|
|
|
15.57 |
|
|
|
0.19 |
|
Three months ended September 30, 2005 |
|
|
20.34 |
|
|
|
16.40 |
|
|
|
0.30 |
|
Three months ended December 31, 2005 |
|
|
16.63 |
|
|
|
12.17 |
|
|
|
0.30 |
|
Three months ended March 31, 2006 |
|
|
15.83 |
|
|
|
12.81 |
|
|
|
0.30 |
|
Three months ended June 30, 2006 |
|
|
16.65 |
|
|
|
14.02 |
|
|
|
0.30 |
|
Three months ended September 30, 2006 |
|
|
16.85 |
|
|
|
13.60 |
|
|
|
0.30 |
|
Three months ended December 31, 2006 |
|
|
16.15 |
|
|
|
14.41 |
|
|
|
0.21 |
|
Direct stock purchase and dividend reinvestment plan
On July 31, 2006, we implemented the direct stock purchase and dividend reinvestment plan
which offers the following:
|
|
|
automatic reinvestment of some or all of the cash distributions paid on common stock, shares of other
classes of stock that we might issue in the future and units of limited partnership interest; |
|
|
|
|
an opportunity to make an initial purchase of our common stock and to acquire additional shares over time; |
|
|
|
|
safekeeping of shares and accounting for distributions received and reinvested at no cost |
Shares of common stock purchased under the plan will be either issued by EDR or acquired directly
from third parties in the open market or in privately negotiated transactions. The purchase price
per share of common stock acquired on any particular investment date will not be less than 95% of
the average high and low sales price per share of the common stock on the NYSE on that particular
day. We will determine the source of shares available through the plan based on market conditions,
relative transaction costs and our need for additional capital. To the extent the plan acquires
shares of common stock directly from EDR, we will receive additional capital for general corporate
purposes.
22
COMPARISON
OF 23 MONTH CUMULATIVE TOTAL RETURN *
Among
Education Realty Trust, The S & P 500 Index
And The MSCI US
REIT Index
*
$100 invested on 1/26/05 in stock or on 12/31/04 in index-including
reinvestment of dividends. Fiscal year ending December 31.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/05 |
|
|
|
12/06 |
|
|
|
Education Realty Trust |
|
|
|
78.36 |
|
|
|
|
89.79 |
|
|
|
S & P 500 |
|
|
|
104.91 |
|
|
|
|
121.48 |
|
|
|
MSCI US REIT |
|
|
|
112.13 |
|
|
|
|
152.41 |
|
|
|
We cannot assure you that your share performance will continue into the future with
the same or similar trends depicted in the graph above. We will not make or endorse
any predictions as to its future share performance.
The performance comparisons noted in the graph shall not be deemed incorporated by
reference by any general statement incorporating by reference this Annual Report on
Form 10-K into any filing under the Securities Act of 1933 or under the Securities
Exchange Act of 1934, except to the extent that we specifically incorporate this graph
by reference, and shall not otherwise be deemed filed under such acts.
The following table provides information with respect to compensation plans under
which our equity securities are authorized for issuance as of December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities |
|
|
Number of Securities to |
|
Weighted Average |
|
Remaining Available for |
|
|
be Issued upon Exercise |
|
Exercise Price of |
|
Future Issuance under |
|
|
of Outstanding Options, |
|
Outstanding Options |
|
Equity Compensation |
|
|
Warrants and Rights(1) |
|
Warrants and Rights(1) |
|
Plans |
Equity
compensation plans
approved by
security holders |
|
|
N/A |
|
|
|
N/A |
|
|
|
688,000 |
|
Equity compensation
plans not approved
by security holders |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
N/A |
|
|
|
N/A |
|
|
|
688,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Does not include 192,000 shares of restricted stock that are subject to vesting
requirements which were issued through EDRs 2004 Incentive Plan. |
Recent Sales of Unregistered Securities
For the year ended December 31, 2006, we issued 22,500 profits interest units to employees and
4,000 restricted shares to officers that vested immediately. The issuance of these units was made
in reliance upon exemptions from registration provided by Section 4(2) under the Securities Act and
Rule 506 of Regulation D thereunder.
Item 6. Selected Financial Data.
We have not presented historical information for EDR prior to the completion of the IPO
because we did not have material
23
corporate operating activity during the period from our formation until the closing of our IPO.
The following table sets forth selected financial and operating data on a consolidated
historical basis for EDR and on a combined historical basis for the EDR Predecessor. For the
periods presented prior to our IPO, the historical combined financial information for the EDR
Predecessor includes:
|
|
|
the student housing operations of Education Properties Trust, LLC (including the properties
referred to as Northpointe, The Reserve at Athens, The Reserve at Clemson and Players Club) |
|
|
|
|
the student housing operations of the properties referred to as the Gables, College Station
and University Towers, and |
|
|
|
|
the third party management and development consulting service operations and real estate
operations of Allen & OHara Education Services, LLC |
The results of operations for the year ended December 31, 2005 represent the combined
historical operations of the EDR Predecessor for the period January 1, 2005 through January 30,
2005 as well as the consolidated historical operations of EDR for the year ended December 31, 2005.
The following information presented below does not provide all of the information contained in
our financial statements, including related notes. You should read the information below in
conjunction with the historical consolidated and combined financial statements and related notes
and Managements Discussion and Analysis of Financial Condition and Results of Operations,
included elsewhere in this Annual Report on Form 10-K.
STATEMENT OF OPERATIONS DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Education Realty |
|
|
EDR |
|
|
|
Trust, Inc. |
|
|
Predecessor |
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student housing leasing revenue |
|
$ |
87,438 |
|
|
$ |
75,877 |
|
|
$ |
17,896 |
|
|
$ |
17,095 |
|
|
$ |
19,139 |
|
Student housing food service revenue |
|
|
3,634 |
|
|
|
3,491 |
|
|
|
3,137 |
|
|
|
2,879 |
|
|
|
|
|
Other leasing revenue |
|
|
14,012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third-party development consulting
services |
|
|
3,773 |
|
|
|
1,759 |
|
|
|
392 |
|
|
|
691 |
|
|
|
1,444 |
|
Third-party management revenue |
|
|
2,796 |
|
|
|
1,968 |
|
|
|
1,326 |
|
|
|
1,026 |
|
|
|
784 |
|
Operating expense reimbursements |
|
|
7,638 |
|
|
|
6,694 |
|
|
|
5,223 |
|
|
|
4,438 |
|
|
|
3,345 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
119,291 |
|
|
|
89,789 |
|
|
|
27,974 |
|
|
|
26,129 |
|
|
|
24,712 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student housing leasing operations |
|
|
42,669 |
|
|
|
37,794 |
|
|
|
7,645 |
|
|
|
7,408 |
|
|
|
9,212 |
|
Student housing food service operations |
|
|
3,318 |
|
|
|
3,275 |
|
|
|
2,899 |
|
|
|
2,645 |
|
|
|
|
|
Reimbursable operating expenses |
|
|
7,638 |
|
|
|
6,694 |
|
|
|
5,223 |
|
|
|
4,438 |
|
|
|
3,345 |
|
General and administrative |
|
|
12,331 |
|
|
|
12,549 |
|
|
|
3,545 |
|
|
|
3,425 |
|
|
|
3,242 |
|
Depreciation and amortization |
|
|
36,083 |
|
|
|
29,168 |
|
|
|
3,120 |
|
|
|
3,061 |
|
|
|
3,324 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
102,039 |
|
|
|
89,480 |
|
|
|
22,432 |
|
|
|
20,977 |
|
|
|
19,123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
17,252 |
|
|
|
309 |
|
|
|
5,542 |
|
|
|
5,152 |
|
|
|
5,589 |
|
Nonoperating expense |
|
|
29,933 |
|
|
|
17,266 |
|
|
|
5,786 |
|
|
|
5,771 |
|
|
|
5,715 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before equity in earnings of unconsolidated entities |
|
|
(12,681 |
) |
|
|
(16,957 |
) |
|
|
(244 |
) |
|
|
(619 |
) |
|
|
(126 |
) |
Equity in earnings of unconsolidated entities |
|
|
740 |
|
|
|
880 |
|
|
|
1,002 |
|
|
|
629 |
|
|
|
128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and minority interest |
|
|
(11,941 |
) |
|
|
(16,077 |
) |
|
|
758 |
|
|
|
10 |
|
|
|
2 |
|
Taxes |
|
|
659 |
|
|
|
497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before minority interest |
|
|
(12,600 |
) |
|
|
(16,574 |
) |
|
|
758 |
|
|
|
10 |
|
|
|
2 |
|
Minority interest |
|
|
(355 |
) |
|
|
(1,040 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(12,245 |
) |
|
$ |
(15,534 |
) |
|
$ |
758 |
|
|
$ |
10 |
|
|
$ |
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share basic and diluted |
|
$ |
(0.46 |
) |
|
$ |
(0.67 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding basic and diluted |
|
|
26,387,547 |
|
|
|
23,063,110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions per common share |
|
$ |
1.10 |
|
|
$ |
0.79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
BALANCE SHEET DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
Education Realty |
|
|
EDR |
|
|
|
Trust, Inc. |
|
|
Predecessor |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
|
(In thousands) |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student housing properties, net |
|
$ |
804,759 |
|
|
$ |
620,305 |
|
|
$ |
83,785 |
|
|
$ |
86,388 |
|
|
$ |
88,900 |
|
Other assets, net |
|
|
30,699 |
|
|
|
83,744 |
|
|
|
5,089 |
|
|
|
5,536 |
|
|
|
5,315 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
835,458 |
|
|
$ |
704,049 |
|
|
$ |
88,874 |
|
|
$ |
91,924 |
|
|
$ |
94,215 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage notes payable |
|
$ |
423,933 |
|
|
$ |
328,335 |
|
|
$ |
81,111 |
|
|
$ |
82,204 |
|
|
$ |
82,959 |
|
Other Indebtedness |
|
|
69,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
19,837 |
|
|
|
17,255 |
|
|
|
5,974 |
|
|
|
7,225 |
|
|
|
5,798 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
513,170 |
|
|
|
345,590 |
|
|
|
87,085 |
|
|
|
89,429 |
|
|
|
88,757 |
|
Minority interest |
|
|
19,289 |
|
|
|
27,926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity (deficit) |
|
|
302,999 |
|
|
|
330,533 |
|
|
|
1,789 |
|
|
|
2,495 |
|
|
|
5,458 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity |
|
$ |
835,458 |
|
|
$ |
704,049 |
|
|
$ |
88,874 |
|
|
$ |
91,924 |
|
|
$ |
94,215 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER DATA (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
Education Realty |
|
|
EDR |
|
|
|
Trust, Inc. |
|
|
Predecessor |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
|
(In thousands, except per share and selected property information) |
|
Funds from operations (FFO) (1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(12,245 |
) |
|
$ |
(15,534 |
) |
|
$ |
758 |
|
|
$ |
10 |
|
|
$ |
2 |
|
Plus student housing property depreciation and
amortization of lease intangibles |
|
|
35,728 |
|
|
|
29,168 |
|
|
|
3,120 |
|
|
|
3,061 |
|
|
|
3,324 |
|
Equity portion of real estate depreciation and
amortization on equity investees |
|
|
54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interest benefit |
|
|
(355 |
) |
|
|
(1,040 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds from operations available to
all share and unitholders |
|
$ |
23,182 |
|
|
$ |
12,594 |
|
|
$ |
3,878 |
|
|
$ |
3,071 |
|
|
$ |
3,326 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operations |
|
$ |
25,187 |
|
|
$ |
18,373 |
|
|
$ |
3,068 |
|
|
$ |
4,309 |
|
|
$ |
3,392 |
|
Net cash used in investing |
|
|
(120,830 |
) |
|
|
(200,157 |
) |
|
|
(181 |
) |
|
|
(925 |
) |
|
|
(42,982 |
) |
Net cash provided by (used in) financing |
|
|
40,408 |
|
|
|
243,445 |
|
|
|
(2,480 |
) |
|
|
(3,658 |
) |
|
|
38,951 |
|
Per share and distribution data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share basic and diluted |
|
$ |
(0.46 |
) |
|
$ |
(0.67 |
) |
|
$ |
(2,220 |
) |
|
$ |
|
|
|
$ |
|
|
Cash distributions declared per share/unit |
|
|
1.10 |
|
|
|
0.79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash distributions declared |
|
|
29,114 |
|
|
|
18,721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected property information (2): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Units |
|
|
6,400 |
|
|
|
6,186 |
|
|
|
1,146 |
|
|
|
1,146 |
|
|
|
1,146 |
|
Beds |
|
|
20,125 |
|
|
|
19,501 |
|
|
|
3,896 |
|
|
|
3,896 |
|
|
|
3,896 |
|
Occupancy (3) |
|
|
93.3 |
% |
|
|
92.2 |
% |
|
|
89.2 |
% |
|
|
85.1 |
% |
|
|
87.6 |
% |
Revenue per available bed (4) |
|
$ |
367 |
|
|
$ |
366 |
|
|
$ |
421 |
|
|
$ |
406 |
|
|
$ |
400 |
|
25
|
|
|
(1) |
|
As defined by the National Association of Real Estate Investment Trusts (NAREIT), FFO
represents net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from
sales of property, plus real estate-related depreciation and amortization and after adjustments for
unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and
joint ventures will be calculated to reflect funds from operations on the same basis. We present
FFO available to all shareholders and unitholders because we consider it an important supplemental measure of our operating performance and
believe it is frequently used by securities analysts, investors and other interested parties in the
evaluation of REITs, many of which present FFO when reporting their results.
As such, we also exclude the impact of minority interest in our calculation. FFO is intended to
exclude GAAP historical cost depreciation and amortization of real estate and related assets, which
assumes that the value of real estate diminishes ratably over time. Historically, however, real
estate values have risen or fallen with market conditions. Because FFO excludes depreciation and
amortization unique to real estate, gains and losses from property dispositions and extraordinary
items, it provides a performance measure that, when compared year over year, reflects the impact to
operations from trends in occupancy rates, rental rates, operating costs, development activities
and interest costs, providing perspective not immediately apparent from net income. |
|
(2) |
|
The selected property information represents all 27 and 26 owned and operated properties for 2006
(excluding the Place Portfolio) and 2005, respectively. Previous to 2004 the data represents the
seven properties owned by the EDR Predecessor, which are NorthPointe, The Reserve at Athens, The
Reserve at Clemson, Players Club, The Gables, College Station and University Towers. |
|
(3) |
|
Average of the month-end occupancy rates for the period. |
|
(4) |
|
Revenue per available bed is equal to the total revenue divided by the sum
of the design beds (including staff and model beds) at the property each month. Revenue and
design beds for any acquired property is included prospectively from acquisition date. |
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
(Dollars in thousands, except selected property information and share data)
The following discussion should be read in conjunction with the financial statements and notes
thereto appearing elsewhere in this report. Where appropriate, the following discussion includes
analysis of the effects of our initial public offering and the formation transactions. We make
statements in this section that are forward-looking statements, see the section of this Form 10-K
report entitled Forward-Looking Statements. Certain risk factors may cause our actual results,
performance or achievements to differ materially from those expressed or implied by the following
discussion. For a discussion of such risk factors, see the sections of this Form 10-K report
entitled Risk Factors and Forward-Looking Statements.
Overview
We are a self-managed and self-advised REIT engaged in the ownership, acquisition and
management of high quality student housing communities. We also provide student housing development
consulting services to universities, charitable foundations and others. We believe that we are one
of the largest private owners, developers and managers of high quality student housing communities
in the United States in terms of total beds owned and under management.
We were formed to continue and expand upon the student housing business of the EDR
Predecessor, which commenced in 1964. We did not commence operations until the completion of our
initial public offering, which occurred on the Closing Date. The historical operations prior to the
Closing Date that are described in this report refer to the operations of the EDR Predecessor. We
have described our operations in this report as if the historical operations of the EDR Predecessor
were conducted by us. Where appropriate, the following discussion includes an analysis of the
completion of our initial public offering and certain matters that have occurred following the
completion of our initial public offering.
We earn income from rental payments we receive as a result of our ownership of student housing
properties. We also earn income by performing property management services and development
consulting services for third parties. While we manage most of the properties we own, we do not recognize
any fee income from their management on a consolidated basis.
We have elected to be taxed as a REIT for federal income tax purposes.
Our Business Segments
26
We define business segments by their distinct customer base and service provided. Management
has identified three reportable segments: student housing leasing, third party development
consulting services and third-party management services. We evaluate each segments performance
based on net operating income, which is defined as income before depreciation, amortization,
interest expense and equity in earnings of unconsolidated entities. The accounting policies of the
reportable segments are described in more detail in the summary of significant accounting policies
in the footnotes to the financial statements. Inter-company fees are reflected at the contractually
stipulated amounts.
Student Housing Leasing
Student housing leasing revenue represented approximately 94.1% of our revenue, excluding
operating expense reimbursements, for the twelve months ended December 31, 2006. Our revenue
related to food service operations at two locations is included in this segment. Additionally this
segment includes other leasing revenue related to the Place Portfolio lease.
Unlike multi-family housing where apartments are leased by the unit, student-housing
communities are typically leased by the bed on an individual lease liability basis. Individual
lease liability limits each residents liability to his or her own rent without liability for a
roommates rent. A parent or guardian is required to execute each lease as a guarantor unless the
resident provides adequate proof of income. The number of lease contracts that we
administer is therefore equivalent to the number of beds occupied instead of the number of
apartment units.
Due to our predominantly private bedroom accommodations, the high level of student-oriented
amenities offered at our communities and the individual lease liability, we believe our properties
can typically command higher per-unit and per-square foot rental rates than most multi-family
properties in the same geographic markets. We are also typically able to command higher rental
rates than on-campus student housing, which tends to offer fewer amenities.
The majority of our leases commence mid-August and terminate the last day of July. These dates
coincide with the commencement of the universities fall academic term and the completion of the
subsequent summer school session. As such, we are required to re-lease each property in its
entirety each year, resulting in significant turnover in our tenant population from year to year.
In 2006 and 2005, approximately 68.3% and 69.9%, respectively, of our beds were leased to students
who were first-time residents at our properties. As a result, we are highly dependent upon the
effectiveness of our marketing and leasing efforts during the annual leasing season that typically
begins in February and ends in August of each year. Our properties occupancy rates are therefore
typically stable during the August to July academic year but are susceptible to fluctuation at the
commencement of each new academic year.
Prior to the commencement of each new lease period, mostly during the first two weeks of
August but also during September at some communities, we prepare the units for new incoming
tenants. Other than revenue generated by in-place leases for returning tenants, we do not generally
recognize lease revenue during this period referred to as Turn as we have no leases in place. In
addition, during Turn we incur significant expenses making our units ready for occupancy, which we
recognize immediately. This lease Turn period results in seasonality in our operating results
during the third quarter of each year.
Third-Party Management Services
Revenue from our third-party management services, excluding operating expense reimbursements,
represented approximately 2.5% of our revenue for the twelve months ended December 31, 2006. These
revenues are typically derived from multi-year management agreements, under which management fees
are typically 3-5% of leasing revenue. These agreements typically have an initial term of five to
ten years with a renewal option for an additional five years. As part of the management agreements,
there are certain payroll and related expenses we pay on behalf of the third-party properties
owners. These costs are referred to as reimbursable operating expenses and are required to be
reimbursed to us by the third-party property owners. We recognize the expense and revenue related
to these reimbursements when incurred. These operating expenses are wholly reimbursable and
therefore not considered by our management when analyzing the operating performance of our
third-party management services business.
Third-Party Development Consulting Services
Revenue from our third-party development consulting services, excluding operating expense
reimbursements, represented approximately 3.4% of our revenue for the twelve months ended December
31, 2006. Fees for these services are typically 3-5% of the total project cost and are payable over
the life of the project, which is typically one to two years in length. We incur expenses that are
reimbursable by a project when awarded. We recognize the expenses when incurred, while the
reimbursement revenue is not
recognized until the consulting contract is awarded. These operating expenses are wholly
reimbursable and therefore not considered by our management when analyzing the operating
performance of our third-party development consulting services business. Also at
27
times we will pay
pre-development project expenses such as architectural fees and permits if such are required prior
to the projects financing being in place. We typically obtain a guarantee from the owner for
repayment.
We periodically enter into joint venture arrangements whereby we provide development
consulting services to third-party student housing owners in an agency capacity. We recognize our
portion of the earnings in each joint venture based on our ownership interest, which is reflected
as equity in earnings of unconsolidated entities after net operating income in our statement of
operations. Our revenue and operating expenses could fluctuate from period to period based on the
extent we utilize joint venture arrangements to provide third-party development consulting
services.
The amount and timing of future revenues from development consulting services will be
contingent upon our ability to successfully compete in public universities competitive procurement
processes, our ability to successfully structure financing of these projects, and our ability to
ensure completion of construction within agreed construction timelines and budgets. To date, all of
our third-party development projects have completed construction in time for their targeted
occupancy dates.
Trends and Outlook
Rents and Occupancy
We expect the general trends of increased university enrollment and limited availability of
on-campus housing to continue for the foreseeable future, providing us with continued opportunities
to maximize revenues through increased occupancy and/or rental rates in our owned portfolio. We
manage our properties to maximize revenues, which are primarily determined by two components:
rental rates and occupancy rates. We customarily adjust rental rates in order to maximize revenues,
which in some cases results in a lower occupancy rate, but in most cases results in stable or
increasing revenues from the property. As a result, a decrease in occupancy rates may be offset by
an increase in rental rates and may not be material to our operations.
General and Administrative Costs
As a result of becoming a public company in January 2005, we experienced significant increases
in payroll, legal and accounting costs, director fees, costs related to communicating with
stockholders, including ongoing communications and distribution of proxy statements in connection
with stockholder meetings, as well as other cost that are unique to being a public company. We
also experienced increases in 2006 due to continued growth in payroll and the additional costs
associated with formulating and documenting our internal control systems and implementation of the
Sarbanes Oxley Act of 2002. For the year ended December 31, 2006 the costs related to documenting
our internal control systems and implementation of the Sarbanes Oxley Act of 2002 totaled
approximately $850.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States (GAAP) requires management to make estimates and assumptions in
certain circumstances that affect amounts reported in our financial statements and related notes.
In preparing these financial statements, management has utilized all available information,
including its past history, industry standards and the current economic environment, among other
factors, in forming its estimates and judgments of certain amounts included in the financial
statements, giving due consideration to materiality. It is possible that the ultimate outcome
anticipated by management in formulating its estimates may not be realized. Application of the
critical accounting policies below involves the exercise of judgment and use of assumptions as to
future uncertainties and, as a result, actual results could differ from these estimates. In
addition, other companies in similar businesses may utilize different estimation policies and
methodologies, which may impact the comparability of our results of operations and financial
condition to those companies.
Student Housing Leasing Revenue Recognition
Student housing leasing revenue is comprised of revenue related to the leasing activities at
the student housing properties and includes revenues from the leasing of space, parking lot rentals
and certain ancillary services. Also included in this segment is revenue from our food service
operations and other leasing revenue related to the Place Portfolio lease.
Students are required to execute lease contracts with payment schedules that vary from single
to monthly payments.
