UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q/A

Amendment No. 1

(Mark One)

x

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

 

 

 

 

 

For the quarterly period ended September 30, 2005

 

 

 

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                        to                       

Commission file number 001-32290

GMH COMMUNITIES TRUST

(Exact Name of Registrant as Specified in Its Charter)

Maryland

 

201181390

(State or other Jurisdiction of
Incorporation or Organization)

 

(IRS Employer Identification No.)

 

 

 

10 Campus Boulevard, Newtown Square, PA

 

19073

(Address of Principal Executive Offices)

 

(Zip Code)

 

Registrant’s Telephone Number, Including Area Code (610) 355-8000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x   No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. (See definition of accelerated filer and large accelerated filed in Rule 12b-2 of the Exchange Act).

Large Accelerated Filer o Accelerated Filer x Non-Accelerated Filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o   No  x

On October 31, 2005, 39,699,843 of the registrant’s common shares of beneficial interest, $0.001 par value, were outstanding. This amount includes 33,854 restricted common shares that are considered outstanding for voting purposes and are eligible to receive dividend distributions payable to common shareholders, but are not considered outstanding under generally accepted accounting principles for purposes of the financial statements included in this report.

 




GMH COMMUNITIES TRUST

EXPLANATORY NOTE

GMH Communities Trust (“we” or the “Company”) is amending its quarterly report on Form 10-Q for the period ended September 30, 2005 to restate the Company’s consolidated interim financial statements for the three and nine month periods ended September 30, 2005 and the related disclosures. Please refer to Note 2 to our consolidated interim financial statements included in this amendment on Form 10-Q/A for a further discussion of the restatement.

As the Company previously disclosed in Part II, Item 9A of its Annual Report on Form 10-K for the year ended December 31, 2005, in the first quarter of 2006 the Audit Committee of the Company’s Board of Trustees conducted an investigation of certain accounting and financial reporting matters. The investigation identified material weaknesses in our internal control over financial reporting and in our disclosure controls and procedures as of December 31, 2005. In connection with the investigation, we reviewed our previously reported financial statements. Through this review, we identified adjustments that were material to the results we previously reported for the quarterly periods ended March 31, 2005, June 30, 2005 and September 30, 2005. More specifically, the Company determined that the restatements with respect to its consolidated financial statements for these periods were necessary due to the discovery of errors in revenue recognition, depreciation and operating expenses related to certain transactions reported by the Company and to reclassify equity in earnings of unconsolidated entities. Accordingly, we have restated our financial statements for the quarterly periods ended March 31, 2005 and June 30, 2005 in connection with the filing of our quarterly reports for the comparable periods during 2006, and we are now restating our financial statements for the quarterly period ended September 30, 2005 in this amended report. A summary of our restated operating results for each of the quarterly periods during 2005 is set forth in Note 15 of the notes to consolidated and combined financial statements contained in the section entitled “Financial Statements and Supplementary Data” in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2005.

Except as discussed above, we have not modified or updated disclosures presented in the original quarterly report on Form 10-Q, except as required to reflect the effects of the restatement in this Form 10-Q/A. Accordingly, this Form 10-Q/A does not reflect events occurring after the filing of our original Form 10-Q or modify or update those disclosures affected by subsequent events. Information not affected by the restatement is unchanged and reflects the disclosures made at the time of the original filing of the Form 10-Q on November 14, 2005. This Form 10-Q/A should be read in conjunction with our filings made with the Securities and Exchange Commission subsequent to the filing of the original Form 10-Q, including any amendments to those filings. The following items in this Form 10-Q/A have been amended as a result of the restatement:

·      Part I—Item 1—Financial Statements

·      Part I—Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations

·      Part I—Item 4—Controls and Procedures

Please refer to Note 2 to the accompanying consolidated interim financial statements for additional information on the restatement.

2




GMH COMMUNITIES TRUST

INDEX TO FORM 10-Q

Cautionary Note Regarding Forward-Looking Statements

 

 

 

Part I — Financial Information

 

Item 1. Financial Statements

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Item 3. Quantitative and Qualitative Disclosure About Market Risk

 

Item 4. Controls and Procedures

 

 

 

Part II — Other Information

 

Item 1. Legal Proceedings

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

Item 3. Defaults Upon Senior Securities

 

Item 4. Submission of Matters to a Vote of Security Holders

 

Item 5. Other Information

 

Item 6. Exhibits

 

 

 

Signatures

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Our disclosure and analysis in this report contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements provide our current expectations or forecasts of future events and are not statements of historical fact. These forward-looking statements include information about possible or assumed future events, including, among other things, operating or financial performance, strategic plans and objectives, or regulatory or competitive environments. Statements regarding the following subjects are forward-looking by their nature:

·         our ability to successfully implement our business strategy, including our ability to acquire and manage student housing properties and to secure and operate military housing privatization projects;

·         our projected operating results and financial condition;

·         completion of any of our targeted acquisitions or development projects within our expected timeframe or at all;

·         our ability to obtain future financing arrangements on terms acceptable to us, or at all;

·         estimates relating to, and our ability to pay, future dividends;

·         our ability to qualify as a real estate investment trust (“REIT”) for federal income tax purposes;

·         our understanding of our competition, market opportunities and trends;

·         projected timing and amounts of capital expenditures; and

·         the impact of technology on our properties, operations and business.

The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. Factors that could cause actual results to differ materially from our management’s current expectations include, but are not limited to:

·         the factors referenced in the 424(b) prospectus relating to our most recent public offering of common shares, as filed with the Securities and Exchange Commission (“SEC”) on September 28, 2005, including those sections of the prospectus titled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Our Business and Properties;”

3




 

·         changes in our business strategy, including acquisition and development activities;

·         availability, terms and deployment of capital, including equity and debt financing;

·         availability of qualified personnel;

·         unanticipated costs associated with the acquisition and integration of our student housing property acquisitions and development projects, and military housing privatization projects;

·         the effects of military base realignment and closures on installations covered by our military housing privatization projects;

·         high leverage on the entities that own the military housing privatization projects;

·         reductions in government military spending;

·         changes in student population enrollment at colleges and universities or adverse trends in the off-campus student housing market;

·         changes in the student and military housing industry, interest rates or the general economy;

·         changes in local real estate conditions (including changes in rental rates and the number of competing properties) and the degree and nature of our competition;

·         our failure to lease unoccupied space in accordance with management’s projections;

·         potential liability under environmental or other laws; and

·         the existence of complex regulations relating to our status as a REIT and the adverse consequences of our failure to qualify as a REIT.

When we use the words “believe,” “expect,” “may,” “potential,” “anticipate,” “estimate,” “plan,” “will,” “could,” “intend” or similar expressions, we intend to identify forward-looking statements. You should not place undue reliance on these forward-looking statements. We are not obligated to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except to the extent otherwise required by law.

4




 

PART I — FINANCIAL INFORMATION

Item 1.    Financial Statements

GMH COMMUNITIES TRUST

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value and number of shares)

 

 

September 30,
2005
Unaudited

 

December 31,
2004

 

 

 

(as restated)

 

 

 

ASSETS

 

 

 

 

 

Real estate investments:

 

 

 

 

 

Student housing properties

 

$

1,086,902

 

$

638,635

 

Accumulated depreciation

 

(21,372

)

(3,905

)

 

 

1,065,530

 

634,730

 

Corporate assets:

 

 

 

 

 

Corporate assets

 

7,686

 

11,625

 

Accumulated depreciation

 

(443

)

(241

)

 

 

7,243

 

11,384

 

Cash and cash equivalents

 

33,872

 

60,926

 

Restricted cash

 

12,575

 

2,313

 

Accounts and other receivables, net:

 

 

 

 

 

Related party

 

23,080

 

9,309

 

Third party

 

3,137

 

2,257

 

Investments in military housing projects

 

37,220

 

39,482

 

Deferred contract costs

 

338

 

126

 

Deferred financing costs, net

 

4,064

 

2,820

 

Lease intangibles, net

 

3,244

 

4,994

 

Deposits

 

672

 

1,848

 

Other assets

 

5,834

 

2,872

 

Total assets

 

$

1,196,809

 

$

773,061

 

LIABILITIES AND BENEFICIARIES’ EQUITY

 

 

 

 

 

Notes payable

 

$

629,171

 

$

370,007

 

Line of credit

 

137,000

 

 

Accounts payable:

 

 

 

 

 

Related party

 

57

 

277

 

Third party

 

589

 

1,160

 

Accrued expenses

 

27,497

 

9,308

 

Dividends and distributions payable

 

14,107

 

9,583

 

Other liabilities

 

18,805

 

4,907

 

Total liabilities

 

827,226

 

395,242

 

Minority interest

 

192,282

 

182,118

 

Beneficiaries’ equity:

 

 

 

 

 

Common shares of beneficial interest, $0.001 par value; 500,000,000 shares authorized, 30,350,989 issued and outstanding at September 30, 2005 and December 31, 2004

 

30

 

30

 

Preferred shares—100,000,000 shares authorized, no shares issued or outstanding

 

 

 

Additional paid-in capital

 

200,367

 

200,276

 

Cumulative earnings

 

2,490

 

251

 

Cumulative dividends

 

(25,586

)

(4,856

)

Total beneficiaries’ equity

 

177,301

 

195,701

 

Total liabilities and beneficiaries’ equity

 

$

1,196,809

 

$

773,061

 

 

See accompanying notes to condensed consolidated and combined financial statements.