Generally, a nonrefundable application fee, a nonrefundable service fee and a notarized parental
guarantee must accompany each executed contract. Receivables are recorded when due, and leasing
revenues and related lease incentives and nonrefundable application and service fees are recognized
on a straight-line basis over the term of the contracts. Balances are considered past due when
payment is not received on the contractual due date. Allowances for doubtful accounts are
established by management when it is determined that collection is doubtful.
28
Student Housing Food Service Revenue Recognition
We provide food service to an unaffiliated secondary boarding school through a contract
covering a nine-month period. The contract requires a flat weekly fee and the related revenues are
recognized on a straight-line basis over the contract period. This contract was terminated
affective December 31, 2006. Additionally, we maintain a dining facility at University Towers,
which offers meal plans to the tenants as well as dining to other third party customers. The meal
plans typically require upfront payment by the tenant covering the school semester and the related
revenue is recognized on a straight-line basis over the corresponding semester.
Other Leasing Revenue Recognition
Other leasing revenue relates to our leasing of 13 properties we acquired from Place
Properties (Place). Simultaneous with the acquisition of the 13 properties, the Trust leased the
assets to Place and receives base monthly rent of $1,145 and has the right to receive Additional
Rent annually if the properties exceed certain criteria defined in the lease agreement. Base rent
is recognized on a straight line basis over the lease term and Additional Rent is recognized only
upon satisfaction of the defined criteria.
Revenue and Cost Recognition of Third-Party Development Consulting Services
Costs associated with the pursuit of third-party development consulting contracts are expensed
as incurred until such time as we have been notified of a contract award or reimbursement has been
otherwise guaranteed by the customer. At such time, the reimbursable portion of such costs is
recorded as a receivable. Development consulting revenues are recognized using the percentage of
completion method as determined by construction costs incurred relative to the total estimated
construction costs. Costs associated with development consulting services are expensed as incurred.
We generally receive a significant percentage of our fees for development consulting services upon
closing of the project financing, a portion of the fee over the construction period, and the
balance upon substantial completion of construction. Because revenue from these services is
recognized for financial reporting purposes utilizing the percentage of completion method,
differences occur between amounts received and revenues recognized. Differences also occur between
amounts recognized for tax purposes and those recognized from financial reporting purposes. Because
as a REIT, we are required to distribute 90% of our taxable income, our distribution requirement
with respect to our income from third-party services may exceed that reflected as net income for
financial reporting purposes from such activities.
We periodically enter into joint venture arrangements whereby we provide
development-consulting services to third-party student housing owners in an agency capacity. We
recognize our portion of the earnings in each joint venture based on our ownership interest, which
is reflected after net operating income in our statement of operations as equity in earnings of
unconsolidated entities. Our revenue and operating expenses could fluctuate from period to period
based on the extent we utilize joint venture arrangements to provide third-party development
consulting services.
Student Housing Property Acquisitions
Land, land improvements, buildings and improvements, and furniture, fixtures and equipment are
recorded at cost. Buildings and improvements are depreciated over 30 to 40 years, land improvements
are depreciated over 15 years and furniture, fixtures, and equipment are depreciated over 3 to 7
years. Depreciation is computed using the straight-line method for financial reporting purposes.
Property acquisitions initiated subsequent to June 30, 2001 are accounted for utilizing the
purchase method in accordance with Statement of Financial Accounting Standards (SFAS) No. 141,
Business Combinations , and accordingly, the results of operations are included in the results of
operations from the respective dates of acquisition. Pre-acquisition costs, including legal and
professional fees and other third party costs related directly to the acquisition of the property,
are accounted for as part of the purchase price. Independent appraisals, obtained at the time of
the original acquisition by the owners of the properties we acquired in our formation transactions,
estimates of cash flows, and valuation techniques are used to allocate the purchase price of
acquired property between land, land improvements, buildings and improvements, furniture, fixtures
and equipment and other identifiable intangibles such as amounts related to in-place leases.
Repairs and Maintenance
The costs of ordinary repairs and maintenance are charged to operations when incurred. Major
improvements that extend the life of an asset are capitalized and depreciated over the remaining
useful life of the asset. Planned major repair, maintenance and improvement projects are
capitalized when performed. In some circumstances the lenders require us to maintain a reserve
account for future repairs and capital expenditures. These amounts are not available for current
use.
Long Lived Assets Impairment
29
Management is required to assess whether there are any indicators that our real
estate properties may be impaired. A propertys value is considered impaired if managements
estimate of the aggregate future cash flows (undiscounted and without interest charges) to be
generated by the property is less than the carrying value of the property. These estimates of cash
flows are based on factors such as expected future operating income, trends and prospects, as well
as the effects of demand, competition and other factors. To the extent impairment has occurred, the
loss will be measured as the excess of the carrying amount of the property over the fair value of
the property, thereby reducing our net income.
Results of Operations for the Years Ended December 31, 2006 and 2005
The following table presents our results of operations for Education Realty Trust, Inc. for
the year ended December 31, 2006 and the combined results of operations for Education Realty Trust,
Inc. (post Offering) and the EDR Predecessor (pre Offering) for the year ended December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006 |
|
|
Year Ended December 31, 2005 |
|
|
|
|
|
|
|
Third-Party |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third-Party |
|
|
|
|
|
|
|
|
|
|
|
|
Student |
|
|
Development |
|
|
Third-Party |
|
|
|
|
|
|
|
|
|
|
Student |
|
|
Development |
|
|
Third-Party |
|
|
|
|
|
|
|
|
|
Housing |
|
|
Consulting |
|
|
Management |
|
|
|
|
|
|
|
|
|
|
Housing |
|
|
Consulting |
|
|
Management |
|
|
|
|
|
|
|
|
|
Leasing |
|
|
Services |
|
|
Services |
|
|
Adjustments |
|
|
Total |
|
|
Leasing |
|
|
Services |
|
|
Services |
|
|
Adjustments |
|
|
Total |
|
|
|
(In
thousands) |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student housing
leasing revenue |
|
$ |
87,438 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
87,438 |
|
|
$ |
75,877 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
75,877 |
|
Student housing food
service revenue |
|
|
3,634 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,634 |
|
|
|
3,491 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,491 |
|
Other leasing revenue |
|
|
14,012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third-party
development
consulting services |
|
|
|
|
|
|
3,773 |
|
|
|
|
|
|
|
|
|
|
|
3,773 |
|
|
|
|
|
|
|
1,759 |
|
|
|
|
|
|
|
|
|
|
|
1,759 |
|
Third-party
management services |
|
|
|
|
|
|
|
|
|
|
2,796 |
|
|
|
|
|
|
|
2,796 |
|
|
|
|
|
|
|
|
|
|
|
1,968 |
|
|
|
|
|
|
|
1,968 |
|
Intersegment revenues |
|
|
|
|
|
|
|
|
|
|
3,544 |
|
|
|
(3,544 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,644 |
|
|
|
(2,644 |
) |
|
|
|
|
Operating expense
reimbursements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,638 |
|
|
|
7,638 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,694 |
|
|
|
6,694 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
105,084 |
|
|
|
3,773 |
|
|
|
6,340 |
|
|
|
4,094 |
|
|
|
119,291 |
|
|
|
79,368 |
|
|
|
1,759 |
|
|
|
4,612 |
|
|
|
4,050 |
|
|
|
89,789 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student housing
leasing operations |
|
|
42,669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,669 |
|
|
|
37,794 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,794 |
|
Student housing food
service operations |
|
|
3,318 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,318 |
|
|
|
3,275 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,275 |
|
General and
administrative |
|
|
|
|
|
|
2,210 |
|
|
|
5,004 |
|
|
|
|
|
|
|
7,214 |
|
|
|
|
|
|
|
2,245 |
|
|
|
3,969 |
|
|
|
|
|
|
|
6,214 |
|
Intersegment expenses |
|
|
3,544 |
|
|
|
|
|
|
|
|
|
|
|
(3,544 |
) |
|
|
|
|
|
|
2,644 |
|
|
|
|
|
|
|
|
|
|
|
(2,644 |
) |
|
|
|
|
Reimbursable
operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,638 |
|
|
|
7,638 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,694 |
|
|
|
6,694 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
49,531 |
|
|
|
2,210 |
|
|
|
5,004 |
|
|
|
4,094 |
|
|
|
60,839 |
|
|
|
43,713 |
|
|
|
2,245 |
|
|
|
3,969 |
|
|
|
4,050 |
|
|
|
53,977 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income (loss) |
|
|
55,553 |
|
|
|
1,563 |
|
|
|
1,336 |
|
|
|
|
|
|
|
58,452 |
|
|
|
35,655 |
|
|
|
(486 |
) |
|
|
643 |
|
|
|
|
|
|
|
35,812 |
|
Nonoperating expenses(1) |
|
|
64,708 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64,708 |
|
|
|
46,578 |
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
46,572 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before equity in
earnings of unconsolidated entities,
income taxes and minority interest |
|
|
(9,155 |
) |
|
|
1,563 |
|
|
|
1,336 |
|
|
|
|
|
|
|
(6,256 |
) |
|
|
(10,923 |
) |
|
|
(480 |
) |
|
|
643 |
|
|
|
|
|
|
|
(10,760 |
) |
Equity in earnings of unconsolidated
entities |
|
|
(74 |
) |
|
|
814 |
|
|
|
|
|
|
|
|
|
|
|
740 |
|
|
|
|
|
|
|
880 |
|
|
|
|
|
|
|
|
|
|
|
880 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes and
minority interest(2) |
|
$ |
(9,229 |
) |
|
$ |
2,377 |
|
|
$ |
1,336 |
|
|
$ |
|
|
|
$ |
(5,516 |
) |
|
$ |
(10,923 |
) |
|
$ |
400 |
|
|
$ |
643 |
|
|
$ |
|
|
|
$ |
(9,880 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Nonoperating expenses include interest expense, interest income, exit fees on early payment of debt, amortization of deferred financing costs,
depreciation, and amortization of intangibles. |
|
(2) |
|
The following is a reconciliation of the reportable segments net income
(loss) before income taxes and minority interest to EDRs consolidated net
income (loss) before income taxes and minority interest
determined under generally accepted accounting principles: |
30
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Net income (loss) before taxes and minority interest for reportable segments |
|
$ |
(5,516 |
) |
|
$ |
(9,880 |
) |
Unallocated corporate amounts: |
|
|
|
|
|
|
|
|
Noncash compensation charge for PIUs and restricted stock |
|
|
(796 |
) |
|
|
(4,679 |
) |
Other corporate expenses |
|
|
(5,629 |
) |
|
|
(1,518 |
) |
|
|
|
|
|
|
|
Net income (loss) before income taxes and minority interest |
|
$ |
(11,941 |
) |
|
$ |
(16,077 |
) |
|
|
|
|
|
|
|
Student housing leasing
Overall average physical occupancy and Revenue per Available Bed (RevPAB) for the years
ended December 31, 2006 and 2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
Year ended |
|
|
|
|
December |
|
December |
|
|
|
|
31, 2006 |
|
31, 2005 |
|
Difference |
Occupancy |
|
|
|
|
|
|
|
|
|
|
|
|
Physical (1) |
|
|
93.3 |
% |
|
|
92.2 |
% |
|
|
1.1 |
% |
Economic (2) |
|
|
91.2 |
% |
|
|
90.5 |
% |
|
|
0.7 |
% |
NarPAB (3) |
|
$ |
343 |
|
|
$ |
340 |
|
|
$ |
3 |
|
Other income per avail. bed (4) |
|
$ |
24 |
|
|
$ |
26 |
|
|
$ |
(2 |
) |
RevPAB (5) |
|
$ |
367 |
|
|
$ |
366 |
|
|
$ |
1 |
|
Operating expense per bed (6) |
|
$ |
179 |
|
|
$ |
182 |
|
|
$ |
(3 |
) |
Operating margin |
|
|
51.2 |
% |
|
|
50.2 |
% |
|
|
1 |
% |
Design Beds (7) |
|
|
238,380 |
|
|
|
207,355 |
|
|
|
31,025 |
|
|
|
|
(1) |
|
Physical occupancy represents a weighted average of the month end occupancies for the
respective period. |
|
(2) |
|
Economic occupancy represents the effective occupancy calculated by taking net apartment rent
accounted for on a GAAP basis for the respective period divided by market rent for the respective
period. |
|
(3) |
|
NarPAB represents GAAP net apartment rent for the respective period divided by the sum of the
design beds in the portfolio for each of the included months. Does not include food service revenue
or other leasing revenue. |
|
(4) |
|
Represents other GAAP-based income for the respective period divided by the sum of the design
beds in the portfolio for each of the included months. Other income includes service/app fees, late
fees, termination fees, parking fees, transfer fees, damage recovery, utility recovery, and other
misc. |
|
(5) |
|
Represents total revenue (net apartment rent plus other income) for the respective period
divided by the sum of the design beds in the portfolio for each of the included months. |
|
(6) |
|
Represents property-level operating expense excluding management fees, depreciation and
amortization divided by the sum of the design beds for each of the included months. |
|
(7) |
|
Represents the sum of the monthly design beds in the portfolio during the period, excluding
Place properties. |
Revenue from student housing leasing increased $25,716 to $105,084 for the year
ended December 31, 2006. This 32.4% increase in revenue from the same period in 2005 is
attributable to a significant increase in beds by way of acquisition and the addition of other
leasing revenue related to the 13 property Place Portfolio lease discussed below. Aggregate design
beds for the year ended December 31, 2006 increased 31,025 beds or 15.0% over the same period last
year to 238,380 beds. At current RevPAB rates this acquisition driven increase in beds represents
about $11,400 of the increased revenue for the year ended December 31, 2006, while growth in same
community revenue contributed approximately $400. In January 2006 we completed the acquisition of a
13 property portfolio from Place Properties. Simultaneous with the acquisition we entered into a
lease agreement under which Place Properties leases and operates the properties. Other leasing
revenue related to the lease contributed $14,012 of revenue for the year ended December 31,
2006, including the recognition of $274 of Additional Rent, as defined in the lease agreement.
Student housing food service revenue was relatively flat at about $3,600. Approximately $1,400 of
student housing food service revenue was related to a contract to provide food service to a
secondary boarding school in California. This contract was terminated effective December 31, 2006.
Operating expenses of our student housing communities increased $5,818 to $49,531
for the year ended December 31, 2006. Expense growth of approximately $4,900 is attributable to
increased beds by way of acquisition as discussed above. Same store operating expenses year over
year were held relatively flat mainly as a result of improvements in turn costs and bad debt
expense along with other improvements that combined to offset higher utility costs and property
taxes for the period. Intersegment expenses, which represent management fees paid to our management
company increased just over $900 as a result of acquired beds and higher revenue.
The net impact of the growth in revenue and expenses noted above was a 55.8% rise in net
operating income for the segment to $55,553 for the year ended December 31, 2006. As noted a
majority of the growth came through acquisition and the addition of other leasing revenue related
to the Place Portfolio which drove an increase in operating margins from 44.9% to 52.9% for the
segment.
31
However, we also attained good growth in our owned and operated properties, excluding the
13 properties leased to Place Properties, with margins improving from 50.2% to 51.2%.
Third-party development consulting services
The following table represents the development consulting projects that were active during the
years ended December 31, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized Earnings |
Project |
|
Beds |
|
Fee Type |
|
2006 |
|
2005 |
|
Difference |
|
Slippery Rock University Phase I |
|
|
1,390 |
|
|
Development fee |
|
$ |
1,787 |
|
|
$ |
887 |
|
|
$ |
900 |
|
Indiana University of Pennsylvania |
|
|
734 |
|
|
Development fee |
|
|
924 |
|
|
|
|
|
|
|
924 |
|
University of Michigan |
|
|
849 |
|
|
Development fee |
|
|
567 |
|
|
|
|
|
|
|
567 |
|
Auraria Higher Education System |
|
|
685 |
|
|
Development fee |
|
|
|
|
|
|
365 |
|
|
|
(365 |
) |
Calhoun Street |
|
|
|
|
|
Purchasing fee |
|
|
|
|
|
|
306 |
|
|
|
(306 |
) |
University of North Carolina Greensboro |
|
|
600 |
|
|
Construction oversight fee |
|
|
105 |
|
|
|
|
|
|
|
105 |
|
University of Louisville Phase III |
|
|
359 |
|
|
Construction oversight fee |
|
|
59 |
|
|
|
41 |
|
|
|
18 |
|
University of Alabama Birmingham |
|
|
753 |
|
|
Construction oversight fee |
|
|
61 |
|
|
|
160 |
|
|
|
(99 |
) |
University of Alabama Tuscaloosa |
|
|
631 |
|
|
Development fee |
|
|
257 |
|
|
|
|
|
|
|
257 |
|
Other |
|
|
|
|
|
Consulting fee |
|
|
13 |
|
|
|
|
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
Third-party development consulting services |
|
|
|
|
|
|
|
$ |
3,773 |
|
|
$ |
1,759 |
|
|
$ |
2,014 |
|
|
|
|
|
|
|
|
|
|
California University of Pennsylvania Phase IV |
|
|
447 |
|
|
Development fee |
|
$ |
173 |
|
|
$ |
156 |
|
|
$ |
17 |
|
California University of Pennsylvania Phase V |
|
|
354 |
|
|
Development fee |
|
|
143 |
|
|
|
|
|
|
|
143 |
|
University of North Carolina Greensboro |
|
|
600 |
|
|
Development fee |
|
|
240 |
|
|
|
|
|
|
|
240 |
|
Bloomsburg University |
|
|
407 |
|
|
Development fee |
|
|
|
|
|
|
239 |
|
|
|
(239 |
) |
University of Louisville Phase III |
|
|
359 |
|
|
Development fee |
|
|
126 |
|
|
|
100 |
|
|
|
26 |
|
University of Alabama Birmingham |
|
|
753 |
|
|
Development fee |
|
|
132 |
|
|
|
357 |
|
|
|
(225 |
) |
Other |
|
|
|
|
|
Development fee |
|
|
|
|
|
|
28 |
|
|
|
(28 |
) |
|
|
|
|
|
|
|
|
|
Equity in earnings of unconsolidated entities |
|
|
|
|
|
|
|
$ |
814 |
|
|
$ |
880 |
|
|
$ |
(66 |
) |
|
|
|
|
|
|
|
|
|
Third-party development services revenues increased by $2,014 to $3,773 for the year
ended December 31, 2006 from $1,759 for the year ended December 31, 2005. During 2006 we were
engaged in four active development projects representing 3,604 beds and recognized construction
oversight fees on an additional 3 projects. During the same period in 2005 we recognized
development fees on two projects, recognized $306 of purchasing fees related to a third project,
and recognized construction oversight fees on another two projects. The increased volume in
development consulting revenue is mainly due to an increase in the number of projects being managed
by our development subsidiary (AODC) but also represents a shift in the percentage of new projects
AODC contracts directly. In previous years the majority of our development services were contracted
through joint venture relationships with the profits from those services being recognized through
equity in earnings of unconsolidated entities.
Equity in earnings of unconsolidated entities remained flat at just over $800 for the years
ended December 31, 2006 and 2005. During 2006 there were five projects underway representing 2,513
beds while four projects representing 1,996 beds were being managed through joint ventures in 2005.
General and administrative costs in the third-party development consulting services was held
relatively flat year over year at just over $2,200 for the years ended December 31, 2006 and 2005.
Third-party management services
Third-party management services revenues increased $828 to $2,796 for the year ended December
31, 2006 from
32
$1,968 million for the year ended December 31, 2005. Growth in our owned portfolio
year over year contributed just over $900 of the increase by way of intersegment revenue. Aggregate
design beds in our owned portfolio for the year ended December 31, 2006 were 238,380 which is an
increase of 31,025 aggregate beds from the same period in the prior year. The opening of three new
managed properties in August and September of 2005 and the addition of a new management contract in
September 2005 contributed $378 of additional revenue year over year. Three third-party development
communities opening during the summer of 2006 added $328 to 2006 revenue. Management services
provided to three properties acquired in the fall of 2006 through joint venture arrangements
contributed $67 of management fees in 2006 and our management company subsidiary earned
approximately $100 in preopening management support fees related to two communities while under
development. Offsetting these increases was a decline of $150 as a result of the termination of
two management agreements during the summer of 2006.
General and administrative costs for our third-party management services increased $1,035 to
$5,004 for the year ended December 31, 2006. This increase is a direct result of the growth in both
our owned and managed portfolios as discussed above. Our owned portfolio grew from 21 properties at
the start of 2005 to 27 properties at the end of 2006. In addition the third-party management
services group added a total of ten new properties to its managed portfolio since the spring of
2005, while two contracts were terminated. Additional growth in general and administrative expenses
occurred due to a higher overhead burden as a result of the overall growth of the company.
Nonoperating expenses
Nonoperating expenses increased $18,130 to $64,708 for the year ended December 31, 2006. The
increase is driven by approximately $12,453 of additional interest expense and $6,830 of additional
depreciation and amortization related mainly to the acquisition of the 13 properties from Place
properties in January 2006 and a full twelve months of expense in the current period related to
acquisitions made during 2005. These increases were partially offset by a $1,100 decline in
amortization of deferred financing costs as a result of prepayment penalties on early retirement of
debt that was incurred in the first quarter of 2005. We anticipate continued pressures on in interest
expense as a result of recent acquisitions as well as the potential of continued increases in
interest rates. However, we also plan on paying down our variable rate debt with excess cash in 2007.
Other corporate expenses
Other corporate expenses represent general and administrative expenses that are not allocated
to the third-party development consulting and third-party management services segments.
Intersegment management fees are charged to the student housing leasing segment so it is not
allocated any corporate expenses. For the year ended December 31, 2006 other corporate expenses
were $5,629, an increase of $4,111 over the prior year. Corporate related net interest expense was approximately $300 in 2006
compared to net interest income of approximately $900 in 2005. The change is a result of higher than usual interest income in the second half of
2005 related to uninvested funds from our private
equity offering in September 2005. In 2006 the private equity offering funds were used in the acquisition
of the Place Portfolio and additional interest expense was incurred as funds were drawn on our revolving credit facility
to partially fund distributions to our shareholders. General and administrative expenses increased approximately $2,800 mainly
due to increased salaries and staffing costs and $850 related to the first year costs of
implementing the Sarbanes-Oxley Act of 2002.
Noncash compensation expense for the year ended December 31, 2006 was $796 compared to $4,679
for the year ended December 31, 2005. Noncash compensation includes the amortization of restricted
stock awards over their vesting period and the applicable cost of any awards that were immediately
vested upon date of grant. The decrease of $3,883 from 2005 is due to a one-time charge related to
our Offering that occurred in January 2005 when fully vested awards were granted.
Results of Operations for the years ended December 31, 2005 and 2004
The following table presents our combined results of operations for Education
Realty Trust, Inc. (post Offering) and the EDR Predecessor (pre Offering) for the year ended
December 31, 2005 and the combined results of operations for the EDR Predecessor for the year ended
December 31, 2004:
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005 |
|
|
Year Ended December 31, 2004 |
|
|
|
|
|
|
|
Third-Party |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third-Party |
|
|
|
|
|
|
|
|
|
|
|
|
Student |
|
|
Development |
|
|
Third-Party |
|
|
|
|
|
|
|
|
|
|
Student |
|
|
Development |
|
|
Third-Party |
|
|
|
|
|
|
|
|
|
Housing |
|
|
Consulting |
|
|
Management |
|
|
|
|
|
|
|
|
|
|
Housing |
|
|
Consulting |
|
|
Management |
|
|
|
|
|
|
|
|
|
Leasing |
|
|
Services |
|
|
Services |
|
|
Adjustments |
|
|
Total |
|
|
Leasing |
|
|
Services |
|
|
Services |
|
|
Adjustments |
|
|
Total |
|
|
|
(In
thousands) |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student housing
leasing revenue |
|
$ |
75,877 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
75,877 |
|
|
$ |
17,896 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
17,896 |
|
Student housing food
service revenue |
|
|
3,491 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,491 |
|
|
|
3,137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,137 |
|
Third-party
development
consulting services |
|
|
|
|
|
|
1,759 |
|
|
|
|
|
|
|
|
|
|
|
1,759 |
|
|
|
|
|
|
|
392 |
|
|
|
|
|
|
|
|
|
|
|
392 |
|
Third-party
management services |
|
|
|
|
|
|
|
|
|
|
1,968 |
|
|
|
|
|
|
|
1,968 |
|
|
|
|
|
|
|
|
|
|
|
1,326 |
|
|
|
|
|
|
|
1,326 |
|
Intersegment revenues |
|
|
|
|
|
|
|
|
|
|
2,644 |
|
|
|
(2,644 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
973 |
|
|
|
(973 |
) |
|
|
|
|
Operating expense
reimbursements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,694 |
|
|
|
6,694 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,223 |
|
|
|
5,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
79,368 |
|
|
|
1,759 |
|
|
|
4,612 |
|
|
|
4,050 |
|
|
|
89,789 |
|
|
|
21,033 |
|
|
|
392 |
|
|
|
2,299 |
|
|
|
4,250 |
|
|
|
27,974 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student housing
leasing operations |
|
|
37,794 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,794 |
|
|
|
7,645 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,645 |
|
Student housing food
service operations |
|
|
3,275 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,275 |
|
|
|
2,899 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,899 |
|
General and
administrative |
|
|
|
|
|
|
2,245 |
|
|
|
3,969 |
|
|
|
|
|
|
|
6,214 |
|
|
|
|
|
|
|
1,329 |
|
|
|
2,216 |
|
|
|
|
|
|
|
3,545 |
|
Intersegment expenses |
|
|
2,644 |
|
|
|
|
|
|
|
|
|
|
|
(2,644 |
) |
|
|
|
|
|
|
973 |
|
|
|
|
|
|
|
|
|
|
|
(973 |
) |
|
|
|
|
Reimbursable
operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,694 |
|
|
|
6,694 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,223 |
|
|
|
5,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
43,713 |
|
|
|
2,245 |
|
|
|
3,969 |
|
|
|
4,050 |
|
|
|
53,977 |
|
|
|
11,517 |
|
|
|
1,329 |
|
|
|
2,216 |
|
|
|
4,250 |
|
|
|
19,312 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income (loss) |
|
|
35,655 |
|
|
|
(486 |
) |
|
|
643 |
|
|
|
|
|
|
|
35,812 |
|
|
|
9,516 |
|
|
|
(937 |
) |
|
|
83 |
|
|
|
|
|
|
|
8,662 |
|
Nonoperating expenses(1) |
|
|
46,578 |
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
46,572 |
|
|
|
8,906 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,906 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before equity in
earnings of unconsolidated entities,
income taxes and minority interest |
|
|
(10,923 |
) |
|
|
(480 |
) |
|
|
643 |
|
|
|
|
|
|
|
(10,760 |
) |
|
|
610 |
|
|
|
(937 |
) |
|
|
83 |
|
|
|
|
|
|
|
(244 |
) |
Equity in earnings of unconsolidated
entities |
|
|
|
|
|
|
880 |
|
|
|
|
|
|
|
|
|
|
|
880 |
|
|
|
|
|
|
|
1,002 |
|
|
|
|
|
|
|
|
|
|
|
1,002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes and
minority interest(2) |
|
$ |
(10,923 |
) |
|
$ |
400 |
|
|
$ |
643 |
|
|
$ |
|
|
|
$ |
(9,880 |
) |
|
$ |
610 |
|
|
$ |
65 |
|
|
$ |
83 |
|
|
$ |
|
|
|
$ |
758 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Non operating expenses include interest expense, interest income
and exit fees on early payment of debt, amortization of deferred
financing costs, depreciation, and amortization of intangibles. |
|
(2) |
|
The following is a reconciliation of the reportable segments net
income (loss) before income taxes and minority interest to the
Trusts consolidated net income (loss) before income taxes and
minority interest determined under generally accepted accounting
principles: |
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Net income (loss) before taxes and minority interest for reportable segments |
|
$ |
(9,880 |
) |
|
$ |
758 |
|
Unallocated corporate amounts: |
|
|
|
|
|
|
|
|
Noncash compensation charge for PIUs and restricted stock |
|
|
(4,679 |
) |
|
|
|
|
Other corporate expenses |
|
|
(1,518 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before income taxes and minority interest |
|
$ |
(16,077 |
) |
|
$ |
758 |
|
|
|
|
|
|
|
|
Student housing leasing
Revenue from student housing leasing increased by $58,300 to $79,400 for the year ended
December 31, 2005. This increase was
due largely to the acquisition of the 14 JPI properties upon consummation of our Offering and the
incremental impact relating to five new properties acquired since the Offering. Our base portfolio
of EDR Predecessor properties experienced a decrease in revenue per available bed over the
comparable period of 2004. Part of the decrease was due to a drop in occupancy at two of our
properties as a result of increased supply around the universities. In addition we had a planned
drop in rates at our University Towers property designed to reverse a negative trend in occupancy
experienced during the 04-05 academic year. This rate adjustment along with a focused marketing
effort has successfully reversed the trend at University Towers resulting in occupancy at the
beginning of the current lease term of approximately 95% compared to 88% a year earlier.
34
Operating expenses of our student housing communities increased $32,200 to $43,700 for the
year ended December 31, 2005. The majority of this increase was also due to the addition of the 14
JPI properties and the incremental impact relating to the five new properties as described above.
However, the growth in operating expenses outpaced revenue growth year over year. Higher than
anticipated utility costs, turn costs, bad debt expense, and student amenity costs contributed to
operating expenses, excluding intersegment charges, as a percentage of revenue to increase. The
higher utility costs are a result of current economic conditions, however, management has begun
instituting energy conservation programs in an effort to control these costs as much as possible.
The increase in student amenities is mostly the result of additional costs to meet student demand
for better and faster internet capabilities. Management anticipates continued challenges managing
these costs in the future. The increased costs related to turn and bad debt expense are considered
by management to be one time issues related to acquired properties and their assimilation into our
operating structure. While higher than normal bad debt charges were a cost of transitioning the
properties, management believes the additional turn costs incurred were necessary to position the
properties appropriately in the market and view them as an investment in the future leasing success
of the properties.
Third-party development consulting services
Third-party development services revenues increased by $1,400 to $1,800 for the year ended
December 31, 2005 from $400 for the year ended December 31, 2004. This increase relates to revenue
recognized on four projects in 2005 compared to one project during the same period in 2004.
A portion of our third-party development consulting services have been conducted through joint
venture arrangements, and the related fees recognized as equity in earnings of unconsolidated
entities. Equity in earnings of unconsolidated entities decreased by $100 to $900 for the year
ended December 31, 2005 from $1,000 for the year ended December 31, 2004. This decrease was
primarily due to more of our projects being contracted directly with the universities and is
reflected in the increase in third-party development services revenue. There were two projects with
a total of 1,160 beds under development through joint ventures during 2005 compared to four
projects with a total of 2,076 beds during the same period in 2004.
General and administrative costs in the third-party development consulting services increased
$1,100 to $2,200 for the year ended December 31, 2005. General and administrative expenses
increased as a result of the higher volume of development projects and an expansion of the
department. Additional growth in general and administrative expenses occurred due to a higher
overhead burden as a result of the overall growth of the company and its entry into the public
market.
Third-party management services
Third-party management services revenues increased by $2,300 to $4,600 for the year ended
December 31, 2005 from $2,300 for the year ended December 31, 2004. Revenue increased $1,700 due to
intersegment charges to owned properties as a result of the growth in our portfolio from seven to
twenty-six properties. Third-party revenue increased $600 year over year as a result of 2005
benefiting from a full year of management fees on four managed properties consisting of 2,096 beds
that opened in Fall 2004, the opening of 3 new managed properties in August and September of 2005
and a new management contract for a 632 bed facility at the University of Texas in September 2005.
General and administrative costs for our third-party management services increased $1,800 to
$4,000 for the year ended December 31, 2005. This increase is a direct result of the extraordinary
growth in both our owned and managed portfolios as discussed above. Our owned portfolio grew from 7
properties to 26 properties through our Offering and Formation transactions as well as our 2005
acquisition program. In addition the third-party management services group added a total of eight
new properties to its managed portfolio since summer 2004. Additional growth in general and
administrative expenses occurred due to a higher overhead burden as a result of the overall growth
of the company and its entry into the public market.
Nonoperating expenses
Nonoperating expenses increased $37,700 to $46,600 for the year ended December 31, 2005. The
increase includes $1,100 in fees on the early retirement of debt but relates substantially to an
approximate $25,900 increase in depreciation and amortization and an approximate $10,700 dollar
increase in mortgage interest expense as a result of the 14 property JPI acquisition and the
acquisition of five additional properties during the year.
Liquidity and Capital Resources
Revolving
Credit Facility and Other Indebtedness
On March 31, 2006 the Operating Partnership amended and restated the revolving
credit facility, or the Amended Revolver, dated January 31, 2005 in the amount of $100 million and
entered into a senior unsecured term loan facility, or the Term Loan, in the amount of $50,000. EDR
serves as the guarantor for any funds borrowed by the Operating Partnership under the Amended
Revolver
35
and the Term Loan. Additionally, the Amended Revolver is secured by a cross
collateralized, first mortgage lien on all mortgaged properties. The Term Loan is not directly
secured by a lien but has the benefit of a negative pledge on the equity interest in the mortgaged
properties. The Amended Revolver and Term Loan have a term of three years and mature on March 31,
2009, provided that the Operating Partnership may extend the maturity date for one year subject to
certain conditions. At December 31, 2006, there was $22,400 outstanding under the Amended Revolver
and $47,000 outstanding under the Term Loan. The Term Loan is interest only; hence, the entire
outstanding balance of $47,000 is due on the maturity date.
Availability under the Operating Partnerships Amended Revolver is limited to a borrowing
base availability equal to the lesser of (i) 65% of the property asset value of the properties
securing the facility and (ii) the loan amount which would produce a debt service coverage ratio of
no less than 1.30, with debt service based on the greater of two different sets of conditions
specified in the amended credit agreement.
The Operating Partnerships Amended Revolver and Term Loan contain customary affirmative and
negative covenants and do contain financial covenants that, among other things, require the Trust
and its subsidiaries to maintain certain minimum ratios of EBITDA (earnings before payment or
charges of interest, taxes, depreciation, amortization or extraordinary items) as compared to
interest expense and total fixed charges. The financial covenants also include consolidated net
worth and leverage ratio tests.
EDR is prohibited from making distributions that exceed $1.20 per share unless prior to and
after giving effect to such action the total leverage ratio is less than or equal to 60%. The
amount of restricted payments permitted may be increased as long as either of the following
conditions is met: (a) after giving effect to the increased Restricted Payment, the Total Leverage
Ratio shall remain less than or equal to 60%; or (b) the increased Restricted Payment, when
considered along with all other restricted payments for the last 3 quarters, does not exceed (i)
100% of Funds From Operations for the applicable period through and including December 31, 2006,
and (ii) 95% of funds from operations for the applicable period thereafter.
The interest rate per annum applicable to the Amended Revolver is, at the Operating
Partnerships option, equal to a base rate or LIBOR plus an applicable margin based upon our
leverage. The interest rate per annum applicable to the Term Loan is, at the Operating
Partnerships option, equal to a base rate plus 1.25% or LIBOR plus 2.75%.
Liquidity outlook and capital requirements
At December 31, 2006 we had $6,427 of cash, a decrease of approximately $55,000 from December
31, 2005. This decrease is a result of funding the purchase of the 13 property portfolio from Place
Properties in January 2006. In addition to the decline in cash balances we added approximately
$168,060 of debt during 2006 due to the assumption of $98,660 of mortgage debt in the Place
Properties acquisition as well as $69,400 net draws on our line of credit and term loan to
completely fund the Place Properties acquisition, our June 15th acquisition of The Players Club
community in Statesboro, GA, and to cover certain shortfalls in operating cash.
Our current liquidity needs include funds for distributions to our stockholders and unit
holders, including those required to maintain our REIT status and satisfy our current annual
distribution target of $0.82 per share/unit, funds for capital expenditures, funds for debt
repayment and, potentially, funds for new property acquisitions. We generally expect to meet our
short-term liquidity requirements through net cash provided by operations. However, distributions
for the last two years outpaced cash from operations during the same period. Distributions to
shareholders/unitholders totaled $20,213 or $0.79 per weighted average share/unit in 2005 compared
to cash from operations of $18,373 or $0.74 per weighted average share/unit and distributions in
2006 totaled $30,875 or $1.10 per weighted average share/unit compared to cash from operations of
$25,187 or $0.90 per weighted average share/unit during the same time. The resulting operating
cash shortfalls of $1,840 and $5,688 for 2005 and 2006, respectively, were funded by draws on our
revolving line of credit. Effective with our third quarter 2006 dividend that was paid on November
7, 2006 we adjusted our annual dividend rate
from the existing $1.19 per share/unit down to $0.82 per share/unit, which is more in line with our
current operating cash and FFO levels. We feel this addresses the operating cash shortfalls for
the near term and positions us to utilize capital resources for all the funding requirements noted
above. We expect our long-term liquidity requirements to be satisfied through growth in cash
generated by operations and external sources of debt and equity capital, including public capital
markets as well as private sources of capital. To the extent that we are unable to maintain our
revolving credit facility or an equivalent source of debt financing, we will be more reliant upon
the public and private capital markets to meet our long-term liquidity needs.
An additional source of capital is the possible disposition of non-core properties. We
continually assess all of our properties, the markets they are in, and the universities they serve
to determine if any dispositions are necessary or appropriate. The sale of any unencumbered asset
would provide additional capital to most likely paydown debt or possibly finance other operational
acquisitions or operational needs. Subsequent to December 31, 2006 we entered into agreements with
two unrelated parties for the possible sale of two unencumbered assets. At this time there is no
certainty that the deals will close as they are still in the due diligence period and no earnest
money is yet at risk.
36
In the third quarter the SEC declared effective our newly established dividend reinvestment
and direct stock purchase plan. The plan allows existing investors to reinvest dividends and
allows both existing and new investors to purchase shares of EDR directly from the company at a
discount. Total capital of $5,994, representing 405,607 shares, was issued during 2006.
Based on our closing share price of $14.77 on December 31, 2006 our total enterprise value was
$906,138. With total debt outstanding on December 31, 2006 of $491,025 our current debt to total
enterprise value was 54.2%. We believe our capital structure and current FFO and distribution
targets along with the $77,600 remaining availability under our Amended Revolver leaves us with
sufficient liquidity and access to financing to fund current working capital needs and make future
student housing investments. Current market conditions and rising interest rates are expected to
make additional capital more expensive for us and could impact our access to the capital markets.
There can be no assurance that we will be able to obtain financing under satisfactory conditions or
that we will make any investments in additional properties.
We intend to invest in additional properties only as suitable opportunities arise. In the
short term, we intend to fund any acquisitions with working capital and borrowings under first
mortgage property secured debt or our $100 million revolving credit facility. We intend to finance
property acquisitions over the longer term with the proceeds from additional issuances of common or
preferred stock, debt financing and issuances of units of our Operating Partnership.
We anticipate that our existing working capital and cash from operations will be adequate to
meet our liquidity requirements for at least the next twelve months.
Predevelopment expenditures
Our third-party development consulting activities have historically required us to fund
predevelopment expenditures such as architectural fees, permits, and deposits. Because the closing
of a development projects financing is often subject to third-party delay, we cannot always
predict accurately the liquidity needs of these activities. We frequently incur these
predevelopment expenditures before a financing commitment has been obtained and, accordingly, bear
the risk of the loss of these predevelopment expenditures if financing cannot ultimately be
arranged on acceptable terms. We typically obtain from the project owner a guarantee of repayment
of these predevelopment expenditures, but no assurance can be given that we would be successful in
collecting the amount guaranteed in the event that a project financing is not obtained. In the
event that we develop properties for ownership by the Trust our exposure and capital requirements
related to development activities will increase dramatically.
Long-term liquidity requirements
Our long-term liquidity requirements consists primarily of funds necessary to pay scheduled
debt maturities, renovations, expansion and other non-recurring capital expenditures that need to
be made periodically to our properties. We expect to meet these needs through existing working
capital, cash provided by operations, additional borrowings under our Amended Revolver, and the
issuance of equity instruments, including common stock, or additional or replacement debt, if
market conditions permit. We believe these sources of capital will be sufficient to provide for our
long-term capital needs.
Our Amended Revolver and Term Loan are material sources to satisfy our long-term liquidity
requirements. As such compliance with their financial and operating debt covenants is material to
our liquidity. Non-compliance with the covenants would have a material adverse effect on our
financial condition and liquidity.
Capital expenditures
The historical recurring capital expenditures at our owned and managed communities, excluding
the 13 properties leased to Place Properties, are set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Years Ended |
|
|
December 31, |
|
|
2006 |
|
2005 |
|
2004 |
Total units |
|
|
6,400 |
|
|
|
5,935 |
|
|
|
895 |
|
Total beds |
|
|
20,125 |
|
|
|
18,548 |
|
|
|
2,943 |
|
Total recurring capital expenditures |
|
$ |
2,222 |
|
|
$ |
1,638 |
|
|
$ |
166 |
|
Average per unit |
|
$ |
347.25 |
|
|
$ |
275.96 |
|
|
$ |
185.88 |
|
Average per bed |
|
$ |
110.43 |
|
|
$ |
88.30 |
|
|
$ |
56.53 |
|
Recurring capital expenditures exclude capital spending on renovations, community
repositioning, or other major periodic projects. Capital expenditures associated with newly
acquired or developed properties are typically capitalized as part of their
37
acquisition price or
development budget. As a result such properties typically do not require capital expenditures until
their second year of operation or later.
Additionally, we are required by certain of our lenders to contribute contractual amounts
annually to reserves for capital repairs and improvements at the mortgaged properties. These
contributions may be less than or exceed the amount of capital expenditures actually incurred
during any given year at such properties.
Commitments
The following table summarizes our contractual obligations as of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than |
|
|
1-3 |
|
|
3-5 |
|
|
After 5 |
|
|
|
|
|
|
1 Year |
|
|
Years |
|
|
Years |
|
|
Years |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
Contractual Obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Debt Obligations(1) |
|
$ |
60,158 |
|
|
$ |
380,930 |
|
|
$ |
1,835 |
|
|
$ |
48,102 |
|
|
$ |
491,025 |
|
Contractual Fixed Interest Obligations(2) |
|
|
23,322 |
|
|
|
38,184 |
|
|
|
9,839 |
|
|
|
2,881 |
|
|
|
74,226 |
|
Operating Lease and Future Purchase Obligations(3) |
|
|
2,724 |
|
|
|
4,282 |
|
|
|
3,246 |
|
|
|
908 |
|
|
|
11,160 |
|
Capital Reserve Obligations(4) |
|
|
1,573 |
|
|
|
2,418 |
|
|
|
421 |
|
|
|
182 |
|
|
|
4,594 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
87,777 |
|
|
$ |
425,814 |
|
|
$ |
15,341 |
|
|
$ |
52,073 |
|
|
$ |
581,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes required monthly principal amortization and amounts due
at maturity on first mortgage debt secured by student housing
properties and amounts due under Amended Revolver and Term loan
agreements. |
|
(2) |
|
Includes contractual fixed rate interest payments. |
|
(3) |
|
Includes future minimum lease commitments under operating lease obligations and future purchase
obligations for advertising. |
|
(4) |
|
Includes future annual contributions to the capital reserve as required by certain mortgage debt. |
Long-Term Indebtedness
In conjunction with the Formation Transactions, the Operating Partnership assumed total fixed
rate mortgage debt of $392,998 with an average interest rate of approximately 5.5%. Concurrent with
the closing of the Formation Transactions, the Operating Partnership paid off $115,221 of the
assumed debt. In connection with managements decision to prepay certain debt obligations, we
recognized a charge of $1,084 in February 2005.
In March 2005, the Operating Partnership assumed an additional $11,200 of mortgage debt with a
fixed interest rate of 4.92% in connection with the acquisition of a student housing property
located at the University of South Carolina. In June 2005, the Operating Partnership assumed
$37,526 of additional mortgage debt with a fixed interest rate of 6.97% in connection with the
acquisition of a student housing property located near the University of Florida.
In January 2006, the Operating Partnership assumed an additional $98,660 of mortgage debt with
a fixed interest rate of 6.44% in connection with the acquisition of the Place Portfolio.
At December 31, 2006, we had outstanding indebtedness of $493,333 (net of unamortized debt
premium of $2,308). The scheduled future maturities of all outstanding indebtedness at December 31,
2006 are as follows:
|
|
|
|
|
Year |
|
|
|
|
2007 |
|
$ |
60,158 |
|
2008 |
|
|
26,481 |
|
2009 |
|
|
354,449 |
|
2010 |
|
|
888 |
|
2011 |
|
|
947 |
|
Thereafter |
|
|
48,102 |
|
|
|
|
|
Total |
|
$ |
491,025 |
|
|
|
|
|
Debt premium |
|
|
2,308 |
|
|
|
|
|
Outstanding as of December 31, 2006, net of debt premium |
|
$ |
493,333 |
|
|
|
|
|
At December 31, 2006, the outstanding mortgage debt had a weighted average interest
rate of 5.85% and carried an average term to maturity of 2.7 years. Our ratio of mortgage debt to
total market capitalization was approximately 54.2% at December 31, 2006.
38
Three mortgages totaling
$56,463 are scheduled to mature within five months of December 31, 2006. On March 1, 2007 two of
the mortgages totaling $29,963 were refinanced at a new rate of 5.55% compared to the existing rate
of 6.63%. We expect to refinance the third mortgage in the near future.
In addition to mortgage debt, the Trust also had $22,400 outstanding under the Amended
Revolver and $47,000 outstanding under the Term Loan. The Amended Revolver and the Term Loan have a
term of three years and mature on March 31, 2009, provided that the Operating Partnership may
extend the maturity date for one year subject to certain conditions. The Amended Revolver and Term
Loan require interest only payments through maturity. The interest rate per annum applicable to
the Amended Revolver is, at the Operating Partnerships option, equal to a base rate or LIBOR plus
an applicable margin based upon our leverage (7.08% at December 31, 2006). The interest rate per
annum applicable to the Term Loan is, at the Operating Partnerships option, equal to a base rate
plus 1.25% or LIBOR plus 2.75% (8.08% at December 31, 2006).