5




 

GMH COMMUNITIES TRUST AND THE GMH PREDECESSOR ENTITIES

CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS

(Unaudited and in thousands, except share and per share information)

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2005

 

2004

 

2005

 

2004

 

 

 

(Company)

 

(Predecessor)

 

(Company)

 

(Predecessor)

 

 

 

(as restated)

 

 

 

(as restated)

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

Rent and other property income

 

$

35,409

 

$

6,753

 

$

91,013

 

$

7,023

 

Expense reimbursements:

 

 

 

 

 

 

 

 

 

Related party

 

20,096

 

8,702

 

40,552

 

16,669

 

Third party

 

1,299

 

1,906

 

3,876

 

5,475

 

Management fees:

 

 

 

 

 

 

 

 

 

Related party

 

1,755

 

967

 

5,085

 

2,683

 

Third party

 

611

 

752

 

2,156

 

3,430

 

Other fee income-related party

 

5,895

 

2,115

 

12,849

 

4,174

 

Other income

 

81

 

141

 

248

 

493

 

Total revenue

 

65,146

 

21,336

 

155,779

 

39,947

 

Operating Expenses:

 

 

 

 

 

 

 

 

 

Property operating expenses

 

18,906

 

5,808

 

41,104

 

9,851

 

Reimbursed expenses

 

21,395

 

10,608

 

44,428

 

22,144

 

Real estate taxes

 

3,184

 

490

 

8,339

 

490

 

Administrative expenses

 

2,992

 

2,172

 

8,768

 

4,488

 

Profits interest expense

 

 

33,180

 

 

33,180

 

Depreciation and amortization

 

8,550

 

1,770

 

24,958

 

2,188

 

Interest

 

8,989

 

1,722

 

21,247

 

1,880

 

Total operating expenses

 

64,016

 

55,750

 

148,844

 

74,221

 

Income (loss) before equity in earnings of unconsolidated entities, income taxes and minority interest

 

1,130

 

(34,414

)

6,935

 

(34,274

)

Equity in earnings of unconsolidated entities

 

1,058

 

 

1,999

 

 

Income (loss) before income taxes and minority interest

 

2,188

 

(34,414

)

8,934

 

(34,274

)

Income taxes

 

2,254

 

 

4,512

 

 

(Loss) income before minority interest

 

(66

)

 

4,422

 

 

Minority interest

 

(34

)

 

2,183

 

 

Net (loss) income

 

$

(32

)

$

(34,414

)

$

2,239

 

$

(34,274

)

 

 

 

 

 

 

 

 

 

 

Earnings per common share—basic

 

$

(0.00

)

 

 

$

0.07

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share—diluted

 

$

(0.00

)

 

 

$

0.07

 

 

 

Weighted-average shares outstanding during the period:

 

 

 

 

 

 

 

 

 

Basic

 

30,350,989

 

 

 

30,350,989

 

 

 

Diluted

 

64,413,934

 

 

 

64,085,950

 

 

 

Common share dividend declared per share

 

$

0.2275

 

 

 

$

0.6825

 

 

 

 

See accompanying notes to condensed consolidated and combined financial statements.

6




 

GMH COMMUNITIES TRUST AND THE GMH PREDECESSOR ENTITIES

CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS

(Unaudited and in thousands)

 

 

Nine Months Ended September 30,

 

 

 

2005

 

2004

 

 

 

(Company)

 

(Predecessor)

 

 

 

(as restated)

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net income (loss)

 

$

2,239

 

$

(34,274

)

Adjustments to reconcile net income (loss) to net cash from operating activities:

 

 

 

 

 

Depreciation

 

17,878

 

2,188

 

Amortization:

 

 

 

 

 

Lease intangibles

 

7,080

 

 

Notes payable fair value adjustment

 

(1,637

)

(266

)

Deferred loan costs

 

905

 

36

 

Restricted shares

 

78

 

 

Allowance for doubtful accounts

 

935

 

 

Equity in earnings of unconsolidated entities, in excess of distributions received

 

(716

)

(70

)

Minority interest

 

2,183

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

Restricted cash

 

(10,262

)

(1,966

)

Accounts and other receivables

 

(16,602

)

(346

)

Deferred contract costs

 

(344

)

(4,954

)

Due from related parties

 

 

(4,778

)

Other assets

 

(1,782

)

(4,972

)

Accounts payable

 

(792

)

 

Accrued expenses

 

17,858

 

14,171

 

Accrued profits interest

 

 

33,180

 

Other liabilities

 

13,898

 

1,030

 

Net cash from operating activities

 

30,919

 

(1,021

)

Cash flows from investing activities:

 

 

 

 

 

Property acquisitions

 

(329,160

)

(120,152

)

Capitalized expenditures

 

(9,898

)

(75

)

Distributions received in excess of earnings of unconsolidated entities

 

4,062

 

(3

)

Purchase of management contracts

 

 

(1,186

)

Net cash from investing activities

 

(334,996

)

(121,416

)

Cash flows from financing activities:

 

 

 

 

 

Owner distributions

 

(36,866

)

(31,652

)

Owner contributions

 

 

90,688

 

Proceeds from line of credit

 

244,000

 

 

Repayment of line of credit

 

(107,000

)

 

Proceeds from notes payable

 

202,228

 

69,536

 

Repayment of notes payable

 

(23,190

)

(808

)

Short-term borrowings from owner

 

 

3,697

 

Payment of financing costs

 

(2,149

)

(663

)

Costs related to initial public offering

 

 

(5,443

)

Net cash from financing activities

 

277,023

 

125,355

 

Net (decrease) increase in cash and cash equivalents

 

(27,054

)

2,918

 

Cash and cash equivalents, beginning of period

 

60,926

 

515

 

Cash and cash equivalents, end of period

 

$

33,872

 

$

3,433

 

 

 

 

 

 

 

Supplemental information:

 

 

 

 

 

Real estate acquired by assuming debt

 

$

83,341

 

$

128,622

 

Issuance of units of limited partnership interest for purchase of student housing properties

 

$

28,528

 

$

 

Property distributed at net book value

 

$

3,854

 

$

381

 

Debt distributed at net book value

 

$

4,208

 

$

 

Cash paid for interest, net of amounts capitalized of $90

 

$

20,846

 

$

1,880

 

Cash paid for taxes

 

$

2,272

 

$

 

Furniture and computers contributed at net book value

 

$

 

$

463

 

 

See accompanying notes to condensed consolidated and combined financial statements.

7




GMH COMMUNITIES TRUST AND THE GMH PREDECESSOR ENTITIES

Notes to Condensed Consolidated and Combined Financial Statements

September 30, 2005

(Unaudited)

1. Organization and Basis of Presentation

Organization

Management of both GMH Communities Trust (the “Trust,” and collectively with its subsidiaries, “we” or the “Company) and The GMH Predecessor Entities (defined below) has prepared these condensed consolidated and combined financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or combined pursuant to such rules and regulations, although we believe that the disclosures are adequate to make the information presented not misleading. The financial statements as of and for the three and nine month periods ended September 30, 2005 have been restated in conformance with the restated results reported as of such date and for such periods in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 (see Note 2). The condensed consolidated and combined financial statements should be read in conjunction with the audited financial statements and the notes thereto of the Trust and The GMH Predecessor Entities included in the Trust’s Annual Report on Form 10-K for the year ended December 31, 2004, as filed with the SEC on March 31, 2005. In management’s opinion, all adjustments, consisting solely of normal recurring adjustments, necessary to present fairly the consolidated financial position of the Trust and the consolidated and combined results of operations and cash flows of the Trust and The GMH Predecessor Entities are included. The results of operations for such interim periods are not necessarily indicative of the results for the full year.

The Trust elected to qualify as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended (the “Code”) commencing with its taxable year ended December 31, 2004. The Trust was formed as a Maryland real estate investment trust in May 2004 and prior to completion of our initial public offering, had no operations. We completed our initial public offering on November 2, 2004, pursuant to which we sold an aggregate of 30,350,989 common shares of beneficial interest at an offering price of $12.00 per share, and raised an aggregate of $331.7 million in net proceeds, after deducting the underwriters’ discount and other offering-related expenses. We contributed the net proceeds from the offering to our operating partnership, GMH Communities, LP, a Delaware limited partnership (the “Operating Partnership”), in exchange for units of partnership interest. As of September 30, 2005, the Operating Partnership had 61,978,306 units of partnership interest outstanding, of which the Trust owned 29,769,820 units of limited partnership interest; and through a wholly-owned subsidiary, GMH Communities GP Trust, the Trust owned 581,169 units of general partnership interest, which represents 100% of the general partnership interest in the Operating Partnership. As of September 30, 2005, there were 31,627,317 units of limited partnership interest outstanding that were not owned by the Company.

In September 2005, we commenced a public offering of common shares. The offering was completed on October 4, 2005 with the sale of 9,315,000 common shares of beneficial interest, including 1,215,000 shares issued upon full exercise of the underwriters’ over-allotment option, at an offering price of $14.25 per share. The Company raised an aggregate of $124.6 million in net proceeds from the offering after deducting the underwriters’ discounts, payment of financial advisory fees and other offering-related expenses.  The net proceeds of this offering, which the Company contributed to the Operating Partnership in exchange for units of partnership interest, were used by the Operating Partnership to repay outstanding indebtedness under our credit facility.

We, through the Operating Partnership and its subsidiaries, are a self-advised, self-managed, specialty housing company that focuses on providing housing to college and university students residing off-campus and to members of the U.S. military and their families located on or near military bases throughout the United States. Through the Operating Partnership, we own and operate our student housing properties and the interests in joint ventures that own military housing privatization projects (“military housing projects”).

Formation Transactions

The Operating Partnership commenced operations on July 27, 2004, when Gary M. Holloway, Sr., our chairman, president, and chief executive officer, Vornado Realty Trust (“Vornado”), and certain entities affiliated with Mr. Holloway and Vornado, entered into an agreement to contribute various assets to the Operating Partnership. Under the terms of the contribution agreement, Mr. Holloway contributed equity interests relating to student housing properties and military housing projects owned by him and by entities affiliated with him, including College Park Management, Inc., GMH Military Housing, LLC, other entities owning a 10% interest in four student housing properties, and other related assets in exchange for 66,000 Class A partnership interests in the Operating Partnership. Vornado agreed to contribute up to $159.0 million to the

8




Operating Partnership in exchange for 34,000 Class B partnership interests. In connection with its investment in the Operating Partnership, Vornado also purchased a warrant for $1.0 million to acquire, at its option, a number of units of limited partnership interest in the Operating Partnership, common shares in the Trust, or a combination of both, representing a 38.264% economic interest in the Operating Partnership or the Trust, as the case may be, immediately prior to completion of our initial public offering. The proceeds from sale of the warrant are included in minority interest on the accompanying consolidated balance sheets. In addition, in connection with the closing of our initial public offering on November 2, 2004, Mr. Holloway further contributed his interests in 353 Associates, L.P. and Corporate Flight Services, LLC, a student housing property and other related assets to the Operating Partnership. We collectively refer to College Park Management, Inc., GMH Military Housing, LLC, 353 Associates, L.P. and Corporate Flight Services, LLC, together with the Operating Partnership, as The GMH Predecessor Entities.  The exchange of contributed interests has been accounted for as a reorganization of entities under common control. Accordingly, the contributed assets and assumed liabilities have been recorded at the historical cost of The GMH Predecessor Entities.