Distributions
We are required to distribute 90% of our REIT taxable income (excluding capital gains) on an
annual basis in order to qualify as a REIT for federal income tax purposes. Accordingly, we intend
to make, but are not contractually bound to make, regular quarterly distributions to holders of our
common stock. All such distributions are at the discretion of our board of directors. We may be
required to use borrowings under our revolving credit facility, if necessary, to meet REIT
distribution requirements and maintain our REIT status. We consider market factors and our
performance in addition to REIT requirements in determining distribution levels. As a result of
these considerations we adjusted our existing annual dividend target of $1.19 per share/unit to
$0.82 per share/unit effective with the second quarter 2006 dividend that was paid on November 7,
2006. The new dividend target is more in line with current FFO and operating cash flow levels and
put us in a better position to take advantage of opportunities to pay down debt or invest in other
student housing assets.
On January 9, 2007 we announced our fourth quarter distribution of $0.205 per share of common
stock for the quarter ending on December 31, 2006. The distribution is payable on February 6, 2007
to stockholders of record at the close of business on January 23, 2007.
Off-Balance Sheet Arrangements
As discussed in note 7 to the consolidated financial statements we hold investments in
unconsolidated entities. Three of these unconsolidated entities have third party mortgage
indebtedness totaling $89,000 at December 31, 2006. Additionally, on May 10, 2006, the Operating
Partnership guaranteed $23,200 of construction debt held by University Village-Greensboro LLC in
order to receive a 25% ownership stake in the venture with College Park Apartments. The
construction debt is expected to be refinanced in September of 2008 after construction is complete
and the student housing community is occupied. The Operating Partnership will not guarantee the
debt after the construction loan is refinanced.
Funds From Operations
As defined by the National Association of Real Estate Investment Trusts (NAREIT), FFO
represents net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from
sales of property, plus real estate related depreciation and amortization and after adjustments for
unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships
and joint ventures will be calculated to reflect funds from operations on the same basis. We
present FFO available to all shareholders and unitholders because we consider it an important supplemental measure of our operating performance
and believe it is frequently used by securities analysts, investors and other interested parties in
the evaluation of REITs, many of which present FFO when reporting their results.
As such, we also exclude the impact of minority interest in our calculation. FFO is intended to
exclude GAAP historical cost depreciation and amortization of real estate and related assets, which
assumes that the value of real estate diminishes ratably over time. Historically, however, real
estate values have risen or fallen with market conditions. Because FFO excludes depreciation and
amortization unique to real estate, gains and losses from property dispositions and extraordinary
items, it provides a performance measure that, when compared year over year, reflects the impact to
operations from trends in occupancy rates, rental rates, operating costs, development activities
and interest costs, providing perspective not immediately apparent from net income.
We compute FFO in accordance with standards established by the Board of Governors of NAREIT in
its March 1995 White Paper (as amended in November 1999 and April 2002), which may differ from the
methodology for calculating FFO utilized by other equity REITs and, accordingly, may not be
comparable to such other REITs. Further, FFO does not represent amounts available for managements
discretionary use because of needed capital replacement or expansion, debt service obligations or
other commitments and uncertainties. FFO should not be considered as an alternative to net income
(loss) (computed in accordance with GAAP) as an indicator of our financial performance or to cash
flow from operating activities (computed in accordance with GAAP) as an indicator of our liquidity,
nor is it indicative of funds available to fund our cash needs, including our ability to make
distributions.
We changed the presentation of FFO beginning with our Form 10-Q covering the three months ended
March 31, 2006 to presenting FFO available to all shareholders and unitholders. Previously,
including in our Form 10-K for the year ended December 31, 2005, we presented only FFO available to common shareholders.
The impact of this change is the exclusion of the impact of minority
interest expense on FFO in the amount of $1,040.
39
The following table presents a reconciliation of our
FFO available to our shareholders and unitholders to our net income for the years ended
December 31, 2006, 2005 and 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Net income (loss) |
|
$ |
(12,245 |
) |
|
$ |
(15,534 |
) |
|
$ |
758 |
|
Plus student housing property depreciation and amortization of
lease intangibles |
|
|
35,728 |
|
|
|
29,168 |
|
|
|
3,120 |
|
Plus equity portion of real estate depreciation and amortization
on equity investees |
|
|
54 |
|
|
|
|
|
|
|
|
|
Plus minority interest benefit |
|
|
(355 |
) |
|
|
(1,040 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds from operations available to all share and unit holders |
|
$ |
23,182 |
|
|
$ |
12,594 |
|
|
$ |
3,878 |
|
|
|
|
|
|
|
|
|
|
|
Inflation
Our student housing leases typically do not have terms that extend beyond twelve months.
Accordingly, although on a short-term basis we would be required to bear the impact of rising costs
resulting from inflation, we have the opportunity to raise rental rates at least annually to offset
such rising costs. However, our ability to raise rental rates may be limited by a weak economic
environment, increased competition from new student housing in our primary markets or a reduction
in student enrollment at our principal universities.
Recent accounting pronouncements
In December 2004, SFAS No. 153, Exchange of Nonmonetary Assets, was issued. SFAS No. 153
amends APB Opinion No. 29, Accounting for Nonmonetary Transactions to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial substance. That exception required that
some nonmonetary exchanges be recorded on a carryover basis versus SFAS No. 153, which requires an
entity record a nonmonetary exchange at fair value and recognize any gain or loss if the
transaction has commercial substance. The standard specifies that a nonmonetary exchange has
commercial substance if the future cash flows of the entity are expected to change significantly as
a result of the exchange. SFAS No. 153 is effective the fiscal year beginning January 1, 2006. The
adoption of SFAS No. 153 did not have a material impact on the Trusts consolidated financial
condition or results of operations taken as a whole.
In December 2004, the Financial Accounting Standards Board (FASB) issued Statement No. 123
(revised December 2004), Share-Based Payment (Statement 123(R)). Statement 123(R) replaces FASB
Statement No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. Statement 123(R) requires compensation costs related
to share-based payment transactions to be recognized in the financial statements. With limited
exceptions, the amount of compensation cost will be measured based on the grant-date fair value of
the equity instruments issued. Compensation cost will be recognized over the period that an
employee provides service in exchange for the award. Statement 123(R) is effective as of the
beginning of the first annual reporting period that begins after June 15, 2005. The Trust adopted
Statement 123(R) effective January 1, 2006, and it did not have a material impact on the Trusts
consolidated financial condition or results of operations taken as a whole. In March 2005, the SEC
issued Staff Accounting Bulleting (SAB 107) to provide public companies additional guidance in
applying the provisions of Statement 123(R). Among other things, SAB 107 describes the SEC staffs
expectations in determining the
assumptions that underlie the fair value estimates and discusses the interaction of Statement
123(R) with certain existing SEC guidance. The guidance is also beneficial to users of financial
statements in analyzing the information provided under statement 123(R). SAB 107 was applied upon
the adoption of Statement 123(R).
In June 2005, the FASB ratified EITF 04-5: Determining Whether a General Partner, or the
General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited
Partners Have Certain Rights (EITF 04-5). EITF 04-5 provides a framework for determining whether
a general partner is required to consolidate limited partners. The new framework is significantly
different than the guidance in SOP 78-9 and makes it more difficult for a general partner to
overcome the presumption that it controls the limited partnership, requiring the limited partner to
have substantive kick-out or participating rights. Kick-out rights are the right to dissolve or
liquidate the partnership or to otherwise remove the general partner without cause and
participating rights are the right to effectively participate in significant decisions made in the
ordinary course of the partnerships business. EITF 04-5 became effective immediately for all newly
formed limited partnerships and existing limited partnerships which are modified. The guidance
became effective for existing limited partnerships which are not modified the beginning of the
first reporting period in fiscal years beginning after December 15, 2005. The adoption of EITF 04-5
did not have a material impact on the Trusts consolidated financial condition or results of
operations taken as a whole.
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, an Interpretation of FASB
40
Statement No. 109 (FIN 48). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in a companys financial statements and prescribes a
recognition threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. The Interpretation
also provides guidance on description, classification, interest and penalties, accounting in
interim periods, disclosure and transition. FIN 48 becomes effective on January 1, 2007. The Trust
is currently evaluating the impact of adopting FIN 48 on its consolidated financial condition and
results of operations.
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No.
108 (SAB 108), which becomes effective for fiscal years ending after November 15, 2006. SAB 108
provides guidance on the consideration of the effects of prior period misstatements in quantifying
current year misstatements for the purpose of a materiality assessment. SAB 108 requires an entity
to evaluate the impact of correcting all misstatements, including both the carryover and reversing
effects of prior year misstatements, on current year financial statements. If a misstatement is
material to the current year financial statements, the prior year financial statements should also
be corrected, even though such revision was, and continues to be, immaterial to the prior year
financial statements. Correcting prior year financial statements for immaterial errors would not
require previously filed reports to be amended. Such correction should be made in the current
period filings. The adoption of SAB 108 did not have a material impact on the Trusts consolidated
financial condition or results of operations taken as a whole.
In September 2006, the FASB issued SFAS 157, Fair Value Measurements. SFAS 157 does not
address what to measure at fair value; instead, it addresses how to measure fair value. SFAS
157 applies (with limited exceptions) to existing standards that require assets or liabilities to
be measured at fair value. SFAS 157 establishes a fair value hierarchy, giving the highest priority
to quoted prices in active markets and the lowest priority to unobservable data and requires new
disclosures for assets and liabilities measured at fair value based on their level in the
hierarchy. SFAS 157 is effective for financial statements issued for fiscal years beginning after
November 15, 2007. The Trust is currently evaluating the impact of adopting SFAS 157 on its
consolidated financial condition and results of operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Our future income, cash flows and fair values relevant to financial instruments are dependent
upon prevailing market interest rates. Market risk refers to the risk of loss from adverse changes
in market prices and interest rates. The Trusts interest rate risk objective is to limit the
impact of interest rate fluctuations on earnings and cash flows and to lower its overall borrowing
costs. To achieve this objective, the Trust manages its exposure to fluctuations in market interest
rates for its borrowings through the use of fixed rate debt instruments to the extent that
reasonably favorable rates are obtainable.
For fixed rate debt, interest rate changes affect the fair market value but do not impact net
income to common shareholders or cash flows. Conversely, for floating rate debt, interest changes
generally do not affect the fair market value but do impact net income to common stockholders and
cash flows, assuming other factors are held constant. At December 31, 2006 we had fixed rate debt
of $421,625. Holding other variables constant a 100 basis point increase in interest rates would
cause a $9,046 decline in the fair value for our fixed rate debt. Conversely, a 100 basis point
decrease in interest rates would cause a $9,415 increase in the fair value of our fixed rate debt.
At December 31, 2006, all of the outstanding principal amounts of our mortgage notes payable on the
properties we own have fixed interest rates with a weighted average rate of 5.85% and an average
term to maturity of 2.7 years.
At December 31, 2006, we had a $47,000 variable rate term loan and $22,400 drawn on the
Amended Revolver. The interest rate per annum applicable to the Amended Revolver is, at the
Operating Partnerships option, equal to a base rate or LIBOR plus an applicable margin based upon
our leverage. The interest rate per annum applicable to the term loan is, at the Operating
Partnerships
option, equal to a base rate plus 1.25% or LIBOR plus 2.75%. For the year ended December 31, 2006,
the term loan had an average interest rate of 8.07%. Holding other variables constant a 100 basis
point increase in interest rates would cause a $365 decrease annually in net income available to
our common stockholders and a 100 basis point decrease in interest rates would cause a $365
increase annually in net income available to our common stockholders.
Approximately 86% of the Trusts outstanding debt was subject to fixed rates at December 31,
2006. We may in the future use derivative financial instruments to manage, or hedge, interest rate
risks related to such variable rate borrowings. We do not, and do not expect to, use derivatives
for trading or speculative purposes, and we expect to enter into contracts only with major
financial institutions.
Item 8. Financial Statements and Supplementary Data.
The information required herein is included on pages F-1 to F-66 of this Annual Report on Form
10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
41
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the Companys filings under the Securities Exchange Act of
1934 (the Exchange Act) is recorded, processed, summarized and reported within the time periods
specified in the SECs rules and forms, and to ensure that such information is accumulated and
communicated to the Companys management, including its Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company also
has investments in unconsolidated entities which are not under its control. Consequently, the
Companys disclosure controls and procedures with respect to
these entities are necessarily more
limited than those it maintains with respect to its consolidated subsidiaries.
Our management, with the participation of our principal executive officer and financial
officers has evaluated the effectiveness of the design and operation of the Companys disclosure
controls and procedures pursuant to Rule 13a-15(e) and 15d-15(e) of the Exchange Act. Based on
their evaluation as of December 31, 2006, our Chief Executive Officer and Chief Financial Officer
have concluded that the Companys disclosure controls and procedures were effective to ensure that
information required to be disclosed by the Company in the Companys Exchange Act filings is
recorded, processed, summarized and reported within the time periods specified in the applicable
SEC rules and forms.
Changes in Internal Control Over Financial Reporting
During the three months ended December 31, 2006, there were no significant changes in EDRs
internal control over financial reporting that materially affected, or that are reasonably likely
to materially affect, EDRs internal control over financial reporting (as defined in Rule 13a-15(f)
and 15d-15(f) of the Exchange Act).
Managements Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under
the supervision and with the participation of our management, including our Chairman, Chief
Executive Officer, and Chief Financial Officer, we conducted an evaluation of the effectiveness of
our internal control over financial reporting as of December 31, 2006 based on the guidelines
established in Internal Control Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Our internal control over financial reporting
includes policies and procedures that provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external reporting purposes in
accordance with U.S. generally accepted accounting principles.
Based on the results of our evaluation, our management concluded that our internal control
over financial reporting was effective as of December 31, 2006. We reviewed the results of
managements assessment with our Audit Committee.
Managements assessment of the effectiveness of our internal control over financial reporting
as of December 31, 2006 has been audited by Deloitte & Touche LLP, an independent registered public
accounting firm, as stated in their report which follows this Item 9A.
42
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
Education Realty Trust, Inc.
Memphis, Tennessee
We have audited managements assessment, included in the accompanying Managements Report on
Internal Control Over Financial Reporting, that Education Realty Trust, Inc. and subsidiaries (the
Trust) maintained effective internal control over financial reporting as of December 31, 2006,
based on criteria established in Internal ControlIntegrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. The Trusts management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility is to express an
opinion on managements assessment and an opinion on the effectiveness of the Trusts internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating managements assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinions.
A companys internal control over financial reporting is a process designed by, or under the
supervision of, the companys principal executive and principal financial officers, or persons
performing similar functions, and effected by the companys board of directors, management, and
other personnel to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A companys internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material misstatements due to
error or fraud may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that the Trust maintained effective internal control over
financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on
the criteria established in Internal ControlIntegrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Trust maintained, in
all material respects, effective internal control over financial reporting as of December 31, 2006
based on the criteria established in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated financial statements of the Trust as of and for the year
ended December 31, 2006 and our report dated March 9, 2007 expressed an unqualified opinion on
those consolidated financial statements.
/s/ Deloitte & Touche LLP
Memphis, Tennessee
March 9, 2007
43
Item 9B. Other Information.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this Item will be presented in the Companys definitive proxy
statement for the annual meeting of stockholders to be held on May 22, 2007, which will be filed
with the Securities and Exchange Commission and is incorporated herein by reference.
Item 11. Executive Compensation.
The information required by this Item will be presented in the Companys definitive proxy
statement for the annual meeting of stockholders to be held on May 22, 2007, which will be filed
with the Securities and Exchange Commission and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
The information required by this Item will be presented in the Companys definitive proxy
statement for the annual meeting of stockholders to be held on May 22, 2007, which will be filed
with the Securities and Exchange Commission and is incorporated herein by reference.
The
information required by Item 201(d) or Regulation S-K disclosing the
securities authorized for issuance under EDRs equity
compensation plans can be found under Part II, Item 5 Market
for Registrants Common Equity, Related Stockholder Matters and
Issuers Purchases of Equity Securities of this Annual Report on
Form 10-K and is incorporated by reference herein.
Item 13. Certain Relationships and Related Transactions.
The information required by this Item will be presented in the Companys definitive proxy
statement for the annual meeting of stockholders to be held on May 22, 2007, which will be filed
with the Securities and Exchange Commission and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services.
The information required by this Item will be presented in the Companys definitive proxy
statement for the annual meeting of stockholders to be held on May 22, 2007, which will be filed
with the Securities and Exchange Commission and is incorporated herein by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a) List of Documents Filed.
1. Financial Statements
The list of the financial statements filed as part of this Annual Report on Form 10-K is
set forth on page F-1 herein.
2. Financial Statement Schedules
All schedules required are included in the financial statements and notes thereto.
3. Exhibits
The list of exhibits filed as part of this Annual Report on Form 10-K is submitted in
the Exhibit Index following the financial statements in response to Item 601 of Regulation S-K.
(b) Exhibits.
44
The exhibits filed in response to Item 601 of Regulation S-K are listed on the Exhibit
Index attached hereto.
(c) None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Education Realty Trust, Inc.
|
|
|
|
|
|
|
By:
|
|
/s/ Paul O. Bower |
|
|
|
|
Paul O. Bower |
|
|
|
|
President, Chief Executive Officer |
|
|
|
|
and Chairman of the Board of Directors |
Dated: March 12, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
/s/ Paul O. Bower
Paul O. Bower |
|
President, Chief Executive
Officer and Chairman of the
Board of Directors
(Principal Executive
Officer)
|
|
March 12, 2007 |
|
|
|
|
|
/s/ Randall H. Brown
Randall H. Brown |
|
Executive Vice President,
Chief Financial Officer,
Treasurer and Secretary
(Principal Financial
Officer)
|
|
March 12, 2007 |
|
|
|
|
|
/s/ J. Drew Koester
J. Drew Koester |
|
Vice President and Chief
Accounting Officer
(Principal Accounting
Officer)
|
|
March 12, 2007 |
|
|
|
|
|
/s/ Monte J. Barrow
Monte J. Barrow |
|
Director
|
|
March 12, 2007 |
|
|
|
|
|
/s/ William J. Cahill, III
William J. Cahill, III |
|
Director
|
|
March 12, 2007 |
|
|
|
|
|
/s/ Randall L. Churchey
Randall L. Churchey |
|
Director
|
|
March 12, 2007 |
|
|
|
|
|
/s/ John L. Ford
John L. Ford |
|
Director
|
|
March 12, 2007 |
45
INDEX TO FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page |
Education Realty Trust, Inc. and EDR Predecessor |
|
|
|
|
|
|
|
F-3 |
|
|
|
|
|
|
|
|
|
F-4 |
|
|
|
|
|
|
|
|
|
F-5 |
|
|
|
|
|
|
|
|
|
F-6 |
|
|
|
|
|
|
|
|
|
F-7 |
|
|
|
|
|
|
|
|
|
F-9 |
|
|
|
|
|
|
National Development/ Allen & OHara CUPA, LLC |
|
|
|
|
|
|
|
F-33 |
|
|
|
|
|
|
|
|
|
F-34 |
|
|
|
|
|
|
|
|
|
F-35 |
|
|
|
|
|
|
|
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|
F-36 |
|
|
|
|
|
|
|
|
|
F-37 |
|
|
|
|
|
|
|
|
|
F-38 |
|
|
|
|
|
|
National Development/ Allen & OHara Clarion, LLC |
|
|
|
|
|
|
|
F-41 |
|
|
|
|
|
|
|
|
|
F-42 |
|
|
|
|
|
|
|
|
|
F-43 |
|
|
|
|
|
|
|
|
|
F-44 |
|
|
|
|
|
|
|
|
|
F-45 |
|
|
|
|
|
|
|
|
|
F-46 |
|
|
|
|
|
|
National Development/ Allen & OHara Lock Haven, LLC |
|
|
|
|
|
|
|
F-49 |
|
F-1
|
|
|
|
|
|
|
Page |
|
|
|
F-50 |
|
|
|
|
|
|
|
|
|
F-51 |
|
|
|
|
|
|
|
|
|
F-52 |
|
|
|
|
|
|
|
|
|
F-53 |
|
|
|
|
|
|
|
|
|
F-54 |
|
|
|
|
|
|
Properties Subject to Net Lease - Place Portfolio Lessee, LLC |
|
|
|
|
|
|
|
|
|
|
|
|
F-57 |
|
|
|
|
|
|
|
|
|
F-58 |
|
|
|
|
|
|
|
|
|
F-59 |
|
|
|
|
|
|
|
|
|
F-60 |
|
|
|
|
|
|
|
|
|
F-61 |
|
|
|
|
|
|
|
|
|
F-62 |
|
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Education Realty Trust, Inc.
Memphis, Tennessee
We have audited the accompanying consolidated balance sheets of Education Realty Trust, Inc.
and subsidiaries (the Trust) as of December 31, 2006 and 2005, and the related consolidated
statements of operations, stockholders equity and cash flows for the Trust for the years ended
December 31, 2006 and 2005 and the period July 12, 2004 (date of formation) through December 31,
2004 and the combined statements of operations, owners equity, and cash flows for Education Realty
Trust Predecessor (the EDR Predecessor, as defined in note 1) for the period January 1, 2005
through January 30, 2005 and the year ended December 31, 2004. These consolidated and combined
financial statements are the responsibility of the Trusts management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated and combined financial statements present fairly, in all
material respects, the consolidated financial position of the Trust at December 31, 2006 and 2005,
and the consolidated results of operations and cash flows of the Trust for the years ended December
31, 2006 and 2005 and the period July 12, 2004 (date of formation) through December 31, 2004 and
the combined results of operations and cash flows of the EDR Predecessor for the period January 1,
2005 through January 30, 2005 and the year ended December 31, 2004 in conformity with accounting
principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of the Trusts internal control over financial
reporting as of December 31, 2006, based on the criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated March 9, 2007 expressed an unqualified opinion on managements assessment of
the effectiveness of the Trusts internal control over financial reporting and an unqualified
opinion on the effectiveness of the Trusts internal control over financial reporting.
/s/ Deloitte & Touche LLP
Memphis, Tennessee
March 9, 2007
F-3
EDUCATION REALTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
|
(Amounts in thousands, except share |
|
|
|
and per share data) |
|
ASSETS
|
Student housing properties, net |
|
$ |
804,759 |
|
|
$ |
620,305 |
|
Corporate office furniture, net |
|
|
752 |
|
|
|
991 |
|
Cash and cash equivalents |
|
|
6,427 |
|
|
|
61,662 |
|
Restricted cash |
|
|
9,154 |
|
|
|
6,738 |
|
Student contracts receivable, net |
|
|
227 |
|
|
|
470 |
|
Receivable from affiliate |
|
|
369 |
|
|
|
|
|
Management fee receivable from third parties |
|
|
669 |
|
|
|
552 |
|
Goodwill and other intangibles, net |
|
|
3,649 |
|
|
|
3,546 |
|
Other assets |
|
|
9,452 |
|
|
|
9,785 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
835,458 |
|
|
$ |
704,049 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Mortgage loans, net of unamortized premium/discount |
|
$ |
423,933 |
|
|
$ |
328,335 |
|
Other long term debt |
|
|
47,000 |
|
|
|
|
|
Revolving line of credit |
|
|
22,400 |
|
|
|
|
|
Accounts payable |
|
|
696 |
|
|
|
2,075 |
|
Accrued expenses |
|
|
10,068 |
|
|
|
7,295 |
|
Accounts payable affiliate |
|
|
|
|
|
|
225 |
|
Deferred revenue |
|
|
9,073 |
|
|
|
7,660 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
513,170 |
|
|
|
345,590 |
|
|
|
|
|
|
|
|
Minority interest |
|
|
19,289 |
|
|
|
27,926 |
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Common stock, $.01 par value, 200,000,000 shares
authorized, 26,810,552 and 26,263,889 shares
issued and outstanding as of December 31, 2006 and
2005, respectively |
|
|
268 |
|
|
|
263 |
|
Preferred shares, $0.01 par value, 50,000,000
shares authorized, no shares issued and
outstanding |
|
|
|
|
|
|
|
|
Unearned deferred compensation |
|
|
|
|
|
|
(2,470 |
) |
Additional paid in capital |
|
|
330,374 |
|
|
|
354,134 |
|
Loan to unitholder |
|
|
|
|
|
|
(5,996 |
) |
Warrants |
|
|
375 |
|
|
|
375 |
|
Accumulated deficit |
|
|
(28,018 |
) |
|
|
(15,773 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
302,999 |
|
|
|
330,533 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
835,458 |
|
|
$ |
704,049 |
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated and combined financial statements.
F-4
EDUCATION REALTY TRUST, INC. AND
SUBSIDIARIES AND EDR PREDECESSOR
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Education Realty Trust, Inc. |
|
|
EDR Predecessor |
|
|
|
Consolidated |
|
|
Combined |
|
|
|
|
|
|
|
|
|
|
|
July 12 |
|
|
January 1 |
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
through |
|
|
through |
|
|
Year Ended |
|
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
January 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
(Amounts in thousands, except share and per share data) |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student housing leasing revenue |
|
$ |
87,438 |
|
|
$ |
74,374 |
|
|
$ |
|
|
|
$ |
1,503 |
|
|
$ |
17,896 |
|
Student housing food service revenue |
|
|
3,634 |
|
|
|
3,222 |
|
|
|
|
|
|
|
269 |
|
|
|
3,137 |
|
Other leasing revenue |
|
|
14,012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third-party development services |
|
|
3,773 |
|
|
|
1,759 |
|
|
|
|
|
|
|
|
|
|
|
392 |
|
Third-party management services |
|
|
2,796 |
|
|
|
1,865 |
|
|
|
|
|
|
|
103 |
|
|
|
1,326 |
|
Operating expense reimbursements |
|
|
7,638 |
|
|
|
6,023 |
|
|
|
|
|
|
|
671 |
|
|
|
5,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
119,291 |
|
|
|
87,243 |
|
|
|
|
|
|
|
2,546 |
|
|
|
27,974 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student housing leasing operations |
|
|
42,669 |
|
|
|
37,270 |
|
|
|
|
|
|
|
524 |
|
|
|
7,645 |
|
Student housing food service operations |
|
|
3,318 |
|
|
|
3,020 |
|
|
|
|
|
|
|
255 |
|
|
|
2,899 |
|
General and administrative |
|
|
12,331 |
|
|
|
12,182 |
|
|
|
201 |
|
|
|
367 |
|
|
|
3,545 |
|
Depreciation and amortization |
|
|
36,083 |
|
|
|
28,908 |
|
|
|
|
|
|
|
260 |
|
|
|
3,120 |
|
Reimbursable operating expenses |
|
|
7,638 |
|
|
|
6,023 |
|
|
|
|
|
|
|
671 |
|
|
|
5,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
102,039 |
|
|
|
87,403 |
|
|
|
201 |
|
|
|
2,077 |
|
|
|
22,432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
17,252 |
|
|
|
(160 |
) |
|
|
(201 |
) |
|
|
469 |
|
|
|
5,542 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonoperating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
29,353 |
|
|
|
16,186 |
|
|
|
21 |
|
|
|
479 |
|
|
|
5,623 |
|
Exit fees on early repayment of
mortgages |
|
|
|
|
|
|
1,084 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred financing costs |
|
|
1,114 |
|
|
|
820 |
|
|
|
|
|
|
|
|
|
|
|
163 |
|
Interest income |
|
|
(534 |
) |
|
|
(1,303 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonoperating expenses |
|
|
29,933 |
|
|
|
16,787 |
|
|
|
21 |
|
|
|
479 |
|
|
|
5,786 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before equity in earnings of
unconsolidated entities, income taxes
and minority interest |
|
|
(12,681 |
) |
|
|
(16,947 |
) |
|
|
(222 |
) |
|
|
(10 |
) |
|
|
(244 |
) |
Equity in earnings of unconsolidated
entities |
|
|
740 |
|
|
|
853 |
|
|
|
|
|
|
|
27 |
|
|
|
1,002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and
minority interest |
|
|
(11,941 |
) |
|
|
(16,094 |
) |
|
|
(222 |
) |
|
|
17 |
|
|
|
758 |
|
Taxes |
|
|
659 |
|
|
|
497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before minority
interest |
|
|
(12,600 |
) |
|
|
(16,591 |
) |
|
|
(222 |
) |
|
|
17 |
|
|
|
758 |
|
Minority interest |
|
|
(355 |
) |
|
|
(1,040 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(12,245 |
) |
|
$ |
(15,551 |
) |
|
$ |
(222 |
) |
|
$ |
17 |
|
|
$ |
758 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share basic and diluted |
|
$ |
(0.46 |
) |
|
$ |
(0.67 |
) |
|
$ |
(2,220 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding basic and diluted |
|
|
26,387,547 |
|
|
|
23,063,110 |
|
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions per common share |
|
$ |
1.10 |
|
|
$ |
0.79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated and combined financial statements.
F-5
EDUCATION REALTY TRUST, INC. AND
SUBSIDIARIES AND EDR PREDECESSOR
CONSOLIDATED AND COMBINED STATEMENTS OF CHANGES IN
STOCKHOLDERS AND OWNERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
Additional |
|
|
Unearned |
|
|
|
|
|
|
Loan to |
|
|
|
|
|
|
EDR |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid-In |
|
|
Deferred |
|
|
|
|
|
|
Unit |
|
|
Accumulated |
|
|
Predecessor |
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Compensation |
|
|
Warrants |
|
|
Holder |
|
|
deficit |
|
|
Equity |
|
|
Total |
|
|
|
(Amounts in thousands, except share and per share data) |
|
EDR Predecessor: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,495 |
|
|
|
2,495 |
|
Equity contributions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40 |
|
|
|
40 |
|
Distributions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,504 |
) |
|
|
(1,504 |
) |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
758 |
|
|
|
758 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,789 |
|
|
|
1,789 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17 |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,806 |
|
|
$ |
1,806 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Trust: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributed capital, July
12, 2004 |
|
|
100 |
|
|
|
|
|
|
$ |
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(222 |
) |
|
|
|
|
|
|
(222 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004 |
|
|
100 |
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(222 |
) |
|
|
|
|
|
|
(221 |
) |
Issuance and registration
of common shares The Offering |
|
|
21,850,000 |
|
|
$ |
219 |
|
|
|
320,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
320,419 |
|
Redemption of Promoters common
shares simultaneous with The
Offering |
|
|
(100 |
) |
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
Issuance of warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
375 |
|
Loan to unit holder |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(5,996 |
) |
|
|
|
|
|
|
|
|
|
|
(5,996 |
) |
Excess of purchase price of EDR
Predecessor over fair value
related to Promoter carried
over at historical cost |
|
|
|
|
|
|
|
|
|
|
(17,382 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,382 |
) |
Restricted shares issued to
officers and directors |
|
|
|
|
|
|
|
|
|
|
3,126 |
|
|
$ |
(3,126 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of restricted stock |
|
|
38,889 |
|
|
|
|
|
|
|
|
|
|
|
656 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
656 |
|
Issuance of common shares
private placement |
|
|
4,375,000 |
|
|
|
44 |
|
|
|
66,911 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66,955 |
|
Cash dividends |
|
|
|
|
|
|
|
|
|
|
(18,721 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,721 |
) |
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,551 |
) |
|
|
|
|
|
|
(15,551 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005 |
|
|
26,263,889 |
|
|
|
263 |
|
|
|
354,134 |
|
|
|
(2,470 |
) |
|
|
375 |
|
|
|
(5,996 |
) |
|
|
(15,773 |
) |
|
|
|
|
|
|
330,533 |
|
Reclassification of unearned
compensation upon adoption of
SFAS 123R |
|
|
|
|
|
|
|
|
|
|
(2,470 |
) |
|
|
2,470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted shares issued to
officers and directors |
|
|
6,000 |
|
|
|
|
|
|
|
88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88 |
|
Amortization of restricted
stock |
|
|
36,000 |
|
|
|
|
|
|
|
604 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
604 |
|
Operating unit conversion to
common stock |
|
|
99,056 |
|
|
|
1 |
|
|
|
1,389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,390 |
|
Redemption of minority interest
to satisfy loan to unitholder |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,996 |
|
|
|
|
|
|
|
|
|
|
|
5,996 |
|
Net proceeds from issuance of
common shares -dividend
reinvestment plan |
|
|
405,607 |
|
|
|
4 |
|
|
|
5,743 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,747 |
|
Cash dividends |
|
|
|
|
|
|
|
|
|
|
(29,114 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(29,114 |
) |
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,245 |
) |
|
|
|
|
|
|
(12,245 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006 |
|
|
26,810,552 |
|
|
$ |
268 |
|
|
$ |
330,374 |
|
|
|
|
|
|
$ |
375 |
|
|
|
|
|
|
$ |
(28,018 |
) |
|
|
|
|
|
$ |
302,999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated and combined financial statements.
F-6
EDUCATION REALTY TRUST, INC. AND
SUBSIDIARIES AND EDR PREDECESSOR
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Education Realty Trust, Inc. |
|
|
EDR Predecessor |
|
|
|
Consolidated |
|
|
Combined |
|
|
|
|
|
|
|
|
|
|
|
July 12 |
|
|
January 1 |
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
through |
|
|
through |
|
|
Year Ended |
|
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
January 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(12,245 |
) |
|
$ |
(15,551 |
) |
|
$ |
(222 |
) |
|
$ |
17 |
|
|
$ |
758 |
|
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
36,083 |
|
|
|
28,908 |
|
|
|
|
|
|
|
246 |
|
|
|
3,120 |
|
Deferred tax benefit |
|
|
(48 |
) |
|
|
(209 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Loss on disposal of assets |
|
|
11 |
|
|
|
18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred financing costs |
|
|
1,114 |
|
|
|
820 |
|
|
|
|
|
|
|
14 |
|
|
|
163 |
|
Amortization of unamortized debt
premiums/discounts |
|
|
(559 |
) |
|
|
(364 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Distributions from unconsolidated entities |
|
|
787 |
|
|
|
879 |
|
|
|
|
|
|
|
|
|
|
|
808 |
|
Noncash compensation expense related to PIUs
and restricted stock |
|
|
796 |
|
|
|
4,783 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of unconsolidated entities |
|
|
(740 |
) |
|
|
(853 |
) |
|
|
|
|
|
|
(27 |
) |
|
|
(1,002 |
) |
Minority interest |
|
|
(355 |
) |
|
|
(1,040 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Change in operating assets and liabilities
(net of acquisitions): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student contracts receivable |
|
|
259 |
|
|
|
(374 |
) |
|
|
|
|
|
|
(5 |
) |
|
|
76 |
|
Management fees receivable |
|
|
(117 |
) |
|
|
(284 |
) |
|
|
|
|
|
|
63 |
|
|
|
(52 |
) |
Other assets |
|
|
(1,176 |
) |
|
|
868 |
|
|
|
|
|
|
|
(818 |
) |
|
|
330 |
|
Accounts payable and accrued expenses |
|
|
612 |
|
|
|
3,069 |
|
|
|
|
|
|
|
712 |
|
|
|
(65 |
) |
Accounts payable affiliate |
|
|
(594 |
) |
|
|
(3,729 |
) |
|
|
|
|
|
|
276 |
|
|
|
(471 |
) |
Deferred revenue |
|
|
1,359 |
|
|
|
1,432 |
|
|
|
|
|
|
|
(320 |
) |
|
|
(597 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
25,187 |
|
|
|
18,373 |
|
|
|
(222 |
) |
|
|
158 |
|
|
|
3,068 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property acquisitions, net of cash acquired |
|
|
(112,717 |
) |
|
|
(187,283 |
) |
|
|
|
|
|
|
(25 |
) |
|
|
|
|
Deferred acquisition costs and earnest money
deposits |
|
|
|
|
|
|
(4,718 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of corporate furniture and fixtures |
|
|
(86 |
) |
|
|
(1,093 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash |
|
|
(40 |
) |
|
|
(1,725 |
) |
|
|
|
|
|
|
(2,348 |
) |
|
|
336 |
|
Insurance proceeds on property loss |
|
|
184 |
|
|
|
175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in student housing properties |
|
|
(4,858 |
) |
|
|
(5,513 |
) |
|
|
|
|
|
|
|
|
|
|
(517 |
) |
Investments in joint ventures |
|
|
(3,313 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(120,830 |
) |
|
|
(200,157 |
) |
|
|
|
|
|
|
(2,373 |
) |
|
|
(181 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment of mortgage notes |
|
|
(2,503 |
) |
|
|
(115,782 |
) |
|
|
|
|
|
|
(98 |
) |
|
|
(1,093 |
) |
Borrowings of long-term debt |
|
|
50,000 |
|
|
|
|
|
|
|
497 |
|
|
|
|
|
|
|
|
|
Repayments of long-term debt |
|
|
(3,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt issuance costs |
|
|
(1,352 |
) |
|
|
(3,176 |
) |
|
|
|
|
|
|
|
|
|
|
(3 |
) |
Borrowing (repayment) of line of credit, net |
|
|
22,400 |
|
|
|
(497 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Loan to unit holder |
|
|
|
|
|
|
(5,996 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from Offering and private placement |
|
|
5,994 |
|
|
|
419,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment of offering costs |
|
|
(248 |
) |
|
|
(30,008 |
) |
|
|
(3,790 |
) |
|
|
|
|
|
|
|
|
Distributions paid |
|
|
(30,875 |
) |
|
|
(20,213 |
) |
|
|
|
|
|
|
|
|
|
|
(1,504 |
) |
Borrowing/(repayment) of notes payable
affiliate |
|
|
|
|
|
|
(483 |
) |
|
|
3,515 |
|
|
|
|
|
|
|
80 |
|
Redemption of minority interest |
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity contributions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
40,408 |
|
|
|
243,445 |
|
|
|
222 |
|
|
|
(98 |
) |
|
|
(2,480 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Education Realty Trust, Inc. |
|
|
EDR Predecessor |
|
|
|
Consolidated |
|
|
Combined |
|
|
|
|
|
|
|
|
|
|
|
July 12 |
|
|
January 1 |
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
through |
|
|
through |
|
|
Year Ended |
|
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
January 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Net increase (decrease) in cash and cash equivalents |
|
|
(55,235 |
) |
|
|
61,661 |
|
|
|
|
|
|
|
(2,313 |
) |
|
|
407 |
|
Cash and cash equivalents, beginning of period |
|
|
61,662 |
|
|
|
1 |
|
|
|
1 |
|
|
|
2,883 |
|
|
|
2,476 |
|
Cash and cash equivalents, end of period |
|
$ |
6,427 |
|
|
$ |
61,662 |
|
|
$ |
1 |
|
|
$ |
570 |
|
|
$ |
2,883 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
29,180 |
|
|
$ |
9,778 |
|
|
$ |
21 |
|
|
$ |
471 |
|
|
$ |
5,629 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid |
|
$ |
819 |
|
|
$ |
357 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of noncash activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Place acquisition costs paid in 2005 |
|
$ |
4,718 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemption of minority interest to satisfy
loan to unitholder |
|
|
6,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid offering costs charged against equity |
|
|
|
|
|
|
2,218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Units issued in the Formation Transactions |
|
|
|
|
|
|
26,340 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued in the Formation Transactions |
|
|
|
|
|
|
375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt assumed in property acquisitions net of
premium |
|
|
98,660 |
|
|
|
444,964 |
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated and combined financial statements.
F-8
EDUCATION REALTY TRUST, INC. AND
SUBSIDIARIES AND EDR PREDECESSOR
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
1. Organization and description of business
Education Realty Trust, Inc. (the Trust) was organized in the state of Maryland on July 12,
2004 and commenced operations as a real estate investment trust (REIT) effective with the initial
public offering (the Offering) that was completed on January 31, 2005. Under the Trusts Articles
of Incorporation, as amended, the Trust is authorized to issue up to 200 million shares of common
stock and 50 million shares of preferred stock, each having a par value of $0.01 per share.
The Trust was formed to succeed to the business of a group of entities collectively referred
to herein as the Education Realty Trust Predecessor (the EDR Predecessor). The EDR Predecessor
was not a legal entity, but rather a combination of certain real estate entities under common
management. The EDR Predecessor consisted of the following limited liability companies and limited
partnerships:
|
|
|
Allen & OHara Education Services, LLC (AOES) a Tennessee
limited liability company performing student housing
management activities. |
|
|
|
|
Allen & OHara Development Company, LLC (AODC), a limited
liability company and formerly a wholly owned subsidiary of
AOES, providing development consulting services for third
party student housing properties. |
|
|
|
|
Allen & OHara Educational Properties LLC, a limited
liability company, previously holding the ownership
interests in the student housing property referred to as
The Gables Apartments (The Gables). |
|
|
|
|
Education Properties Trust, LLC (EPT), a Delaware limited
liability company, owned and managed the following four
garden-style student housing properties through four
separate wholly-owned limited liability companies: |
|
|
|
Players Club Apartments, Tallahassee, Florida |
|
|
|
|
The Reserve at Athens, Athens, Georgia |
|
|
|
|
The Reserve at Clemson, Clemson, South Carolina |
|
|
|
|
NorthPointe Apartments, Tucson, Arizona |
|
|
|
C Station, LLC, a Tennessee limited liability company,
owned and operated one garden-style student housing
property referred to as College Station. |
|
|
|
|
University Towers Raleigh, LLC, a North Carolina limited
liability company, owned a student housing property
referred to as University Towers. |
Paul O. Bower (the Promoter) formed the Trust with the intent to effect the Offering of the
common stock of the Trust. Concurrent with the Offering, the Trust contributed the net proceeds
from the offering for 100% of the general partnership interests and a majority of the limited
partnership interests in a newly formed majority-owned Delaware limited partnership, Education
Realty Operating Partnership, LP (the Operating Partnership). The Operating Partnership together
with Allen & OHara Education Services, Inc. (the taxable REIT subsidiary or TRS), and the
partners and members of the affiliated partnerships and limited liability companies of the EDR
Predecessor, engaged in the formation transactions described in Note 2.
The Operating Partnership owns, directly or indirectly, interests in student housing
communities located near major universities in the United States. The Trust also provides real
estate facility management, development and other advisory services through subsidiaries of the
Operating Partnership to third parties and to joint ventures in which the Trust is invested.
The Trust is subject to the risks involved with the ownership and operations of residential
real estate near major universities throughout the United States. These include, among others, the
risks normally associated with changes in the demand for housing by students at the related
universities, competition for tenants, creditworthiness of tenants, changes in tax laws, interest
rate levels, the availability of financing, and potential liability under environmental and other
laws.
F-9
EDUCATION REALTY TRUST, INC. AND
SUBSIDIARIES AND EDR PREDECESSOR
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
2. The Offering, the formation transactions and the private placement
The Trust completed the Offering of its common stock on January 31, 2005. The Trust sold
21,850,000 shares of common stock, including 2,850,000 shares related to the full exercise of the
over-allotment option by the underwriters of the Offering, at a price of $16.00 per share. The
Offering raised net proceeds of approximately $320,400, after underwriting discounts and offering
expenses of approximately $29,200. The Trust contributed the net proceeds of the Offering for 100%
of the general partnership interests and a majority of the limited partnership interests in the
Operating Partnership. Concurrently, the Operating Partnership used approximately $36,500 of
offering proceeds and issued units approximating $18,300 in estimated value to directly or
indirectly acquire the EDR Predecessor.
Simultaneous with the Offering, the Operating Partnership together with its taxable REIT
subsidiary engaged in the following formation transactions (the Formation Transactions):
|
|
|
The Promoter and certain members of management contributed
their interests in AOES in exchange for $12,400 of units
in the Operating Partnership. AOES converted to a
corporation and elected to be treated as the taxable REIT
subsidiary. AOES owns 100% of AODC. |
|
|
|
|
The Operating Partnership acquired all of the interests in
EPT from the previous owners for $26,661 in cash, $1,342
in units in the Operating Partnership and the assumption
of debt totaling $50,134. As a result EPT became a wholly
owned single member LLC subsidiary of the Operating
Partnership. |
|
|
|
|
The owners of The Gables contributed their interests in
the student housing property to a newly formed Delaware
limited partnership referred to as EDR BG, LP in exchange
for all the limited partnership interests of EDR BG LP.
The Operating Partnership acquired all of the ownership
interests in EDR BG LP for $1,043 in cash, $58 in units in
the Operating Partnership and the assumption of debt
totaling $4,552. |
|
|
|
|
C Station LLC merged into a newly formed Delaware LLC, EDR
C Station LLC, which is a wholly owned subsidiary of the
Operating Partnership. The interests were contributed in
exchange for the issuance of $229 in units in the
Operating Partnership and the assumption of debt and notes
payable to the Promoter totaling $2,477. |
|
|
|
|
The University Towers Partnership acquired a 100% interest
in University Towers and in turn was acquired for $8,813
in cash, $4,316 in units and the assumption of debt
totaling $24,371. |
|
|
|
|
The Operating Partnership also acquired 14 properties
referred to as the JPI portfolio simultaneous with the
Offering. The purchase price of $401,975 was paid in cash
of $82,105 the issuance of $7,995 of units in the
Operating Partnership, and the assumption of first
mortgage debt of $311,500, of which $93,360 was repaid
with the use of the net proceeds of the offering.
Additionally the Operating Partnership issued warrants to
JPI to purchase 250,000 shares of common stock at an
exercise price per share of 103% of the Offering price.
These warrants have a value approximating $375. The
warrants are exercisable beginning January 31, 2006 and
expire on February 28, 2007. In connection with the
acquisition, the Operating Partnership entered into an
agreement to provide to the seller a revolving loan
commitment secured by a pledge of the Operating
Partnership units (499,688 units) issued to the seller in
the purchase transaction. On April 10, 2006, the Trust
redeemed 400,632 Operating Partnership units (minority
interest) in full satisfaction of the $5,996 note
receivable and accrued interest of $120. The redemption of
minority interest was recorded in accordance with SFAS No.
141, Business Combinations, which resulted in additional
goodwill of $388. The seller was released from the pledge
of the remaining 99,056 Operating Partnership units. On
April 26, 2006, the seller converted the remaining units
to the Trusts common stock. |
In connection with the Formation Transactions, the Trust paid off certain mortgage
indebtedness resulting in a prepayment penalty of approximately $1,100, which is reflected in
nonoperating expenses in the accompanying consolidated statement of operations for the year ended
December 31, 2005.