The following are descriptions of each of The GMH Predecessor Entities, other than the Operating Partnership:

·                            353 Associates, L.P. owns and operates a 44,721 square foot commercial office building located in Newtown Square, Pennsylvania. In connection with the completion of our initial public offering on November 2, 2004, Mr. Holloway and an entity wholly-owned by him contributed 100% of the equity interests in 353 Associates, L.P. to the Operating Partnership. The building is currently used as the Company’s corporate headquarters. 353 Associates, L.P. historically leased the building to certain of The GMH Predecessor Entities and other entities owned or controlled by Mr. Holloway. We continue to lease a portion of the building to certain other entities owned or controlled by Mr. Holloway that were not contributed to the Company in connection with our initial public offering.

·                            College Park Management, Inc. performed property management and asset management services for residential apartment properties leased to students at colleges and universities located throughout the United States. In connection with the formation of the Operating Partnership on July 27, 2004, Mr. Holloway consented to the merger of College Park Management, Inc. with and into College Park Management, LLC, a wholly-owned subsidiary of the Operating Partnership. College Park Management TRS, Inc., a subsidiary of College Park Management, LLC, has made an election to be treated for federal income tax purposes as a “taxable REIT subsidiary,” as defined in the Code.

·                            GMH Military Housing, LLC, through its wholly-owned subsidiaries, engages in the development, construction, renovation and management of family military housing units located on or near military bases throughout the United States. In connection with the formation of the Operating Partnership on July 27, 2004, Mr. Holloway contributed 100% of the outstanding equity interests in GMH Military Housing, LLC and each of its wholly-owned subsidiaries to the Operating Partnership. GMH Military Housing, LLC has made an election to be treated as a corporation for federal income tax purposes as a “taxable REIT subsidiary,” as defined in the Code.

·                            Corporate Flight Services, LLC (“Corporate Flight LLC”) owned and operated a corporate aircraft that had been leased to certain of The GMH Predecessor Entities and other entities owned or controlled by Mr. Holloway that were not contributed to the Company in connection with our initial public offering. In connection with the completion of our initial public offering on November 2, 2004, Mr. Holloway contributed 100% of the outstanding equity interests in Corporate Flight LLC to the Operating Partnership. In February 2005, the Company transferred its interest in Corporate Flight LLC, including the corporate aircraft and associated debt initially contributed to the Operating Partnership at the time of the initial public offering, back to Mr. Holloway.  See Note 9.

Redemption of Operating Partnership Interests

Prior to our initial public offering, Vornado and Mr. Holloway were the sole equity holders of the Operating Partnership and each held, through affiliated entities, general partnership interests in the Operating Partnership. Concurrent with the closing of the Company’s initial public offering on November 2, 2004, we became the sole general partner of the Operating Partnership. In accordance with the terms of the limited partnership agreement of the Operating Partnership and concurrent with the completion of our initial public offering on November 2, 2004, we paid approximately $77.3 million to Vornado relating to the redemption of all of Vornado’s Class B partnership interests in the Operating Partnership based on Vornado’s $113.8 million contribution to the Operating Partnership as of the date of the offering, plus a preferential return in the amount of $13.5 million, and after giving effect to the surrender by Vornado of $50.0 million in value of its pre-offering partnership interest in the Operating Partnership, as payment for the portion of its warrant required to be exercised upon completion of our initial public offering under the terms of the warrant. Upon closing of our initial public offering, Vornado exercised the warrant to purchase 6,666,667 units of limited partnership interest in our Operating Partnership at a price of $7.50 per unit, which represented a 20.972% economic interest in the Operating Partnership immediately prior to our initial public offering. As of September 30, 2005, the remaining portion of the warrant was exercisable for up to 5,857,164 units of limited

9




partnership interest of the Operating Partnership or common shares, at an exercise price of $8.54 per unit or common share, at any time during the 18 months following the closing of our initial public offering.

In addition, in connection with the redemption of Vornado’s interests in the Operating Partnership and amendment to the partnership agreement for the Operating Partnership on November 2, 2004, Mr. Holloway’s Class A limited partnership interest and managing general partnership interest in the Operating Partnership were exchanged for 19,624,294 limited partnership units and Mr. Holloway contributed additional assets to the Operating Partnership, including interests in entities that own our corporate headquarters and aircraft and interests in an additional student housing property.

In recognition of past service, certain employees of The GMH Predecessor Entities and other entities affiliated with Gary M. Holloway were awarded profits interests by Gary M. Holloway. These employees were eligible to participate in the net proceeds or value received by Gary M. Holloway upon the sale or disposition of certain student housing properties and the military housing business in excess of Mr. Holloway’s equity investments in such assets.  These employees rendered all services and satisfied all conditions necessary to earn the right to benefit from these profits interests as of the date that such profits interests were awarded.  In accordance with Financial Accounting Standards Statement No.5, Accounting for Contingencies, compensation expense relating to the award of these profits interests was required to be recognized by The GMH Predecessor Entities when the sale or disposition of the assets resulting in proceeds received by Gary M. Holloway in an amount in excess of his equity investment in such assets became probable.  This amount became probable during the third quarter of 2004 when, in connection with the contribution of the ownership interests in GMH Military Housing LLC, College Park Management, Inc. and other assets by Mr. Holloway to our operating partnership in anticipation of the initial public offering of the Company, the remaining profits interests awards were amended to fix the value of such awards at $33.2 million to be paid to these employees unconditionally.  Accordingly, this amount was recognized in the third quarter of 2004 and Mr. Holloway’s obligations regarding the profits interests were satisfied upon the transfer of $33.2 million of units of limited partnership in our operating partnership to these employees on November 2, 2004, the closing date of our initial public offering.

Basis of Presentation

The financial statements of GMH Communities Trust included herein present the consolidated financial position of the Company and its subsidiaries as of September 30, 2005 and December 31, 2004, the consolidated results of their operations for the three and nine months ended September 30, 2005 and their consolidated cash flows for the nine months ended September 30, 2005. All intercompany items and transactions have been eliminated.

The financial statements of The GMH Predecessor Entities included herein present the combined results of their operations for the three and nine months ended September 30, 2004 and their combined cash flows for the nine months ended September 30, 2005. All intercompany items and transactions have been eliminated.

2. Restatement of Condensed Consolidated Financial Statements

In the first quarter of 2006, the Audit Committee of the Company’s Board of Trustees commenced an investigation of certain accounting and financial reporting matters. The investigation identified material weaknesses in the Company’s internal control over financial reporting and in its disclosure controls and procedures as of December 31, 2005. In connection with the investigation, the Company reviewed its previously reported financial statements. Through this review, the Company identified adjustments that were material to the results the Company previously reported for the quarterly periods ended March 31, 2005, June 30, 2005 and September 30, 2005. More specifically, the Company determined that the restatements with respect to its financial statements for these periods were necessary due to the discovery of errors in revenue recognition, depreciation and operating expenses related to certain transactions reported by the Company and to reclassify equity in earnings of unconsolidated entities. Accordingly, the Company has restated its financial statements for the quarterly periods ended March 31, 2005 and June 30, 2005 in connection with the filing of its quarterly reports for the comparable periods during 2006, and is restating its financial statements for the quarterly period ended September 30, 2005 in this amended report.

The following schedules reconcile the amounts originally reported in the Company’s condensed consolidated balance sheet as of September 30, 2005, and the condensed consolidated statements of operations for the three and nine month periods ended September 30, 2005 to the corresponding amounts in each of these statements (in thousands).

10




 

 

 

September 30,

 

Total

 

September 30,

 

 

 

2005

 

Adjustments

 

2005

 

 

 

(as reported)

 

 

 

(as restated)

 

 

 

 

 

 

 

 

 

Balance Sheet:

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Real estate investments:

 

 

 

 

 

 

 

Student housing properties

 

$

1,080,304

 

$

6,598

(a)

$

1,086,902

 

Accumulated depreciation

 

(19,109

)

(2,263

)(b)

(21,372

)

 

 

1,061,195

 

4,335

 

1,065,530

 

Corporate assets:

 

 

 

 

 

 

 

Corporate assets

 

7,686

 

 

7,686

 

Accumulated depreciation

 

(443

)

 

(443

)

 

 

7,243

 

 

7,243

 

Cash and cash equivalents

 

33,248

 

624

(a)

33,872

 

Restricted cash

 

12,575

 

 

12,575

 

Accounts and other receivables, net:

 

 

 

 

 

 

 

Related party

 

21,912

 

1,168

(c)

23,080

 

Third party

 

5,365

 

(2,228

)(d)

3,137

 

Investments in military housing projects

 

37,220

 

 

37,220

 

Deferred contract costs

 

470

 

(132

)(e)

338

 

Deferred financing costs, net

 

4,064

 

 

 

4,064

 

Lease intangibles, net

 

3,244

 

 

3,244

 

Deposits

 

672

 

 

672

 

Other assets

 

6,080

 

(246

)(f)

5,834

 

Total assets

 

$

1,193,288

 

$

3,521

 

$

1,196,809

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Notes payable

 

$

629,171

 

$

 

$

629,171

 

Line of credit

 

137,000

 

 

137,000

 

Accounts payable:

 

 

 

 

 

 

 

Related party

 

57

 

 

57

 

Third party

 

688

 

(99

)(g)

589

 

Accrued expenses

 

24,233

 

3,264

(g)

27,497

 

Dividends and distributions payable

 

14,107

 

 

14,107

 

Other liabilities

 

10,728

 

8,077

(h)

18,805

 

Total liabilities

 

815,984

 

11,242

 

827,226

 

Minority interest

 

197,120

 

(4,838

)

192,282

 

 

 

 

 

 

 

 

 

Beneficiaries’ Equity

 

 

 

 

 

 

 

Common shares

 

30

 

 

30

 

Additional paid-in-capital

 

200,367

 

 

200,367

 

Cumulative earnings

 

5,373

 

(2,883

)

2,490

 

Cumulative dividends

 

(25,586

)

 

(25,586

)

Total beneficiaries’ equity

 

180,184

 

(2,883

)

177,301

 

 

 

 

 

 

 

 

 

Total liabilities and beneficiaries’ equity

 

$

1,193,288

 

$

3,521

 

$

1,196,809

 

 

11




 

 

 

Three Months Ended
September 30, 2005

 

Adjustments

 

Three Months Ended
September 30, 2005

 

 

 

(as reported)

 

 

 

(as restated)

 

 

 

 

 

 

 

 

 

Statement of Operations:

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

Rent and other property income

 

$

35,429

 

$

(20

)

$

35,409

 

Expense reimbursements:

 

 

 

 

 

 

 

Related party

 

20,744

 

(648

)(i)

20,096

 

Third party

 

1,299

 

 

1,299

 

Management fees:

 