On September 30, 2005, the Trust completed a private placement of 4,375,000 shares of its
common stock at a price of $16.00 per share (the Private Placement). The Private Placement raised
net proceeds of approximately $67,000, after offering expenses of approximately $3,000. In
connection with the Private Placement, the Trust also entered into a registration rights agreement
with the investors on September 22, 2005 (the Registration Rights Agreement). Pursuant to the
Registration Rights Agreement, the Trust agreed to file a registration statement covering the
shares and to cause the registration statement to be declared effective within 180 days after the
September 30, 2005 closing date. These shares were registered with the Securities and Exchange
Commission on January 25, 2006.
F-10
EDUCATION REALTY TRUST, INC. AND
SUBSIDIARIES AND EDR PREDECESSOR
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
3. Summary of significant accounting policies
Basis of presentation and principles of consolidation and combination
The accompanying consolidated and combined financial statements have been prepared on the
accrual basis of accounting in
conformity with accounting principles generally accepted in the United States (GAAP). The
accompanying consolidated financial statements of the Trust represent the assets and liabilities
and operating results of the Trust and its majority owned subsidiaries.
The Trust, as the sole general partner of the Operating Partnership, has the responsibility
and discretion in the management and control of the Operating Partnership, and the limited partners
of the Operating Partnership, in such capacity, have no authority to transact business for, or
participate in the management activities of the Operating Partnership. Accordingly, the Trust
accounts for the Operating Partnership using the consolidation method.
The accompanying combined financial statements of the EDR Predecessor represent the assets and
liabilities and operating results
of the entities comprising the EDR Predecessor. The historical combined financial statements of the
EDR Predecessor are presented as the Promoter, either directly or indirectly through his previous
ownership in AOES, managed the EDR Predecessor prior to the Trust acquiring those interests in
connection with the Formation Transactions. The Promoter has other operations, which were not
contributed to the Operating Partnership or the Trust and, therefore, the combined financial
statements of EDR Predecessor are not intended to represent the financial position and results of
operations of all of the Promoters investments.
All intercompany balances and transactions have been eliminated in the accompanying
consolidated and combined financial statements.
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 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, and in the recording of the allowance for doubtful
accounts. Actual results could differ from those estimates.
Cash and cash equivalents
All highly liquid investments with a maturity of three months or less when purchased are
considered cash equivalents. Restricted cash and short-term investments are excluded from cash for
the purpose of preparing the consolidated and combined statements of cash flows. The Trust
maintains cash balances in various banks. At times the amounts of cash may exceed the $100,000
amount the FDIC insures. The Trust does not believe it is exposed to any significant credit risk on
cash and cash equivalents.
Restricted cash
Restricted cash includes escrow accounts held by lenders for the purpose of paying taxes,
insurance, principal and interest, and to fund capital improvements.
Distributions
The Trust pays regular quarterly cash distributions to shareholders. These distributions are
determined quarterly by the Board based on the operating results, economic conditions, capital
expenditure requirements, the Internal Revenue Codes REIT annual distribution requirements,
leverage covenants imposed by our revolving credit facility and other debt documents, and any other
matters the Board deems relevant.
Student housing properties
Land, land improvements, buildings and improvements, and furniture, fixtures and equipment are
recorded at cost. Buildings and improvements are depreciated over 30 to 40 years, land improvements
are depreciated over 15 years, and furniture, fixtures, and
F-11
EDUCATION REALTY TRUST, INC. AND
SUBSIDIARIES AND EDR PREDECESSOR
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
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.
Acquisitions of student housing properties are accounted for utilizing the purchase method in
accordance with Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations, and accordingly, the results of operations are included in the results of operations
from the respective dates of acquisition. Pre-acquisition costs, which include legal and
professional fees and other third party costs related directly to the acquisition of the property,
are accounted for as part of the purchase price. Independent appraisals, estimates of cash flows,
and valuation techniques are used to allocate the purchase price of acquired property between land,
land improvements, buildings and improvements, furniture, fixtures and equipment and other
identifiable intangibles such as amounts related to in-place leases.
Management assesses impairment of long-lived assets in accordance with SFAS No. 144,
Accounting for the Impairment and Disposal of Long-lived Assets. SFAS No. 144 requires that
long-lived assets to be held and used be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. In accordance
with SFAS No. 144, management uses an estimate of future undiscounted cash flows of the related
asset over the remaining life in measuring whether the assets are recoverable. As of December 31,
2006 and 2005, management determined that no indicators of impairment existed.
Deferred financing costs
Deferred financing costs represent costs incurred in connection with acquiring debt
facilities. The costs incurred during the years ended December 31, 2006 and 2005 were $1,352 and
$3,176, respectively, and are being amortized over the terms of the related debt using a method
that approximates the effective interest method.
Amortization expense approximated $1,114 and $820 for the Trust for the years ended December
31, 2006 and 2005, respectively and $163 for the EDR Predecessor for the year ended December 31,
2004. Accumulated amortization for the Trust at December 31, 2006 and 2005, respectively
approximated $1,934 and $820 and accumulated amortization for the EDR Predecessor approximated $709
at December 31, 2004. Deferred financing costs, net of amortization, are included in other assets
on the accompanying consolidated balance sheets.
Offering costs
Specific incremental costs directly attributable to the Offering, the Private Placement and
the dividend reinvestment plan were deferred and charged against the gross proceeds. Accordingly,
underwriting commissions and other stock issuance costs are reflected as a reduction of additional
paid-in capital.
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. As of December 31, 2006
and 2005, respectively, the Trust had net unamortized debt premiums of $2,308 and $2,867. These
amounts are included in mortgage loans in the accompanying consolidated balance sheets.
Income taxes
The Trust qualifies as a REIT under the Internal Revenue Code of 1986, as amended (the
Code). The Trust is generally not subject to federal income tax to the extent that it distributes
at least 90% of its taxable income for each tax year to its shareholders. REITs are subject to a
number of organizational and operational requirements. If the Trust fails to qualify as a REIT in
any taxable year, the Trust will be subject to federal income tax (including any applicable
alternative minimum tax) on its taxable income and property and to federal income and excise taxes
on its undistributed income.
The Trust has elected to treat its management company, AOES, as a taxable REIT subsidiary
(TRS). The TRS is subject to federal, state and local income taxes. AOES manages the Trusts
non-REIT activities. The Trust follows SFAS No. 109, Accounting for Income Taxes, which requires
the use of the asset and liability method. 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 bases. 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.
F-12
EDUCATION REALTY TRUST, INC. AND
SUBSIDIARIES AND EDR PREDECESSOR
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
No provision for income taxes has been recorded in the EDR Predecessor combined financial
statements, as the owners are required to report their share of the EDR Predecessors earnings in
their respective income tax returns.
Earnings per share
The Trust calculates earnings per share in accordance with SFAS No. 128, Earnings Per Share.
Basic earnings per share is calculated by dividing net earnings available to common shares by
weighted average common shares outstanding. Diluted earnings per
share is calculated similarly, except that it includes the dilutive effect of the assumed exercise
of potentially dilutive securities. At December 31, 2006 and 2005, 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:
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
Operating Partnership units |
|
|
913,738 |
|
|
|
1,376,471 |
|
University Towers Operating Partnership units |
|
|
269,757 |
|
|
|
269,757 |
|
Restricted Stock (unvested shares) |
|
|
111,111 |
|
|
|
147,111 |
|
Profits Interest Units |
|
|
265,000 |
|
|
|
245,000 |
|
|
|
|
|
|
|
|
|
|
Total potentially dilutive securities |
|
|
1,559,606 |
|
|
|
2,038,339 |
|
|
|
|
|
|
|
|
|
|
A reconciliation of the numerators and denominators for the basic and diluted earnings per
share computations is not required.
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 and EDR Predecessor
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.
Goodwill and other intangible assets
The Trust accounts for its goodwill and other intangible assets under SFAS No. 142, Goodwill
and Other Intangible Assets. Goodwill is tested annually for impairment, and is tested for
impairment more frequently if events and circumstances indicate that the asset might be impaired.
An impairment loss is recognized to the extent that the carrying amount exceeds the assets fair
value.
Investment in unconsolidated joint ventures and limited liability companies
The Operating Partnership accounts for its investments in unconsolidated joint ventures and
limited liability companies using the equity method whereby the cost of an investment is adjusted
for the Trusts and EDR Predecessors share of equity in earnings of the respective investment
reduced by distributions received. The earnings and distributions of the unconsolidated joint
ventures and limited liability companies are allocated based on each owners respective ownership
interests. As of December 31, 2005, the Trust had investments, directly or indirectly, in the
following unconsolidated joint ventures and limited liability companies that are accounted for
under the equity method:
|
|
|
Salisbury Student Apartment Developers Joint Venture, 33% owned by AOES |
|
|
|
|
Salisbury Student Apartment Developers LLC, a Maryland
limited liability company 33% owned by AOES |
|
|
|
|
University of Louisville Apartment Developers LLC, a Kentucky
limited liability company 50% owned by AOES |
F-13
EDUCATION REALTY TRUST, INC. AND
SUBSIDIARIES AND EDR PREDECESSOR
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
|
|
|
Hines/ AOES LLC, an Alabama limited liability company, 50% owned by AOES |
|
|
|
|
National Development/ Allen & OHara CUPA, LLC, a Pennsylvania limited liability company, 50% owned by Allen &
OHara Development Company, LLC (AODC) |
|
|
|
|
National Development/ Allen & OHara Lock Haven, LLC, a Pennsylvania limited liability company, 50% owned by AODC |
|
|
|
|
National Development/ Allen & OHara Clarion, LLC, a Pennsylvania limited liability company, 50% owned by AODC |
|
|
|
|
Allen & OHara National Development Bloomsburg LLC, a Pennsylvania limited liability company, 50% owned by AODC |
|
|
|
|
Allen & OHara/ Academic Privatization LLC, a Tennessee limited liability company, 50% owned by AODC |
All of the investments in unconsolidated joint ventures and limited liability companies
as of December 31, 2005 were held by the Trust at December 31, 2006.
During the year ended December 31, 2006, the Trust invested in the following unconsolidated
joint ventures and limited liability companies which are accounted for under the equity method:
|
|
|
University Village-Greensboro LLC, a Delaware limited liability company, 25% owned by EROP |
|
|
|
|
AODC/CPA, LLC, a Delaware limited liability company, 50% owned by AODC |
|
|
|
|
WEDR Riverside Investors V, LLC, a Delaware limited liability company, 10% owned by EROP |
|
|
|
|
APF EDR, LP, a Delaware limited partnership, 10% owned by EROP |
|
|
|
|
APF EDR Food Services, LP, a Delaware limited partnership, 10% owned by EROP |
|
|
|
|
WEDR Stinson Investors V, LLC, a Delaware limited liability company, 10% owned by EROP |
Revenue recognition
The Trust and EDR Predecessor recognize revenue related to leasing activities at the student
housing properties owned by the Trust and EDR Predecessor, management fees related to managing
third party student housing properties, development consulting fees related to the general
oversight of third party student housing development and operating expense reimbursements for
payroll and related expenses incurred by third party student housing properties managed by the
Trust and EDR Predecessor.
Student housing leasing revenue Student housing leasing revenue is comprised of all
activities related to the leasing activities at the student housing properties and includes
revenues from the leasing of space, from parking lot rentals, and from providing certain ancillary
services. This revenue is reflected in student housing leasing revenue in the accompanying
consolidated and combined statements of operations. Students are required to execute lease
contracts with payment schedules that vary from single to monthly payments. Generally, the Trust
and EDR Predecessor require each executed leasing contract to be accompanied by a nonrefundable
application fee and a signed parental guarantee. Receivables are recorded when billed, revenues and
related lease incentives and nonrefundable application fees are recognized on a straight-line basis
over the term of the contracts. The Trust and EDR Predecessor have no contingent rental contracts
except as noted below related to other leasing revenue. The future minimum rental income to be
received based on leases held as of December 31, 2006 is approximately $48,527. At certain student
housing facilities the Trust and EDR Predecessor offer parking lot rentals to the tenants. The
related revenues are recognized on a straight-line basis over the term of the related agreement.
Student housing food service revenue The Trust and EDR Predecessor provide food service to
an unaffiliated secondary boarding school through a contract covering a nine-month period. The
contract requires a flat weekly fee and the related revenues are recognized on a straight-line
basis over the contract period. Additionally, the Trust and EDR Predecessor maintain a dining
facility at University Towers, which offers meal plans to the tenants as well as dining to other
third party customers. The meal plans typically require upfront payment by the tenant covering the
school semester and the related revenue is recognized on a straight-line basis over the
corresponding semester.
Other leasing revenue Other leasing revenue relates to our leasing of the 13 properties we
acquired from Place Properties (Place) on January 1, 2006 as discussed in Note 5. Simultaneous
with the acquisition of the 13 properties, the Trust leased the assets to Place and receives base
monthly rent of $1,145 and has the right to receive Additional Rent annually if the properties
exceed certain criteria defined in the lease agreement. Base rent is recognized on a straight line
basis over the lease term and Additional Rent
is recognized only upon satisfaction of the defined criteria.
F-14
EDUCATION REALTY TRUST, INC. AND
SUBSIDIARIES AND EDR PREDECESSOR
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
Third-party development consulting revenue The Trust and EDR Predecessor provide
development-consulting services in an agency capacity with third parties whereby the fee is
determined based upon the total construction costs. A portion of the fee is typically received
upfront and varies from 3-5% of the total estimated costs. These fees, including the upfront fee,
are recognized using the percentage of completion method in proportion to the contract costs
incurred by the owner over the course of the construction phases of the respective projects.
Third-party management revenue The Trust and EDR Predecessor enter into management contracts
to manage third party student housing facilities. Management revenues are recognized when earned in
accordance with each management contract. Incentive management fees are recognized when the
incentive criteria have been met.
Operating expense reimbursement revenue The Trust and EDR Predecessor pay certain payroll
and related costs related to the operations of third party student housing properties that are
managed by the Trust and EDR Predecessor. Under the terms of the related management agreements, the
third party property owners reimburse these costs. The amounts billed to the third party owners are
recognized as revenue in accordance with Emerging Issues Task Force No. 01-14, Income Statement
Characterization of Reimbursements Received for Out of Pocket Expenses Incurred.
Due to the nature of the Trust and EDR Predecessors business, accounts receivable result
primarily from monthly billings of student rents. Payments are normally received within 30 days.
Balances are considered past due when payment is not received on the contractual due date.
Allowances for uncollectible accounts are established by management when it is determined that
collection is doubtful. Such allowances are reviewed periodically based upon experience. The
following table reconciles the allowance for doubtful accounts for the years ended December 31,
2006 and 2005, for the Trust, and the year ended December 31, 2004 for the EDR Predecessor. The
Trust had no allowance for doubtful accounts for the year ended December 31, 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Education Realty |
|
|
EDR |
|
|
|
Trust, Inc. |
|
|
Predecessor |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Balance, beginning of period |
|
$ |
410 |
|
|
$ |
|
|
|
$ |
114 |
|
Provision for uncollectible accounts |
|
|
775 |
|
|
|
2,306 |
|
|
|
152 |
|
Deductions |
|
|
(1,142 |
) |
|
|
(1,896 |
) |
|
|
(169 |
) |
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
43 |
|
|
$ |
410 |
|
|
$ |
97 |
|
|
|
|
|
|
|
|
|
|
|
Costs related to third party development consulting services
Costs associated with the pursuit of 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 balance sheets.
Advertising expense
Advertising expenses are charged to income during the period incurred. The Trust and EDR
Predecessor do not use direct response advertising. Advertising expense was $1,871 and $1,990 for
the Trust for the years ended December 31, 2006 and 2005, respectively, and $587 for the EDR
Predecessor for the year ended December 31, 2004.
Minority interests
Minority interests in the Operating Partnership represent limited partnership interests in the
form of operating partnership units and profits interest units. Income is allocated to minority
interests based on weighted average percentage ownership each fiscal quarter. In the event the Operating Partnership was terminated on December 31, 2006
the amount of consideration paid to the minority interests holders would be in accordance with their positive capital account balances,
determined after taking into account all capital account adjustments for all prior periods and the Operating Partnerships
taxable year during which the termination occurs.
Segment information
The Trust and EDR Predecessor apply SFAS No. 131, Disclosures about Segments of an Enterprise
and Related Information,
F-15
EDUCATION REALTY TRUST, INC. AND
SUBSIDIARIES AND EDR PREDECESSOR
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
which requires disclosure of certain operating and financial data with respect to separate business
activities within an enterprise. The Trust and EDR Predecessor have identified three reportable
business segments: student housing leasing, student housing development consulting services, and
student housing management services.
Stock-based compensation
The Trust adopted the Education Realty Trust, Inc. 2004 Incentive Plan (the Plan) effective
upon the closing of the Offering. The Plan is described more fully in Note 8. The Trust adopted
SFAS No. 123 (R), Share-Based Payment on January 1, 2006, which requires that compensation costs
related to share-based payments be recognized in financial statements. Prior to January 1, 2006,
the Trust applied the provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees,
and related interpretations.
Fair value of financial instruments
The Trust and EDR Predecessor follow SFAS No. 107, Disclosure about the Fair Value of
Financial Instruments, which requires the disclosure of the fair value of financial instruments
for which it is practicable to estimate. The Trust and EDR Predecessor do not hold or issue
financial instruments for trading purposes. The Trust and EDR Predecessor consider the carrying
amounts or cash and cash equivalents, restricted cash and short-term investments, student contracts
receivable, accounts payable and accrued expenses to approximate fair value due to the short
maturity of these instruments. The Trust and EDR Predecessor have estimated the fair value of the
mortgage notes payable utilizing present value techniques. At December 31, 2006, the carrying
amount and estimated fair value of the mortgage notes payable was $423,933 and $404,240,
respectively. At December 31, 2005, the carrying amount and estimated fair value of the mortgage
notes payable was $328,335 and $318,423, respectively. The revolving credit facility and term loan
bear interest at variable rates and therefore cost approximates market value at December 31, 2006.
Recent accounting pronouncements
In December 2004, SFAS No. 153, Exchange of Nonmonetary Assets, was issued. SFAS No. 153
amends APB Opinion No. 29, Accounting for Nonmonetary Transactions to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial substance. That exception required that
some nonmonetary exchanges be recorded on a carryover basis versus SFAS No. 153, which requires an
entity record a nonmonetary exchange at fair value and recognize any gain or loss if the
transaction has commercial substance. The standard specifies that a nonmonetary exchange has
commercial substance if the future cash flows of the entity are expected to change significantly as
a result of the exchange. SFAS No. 153 is effective the fiscal year beginning January 1, 2006. The
adoption of SFAS No. 153 did not have a material impact on the Trusts consolidated financial
condition or results of operations taken as a whole.
In December 2004, the Financial Accounting Standards Board (FASB) issued Statement No. 123
(revised December 2004), Share-Based Payment (Statement 123(R)). Statement 123(R) replaces FASB
Statement No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. Statement 123(R) requires compensation costs related to
share-based payment transactions to be recognized in the financial statements. With limited
exceptions, the amount of compensation cost is measured based on the grant-date fair value of the
equity instruments issued. Compensation cost is recognized over the period that an employee
provides service in exchange for the award. Statement 123(R) is effective as of the beginning of
the first annual reporting period that begins after June 15, 2005. The Trust adopted Statement
123(R) effective January 1, 2006, and it did not have a material impact on the Trusts consolidated
financial condition or results of operations taken as a whole. In March 2005, the SEC issued Staff
Accounting Bulletin No. 107 (SAB 107) to provide public companies additional guidance in applying
the provisions of Statement 123(R). Among other things, SAB 107 describes the SEC staffs
expectations in determining the assumptions that underlie the fair value estimates and discusses
the interaction of Statement 123(R) with certain existing SEC guidance. The guidance is also
beneficial to users of financial statements in analyzing the information provided under statement
123(R). SAB 107 was applied upon the adoption of Statement 123(R).
In June 2005, the FASB ratified EITF 04-5: Determining Whether a General Partner, or the
General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited
Partners Have Certain Rights (EITF 04-5). EITF 04-5 provides a framework for determining whether
a general partner is required to consolidate limited partners. The new framework is significantly
different than the guidance in SOP 78-9 and makes it more difficult for a general partner to
overcome the presumption that it controls the limited partnership, requiring the limited partner to
have substantive kick-out or participating rights. Kick-out rights are the right to dissolve or
liquidate the partnership or to otherwise remove the general partner without cause and
participating rights are the right to effectively participate in significant decisions made in the
ordinary course of the partnerships business. EITF 04-5 became effective immediately for all newly
formed limited partnerships and existing limited partnerships which are modified. The guidance became effective for existing
F-16
EDUCATION REALTY TRUST, INC. AND
SUBSIDIARIES AND EDR PREDECESSOR
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
limited partnerships which are not modified the
beginning of the first reporting period in fiscal years beginning after December 15, 2005. The
adoption of EITF 04-5 did not have a material impact on the Trusts consolidated financial
condition or results of operations taken as a whole.
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No.
108 (SAB 108), which becomes effective for fiscal years ending after November 15, 2006. SAB 108
provides guidance on the consideration of the effects of prior period misstatements in quantifying
current year misstatements for the purpose of a materiality assessment. SAB 108 requires an entity
to evaluate the impact of correcting all misstatements, including both the carryover and reversing
effects of prior year misstatements, on current year financial statements. If a misstatement is
material to the current year financial statements, the prior year financial statements should also
be corrected, even though such revision was, and continues to be, immaterial to the prior year
financial statements. Correcting prior year financial statements for immaterial errors would not
require previously filed reports to be amended. Such correction should be made in the current
period filings. The adoption of SAB 108 did not have a material impact on the Trusts consolidated
financial condition or results of operations taken as a whole.
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, an Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in a companys financial statements and prescribes a
recognition threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. The Interpretation
also provides guidance on description, classification, interest and penalties, accounting in
interim periods, disclosure and transition. FIN 48 becomes effective on January 1, 2007. The Trust
is currently evaluating the impact of adopting FIN 48 on its consolidated financial condition and
results of operations.
In September 2006, the FASB issued SFAS 157, Fair Value Measurements. SFAS 157 does not
address what to measure at fair value; instead, it addresses how to measure fair value. SFAS
157 applies (with limited exceptions) to existing standards that require assets or liabilities to
be measured at fair value. SFAS 157 establishes a fair value hierarchy, giving the highest priority
to quoted prices in active markets and the lowest priority to unobservable data and requires new
disclosures for assets and liabilities measured at fair value based on their level in the
hierarchy. SFAS 157 is effective for financial statements issued for fiscal years beginning after
November 15, 2007. The Trust is currently evaluating the impact of adopting SFAS 157 on its
consolidated financial condition and results of operations.
4. Income taxes
Upon formation, the TRS became subject to federal and state income taxation and accordingly
established deferred tax assets and liabilities. The EDR Predecessor was not subject to income
taxes. The net deferred tax asset recorded upon the formation was approximately $341.
Deferred income taxes result from temporary differences between the carrying amounts of assets
and liabilities of the TRS for financial reporting purposes and the amounts used for income tax
purposes. Significant components of the deferred tax assets and liabilities at December 31, 2006
and 2005, respectively, are as follows:
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Deferred revenue |
|
$ |
49 |
|
|
$ |
458 |
|
Depreciation and amortization |
|
|
335 |
|
|
|
39 |
|
Accrued expenses |
|
|
132 |
|
|
|
109 |
|
Straight line rent |
|
|
30 |
|
|
|
3 |
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
546 |
|
|
|
609 |
|
Deferred tax liability: |
|
|
|
|
|
|
|
|
Amortization of management contracts intangible |
|
|
(44 |
) |
|
|
(59 |
) |
|
|
|
|
|
|
|
Net deferred tax assets |
|
$ |
502 |
|
|
$ |
550 |
|
|
|
|
|
|
|
|
F-17
EDUCATION REALTY TRUST, INC. AND
SUBSIDIARIES AND EDR PREDECESSOR
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
Significant components of the income tax provision (benefit) for the years ended December 31,
2006 and 2005, respectively, are as follows:
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Deferred: |
|
|
|
|
|
|
|
|
Federal |
|
$ |
40 |
|
|
$ |
(182 |
) |
State |
|
|
8 |
|
|
|
(27 |
) |
|
|
|
|
|
|
|
Deferred expense |
|
|
48 |
|
|
|
(209 |
) |
|
|
|
|
|
|
|
Current: |
|
|
|
|
|
|
|
|
Federal |
|
|
498 |
|
|
|
525 |
|
State |
|
|
113 |
|
|
|
181 |
|
|
|
|
|
|
|
|
Current expense |
|
|
611 |
|
|
|
706 |
|
|
|
|
|
|
|
|
Total provision |
|
$ |
659 |
|
|
$ |
497 |
|
|
|
|
|
|
|
|
TRS earnings subject to tax consisted of $1,606 and $1,121 for the years ended December 31,
2006 and 2005, respectively. The reconciliation of income tax attributable to income before
minority interest computed at the U.S. statutory rate to income tax provision is as follows:
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Tax provision at U.S. statutory rates on TRS income subject to tax |
|
$ |
546 |
|
|
$ |
381 |
|
State income tax, net of federal benefit |
|
|
108 |
|
|
|
114 |
|
Other |
|
|
5 |
|
|
|
2 |
|
|
|
|
|
|
|
|
Tax provision |
|
$ |
659 |
|
|
$ |
497 |
|
|
|
|
|
|
|
|
5. Student housing acquisitions
On January 1, 2006, the Operating Partnership acquired the 13 student housing properties
referred to as the Place Portfolio for a combination of cash, partnership units and assumed debt.
The cash contribution totaled approximately $105,200. The Operating Partnership also issued 36,954
Operating Partnership units valued at approximately $500, and assumed liabilities of $800 and
interest-only mortgage debt of approximately $98,660. A summary follows of the fair values of the
assets acquired and the liabilities assumed as of the date of the acquisition:
|
|
|
|
|
|
|
Allocation |
|
|
|
Place Portfolio |
|
Current assets and restricted cash |
|
$ |
2,376 |
|
Student housing properties |
|
|
202,250 |
|
Other |
|
|
570 |
|
|
|
|
|
Total assets acquired |
|
|
205,196 |
|
Current liabilities |
|
|
(855 |
) |
Mortgage debt assumed net of premium/discount |
|
|
(98,660 |
) |
Acquisition costs |
|
|
(7,446 |
) |
|
|
|
|
Purchase price |
|
$ |
98,235 |
|
|
|
|
|
On June 15, 2006, the Operating Partnership acquired Players Club, an off-campus
collegiate community located near Georgia Southern University in Statesboro, Georgia
(Statesboro), for $12,900 in cash and assumed liabilities. A summary follows of the estimated
fair values of the assets acquired and the liabilities assumed as of the date of the acquisition:
|
|
|
|
|
|
|
Preliminary allocation |
|
|
|
Statesboro |
|
Current assets and restricted cash |
|
$ |
77 |
|
Student housing properties |
|
|
12,703 |
|
Other |
|
|
159 |
|
|
|
|
|
Total assets acquired |
|
|
12,939 |
|
Current liabilities |
|
|
(115 |
) |
Mortgage debt assumed net of premium/discount |
|
|
|
|
Acquisition costs |
|
|
(65 |
) |
|
|
|
|
Purchase price |
|
$ |
12,759 |
|
|
|
|
|
F-18
EDUCATION REALTY TRUST, INC. AND
SUBSIDIARIES AND EDR PREDECESSOR
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
The purchase price allocation related to the Statesboro acquisition is considered
preliminary and changes are expected as additional information becomes available. Management
expects to continue its process of refining and finalizing our purchase accounting estimates and
assumptions during 2007 and as a result this preliminary purchase price allocation is subject to
change.
As discussed in Note 2, in connection with the Offering and Formation Transactions, the
Operating Partnership acquired the entities comprising the EDR Predecessor as well as the 14
properties that comprised the JPI portfolio on January 31, 2005. Prior to the acquisition of the
EDR Predecessor, the Promoter, directly and indirectly, held ownership interests in the predecessor
entities. To the extent the Promoter exchanged his ownership interests; the acquisition was
accounted for at historical cost. To the extent other ownership interests were exchanged, the
acquisition has been recorded at the estimated fair value of the consideration exchanged. The
following is a summary of the estimated fair values of the assets acquired and liabilities assumed
in connection with the Formation Transactions as of the date of acquisition:
|
|
|
|
|
|
|
|
|
|
|
EDR Predecessor |
|
|
JPI Portfolio |
|
Current assets and restricted cash |
|
$ |
6,175 |
|
|
$ |
3,093 |
|
Student housing properties |
|
|
117,587 |
|
|
|
403,380 |
|
Goodwill and other intangibles |
|
|
4,225 |
|
|
|
3,562 |
|
Carryover basis at historical cost |
|
|
17,382 |
|
|
|
|
|
Other |
|
|
352 |
|
|
|
719 |
|
|
|
|
|
|
|
|
Total assets acquired |
|
|
145,721 |
|
|
|
410,754 |
|
Current liabilities |
|
|
(6,625 |
) |
|
|
(4,650 |
) |
Mortgage debt assumed net of premium/discount |
|
|
(83,099 |
) |
|
|
(310,448 |
) |
Acquisition costs |
|
|
(1,272 |
) |
|
|
(7,540 |
) |
|
|
|
|
|
|
|
Purchase price |
|
$ |
54,725 |
|
|
$ |
88,116 |
|
|
|
|
|
|
|
|
Subsequent to the Offering, the Operating Partnership acquired student housing
properties during 2005 near the University of Mississippi (February 2005), the University of South
Carolina (March 2005), Middle Tennessee State University (April 2005), the University of Florida
(June 2005), and Auburn University (July 2005). The aggregate purchase price approximated $119,800,
including the assumption of mortgage debt with a total contract value of $48,700. A summary follows
of the estimated fair values of the assets acquired and the liabilities assumed as of the
respective dates of the acquisitions:
|
|
|
|
|
|
|
Allocation |
|
|
|
student housing |
|
|
|
acquisitions |
|
Current assets and restricted cash |
|
$ |
791 |
|
Student housing properties |
|
|
117,390 |
|
Goodwill and other intangibles |
|
|
1,209 |
|
Other |
|
|
443 |
|
|
|
|
|
Total assets acquired |
|
|
119,833 |
|
Current liabilities |
|
|
(1,668 |
) |
Mortgage debt assumed net of premium/discount |
|
|
(51,408 |
) |
Acquisition costs |
|
|
(1,231 |
) |
|
|
|
|
Purchase price |
|
$ |
65,526 |
|
|
|
|
|
F-19
EDUCATION REALTY TRUST, INC. AND
SUBSIDIARIES AND EDR PREDECESSOR
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
The results of operations for each acquisition have been included in our
consolidated statements of operations from the respective acquisition dates. In connection with the
acquisitions that occurred during 2005, $3,070 and $5,926 was allocated to goodwill and other
identifiable intangibles (in-place leases and management contracts), respectively. In connection
with the Statesboro acquisition discussed above, $159 was allocated to other identifiable
intangibles (in-place leases). In-place lease intangibles and management contracts are amortized
over the estimated life of the remaining lease/contract term. Accumulated amortization was $5,894
and $5,449 for the years ended December 31, 2006 and 2005, respectively. Amortization expense
totaled $445 and $5,449 for the years ended December 31, 2006 and 2005, respectively. Amortization
expense for fiscal 2007 is estimated to be $261 and $34 annually in each of the four fiscal years
following fiscal 2007. In accordance with SFAS No. 142, goodwill is not subject to amortization.
The carrying value of goodwill is $3,458 (includes the addition of $388 related to the redemption
of minority interest discussed in note 2) and $3,070 at December 31, 2006 and 2005, respectively.
The following unaudited pro forma financial information for the years ended December 31, 2006
and 2005 gives effect to the acquisitions as if the transactions had occurred at the beginning of
the respective period:
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
Pro forma revenue |
|
$ |
120,274 |
|
|
$ |
116,974 |
|
Pro forma net loss |
|
|
(11,961 |
) |
|
|
(15,337 |
) |
Loss per share |
|
|
(0.45 |
) |
|
|
(0.56 |
) |
All pro forma financial information presented in this note is unaudited and is not necessarily
indicative of the results that actually would have occurred if the properties were purchased at the
beginning of the respective reporting period.
6. Student housing properties
Student housing properties consist of the following at December 31, 2006 and 2005 for the
Trust, respectively:
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Land |
|
$ |
65,260 |
|
|
$ |
50,818 |
|
Land improvements |
|
|
54,825 |
|
|
|
44,802 |
|
Construction in progress |
|
|
88 |
|
|
|
542 |
|
Buildings |
|
|
697,631 |
|
|
|
512,544 |
|
Furniture, fixtures and equipment |
|
|
45,444 |
|
|
|
34,809 |
|
|
|
|
|
|
|
|
|
|
|
863,248 |
|
|
|
643,515 |
|
Less accumulated depreciation |
|
|
(58,489 |
) |
|
|
(23,210 |
) |
|
|
|
|
|
|
|
Student housing properties, net |
|
$ |
804,759 |
|
|
$ |
620,305 |
|
|
|
|
|
|
|
|
F-20
EDUCATION REALTY TRUST, INC. AND
SUBSIDIARIES AND EDR PREDECESSOR
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
Following is certain information related to the Trusts investment in student
housing properties as of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial Cost |
|
|
|
|
|
|
Total Costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buildings and |
|
|
|
|
|
|
Capitalized |
|
|
|
|
|
|
Buildings and |
|
|
|
|
|
|
Accumulated |
|
|
Date of |
|
Property(3) |
|
Encumbrances |
|
|
Land |
|
|
Improvements |
|
|
Total |
|
|
Subsequently |
|
|
Land |
|
|
Improvements |
|
|
Total |
|
|
Depreciation(4) |
|
|
Acquisition |
|
University Towers |
|
$ |
23,996 |
|
|
$ |
2,195 |
|
|
$ |
31,035 |
|
|
$ |
33,230 |
|
|
$ |
587 |
|
|
$ |
2,195 |
|
|
$ |
31,622 |
|
|
$ |
33,817 |
|
|
$ |
2,920 |
|
|
|
01/31/05 |
|
The Gables |
|
|
4,499 |
|
|
|
198 |
|
|
|
5,099 |
|
|
|
5,297 |
|
|
|
77 |
|
|
|
198 |
|
|
|
5,176 |
|
|
|
5,374 |
|
|
|
525 |
|
|
|
01/31/05 |
|
The Reserve at Athens |
|
|
|
|
|
|
1,740 |
|
|
|
17,985 |
|
|
|
19,725 |
|
|
|
161 |
|
|
|
1,740 |
|
|
|
18,146 |
|
|
|
19,886 |
|
|
|
1,524 |
|
|
|
01/31/05 |
|
Players Club |
|
|
|
|
|
|
727 |
|
|
|
7,498 |
|
|
|
8,225 |
|
|
|
141 |
|
|
|
727 |
|
|
|
7,639 |
|
|
|
8,366 |
|
|
|
652 |
|
|
|
01/31/05 |
|
College Station |
|
|
|
|
|
|
244 |
|
|
|
2,190 |
|
|
|
2,434 |
|
|
|
129 |
|
|
|
244 |
|
|
|
2,319 |
|
|
|
2,563 |
|
|
|
318 |
|
|
|
01/31/05 |
|
The Reserve at Clemson |
|
|
11,810 |
|
|
|
625 |
|
|
|
18,230 |
|
|
|
18,855 |
|
|
|
223 |
|
|
|
625 |
|
|
|
18,453 |
|
|
|
19,078 |
|
|
|
1,656 |
|
|
|
01/31/05 |
|
NorthPointe |
|
|
18,562 |
|
|
|
2,498 |
|
|
|
27,323 |
|
|
|
29,821 |
|
|
|
309 |
|
|
|
2,498 |
|
|
|
27,632 |
|
|
|
30,130 |
|
|
|
2,266 |
|
|
|
01/31/05 |
|
The Pointe at South
Florida |
|
|
23,900 |
|
|
|
3,508 |
|
|
|
30,510 |
|
|
|
34,018 |
|
|
|
632 |
|
|
|
3,508 |
|
|
|
31,142 |
|
|
|
34,650 |
|
|
|
2,848 |
|
|
|
01/31/05 |
|
The Reserve on
Perkins(1) |
|
|
|
|
|
|
913 |
|
|
|
15,795 |
|
|
|
16,708 |
|
|
|
320 |
|
|
|
913 |
|
|
|
16,115 |
|
|
|
17,028 |
|
|
|
1,504 |
|
|
|
01/31/05 |
|
The Commons at
Knoxville |
|
|
32,000 |
|
|
|
4,630 |
|
|
|
18,386 |
|
|
|
23,016 |
|
|
|
244 |
|
|
|
4,630 |
|
|
|
18,630 |
|
|
|
23,260 |
|
|
|
1,672 |
|
|
|
01/31/05 |
|
The Reserve at
Tallahassee |
|
|
|
|
|
|
2,743 |
|
|
|
21,176 |
|
|
|
23,919 |
|
|
|
325 |
|
|
|
2,743 |
|
|
|
21,501 |
|
|
|
24,244 |
|
|
|
1,863 |
|
|
|
01/31/05 |
|
The Pointe at Western |
|
|
21,600 |
|
|
|
1,096 |
|
|
|
30,647 |
|
|
|
31,743 |
|
|
|
212 |
|
|
|
1,096 |
|
|
|
30,859 |
|
|
|
31,955 |
|
|
|
2,678 |
|
|
|
01/31/05 |
|
College Station at W.
Lafayette |
|
|
14,800 |
|
|
|
1,887 |
|
|
|
19,528 |
|
|
|
21,415 |
|
|
|
192 |
|
|
|
1,887 |
|
|
|
19,720 |
|
|
|
21,607 |
|
|
|
1,957 |
|
|
|
01/31/05 |
|
The Commons on Kinnear |
|
|
14,700 |
|
|
|
1,327 |
|
|
|
20,803 |
|
|
|
22,130 |
|
|
|
162 |
|
|
|
1,327 |
|
|
|
20,965 |
|
|
|
22,292 |
|
|
|
1,619 |
|
|
|
01/31/05 |
|
The Pointe at Penn
State(2) |
|
|
|
|
|
|
2,151 |
|
|
|
35,094 |
|
|
|
37,245 |
|
|
|
248 |
|
|
|
2,151 |
|
|
|
35,342 |
|
|
|
37,493 |
|
|
|
2,888 |
|
|
|
01/31/05 |
|
The Reserve at Star
Pass |
|
|
50,740 |
|
|
|
1,584 |
|
|
|
30,810 |
|
|
|
32,394 |
|
|
|
355 |
|
|
|
1,584 |
|
|
|
31,165 |
|
|
|
32,749 |
|
|
|
2,696 |
|
|
|
01/31/05 |
|
The Reserve at
Columbia |
|
|
19,400 |
|
|
|
1,071 |
|
|
|
26,134 |
|
|
|
27,205 |
|
|
|
187 |
|
|
|
1,071 |
|
|
|
26,321 |
|
|
|
27,392 |
|
|
|
2,051 |
|
|
|
01/31/05 |
|
The Reserve on
Frankford |
|
|
14,500 |
|
|
|
1,181 |
|
|
|
26,758 |
|
|
|
27,939 |
|
|
|
289 |
|
|
|
1,181 |
|
|
|
27,047 |
|
|
|
28,228 |
|
|
|
2,541 |
|
|
|
01/31/05 |
|
The Village on Tharpe |
|
|
|
|
|
|
5,410 |
|
|
|
46,504 |
|
|
|
51,914 |
|
|
|
459 |
|
|
|
5,410 |
|
|
|
46,963 |
|
|
|
52,373 |
|
|
|
3,901 |
|
|
|
01/31/05 |
|
The Lofts |
|
|
26,500 |
|
|
|
2,801 |
|
|
|
34,117 |
|
|
|
36,918 |
|
|
|
152 |
|
|
|
2,801 |
|
|
|
34,269 |
|
|
|
37,070 |
|
|
|
2,512 |
|
|
|
01/31/05 |
|
The Reserve on West
31st |
|
|
|
|
|
|
1,896 |
|
|
|
14,920 |
|
|
|
16,816 |
|
|
|
773 |
|
|
|
1,896 |
|
|
|
15,693 |
|
|
|
17,589 |
|
|
|
1,411 |
|
|
|
01/31/05 |
|
Campus Creek |
|
|
|
|
|
|
2,251 |
|
|
|
21,604 |
|
|
|
23,855 |
|
|
|
427 |
|
|
|
2,251 |
|
|
|
22,031 |
|
|
|
24,282 |
|
|
|
1,751 |
|
|
|
02/22/05 |
|
Pointe West |
|
|
11,148 |
|
|
|
2,318 |
|
|
|
10,924 |
|
|
|
13,242 |
|
|
|
234 |
|
|
|
2,318 |
|
|
|
11,158 |
|
|
|
13,476 |
|
|
|
1,080 |
|
|
|
03/17/05 |
|
Campus Lodge |
|
|
37,313 |
|
|
|
2,746 |
|
|
|
44,415 |
|
|
|
47,161 |
|
|
|
300 |
|
|
|
2,746 |
|
|
|
44,715 |
|
|
|
47,461 |
|
|
|
3,075 |
|
|
|
06/07/05 |
|
College Grove |
|
|
|
|
|
|
1,334 |
|
|
|
19,270 |
|
|
|
20,604 |
|
|
|
1,050 |
|
|
|
1,334 |
|
|
|
20,320 |
|
|
|
21,654 |
|
|
|
1,935 |
|
|
|
04/27/05 |
|
The Reserve on South
College |
|
|
|
|
|
|
1,744 |
|
|
|
10,784 |
|
|
|
12,528 |
|
|
|
1,051 |
|
|
|
1,744 |
|
|
|
11,835 |
|
|
|
13,579 |
|
|
|
902 |
|
|
|
07/06/05 |
|
Statesboro Players
Club |
|
|
|
|
|
|
2,028 |
|
|
|
10,675 |
|
|
|
12,703 |
|
|
|
323 |
|
|
|
2,028 |
|
|
|
10,998 |
|
|
|
13,026 |
|
|
|
234 |
|
|
|
06/15/06 |
|
Troy Place |
|
|
9,440 |
|
|
|
523 |
|
|
|
12,404 |
|
|
|
12,927 |
|
|
|
34 |
|
|
|
523 |
|
|
|
12,438 |
|
|
|
12,961 |
|
|
|
511 |
|
|
|
01/01/06 |
|
Jacksonville Place |
|
|
11,120 |
|
|
|
628 |
|
|
|
14,532 |
|
|
|
15,160 |
|
|
|
12 |
|
|
|
628 |
|
|
|
14,544 |
|
|
|
15,172 |
|
|
|
582 |
|
|
|
01/01/06 |
|
Statesboro Place |
|
|
|
|
|
|
1,180 |
|
|
|
17,288 |
|
|
|
18,468 |
|
|
|
18 |
|
|
|
1,180 |
|
|
|
17,306 |
|
|
|
18,486 |
|
|
|
685 |
|
|
|
01/01/06 |
|
Macon Place |
|
|
7,440 |
|
|
|
340 |
|
|
|
9,856 |
|
|
|
10,196 |
|
|
|
1 |
|
|
|
340 |
|
|
|
9,857 |
|
|
|
10,197 |
|
|
|
405 |
|
|
|
01/01/06 |
|
Clayton Place |
|
|
24,540 |
|
|
|
4,291 |
|
|
|
28,843 |
|
|
|
33,134 |
|
|
|
24 |
|
|
|
4,291 |
|
|
|
28,867 |
|
|
|
33,158 |
|
|
|
1,076 |
|
|
|
01/01/06 |
|
Carrollton Place |
|
|
|
|
|
|
682 |
|
|
|
12,166 |
|
|
|
12,848 |
|
|
|
21 |
|
|
|
682 |
|
|
|
12,187 |
|
|
|
12,869 |
|
|
|
441 |
|
|
|
01/01/06 |
|
F-21
EDUCATION REALTY TRUST, INC. AND
SUBSIDIARIES AND EDR PREDECESSOR
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial Cost |
|
|
|
|
|
|
Total Costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buildings and |
|
|
|
|
|
|
Capitalized |
|
|
|
|
|
|
Buildings and |
|
|
|
|
|
|
Accumulated |
|
|
Date of |
|
Property(3) |
|
Encumbrances |
|
|
Land |
|
|
Improvements |
|
|
Total |
|
|
Subsequently |
|
|
Land |
|
|
Improvements |
|
|
Total |
|
|
Depreciation(4) |
|
|
Acquisition |
|
River Place |
|
|
13,680 |
|
|
|
837 |
|
|
|
17,746 |
|
|
|
18,583 |
|
|
|
21 |
|
|
|
837 |
|
|
|
17,767 |
|
|
|
18,604 |
|
|
|
708 |
|
|
|
01/01/06 |
|
Murray Place |
|
|
6,800 |
|
|
|
550 |
|
|
|
8,864 |
|
|
|
9,414 |
|
|
|
47 |
|
|
|
550 |
|
|
|
8,911 |
|
|
|
9,461 |
|
|
|
411 |
|
|
|
01/01/06 |
|
Western Place |
|
|
|
|
|
|
660 |
|
|
|
16,332 |
|
|
|
16,992 |
|
|
|
24 |
|
|
|
660 |
|
|
|
16,356 |
|
|
|
17,016 |
|
|
|
641 |
|
|
|
01/01/06 |
|
Cape Place |
|
|
8,520 |
|
|
|
445 |
|
|
|
11,207 |
|
|
|
11,652 |
|
|
|
42 |
|
|
|
445 |
|
|
|
11,249 |
|
|
|
11,694 |
|
|
|
460 |
|
|
|
01/01/06 |
|
Clemson Place |
|
|
8,160 |
|
|
|
759 |
|
|
|
10,317 |
|
|
|
11,076 |
|
|
|
15 |
|
|
|
759 |
|
|
|
10,332 |
|
|
|
11,091 |
|
|
|
406 |
|
|
|
01/01/06 |
|
Berkeley Place |
|
|
|
|
|
|
1,048 |
|
|
|
18,497 |
|
|
|
19,545 |
|
|
|
24 |
|
|
|
1,048 |
|
|
|
18,521 |
|
|
|
19,569 |
|
|
|
703 |
|
|
|
01/01/06 |
|
Martin Place |
|
|
8,960 |
|
|
|
471 |
|
|
|
11,784 |
|
|
|
12,255 |
|
|
|
93 |
|
|
|
471 |
|
|
|
11,877 |
|
|
|
12,348 |
|
|
|
481 |
|
|
|
01/01/06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
424,128 |
|
|
$ |
65,260 |
|
|
$ |
788,050 |
|
|
$ |
853,310 |
|
|
$ |
9,938 |
|
|
$ |
65,260 |
|
|
$ |
797,988 |
|
|
$ |
863,248 |
|
|
$ |
58,489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Reserve on Perkins is cross collateralized with The Commons at Knoxville against the $32,000 outstanding loan. |
|
(2) |
|
The Pointe at Penn State is cross collateralized with The Reserve at Star Pass against the $50,740 outstanding loan. |
|
(3) |
|
All properties are garden-style student housing communities except for University Towers which is a traditional
residence hall. |
|
(4) |
|
Assets have useful lives ranging from 3 to 40 years. |
F-22
EDUCATION REALTY TRUST, INC. AND
SUBSIDIARIES AND EDR PREDECESSOR
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
The following table reconciles the historical cost of the Trusts investment in student
housing properties for the years ended December 31, 2006 and 2005 and the EDR Predecessors
investment in student housing properties for the year ended December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Education Realty |
|
|
EDR |
|
|
|
Trust, Inc. |
|
|
Predecessor |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Balance, beginning of period |
|
$ |
643,515 |
|
|
$ |
|
|
|
$ |
100,495 |
|
Student housing acquisitions |
|
|
214,953 |
|
|
|
638,357 |
|
|
|
|
|
Additions |
|
|
4,860 |
|
|
|
5,513 |
|
|
|
517 |
|
Disposals |
|
|
(80 |
) |
|
|
(355 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
863,248 |
|
|
$ |
643,515 |
|
|
$ |
101,012 |
|
|
|
|
|
|
|
|
|
|
|
The following table reconciles the accumulated depreciation of the Trusts investment in
student housing properties for the years ended December 31, 2006 and 2005 and the EDR Predecessors
investment in student housing properties for the year ended December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Education Realty |
|
|
EDR |
|
|
|
Trust, Inc. |
|
|
Predecessor |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Balance, beginning of period |
|
$ |
23,210 |
|
|
$ |
|
|
|
$ |
14,107 |
|
Depreciation |
|
|
35,320 |
|
|
|
23,219 |
|
|
|
3,120 |
|
Disposals |
|
|
(41 |
) |
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
58,489 |
|
|
$ |
23,210 |
|
|
$ |
17,227 |
|
|
|
|
|
|
|
|
|
|
|
7. Investments in unconsolidated entities
The Trusts and EDR Predecessors ownership in SSAD, SSAD LLC, ULAD LLC, Hines/ AOES LLC, CUPA
LLC, Lock Haven LLC, Clarion LLC, Bloomsburg LLC, AP LLC, AODC/CPA, LLC, University
Village-Greensboro LLC, WEDR Riverside Investors V, LLC, WEDR Stinson Investors V, LLC, APF EDR,
LP, and APF EDR Food Services, LP is accounted for under the equity method. The following is a
summary of financial information for the Trusts unconsolidated joint ventures, limited liability
companies, and limited partnerships at December 31, 2006 and 2005 and for the years ended December
31, 2006 and 2005 and for the EDR Predecessor for the year ended December 31, 2004. The Trust had
no unconsolidated joint ventures at December 31, 2004.