 

 

 

 

 

 

Related party

 

1,838

 

(83

)(j)

1,755

 

Third party

 

1,364

 

(753

)(k)

611

 

Other fee income – related party

 

7,181

 

(1,286

)(l)

5,895

 

Other income

 

81

 

 

81

 

Total revenue

 

67,936

 

(2,790

)

65,146

 

 

 

 

 

 

 

 

 

Operating Expenses:

 

 

 

 

 

 

 

Property operating expenses

 

17,306

 

1,600

(m)

18,906

 

Reimbursed expenses

 

22,043

 

(648

)(i)

21,395

 

Real estate taxes

 

3,428

 

(244

)(n)

3,184

 

Administrative expenses

 

2,983

 

9

(n)

2,992

 

Depreciation and amortization

 

7,719

 

831

(b)

8,550

 

Interest

 

8,981

 

8

 

8,989

 

Total operating expenses

 

62,460

 

1,556

 

64,016

 

 

 

 

 

 

 

 

 

Income before equity in earnings of unconsolidated entities, income taxes and minority interest

 

5,476

 

(4,346

)

1,130

 

Equity in earnings of unconsolidated entities

 

 

1,058

(o)

1,058

 

Income before income taxes and minority interest

 

5,476

 

(3,288

)

2,188

 

Income taxes

 

976

 

1,278

 

2,254

 

Income (loss) before minority interest

 

4,500

 

(4,566

)

(66

)

Minority interest

 

2,758

 

(2,792

)

(34

)

Net income (loss)

 

$

1,742

 

$

(1,774

)

$

(32

)

 

 

 

Nine Months Ended

 

 

 

Nine Months Ended

 

 

 

September 30, 2005

 

Adjustments

 

September 30, 2005

 

 

 

(as reported)

 

 

 

(as restated)

 

 

 

 

 

 

 

 

 

Statement of Operations:

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

Rent and other property income

 

$

91,033

 

$

(20

)

$

91,013

 

Expense reimbursements:

 

 

 

 

 

 

 

Related party

 

42,475

 

(1,923

)(i)

40,552

 

Third party

 

3,876

 

 

3,876

 

Management fees:

 

 

 

 

 

 

 

Related party

 

5,350

 

(265

)(j)

5,085

 

Third party

 

3,015

 

(859

)(k)

2,156

 

Other fee income – related party

 

14,762

 

(1,913

)(l)

12,849

 

Other income

 

248

 

 

248

 

Total revenue

 

160,759

 

(4,980

)

155,779

 

 

 

 

 

 

 

 

 

Operating Expenses:

 

 

 

 

 

 

 

Property operating expenses

 

39,900

 

1,204

(m)

41,104

 

Reimbursed expenses

 

46,351

 

(1,923

)(i)

44,428

 

Real estate taxes

 

8,003

 

366

(n)

8,339

 

Administrative expenses

 

8,657

 

111

(n)

8,768

 

Depreciation and amortization

 

22,563

 

2,395

(b)

24,958

 

Interest

 

21,228

 

19

 

21,247

 

Total operating expenses

 

146,702

 

2,142

 

148,844

 

 

 

 

 

 

 

 

 

Income before equity in earnings of unconsolidated entities, income taxes and minority interest

 

14,057

 

(7,122

)

6,935

 

Equity in earnings of unconsolidated entities

 

 

1,999

(o)

1,999

 

Income before income taxes and minority interest

 

14.057

 

(5,123

)

8,934

 

Income taxes

 

1,914

 

2,598

 

4,512

 

Income before minority interest

 

12,143

 

(7,721

)

4,422

 

Minority interest

 

7,021

 

(4,838

)

2,183

 

Net income

 

$

5,122

 

$

(2,883

)

$

2,239

 

 

12




Net cash provided by operating activities increased by $7.6 million and net cash used in investing activities decreased by $7.0 million for the nine months ended September 30, 2005 as a result of the restatement. There was no impact on net cash provided by financing activities for the nine months ended September 30, 2005.


(a)          Adjustments include the consolidation of a joint venture being accounted for as a financing transaction, net of adjustments for previously capitalized costs that should have been expensed.  The investment in the joint venture was accounted for under the equity method prior to the restatement.

(b)         Adjustments include (i) the Company’s finalization of the purchase price allocation of student housing properties resulting in an adjustment to amounts allocated to land and building.  Previously, the Company recorded 20% of the purchase price for acquired properties as land.  Management has now reflected the allocation for properties acquired to correspond to appraised values.  The change in estimate is being applied retroactively through prior periods.  With respect to properties acquired for which appraisals had not been obtained prior to implementation of this change in estimate, the Company used appraisals for properties with similar characteristics.  The change in estimate has resulted in an increase in the purchase price allocation to buildings and a decrease in the purchase price allocation to land for the properties acquired through 2005, and an increase in the depreciation expense on buildings; and (ii) the expensing of previously capitalized costs.

(c)          Adjustments include the recognition of additional reimburseable expenses and pre-construction and development fees relating to our military housing segment.

(d)         Adjustments include (i) the reversal of management fees previously recognized during the third quarter of 2005 as the triggering event for recognition occurred in the fourth quarter of 2005;  (ii) reversal of tenant expense reimbursements that were not billable per the terms of the tenant contracts; and (iii) elimination of our investment in the joint venture that is now consolidated and accounted for under the financing method which had previously been accounted for under the equity method of accounting.

(e)          Adjustments include the recognition of additional amortization expense associated with one of our military housing projects.

(f)            Adjustments include the elimination of our investment in the joint venture that is now consolidated and accounted for under the financing method which had previously been accounted for under the equity method of accounting.

(g)         Adjustments include corrections to our accounts payable and accrued expenses balances relating to various income statement adjustments.

(h)         Adjustments include the consolidation of a joint venture which we are accounting for as a financing transaction, which had been previously accounted for under the equity method of accounting.

(i)             Adjustments include reversals relating to the overbooking of certain reimbursable expenses.

(j)             Adjustments include a reclassification of fees earned on one of our military housing projects from management fees – related party to other fee income – related party.

(k)          Adjustments include the reversal of management fees previously recognized during the third quarter of 2005 as the triggering event for recognition occurred in the fourth quarter of 2005.

13




(l)             Adjustments include (i) the reclassification of $1,059,000 and $1,999,000 for the three and nine months ended September 30, 2005, respectively, of preferred returns from military housing project joint ventures; (ii) the reclassification of $83,000 and $265,000 for the three and nine months ended September 30, 2005, respectively, of management fees – related party to other fee income – related party; and (iii) the elimination of development fees earned from a joint venture that is now consolidated and accounted for under the financing method which had previously been accounted for under the equity method of accounting.

(m)       Adjustments include (i) costs that were initially capitalized in purchase accounting with respect to certain student housing properties acquired by the Company during 2005 that should have been expensed; and (ii) previously capitalized costs that should have been expensed.

(n)         Adjustments include corrections to the reporting of expenses in the appropriate periods.

(o)         Adjustments include the reclassification of $1,059,000 and $1,999,000 for the three and nine months ended September 30, 2005, respectively, of preferred returns from military housing project joint ventures.

3. Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect various amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Real Estate Investments and Corporate Assets

We carry real estate investments and corporate assets at cost, net of accumulated depreciation. Cost of acquired assets includes the purchase price and related closing costs. We allocate the cost of real estate investments to tangible and identified intangible assets based on relative fair values in accordance with Statement of Financial Accounting Standards No. 141 (“SFAS 141”), Business Combinations. We estimate fair value based on information obtained from a number of sources, including our due diligence, marketing and leasing activities, independent appraisals that may be obtained in connection with the acquisition or financing of the respective property, and other market data.

The value of in-place leases is based on the difference between (i) the property valued with existing in-place leases and (ii) the property valued as if vacant. As lease terms typically are 12 months or less, rates on in-place leases generally approximate market rental rates. Factors that we consider in the valuation of in-place leases include an estimate of incremental carrying costs during the expected lease-up periods considering current market conditions and nature of the tenancy. We amortize the value of in-place leases to expense over the remaining term of the respective leases. Accumulated amortization related to intangible lease costs was $9.2 million at September 30, 2005 and $2.3 million at December 31, 2004.

Purchase prices of student housing properties to be acquired are not expected to be allocated to tenant relationships considering the terms of the leases and the expected levels of renewals.

We expense routine repair and maintenance expenditures that do not improve the value of an asset or extend its useful life, including turnover costs such as cleaning and interior painting. We capitalize expenditures that improve the value and extend the useful life of an asset. We compute depreciation using the straight-line method over the estimated useful lives of the assets, which is 40 years for buildings including student housing properties and the commercial office building, and three to five years for residential furniture and appliances. During the third quarter of each fiscal year, the Company typically will experience an increase in property operating expenses over other quarters as a result of repair and maintenance expenditures relating to turnover of units at student housing properties. The Company’s student housing lease terms generally commence in August or September to coincide with the beginning of the academic year. Accordingly, the Company expects to incur a majority of its repair and maintenance costs in the third quarter to prepare for new residents.

In accordance with Statement of Financial Accounting Standards No. 144 (“SFAS 144”), Accounting for the Impairment or Disposal of Long-Lived Assets, long-lived assets, such as real estate investments and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. These circumstances may include, but are not limited to, operational performance, market conditions and competition from other off-campus properties and on-campus housing, legal and environmental concerns, and results of appraisals or other information obtained as part of a financing or disposition strategy. We review recoverability of assets to be held and used through a comparison of the carrying amount of an asset to estimated undiscounted future cash

14




flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying value of the asset exceeds the fair value of the asset determined using customary valuation techniques, such as the present value of expected future cash flows. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and no longer would be depreciated.

Cash Equivalents

All highly-liquid investments with an original maturity of three months or less are considered to be cash equivalents.

Restricted Cash

Restricted cash consists of security deposits and cash held as escrows for real estate taxes and capital expenditures as required by the terms of various loan agreements.

Allowance for Doubtful Accounts

We estimate the collectibility of receivables generated by rental and other income as a result of the operation of our student housing properties. If we believe that the collectibility of certain amounts is questionable, we record a specific reserve for these amounts to reduce the amount outstanding to an amount we believe will be collectible and a reserve for all other accounts based on a range of percentages applied to aging categories, which is based on historical collection and write-off experience.

We also evaluate the collectibility of fee income and expense reimbursements generated by the management of student housing properties owned by others and through the provision of development, construction, renovation and management services to our military housing projects based upon the individual facts and circumstances, and record a reserve for specific amounts, if necessary.

Accounts receivable are stated net of an allowance for doubtful accounts of $409,000 at September 30, 2005 and $159,000 at December 31, 2004.

Deferred Financing Costs

Costs incurred in connection with obtaining financing are capitalized and amortized on a straight-line basis over the term of the related loan, which is not materially different than the effective interest method. Amortization of deferred financing costs is included in interest expense. Accumulated amortization of deferred financing costs was $915,000 at September 30, 2005 and $359,000 at December 31, 2004.

Deferred Contract Costs

Deferred contract costs represent costs attributable to a specific military housing project incurred in connection with seeking Congressional approval of a Community Development and Management Plan, or CDMP, subsequent to the project being awarded by the Department of Defense, or DoD. In addition, deferred contract costs also include transition and closing costs incurred that are expected to be reimbursed by the military housing project. Such amounts are evaluated as to the probability of recovery and costs that are not considered probable of recovery are written off. Revenue is recognized and the related costs are expensed at the time that the reimbursement for preparing the CDMP is approved by Congress or at closing of the military housing project.

Deposits

Deposits primarily consist of amounts paid to third parties in connection with planned student housing acquisitions and amounts paid to lenders that provide the related financing or the refinancing of existing loans.  At September 30, 2005, deposits for planned acquisitions and financings totaled less than $0.1 million and other deposits not related to acquisitions or financings totaled $0.6 million. At December 31, 2004, deposits for planned acquisitions totaled $0.8 million and deposits related to financings totaled $1.0 million.

Advertising Costs

Advertising costs are expensed as incurred. Advertising expense for the three and nine-month periods ended September 30, 2005 and 2004 was $513,000, $1,394,000, $21,000, and $41,000, respectively.

15




Revenue Recognition

Student Housing Segment

Rental revenue is recognized when due over the lease terms, which are generally 12 months or less.

Standard management fees are based on a percentage of monthly cash receipts or gross monthly rental and other revenues generated by the properties managed for others. We recognize these fees when the cash is received by the property or the revenue is earned by the managed property, depending upon whether the management agreement relating to a student housing property bases the earned management fee on cash versus accrual basis revenue recognition.

Incentive management fees are earned as a result of the achievement of certain operating performance criteria over a specified period of time by certain managed properties, including targeted annual debt service coverage ratios. Revenue is recognized at the amount that would be due under the contract if the contract was terminated on the balance sheet date.

Expense reimbursements are comprised primarily of salary and related costs of our employees working at certain properties we manage for others, the cost of which is reimbursed by the owners of the related properties. We accrue expense reimbursements as the related expenses are incurred.

Military Housing Segment

Standard management fees are based on a percentage of revenue generated by the military housing projects from the basic allowance for housing provided by the government to service members, referred to as BAH, and are recognized when the revenue is earned by the military housing projects. Incentive management fees are based upon the satisfaction of certain criteria including, among other things, satisfying designated benchmarks relating to emergency work order response, occupancy rates, home turnover and resident satisfaction surveys. Incentive management fees are recognized when the various criteria stipulated in the management contract have been satisfied.

Standard development and construction/renovation fees are based on a percentage of development and construction/renovation costs incurred by the military housing projects including hard and soft costs and financing costs, and are recognized on a monthly basis as the costs are incurred by the military housing projects. Hard costs consist of costs relating to goods such as building components, furniture and equipment and other tangible assets; and soft costs consist of costs incurred relating to intangible services such as consulting, architectural and design services. Incentive development and construction/renovation fees are based upon the satisfaction of certain criteria including, among other things, completing a number of housing units according to schedule, achieving specific safety records and implementing small business or minority subcontracting plans. Incentive development and construction/renovation fees are recognized when the various criteria stipulated in the contract have been satisfied.

Revenues on fixed-price renovation contracts are recorded on the percentage-of-completion method. When the percentage-of-completion method is used, contract revenue is recognized in the ratio that costs incurred to date bear to estimated costs at completion. Adjustments to cost estimates are made in the period in which the facts requiring such revisions become known. When the revised estimates indicate a loss, such loss is currently provided for in its entirety.

Business development fees are earned from companies with which we have relationships in recognition of business development efforts and expenses incurred by us in connection with pursuing military housing projects. The fees consist of (i) a base fee, which is a fee paid to the Company in consideration of the Company’s ongoing pursuit of additional projects, and is paid regardless of whether a project is awarded, and (ii) an incentive fee, which is paid over the course of an awarded project based on a percentage of certain development costs incurred by the project.  The base fees are recognized on a straight-line basis over the term of the related business development agreement.  The incentive fees are recognized as the related costs are incurred by the respective military housing projects.

Preferred returns are earned on our investments in military housing projects.  The preferred returns are based on a fixed percentage of our investment in military housing projects and are recognized at the rates specified in the agreements, subject to projected availability of funds in the underlying project.  Accrued preferred returns are periodically evaluated for collectibility.

Reimbursed Expenses

Expense reimbursements include payroll and related expenses, incurred for certain employees engaged in the operation of certain student housing properties and military housing projects under management, and other operating expenses that are reimbursed to the Company by the owner of the related student housing property or military housing project.

16




Minority Interest

Minority interest as initially recorded at the date of our initial public offering represented the net equity of the Operating Partnership, including the proceeds received from the sale of the warrant to Vornado, multiplied by the ownership percentage of holders of limited partnership units in the Operating Partnership other than the Company. The Operating Partnership is obligated to redeem, at the request of a holder, each unit of limited partnership interest for cash or common shares on a one-for-one basis, subject to adjustments for share splits, dividends, recapitalizations or similar events. If the minority interest unit holders’ share of a current year loss would cause the minority interest balance to be less than zero, the minority interest balance will be reported as zero unless there is an obligation of the minority interest holders to fund those losses. Any losses in excess of the minority interest will be charged against equity. If future earnings materialize, equity will be credited for all earnings up to the amount of those losses previously absorbed. Distributions to limited partnership unit holders other than the Company are recorded as a reduction to minority interest.

In March 2005, June 2005 and September 2005, the Company declared quarterly distributions of $0.2275 per outstanding unit of limited partnership interest. The March 2005 distribution to the holders of limited partnership units in the Operating Partnership of $6.7 million was recorded as a reduction to minority interest and was paid in April 2005. The June 2005 distribution to the holders of limited partnership units in the Operating Partnership of $6.8 million was recorded as a reduction to minority interest and was paid in July 2005. The September 2005 distribution to the holders of limited partnership units in the Operating Partnership of $7.2 million was recorded as a reduction to minority interest on the September 30, 2005 balance sheet and was paid in October 2005.

Investments in Military Housing Projects and Student Housing Joint Ventures

We evaluate each of our investments in military housing projects to determine if the underlying entity is a variable interest entity (“VIE”) as defined under FASB Financial Interpretation No. 46 (as revised) (“FIN 46”). If an entity is deemed to be a VIE pursuant to FIN 46, the entity that absorbs a majority of the expected losses of the VIE is deemed to be the primary beneficiary and must consolidate the VIE. If the entity is not a VIE, it is evaluated for consolidation based on controlling voting interests. If we have the majority voting interest with the ability to control operations and where no approval, veto or other important rights have been granted to other holders, the entity would be consolidated. We are not the primary beneficiary of any VIEs, nor do we have controlling voting interests in any of our military housing projects. We record investments in military housing projects initially at our cost and subsequently adjust them to reflect our preferred return, and other distributions.

The Company entered into a joint venture in August 2005 to develop and construct two student housing properties.  The Company is accounting for the transaction as a financing arrangement because the Company originally owned the land and contributed it to the joint venture and has the option to purchase the joint venture partner’s interest in the joint venture within one year of completion of the properties, and because the Company has provided certain guarantees for the completion of the construction and for a portion of the construction loans. Therefore, the Company accounts for its investment in the joint venture by including its assets and liabilities in the Company’s consolidated financial statements. Prior to the restatement, the investment in this joint venture was accounted for using the equity method.

Income Taxes

GMH Communities Trust elected to be taxed as a REIT under the Code when it filed its tax return for the year ended December 31, 2004 in September 2005 pursuant to an extension granted in March 2005. To continue to qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement that we currently distribute at least 90% of our adjusted taxable income to our shareholders. We believe we are organized and operate in a manner that allows us to qualify for taxation as a REIT under the Code, and it is our intention to adhere to these requirements and maintain the Company’s REIT status in the future. Accordingly, no provision has been made for federal income taxes in the accompanying consolidated financial statements, other than with respect to the Company’s taxable REIT subsidiaries.

In conformity with the Code and applicable state and local tax statutes, taxable income or loss of The GMH Predecessor Entities was required to be reported in the tax returns of Gary M. Holloway, Sr. and Vornado, as such entities were treated as pass-through entities for tax purposes. Accordingly, no income tax provision has been reflected in the accompanying combined statements of operations of The GMH Predecessor Entities.

Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board issued SFAS No. 123R, as revised, “Share-Based Payment.” SFAS No. 123R replaces SFAS No. 123, “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” The scope of SFAS No. 123R includes a wide range of share-based

17




compensation arrangements including stock options, restricted share plans, performance-based awards, stock appreciation rights, and employee stock purchase plans. SFAS No. 123R requires companies to recognize in their financial statements the compensation expense relating to share-based payment transactions. Prior to the effective date of this revision, SFAS No. 123 permitted entities the option of applying the guidance in APB Opinion No. 25, as long as the footnotes to the financial statements disclosed what net income (loss) would have been had the company used the preferable fair-value-based method. The Company will be required to implement SFAS No. 123R for the year beginning January 1, 2006. The Company does not expect the adoption of SFAS No. 123R to have a material impact on its financial statements.

In November 2004, the Company established an equity incentive plan (the “Plan”) that provides for the issuance of options, restricted shares, share appreciation rights, performance units and other equity based awards.  For the three and nine months ended September 30, 2005, the Company issued 8,126 and 33,854 restricted common shares under the Plan to non-employee members of the Company’s Board of Trustees. The restricted common shares vest over a three-year period from the grant date. The restricted common shares are entitled to the same dividend and voting rights during the vesting period as the issued and outstanding common shares. The fair value of the awards was calculated based on the closing market price of the Company’s common shares on the grant date and is expensed on a straight-line basis over the vesting period.  The Company recognized non-cash stock-based compensation expense related to the restricted common shares of $32,000 and $78,000 for the three and nine months ended September 30, 2005, respectively.

Reclassifications

Certain amounts in the prior period financial statements have been reclassified to be consistent with the current period presentation.