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Financial Position: |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
126,626 |
|
|
$ |
80 |
|
Total liabilities |
|
|
92,528 |
|
|
|
340 |
|
|
|
|
|
|
|
|
Equity (deficit) |
|
|
34,098 |
|
|
|
(260 |
) |
|
|
|
|
|
|
|
Trusts and EDR Predecessors investment in unconsolidated entities |
|
$ |
3,134 |
|
|
$ |
(130 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Education Realty |
|
EDR |
|
|
Trust, Inc. |
|
Predecessor |
|
|
2006 |
|
2005 |
|
2004 |
Results of Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
3,909 |
|
$ |
1,770 |
|
$ |
2,272 |
Net income |
|
|
1,013 |
|
|
1,720 |
|
|
2,167 |
Trusts and EDR
Predecessors equity
in earnings of
unconsolidated
entities |
|
$ |
740 |
|
$ |
853 |
|
$ |
1,002 |
F-23
EDUCATION REALTY TRUST, INC. AND
SUBSIDIARIES AND EDR PREDECESSOR
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
These entities provide development consulting services to third party student housing owners
in an agency capacity or own student housing communities which are managed by the Trust.
8. Incentive plans
The Trust adopted the Education Realty Trust, Inc. 2004 Incentive Plan (the Plan) effective
upon the closing of the Offering. The Plan provides for the grant of stock options, restricted
stock units, stock appreciation rights, other stock-based incentive awards, and
profits interest units to employees, directors and other key persons providing services to the
Company. The Trust has reserved 800,000 shares of its common stock for issuance pursuant to the
Plan, subject to adjustments for changes in the Trusts capital structure, including share splits,
dividends and recapitalizations. The number of shares reserved under the Plan is also subject to an
annual adjustment, beginning on January 1, 2006, so that the total number of shares reserved under
the Plan is equal to 4% of the aggregate number of shares outstanding on the last day of the
preceding fiscal year; provided that such annual increase generally may not exceed 80,000 shares.
In 2005, the Trust issued 180,000 shares of restricted stock under the Plan, to certain of its
executive officers, which will vest ratably over five years. The Trust also issued an additional
6,000 shares during 2005 to its independent directors, which were fully vested as of December 31,
2005. During the year ended December 31, 2006, the Trust issued 4,000 shares to its executive
officers and 2,000 shares to its independent directors. The 2006 issuances vested immediately. A
restricted stock award is an award of the Trusts common stock that is subject to restrictions on
transferability and other restrictions as the Trusts compensation committee determines in its sole
discretion on the date of grant. The restrictions may lapse over a specified period of employment
or the satisfaction of pre-established criteria as our compensation committee may determine. Except
to the extent restricted under the award agreement, a participant awarded restricted shares will
have all of the rights of a stockholder as to those shares, including, without limitation, the
right to vote and the right to receive dividends or distributions on the shares. Restricted stock
is generally taxed at the time of vesting. At December 31, 2006 and 2005, unearned compensation
totaled $1,866 and $2,470, respectively and will be recorded as expense over the applicable vesting
period. The value is determined based on the market value of the Trusts common stock on the grant
date. During the years ended December 31, 2006 and 2005, compensation expense of $604 and $500,
respectively, was recognized in the accompanying consolidated statement of operations, related to
the vesting of restricted stock.
Additionally, the Trust granted 245,000 profits interest units in 2005 simultaneous with and
subsequent to the completion of the Offering that vested immediately and resulted in a compensation
charge (reflected in general and administrative expense) of $4,100 in the accompanying consolidated
statements of operations for the year ended December 31, 2005. Profits interest units, or PIUs, are
units in a limited liability company controlled by the Trust that holds a special class of
partnership interests in the Operating Partnership. Each PIU will be deemed equivalent to an award
of one share of the Trusts common stock and will entitle the owner of such unit to receive the
same quarterly per unit distributions as one common unit of the Operating Partnership. This
treatment with respect to quarterly distributions is similar to the expected treatment of
restricted stock awards, which will generally receive full dividends whether vested or not. PIUs
will not initially have full parity with common units of the Operating Partnership with respect to
liquidating distributions. Upon the occurrence of specified capital equalization events, PIUs may,
over time, achieve full or partial parity with common units of the Operating Partnership for all
purposes, and could accrete to an economic value equivalent to the Trusts common stock on a
one-for-one basis. If such parity is reached, vested PIUs may be exchanged into an equal number of
the Trusts shares of common stock at any time. However, there are circumstances under which full
parity would not be reached. Until such parity is reached, the value that may be realized for
vested PIUs will be less than the value of an equal number of shares of the Trusts common stock,
if there is any value at all. The grant or vesting of PIUs is not expected to be a taxable
transaction to recipients. Conversely, we will not receive any tax deduction for compensation
expense from the grant of PIUs. PIUs are treated as minority interests in the accompanying
consolidated financial statements at an amount equal to the holders ownership percentage of the
net equity of the Operating Partnership.
Effective January 1, 2006, the Trust adopted the provisions of SFAS No. 123 (R) using the
modified prospective transition method. This pronouncement requires that compensation costs related
to share-based payments be recognized in financial statements. Prior to January 1, 2006, the Trust
applied the provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. Total compensation cost recognized in general and administrative expense
in the accompanying consolidated statements of operations for the years ended December 31, 2006 and
2005 was approximately $796 and $4,600, respectively. The adoption of SFAS No. 123 (R) had no
impact on the accompanying financial statements other than the reclassification of unearned
compensation of $2,470 to additional paid-in capital in the accompanying statement of changes in
stockholders equity.
F-24
EDUCATION REALTY TRUST, INC. AND
SUBSIDIARIES AND EDR PREDECESSOR
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
A summary of the Trusts stock-based incentive plan activity for the years ended December 31,
2006 and 2005 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted |
|
|
|
|
PIUs |
|
Stock |
|
Total |
Initial issuance |
|
|
220,000 |
|
|
|
174,000 |
|
|
|
394,000 |
|
Granted |
|
|
25,000 |
|
|
|
12,000 |
|
|
|
37,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2005 |
|
|
245,000 |
|
|
|
186,000 |
|
|
|
431,000 |
|
Granted |
|
|
22,500 |
|
|
|
6,000 |
|
|
|
26,000 |
|
Retired |
|
|
(2,500 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006 |
|
|
265,000 |
|
|
|
192,000 |
|
|
|
457,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested at December 31, 2006 |
|
|
265,000 |
|
|
|
80,889 |
|
|
|
345,889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9. Debt
Notes payable and revolving credit facility
At December 31, 2004, the Operating Partnership had a Business Loan Agreement (the
Agreement) with a financial institution with an outstanding balance of $497. All outstanding
amounts under the Agreement were paid off on January 31, 2005 with proceeds of the Offering.
The EDR Predecessor also had a demand note payable to the Promoter that allowed it to borrow
up to $600. The note had an outstanding balance of $485 at December 31, 2004, and was paid in full
on January 31, 2005 as part of the Formation Transactions.
The Operating Partnership obtained a revolving credit facility on January 31, 2005 from
JPMorgan Chase Bank, N.A. and UBS Loan Finance LLC as co-lead managers. Those entities are
affiliates of J.P. Morgan Securities Inc. and UBS Securities LLC, which were underwriters of the
Offering. The revolving credit facility originally had availability in the amount of $75 million
and was subsequently increased to $100 million on April 4, 2005.
On March 30, 2006 the Operating Partnership amended and restated the revolving credit facility
(the Amended Revolver) dated January 31, 2005 and entered into a senior unsecured term loan
facility (the Term Loan) in the amount of $50 million. The Trust serves as the guarantor for any
funds borrowed by the Operating Partnership under the Amended Revolver and the Term Loan.
Additionally, the Amended Revolver is secured by a cross-collateralized, first mortgage lien on all
unmortgaged properties. The Term Loan is not directly secured by a lien but has the benefit of a
negative pledge on the equity interest in the mortgaged properties. The Amended Revolver and the
Term Loan have a term of three years and mature on March 31, 2009, provided that the Operating
Partnership may extend the maturity date for one year subject to certain conditions. At December
31, 2006, there was $22,400 outstanding under the Amended Revolver and $47,000 outstanding under
the Term Loan. The Term Loan requires interest only payments through maturity. The interest rate
per annum applicable to the Amended Revolver is, at the Operating Partnerships option, equal to a
base rate or LIBOR plus an applicable margin based upon our leverage (7.08% at December 31, 2006).
The interest rate per annum applicable to the Term Loan is, at the Operating Partnerships option,
equal to a base rate plus 1.25% or LIBOR plus 2.75% (8.08% at December 31, 2006).
Availability under the Operating Partnerships Amended Revolver is limited to a borrowing
base availability equal to the lesser of (i) 65% of the property asset value (as defined in the
amended credit agreement) of the properties securing the facility and (ii) the loan amount which
would produce a debt service coverage ratio of no less than 1.30, with debt service based on the
greater of two different sets of conditions specified in the amended credit agreement.
The Operating Partnerships Amended Revolver and Term Loan contain customary affirmative and
negative covenants and do contain financial covenants that, among other things, require the Trust
and its subsidiaries to maintain certain minimum ratios of EBITDA (earnings before payment or
charges of interest, taxes, depreciation, amortization or extraordinary items) as compared to
interest expense and total fixed charges. The financial covenants also include consolidated net
worth and leverage ratio tests (see note 17).
The Trust is prohibited from making distributions that exceed $1.20 per share unless prior to
and after giving effect to such action the total leverage ratio is less than or equal to 60%. The
amount of restricted payments permitted may be increased as long as either of the following
conditions is met: (a) after giving effect to the increased restricted payment, the total leverage
ratio shall remain less
F-25
EDUCATION REALTY TRUST, INC. AND
SUBSIDIARIES AND EDR PREDECESSOR
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
than or equal to 60%; or (b) the increased restricted payment, when considered along with all other
restricted payments for the last 3 quarters, does not exceed (i) 100% of funds from operations for
the applicable period through and including December 31, 2006, and (ii) 95% of funds from
operations for the applicable period thereafter.
Mortgage debt
At December 31, 2006 the Trust had mortgage notes payable consisting of the following notes
which were secured by the underlying student housing properties or leaseholds consisting of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at |
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
Contractual Fixed |
|
|
Maturity |
|
|
|
|
Property |
|
2006 |
|
|
Interest Rate |
|
|
Date |
|
|
Amortization |
|
University Towers |
|
$ |
23,563 |
|
|
|
6.77 |
% |
|
|
3/1/2008 |
|
|
30 Year |
The Reserve at Clemson |
|
|
11,651 |
|
|
|
6.63 |
% |
|
|
5/1/2007 |
|
|
30 Year |
The Gables |
|
|
4,433 |
|
|
|
5.50 |
% |
|
|
11/1/2013 |
|
|
30 Year |
NorthPointe |
|
|
18,312 |
|
|
|
6.63 |
% |
|
|
5/1/2007 |
|
|
30 Year |
The Pointe at S. Florida |
|
|
23,779 |
|
|
|
5.48 |
% |
|
|
7/7/2009 |
|
|
30 Year |
The Pointe at Western |
|
|
21,490 |
|
|
|
5.48 |
% |
|
|
7/7/2009 |
|
|
30 Year |
The Lofts |
|
|
26,500 |
|
|
|
3.49 |
% |
|
|
4/5/2007 |
|
|
30 Year |
The Reserve on Perkins/The Commons at Knoxville |
|
|
31,838 |
|
|
|
5.48 |
% |
|
|
7/7/2009 |
|
|
30 Year |
The Pointe at Penn State/The Reserve at Star Pass |
|
|
50,482 |
|
|
|
5.48 |
% |
|
|
7/7/2009 |
|
|
30 Year |
Campus Lodge |
|
|
36,854 |
|
|
|
6.97 |
% |
|
|
5/1/2012 |
|
|
30 Year |
Pointe West |
|
|
10,986 |
|
|
|
4.92 |
% |
|
|
8/1/2014 |
|
|
30 Year |
College Station at W. Lafayette |
|
|
14,725 |
|
|
|
5.48 |
% |
|
|
7/7/2009 |
|
|
30 Year |
The Commons on Kinnear |
|
|
14,625 |
|
|
|
5.48 |
% |
|
|
7/7/2009 |
|
|
30 Year |
The Reserve at Frankford |
|
|
14,426 |
|
|
|
5.48 |
% |
|
|
7/7/2009 |
|
|
30 Year |
The Reserve at Columbia |
|
|
19,301 |
|
|
|
5.48 |
% |
|
|
7/7/2009 |
|
|
30 Year |
Troy Place |
|
|
9,440 |
|
|
|
6.44 |
% |
|
|
12/9/2009 |
|
|
30 Year |
Jacksonville Place |
|
|
11,120 |
|
|
|
6.44 |
% |
|
|
12/9/2009 |
|
|
30 Year |
Macon Place |
|
|
7,440 |
|
|
|
6.44 |
% |
|
|
12/9/2009 |
|
|
30 Year |
Clayton Place |
|
|
24,540 |
|
|
|
6.44 |
% |
|
|
12/9/2009 |
|
|
30 Year |
River Place |
|
|
13,680 |
|
|
|
6.44 |
% |
|
|
12/9/2009 |
|
|
30 Year |
Murray Place |
|
|
6,800 |
|
|
|
6.44 |
% |
|
|
12/9/2009 |
|
|
30 Year |
Cape Place |
|
|
8,520 |
|
|
|
6.44 |
% |
|
|
12/9/2009 |
|
|
30 Year |
Clemson Place |
|
|
8,160 |
|
|
|
6.44 |
% |
|
|
12/9/2009 |
|
|
30 Year |
Martin Place |
|
|
8,960 |
|
|
|
6.44 |
% |
|
|
12/9/2009 |
|
|
30 Year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt /weighted average rate |
|
|
421,625 |
|
|
|
5.85 |
% |
|
|
|
|
|
|
|
|
Unamortized premium |
|
|
2,308 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans net of unamortized premium |
|
|
423,933 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Less current portion of mortgage debt |
|
|
(60,158 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt, net of current portion |
|
$ |
363,775 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-26
EDUCATION REALTY TRUST, INC. AND
SUBSIDIARIES AND EDR PREDECESSOR
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
At December 31, 2005 the Trust had mortgage notes payable consisting of the
following notes which were secured by the underlying student housing properties or leaseholds
consisting of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at |
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
Contractual Fixed |
|
|
Maturity |
|
|
|
|
Property |
|
2005 |
|
|
Interest Rate |
|
|
Date |
|
|
Amortization |
|
University Towers |
|
$ |
23,996 |
|
|
|
6.77 |
% |
|
|
3/1/2008 |
|
|
30 Year |
The Reserve at Clemson |
|
|
11,810 |
|
|
|
6.63 |
% |
|
|
5/1/2007 |
|
|
30 Year |
The Gables |
|
|
4,499 |
|
|
|
5.50 |
% |
|
|
11/1/2013 |
|
|
30 Year |
NorthPointe |
|
|
18,562 |
|
|
|
6.63 |
% |
|
|
5/1/2007 |
|
|
30 Year |
The Pointe at S. Florida |
|
|
23,900 |
|
|
|
5.48 |
% |
|
|
7/7/2009 |
|
|
30 Year |
The Pointe at Western |
|
|
21,600 |
|
|
|
5.48 |
% |
|
|
7/7/2009 |
|
|
30 Year |
The Lofts |
|
|
26,500 |
|
|
|
3.49 |
% |
|
|
4/5/2007 |
|
|
30 Year |
The Reserve on Perkins/The Commons at Knoxville |
|
|
32,000 |
|
|
|
5.48 |
% |
|
|
7/7/2009 |
|
|
30 Year |
The Pointe at Penn State/The Reserve at Star Pass |
|
|
50,740 |
|
|
|
5.48 |
% |
|
|
7/7/2009 |
|
|
30 Year |
Campus Lodge |
|
|
37,313 |
|
|
|
6.97 |
% |
|
|
5/1/2012 |
|
|
30 Year |
Pointe West |
|
|
11,148 |
|
|
|
4.92 |
% |
|
|
8/1/2014 |
|
|
30 Year |
College Station at W. Lafayette |
|
|
14,800 |
|
|
|
5.48 |
% |
|
|
7/7/2009 |
|
|
30 Year |
The Commons on Kinnear |
|
|
14,700 |
|
|
|
5.48 |
% |
|
|
7/7/2009 |
|
|
30 Year |
The Reserve at Frankford |
|
|
14,500 |
|
|
|
5.48 |
% |
|
|
7/7/2009 |
|
|
30 Year |
The Reserve at Columbia |
|
|
19,400 |
|
|
|
5.48 |
% |
|
|
7/7/2009 |
|
|
30 Year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt /weighted average rate |
|
|
325,468 |
|
|
|
5.67 |
% |
|
|
|
|
|
|
|
|
Unamortized premium |
|
|
2,867 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans net of unamortized premium |
|
|
328,335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Less current portion of mortgage debt |
|
|
(2,932 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt, net of current portion |
|
$ |
325,403 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scheduled maturities of all outstanding debt, including non-mortgage debt not shown
above, as of December 31, 2006 are as follows:
|
|
|
|
|
Year |
|
|
|
|
|
2007 |
|
$ |
60,158 |
|
2008 |
|
|
26,481 |
|
2009 |
|
|
354,449 |
|
2010 |
|
|
888 |
|
2011 |
|
|
947 |
|
Thereafter |
|
|
48,102 |
|
|
|
|
|
Total |
|
$ |
491,025 |
|
Debt premium |
|
|
2,308 |
|
|
|
|
|
Outstanding as of December 31, 2006, net of debt premium |
|
$ |
493,333 |
|
|
|
|
|
F-27
EDUCATION REALTY TRUST, INC. AND
SUBSIDIARIES AND EDR PREDECESSOR
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
The following table reconciles the carrying amount of mortgage debt for the years ended
December 31, 2006 and 2005 for the Trust and for the year ended December 31, 2004 for the EDR
Predecessor (the Trust had no outstanding mortgage debt during 2004):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Education Realty |
|
|
EDR |
|
|
|
Trust, Inc. |
|
|
Predecessor |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Balance, beginning of period |
|
$ |
328,335 |
|
|
$ |
|
|
|
$ |
82,204 |
|
Assumption of mortgage debt at fair value |
|
|
98,660 |
|
|
|
444,964 |
|
|
|
|
|
Additions |
|
|
|
|
|
|
6 |
|
|
|
|
|
Repayments of principal |
|
|
(2,503 |
) |
|
|
(116,271 |
) |
|
|
(1,093 |
) |
Amortization of premium |
|
|
(559 |
) |
|
|
(364 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
423,933 |
|
|
$ |
328,335 |
|
|
$ |
81,111 |
|
|
|
|
|
|
|
|
|
|
|
10. Segments
The Trust and EDR Predecessor define business segments by their distinct customer base and
service provided. The Trust and EDR Predecessor have identified three reportable segments: student
housing leasing, student housing development-consulting services, and student housing management
services. Management evaluates each segments performance based on net operating income, which is
defined as income before depreciation, amortization, interest expense, and equity in earnings of
unconsolidated entities. 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. The following table
represents the Trusts and EDR Predecessors segment information for the years ended December 31,
2006, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Education Realty |
|
|
EDR |
|
|
|
Trust, Inc. |
|
|
Predecessor |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Student Housing Leasing |
|
|
|
|
|
|
|
|
|
|
|
|
Rental revenues |
|
$ |
87,438 |
|
|
$ |
75,877 |
|
|
$ |
16,353 |
|
Food service revenue |
|
|
3,634 |
|
|
|
3,491 |
|
|
|
4,680 |
|
Other leasing revenue |
|
|
14,012 |
|
|
|
|
|
|
|
|
|