4. Real Estate Investments and Acquisitions

As of September 30, 2005, the Company owned 52 student housing properties located near 39 colleges and universities in 24 states. These properties contain an aggregate of 9,657 units and 31,371 beds. The Company’s investment in student housing properties at September 30, 2005 and December 31, 2004 was as follows (in thousands):

 

September 30,
2005

 

December 31,
2004

 

 

 

(restated)

 

 

 

Land

 

$

214,890

 

$

124,656

 

Building and improvements

 

843,644

 

501,680

 

Residential furniture and appliances

 

22,747

 

12,299

 

Construction in progress

 

5,621

 

 

 

 

$

1,086,902

 

$

638,635

 

 

During the three months ended September 30, 2005, the Company acquired six student housing properties located near six colleges and universities in six states with an aggregate of 1,213 units and 3,237 beds for an aggregate acquisition cost of approximately $123.4 million.

During the three months ended June 30, 2005, the Company acquired eight student housing properties located near six colleges and universities in five states with an aggregate of 1,354 units and 4,300 beds for an aggregate acquisition cost of approximately $147.4 million.  In connection with the acquisition of two of these properties, the Company issued a total of 1,940,282 units of limited partnership interest in the Operating Partnership to the sellers with an aggregate fair value of $26.9 million.  The fair value of the limited partnership units was based on the closing price of the Company’s common shares on the acquisition date.  The fair value of the units of limited partnership interest was recorded as an increase to minority interest.

During the three months ended March 31, 2005, the Company acquired eight student housing properties located near six colleges and universities in six states with an aggregate of 1,607 units and 4,795 beds for an aggregate acquisition cost of approximately $172.8 million. Gary M. Holloway, Sr., four other employees of the Company, including two executive officers of the Company, and an employee of an entity owned by Mr. Holloway, held an ownership interest in two of these properties that were acquired for a total purchase price of $38.2 million.  The Company paid $36.6 million of cash to investors in the selling entity not affiliated with the Company and issued a total of 141,549 units of limited partnership interest in the Operating Partnership to Mr. Holloway and these individuals with an aggregate fair value of $1.6 million in connection with the purchase of the two properties.  The fair value of the limited partnership units was based on the closing price of the Company’s common shares on the acquisition date. The fair value of the units of limited partnership interest was recorded as an increase to minority interest.

In August 2005, the Company entered into a joint venture with an institutional investor to develop and construct two student

18




housing properties.  The joint venture plans to develop two 144 unit/576 bed purpose built student housing communities located in Orono, Maine and Bowling Green, Ohio.  Construction is expected to be completed by August 2006, concurrent with the beginning of the 2006-2007 academic year.  Under the terms of the joint venture agreement, the Company contributed the two undeveloped land parcels on which the properties will be built in exchange for a 10% equity interest in the joint venture.  In addition, the Company will manage the development and construction of the joint venture properties and receive a fee for these services.  The joint venture has obtained one construction loan and expects to obtain a second construction loan in the fourth quarter that will permit draws of up to $32.0 million to fund the construction of the properties.  In addition to customary default provisions, the construction loans shall be deemed to be in default if there is a material default, after any applicable notice and cure period, under the Company’s $150.0 million senior unsecured revolving credit facility (see Note 8).  The Company has guaranteed the repayment of up to $8.0 million of the construction loans.  The guarantee is reduced to $4.8 million in the event that no event of default, as defined in the loan agreements, has occurred and certain other conditions are satisfied.  The Company is accounting for the transaction as a financing arrangement because the Company originally owned the land and contributed it to the joint venture and the Company has the option to purchase the joint venture partner’s interest in the joint venture within one year of completion of the properties and because the Company has provided certain guarantees for the completion of construction and for a portion of the construction loans.  Therefore, the Company accounts for its investment in the joint venture by including the joint venture’s assets and liabilities in the Company’s consolidated financial statements.  Interest cost of $90,000 has been capitalized during the three and nine months ending September 30, 2005.  The Company has agreed to fund the cost of construction overruns for these properties, and has entered into guaranteed maximum price contracts with the general contractor for the properties unless such overruns result from change orders from the original construction plans.

5. Investments in Military Housing Projects

We record our investments in joint ventures under our military housing projects in accordance with the equity method of accounting.  Our investment is initially recorded at cost, and then subsequently adjusted at each balance sheet to an amount equal to what we would receive from the joint venture in the event that it were liquidated at net book value as of that date,  assuming that the proceeds from the liquidation are distributed in accordance with the terms of, and priority of returns set forth under, the joint venture’s operating agreement. The terms of the various agreements generally provide for the payment to the Company of an agreed upon preferred return on the Company’s invested capital and a return of the Company’s invested capital prior to the distribution of any amounts to the government entity that is a member of the joint venture.

In November 2003, GMH Military Housing, LLC and FW Military Housing LLC formed a joint venture known as GMH Military Housing-Fort Carson LLC, which acquired the ownership interests of an unrelated bankrupt entity that was a member of Fort Carson Family Housing LLC, the entity that owns the Fort Carson military housing project. GMH Military Housing, LLC contributed approximately $2.4 million to GMH Military Housing-Fort Carson LLC in return for its 10% interest in the joint venture. The 10% ownership interest in the joint venture was accounted for using the equity method of accounting from the acquisition date in November 2003 through November 1, 2004. In connection with our initial public offering on November 2, 2004, the remaining 90% interest in the joint venture was acquired in exchange for the issuance to FW Military Housing LLC of 2,583,334 units of limited partnership interest in the Operating Partnership having a value of $31.0 million. This acquisition was recorded at the fair value of the consideration paid. During the three and nine months ended September 30, 2005, the Company received $0.1 million and $4.0 million, respectively, of equity distributions from Fort Carson Family Housing LLC.  The carrying value of this investment was $25.7 million at September 30, 2005 and $29.7 million at December 31, 2004. The Company earns a preferred return on its investment in Fort Carson Family Housing LLC, which is paid on a monthly basis.

In November 2004, the Company and Benham Military Communities, LLC formed a joint venture known as GMH/Benham Military Communities LLC for the purpose of investing in the Navy Northeast Region military housing project. The Company contributed $9.5 million to GMH/Benham Military Communities LLC in return for a 90% interest and Benham Military Communities, LLC invested $1.1 million for the remaining 10% interest. The Company consolidates GMH/Benham Military Communities LLC as it has a 90% economic interest and controls a majority of the voting interests. Benham Military Communities, LLC’s 10% interest is accounted for as minority interest and is included in accrued expenses on the consolidated balance sheet at September 30, 2005 and December 31, 2004.  In November 2004, GMH/Benham Military Communities, LLC invested $10.6 million in Northeast Housing LLC, which owns and operates the Navy Northeast Region military housing project. GMH/Benham Military Communities LLC earns a preferred return on its investment in Northeast Housing LLC. The preferred return will accrue, but not be paid, until the end of the initial development period for the project in October 2010. The carrying value of this investment was $11.5 million at September 30, 2005 and $10.8 million at December 31, 2004.

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6. Income Taxes

Current income tax expense of the Company’s taxable REIT subsidiaries was $4.5 million, which includes $3.8 million of federal taxes and $0.7 million of state taxes, for the nine months ended September 30, 2005.  The federal statutory tax rate of the taxable REIT subsidiaries for the nine months ended September 30, 2005 was 34%.  The effective tax rate of the taxable REIT subsidiaries for the nine months ended September 30, 2005 was 32.5%. The Company’s effective tax rate is lower than the federal statutory rate as a result of the permanent depreciation and amortization differences between income subject to income tax for book and tax purposes.

7. Notes Payable

During the three months ended September 30, 2005, a fixed-rate note payable in the amount of $6.6 million was assumed relating to the acquisition of a student housing property and fixed-rate notes payable totaling $72.6 million were obtained in connection with the acquisition of five other student housing properties and the refinancing of a previously acquired property. These notes require monthly payments of principal and/or interest, bear interest at fixed rates ranging from 4.76% to 5.30%, and mature at various dates through 2024. In conjunction with the purchase accounting for these properties, the net carrying value of the assumed note payable was increased by $0.2 million to record it at its estimated fair value. The fair value of the assumed note was calculated as the difference between the present value of the note using a current estimated market rate of interest and the outstanding principal amount. This amount is being amortized as an adjustment to interest expense over the term of the related debt.

During the three months ended June 30, 2005, fixed-rate notes payable totaling $28.8 million were assumed relating to the acquisition of two student housing properties and fixed-rate notes payable totaling $58.8 million were obtained in connection with the acquisition of five student housing properties. These notes require monthly payments of principal and/or interest, bear interest at fixed rates ranging from 4.50% to 5.46%, and mature at various dates through 2015. In conjunction with the purchase accounting for these properties, the net carrying value of the assumed notes payable was increased by $0.4 million to record them at their estimated fair value. The fair value of the assumed notes was calculated as the difference between the present value of the notes using a current estimated market rate of interest and the outstanding principal amount. This amount is being amortized as an adjustment to interest expense over the term of the related debt.

During the three months ended June 30, 2005, a variable-rate note payable in the amount of $6.8 million was obtained in connection with the acquisition of a student housing property. The note requires payments of interest only at LIBOR plus 2.05% (LIBOR on this loan was 3.56% at September 30, 2005) and matures in 2015.

On June 27, 2005,  we placed a total of $23.6 million of fixed-rate mortgage indebtedness on two student housing properties located in State College, Pennsylvania that serve Pennsylvania State University.  The mortgage debt has a fixed interest rate of 4.70% and a term of five years.  The properties were acquired by the Company in March 2005 for an aggregate purchase price of $38.2 million. Proceeds of this mortgage debt financing were used to repay outstanding borrowings under the Company’s line of credit that were originally drawn to acquire these properties.

During the three months ended March 31, 2005, fixed-rate notes payable totaling $48.0 million were assumed relating to the acquisition of four student housing properties and a fixed-rate note payable in the amount of $31.4 million was obtained in connection with the acquisition of another student housing property. These notes require monthly payments of principal and/or interest, bear interest at fixed rates ranging from 4.92% to 7.09%, and mature at various dates through 2014. In conjunction with the purchase accounting for these properties, the net carrying value of the assumed notes payable was increased by $2.1 million to record them at their estimated fair value. The fair value of the assumed notes was calculated as the difference between the present value of the notes using a current estimated market rate of interest and the outstanding principal amount. This amount is being amortized as an adjustment to interest expense over the term of the related debt.

During the three months ended March 31, 2005, a variable-rate note payable in the amount of $9.2 million was obtained in connection with the acquisition of a student housing property. The note requires payments of interest only at LIBOR plus 1.90% (LIBOR on this loan was 3.57% at September 30, 2005) and matures in 2007.

In February 2005, the Company completed the refinancing of variable-rate notes secured by seven of its student housing properties. In connection with the refinancing, the Company repaid approximately $20.4 million of the total $113.7 million of indebtedness secured by these seven properties, and replaced the remaining $93.3 million of variable-rate debt with an equal amount of fixed-rate debt with interest rates ranging from 4.24% to 4.7% and maturity terms ranging from five to seven years.

Prior to its contribution to the Company in connection with the completion of our initial public offering, Corporate Flight LLC financed the acquisition and refurbishments of the corporate aircraft with two notes payable. One loan required monthly payments of principal and interest at the commercial paper rate plus 1.8% through January 2011. The second loan required monthly payments of principal and interest at 9.5% through August 2006. On February 28, 2005, the Company sold and transferred its ownership of 100% of the outstanding membership interests in Corporate Flight LLC back to

20




Gary M. Holloway, Sr. Corporate Flight LLC’s primary asset was the corporate aircraft which had a net book value of $3.8 million at February 28, 2005 and was secured by the two notes payable, which had an aggregate outstanding balance of $4.2 million at February 28, 2005.  Corporate Flight LLC’s net deficit of $171,000, net of $180,000 tax expense related to the taxable gain upon the transfer, was recorded as a capital contribution and allocated to additional paid-in capital and minority interest on the consolidated balance sheet.

At September 30, 2005, notes payable totaling $623.5 million were secured by 45 student housing properties with a cost and net book value of $907.5 million and $891.5 million, respectively. At December 31, 2004, notes payable totaling $359.8 million were secured by 23 student housing properties with a cost and net book value of $451.9 million and $449.1 million, respectively.

At September 30, 2005, the Company had a note payable in the amount of $5.7 million secured by the corporate headquarters, requiring monthly payments of principal and interest at LIBOR plus 2.25% (LIBOR on this loan was 3.56% at September 30, 2005).  In July 2005, the maturity date of the loan was extended from August 2005 to November 2005. The remaining principal balance was repaid in full in October 2005.

The aggregate annual principal payments as of September 30, 2005 due on our notes payable and line of credit for the remainder of 2005, the five succeeding years and thereafter are as follows (in thousands):

2005

 

$

7,043

 

2006

 

5,188

 

2007

 

224,960

 

2008

 

4,708

 

2009

 

34,076

 

2010

 

65,954

 

Thereafter

 

424,242

 

 

 

$

766,171

 

 

8. Line of Credit

In November 2004, the Company entered into a $150 million three-year unsecured revolving credit facility, subject to increase to $250 million (the “Credit Facility”), with a consortium of banks. The Credit Facility provides for the issuance of up to $20 million of letters of credit, which is included in the $150 million available under the Credit Facility. The Company’s availability under the Credit Facility as of September 30, 2005 was limited to a borrowing base amount equal to the sum of 60% of the value of an unencumbered asset pool (which as of September 30, 2005 consisted of seven student housing properties, and in no event could contain fewer than five student housing properties) as of the end of the previous quarter and 50% of the annualized value of the Company’s cash flow from the management, development and construction/renovation fees received in connection with military housing projects and from the management of student housing properties in the previous quarter, provided that the total cash flow attributable to annualized management fees did not exceed 50% of the borrowing base.

The Company may elect to have amounts outstanding under the Credit Facility bear interest at a Eurodollar rate based on LIBOR or the prime rate, plus an applicable rate, ranging from 1.625% to 2.375% for Eurodollar rate loans or 0.75% to 1.75% for prime rate loans. The applicable rate is determined by the leverage ratio of total liabilities to total asset value of the Company, as defined in the Credit Facility. In addition, the Company pays fees for unused availability on the Credit Facility.

The Credit Facility contains affirmative and negative covenants and also contains financial covenants that, among other things, as of September 30, 2005, (i) required the Company to maintain a total leverage ratio equal to or less than 65% through December 31, 2005, at the end of the first quarter of 2006, the maximum leverage ratio will decrease to 60%, (ii) limited the aggregate amount of outstanding variable-rate indebtedness to 30% of total indebtedness commencing February 8, 2005, (iii) limited the payment of dividends by the Company to its shareholders to 110% of funds from operations as defined in the Credit Facility, (iv) limited the amount of recourse debt, exclusive of amounts outstanding under the Credit Facility, to $25 million, and in no event greater than $150 million in total, and (v) required the Company to maintain a consolidated tangible net worth, as defined in the Credit Facility, of at least $275 million plus an amount equal to 75% of the net proceeds from any equity issuances subsequent to the closing date of the Credit Facility in November 2004. The financial covenants as of September 30, 2005 also required the Company to operate in compliance with the following ratios as defined by the terms of the Credit Facility: (i) fixed charge coverage ratio equal to or greater than 1.75x; (ii) interest coverage ratio equal to or greater than 2.00x; and (iii) unsecured interest coverage ratio equal to or greater than 2.25x. The Company was in compliance with all covenants at September 30, 2005.

In January 2005, the Company paid a dividend to its shareholders in excess of 95% of funds from operations for the period

21




November 2, 2004 to December 31, 2004.  The Company received a formal waiver of this instance of noncompliance with the financial covenant. The Company and the lenders also agreed to modify the covenant related to the payment of dividends to shareholders for the year ending December 31, 2005. Under the terms of the modification, the Company is now restricted from paying dividends to its shareholders in 2005 in excess of 110% of funds from operations. The dividend payment terms of the Credit Facility will revert to the original restriction against distributions in excess of 95% of funds from operations after 2005.

Additionally, the Company did not reduce the aggregate amount of its outstanding variable-rate indebtedness as a percentage of its total outstanding indebtedness below 30% by February 8, 2005, as required by the terms of the Credit Facility. On February 24, 2005, the Company converted certain variable-rate loans secured by seven student housing properties to fixed-rate loans. As a result of this refinancing, the Company lowered its outstanding variable-rate indebtedness as a percentage of fixed-rate indebtedness below the 30% limit. The Company received a formal waiver of this instance of noncompliance with the financial covenant for the period from February 8, 2005 through February 23, 2005.

At June 30, 2005, the Company’s leverage ratio exceeded the 60% ceiling set forth in the Credit Facility.  The Company received a formal waiver of this instance of noncompliance with the financial covenant.

In August 2005, the Company amended the Credit Facility (the “Amendment”).  Under the Amendment, the calculation of the borrowing base was revised to include cash flow from the military housing construction and development fees and to increase the total cash flow attributable to annualized fees from the management, construction and development of the military housing projects and student housing properties from 35% to 50%.  The Amendment also increased the applicable interest rate ranges on outstanding borrowings under the Credit Facility to the following: 1.625% to 2.375% for Eurodollar rate loans and 0.75% to 1.75% for prime rate loans.  In addition, the Amendment modified the calculation of the leverage ratio and increased the maximum leverage ratio from 60% to 65% through December 31, 2005.  At the end of the first quarter of 2006, the maximum leverage ratio will revert to 60%.

As of September 30, 2005, the Company had $137.0 million outstanding under the Credit Facility, bearing interest at a weighted-average rate of 5.90%, and an additional $13.0 million was available for draw under the facility. As of September 30, 2005, there were no letters of credit outstanding under the Credit Facility.

9. Transactions with Related Parties

In the ordinary course of its operations, the Company has on-going business relationships with Gary M. Holloway, Sr., entities affiliated with Mr. Holloway, and entities in which Mr. Holloway or the Company has an equity investment. These relationships and related transactions are summarized below. The operating results or financial position of the Company and The GMH Predecessor Entities could be significantly different from those that would have been reported if the entities were autonomous.

Through the completion of the Company’s initial public offering on November 2, 2004, common costs for human resources, information technology, office equipment and furniture, and certain management personnel were allocated to the various entities owned or controlled by Mr. Holloway, including The GMH Predecessor Entities, using assumptions based on headcount that management believed were reasonable. During the three and nine months ended September 30, 2004, such costs totaled $1.4 million and $2.9 million, respectively, and are included in administrative expenses in the accompanying combined statements of operations.  Subsequent to November 2, 2004, such costs were incurred directly by the Operating Partnership. The allocation of such costs to other entities owned or controlled by Mr. Holloway during the three and nine months ended September 30, 2005 totaled $21,000 and $232,000, respectively, and is reflected as expense reimbursements from related parties in the accompanying consolidated statements of operations.

The Company leases space in its corporate headquarters to entities wholly-owned by Mr. Holloway.  During the three and nine-month periods ended September 30, 2005 and 2004, rental income from these entities totaled $61,000, $183,000, $70,000, and $340,000, respectively, and is included in rent and other property income in the accompanying consolidated and combined statements of operations.

The Company provides property management consulting services to GMH Capital Partners Asset Services, LP, an entity wholly-owned by Mr. Holloway, in connection with property management services that GMH Capital Partners Asset Services, LP performs related to five student housing properties containing a total of 2,172 beds. The Company earns consulting fees equal to 80% of the net management fees that GMH Capital Partners Asset Services, LP earns for providing the property management services.  For the three and nine months ended September 30, 2005, such fees totaled $53,000 and $187,000, respectively.  No such fees were recognized in the comparable periods in 2004.

Through March 31, 2005 the Company earned management fees from properties in which Mr. Holloway was an investor.  As of September 30, 2005, the Company does not manage any properties in which Mr. Holloway is an investor and accordingly

22




did not earn any such fees in the quarter then ended.  During the nine-month period ended September 30, 2005 and the three and nine-month periods ended September 30, 2004, such income totaled $0.2 million, $0.3 million and $1.2 million, respectively.

The Company is reimbursed by the owners of certain military housing projects and student housing properties under management, including certain student housing properties in which Mr. Holloway was an investor through March 31, 2005, for the cost of certain employees engaged in the daily operation of those military housing projects and student housing properties. The reimbursement of these costs is reflected as expense reimbursements from related parties in the accompanying consolidated and combined statements of operations.

The GMH Predecessor Entities previously paid management fees and reimbursed expenses to entities owned by Mr. Holloway that were not contributed to the Company in connection with its initial public offering. During the three and nine-month periods ended September 30, 2004, the management fees and reimbursed expenses totaled $22,000 and $77,000, respectively.

Denis J. Nayden, one of the Company’s trustees, is a senior vice president of General Electric Company, which is the parent company of General Electric Capital Corporation. At September 30, 2005, we had $248.0 million of indebtedness to General Electric Capital Corporation secured by properties or other assets that we own.

Mr. Holloway owns Bryn Mawr Abstract, Inc., an entity that provides title abstract services to third party title insurance companies, from which we have purchased title insurance with respect to student housing properties that we have acquired or refinanced in 2005. In connection with our purchase of title insurance for these student housing properties, we paid premiums to other title insurance companies, which fees in some cases are fixed according to statute. From these premiums, the other title companies paid to Bryn Mawr Abstract $162,000 and $345,000 during the three and nine-month periods ended September 30, 2005, respectively, for the provision of title abstract services.

Mr. Holloway owns GMH Capital Partners Commercial Realty LP, an entity that provides real estate consulting and brokerage services for real estate transactions. During the three months ended March 31, 2005, GMH Capital Partners Commercial Realty LP received aggregate commissions of $284,000 from the sellers of two student housing properties that the Company purchased.

In February 2005, the Company transferred its interest in Corporate Flight LLC, including the corporate aircraft and associated debt initially contributed to the Operating Partnership at the time of the initial public offering, back to Mr. Holloway.  Corporate Flight LLC had a net deficit of $171,000, net of $180,000 tax expense related to the taxable gain upon the transfer to Mr. Holloway, on the date it was transferred back to Mr. Holloway. This transfer was accounted for as a capital contribution and recorded as an $87,000 increase to additional paid-in capital and an $84,000 increase to minority interest.  During the three and nine months ended September 30, 2005, the Company paid Corporate Flight LLC $32,000 and $197,000, respectively, for use of an aircraft owned by Corporate Flight LLC.

10. Commitments and Contingencies

As of September 30, 2005, we had an agreement to acquire one undeveloped parcel of land for an aggregate purchase price of $1.4 million.

In connection with finalizing the agreements with the DoD for the Company’s military housing projects, the Company has committed to contribute the following aggregate amounts as of September 30, 2005 (in thousands):

2006

 

$

2,000

 

2007

 

5,900

 

2010

 

3,600

 

2011 and thereafter

 

14,300

 

Total

 

$

25,800

 

 

In connection with the development, management, construction, and renovation agreements for certain of the military housing projects, the Company guarantees the completion of its obligations under the agreements. The guarantees require the Company to fund any costs in excess of the amounts budgeted in the underlying development, management, construction, and renovation agreements. Management believes that these guarantees will not have a material adverse impact on the Company’s financial position or results of operations.

The Company is subject to routine litigation, claims and administrative proceedings arising in the ordinary course of business. Management believes that the disposition of these matters will not have a material adverse impact on the Company’s financial position or results of operations.

23




The Company has entered into employment agreements with three of its executive officers. Each employment agreement is for an initial three-year term beginning in November 2004 and provides for base salaries aggregating $975,000 in each of the three years. The base salaries are increased annually effective January 1 of each year by a minimum amount equal to at least the percentage increase in the Consumer Price Index.

Under the provisions of FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34,” a guarantor is to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken by issuing the guarantee. The Company enters into indemnification agreements in the ordinary course of business that are subject to the provisions of FIN 45. Under these agreements, the Company indemnifies, holds harmless, and agrees to reimburse the indemnified party for losses suffered or incurred by the indemnified party. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. The Company believes the estimated fair value of these agreements is immaterial. Accordingly, there were no liabilities recorded for these agreements as of September 30, 2005 and December 31, 2004.

11. Segment Reporting

The Company is managed as individual entities that comprise two reportable segments: (1) student housing and (2) military housing. The Company’s management evaluates each segment’s performance based upon net income. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies.  Corporate includes the activities of certain departments from a corporate level, which includes personnel that service GMH Communities Trust as a whole and support our overall operations.

 

 

Three Months Ended September 30,

 

 

 

2005 (Company) (as restated)

 

2004 (Predecessor)

 

 

 

Student
Housing

 

Military
Housing

 

Corporate

 

Total

 

Student
Housing

 

Military
Housing

 

Corporate

 

Total

 

 

 

(in thousands)

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rent and other property income

 

$

35,349

 

$

 

$

60

 

$

35,409

 

$

6,683

 

$

 

$

70

 

$

6,753

 

Expense reimbursements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Related party

 

 

20,074

 

22

 

20,096

 

367

 

7,697

 

638

 

8,702

 

Third party

 

1,299

 

 

 

1,299

 

1,906

 

 

 

1,906

 

Management fees:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Related party

 

 

1,755

 

 

1,755

 

348

 

619

 

 

967

 

Third party

 

611

 

 

 

611

 

752

 

 

 

752

 

Other fee income-related party

 

(39

)

5,934

 

 

5,895

 

 

2,115

 

 

2,115

 

Other income

 

34

 

45

 

2

 

81

 

14

 

24

 

103

 

141

 

Total revenue

 

37,254

 

27,808

 

84

 

65,146

 

10,070

 

10,455

 

811

 

21,336

 

Operating Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating expenses

 

17,658

 

1,248

 

 

18,906

 

4,773

 

1,035

 

 

5,808

 

Reimbursed expenses

 

1,299

 

20,074

 

22

 

21,395

 

2,273

 

7,697

 

638

 

10,608

 

Real estate taxes

 

3,184

 

 

 

3,184

 

490

 

 

 

490

 

Administrative expenses

 

 

 

2,992

 

2,992

 

 

 

2,172

 

2,172

 

Profits interest expense

 

 

 

 

 

 

 

33,180

 

33,180

 

Depreciation and amortization

 

8,370

 

78

 

102

 

8,550

 

1,526

 

10

 

234

 

1,770

 

Interest

 

8,715

 

 

274

 

8,989

 

1,627

 

 

95

 

1,722

 

Total operating expenses

 

39,226

 

21,400

 

3,390

 

64,016

 

10,689

 

8,742

 

36,319

 

55,750

 

Income (loss) before equity in earnings of unconsolidated entities, income taxes and minority interest

 

(1,972

)

6,408

 

(3,306

)

1,130

 

(619

)

1,173

 

(35,508

)

(34,414

)

Equity in earnings of unconsolidated entities

 

 

1,058

 

 

1,058

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes and minority interest

 

(1,972

)

7,466

 

(3,306

)

2,188

 

(619

)

1,713

 

(35,508

)

(34,414

)

Income taxes

 

110

 

2,144

 

 

2,254

 

 

 

 

 

Income (loss) before minority Interest

 

(2,082

)

5,322

 

(3,306

)

(66

)

(619

)

1,713

 

(35,508

)

(34,414

)

Minority interest

 

(1,063

)

2,716

 

(1,687

)

(34

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(1,019

)

$

2,606

 

$

(1,619

)

$

(32

)

$

(619

)

$

1,713

 

$

(35,508

)

$

(34,414

)

 

24




 

 

 

Nine Months Ended September 30,

 

 

 

2005 (Company) (as restated)

 

2004 (Predecessor)

 

 

 

Student
Housing

 

Military
Housing

 

Corporate

 

Total

 

Student
Housing

 

Military
Housing

 

Corporate

 

Total

 

 

 

(in thousands)

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rent and other property income

 

$

90,831

 

$

 

$

182

 

$

91,013

 

$

6,683

 

$

 

$

340

 

$

7,023

 

Expense reimbursements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Related party

 

186

 

40,134

 

232

 

40,552

 

1,089

 

14,845

 

735

 

16,669

 

Third party

 

3,876

 

 

 

3,876

 

5,475

 

 

 

5,475

 

Management fees:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Related party

 

197

 

4,888

 

 

5,085

 

1,163

 

1,520

 

 

2,683

 

Third party

 

2,156

 

 

 

2,156

 

3,430

 

 

 

3,430

 

Other fee income-related party

 

(39

)

12,818

 

70

 

12,849

 

 

4,174

 

 

4,174

 

Other income

 

109

 

69

 

70

 

248

 

58

 

70

 

365

 

493

 

Total revenue

 

97,316

 

57,909

 

554

 

155,779

 

17,898

 

20,609

 

1,440

 

39,947

 

Operating Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating expenses

 

37,866

 

3,238

 

 

41,104

 

6,683

 

3,168

 

 

9,851

 

Reimbursed expenses

 

4,062

 

40,134

 

232

 

44,428

 

6,564

 

14,845

 

735

 

22,144

 

Real estate taxes

 

8,339

 

 

 

8,339

 

490

 

 

 

490

 

Administrative expenses

 

 

 

8,768

 

8,768

 

 

 

4,488

 

4,488

 

Profits interest expense

 

 

 

 

 

 

 

33,180

 

33,180

 

Depreciation and amortization

 

24,414

 

132

 

412

 

24,958

 

1,537

 

18

 

633

 

2,188

 

Interest

 

20,508

 

 

739

 

21,247

 

1,627

 

 

253

 

1,880

 

Total operating expenses

 

95,189

 

43,504

 

10,151

 

148,844

 

16,901

 

18,031

 

39,289

 

74,221

 

Income (loss) before equity in earnings of unconsolidated entities, income taxes and minority interest

 

2,127

 

14,405

 

(9,597

)

6,935

 

997

 

2,578

 

(37,849

)

(34,274

)

Equity in earnings of unconsolidated entities

 

 

1,999

 

 

1,999

 

 

 

 

 

Income (loss) before income taxes and minority interest

 

2,127

 

16,404

 

(9,597

)

8,934

 

997

 

2,578

 

(37,849

)

(34,274

)

Income taxes

 

125

 

4,387

 

 

4,512

 

 

 

 

 

Income (loss) before minority interest

 

2,002

 

12,017

 

(9,597

)

4,422

 

997

 

2,578

 

(37,849

)

(34,274

)

Minority interest

 

954

 

6,023

 

(4,794

)

2,183

 

 

 

 

 

Net income (loss)

 

$

1,048

 

$

5,994

 

$

(4,803

)

$

2,239

 

$

997

 

$

2,578

 

$

(37,849

)

$

(34,274

)

 

 

Student
Housing

 

Military
Housing

 

Corporate

 

Total

 

 

 

(in thousands)

 

As of September 30, 2005:

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,093,595

 

$

60,479

 

$

42,735

 

$

1,196,809

 

As of December 31, 2004:

 

 

 

 

 

 

 

 

 

Total assets

 

$

663,980

 

$

57,856

 

$

51,225

 

$

773,061

 

 

12. Earnings Per Common Share (restated)

The following table details the number of shares and net income used to calculate basic and diluted earnings per share for the three and nine-month periods ended September 30, 2005 (in thousands, except share and per share amounts):

 

Three months ended September 30, 2005

 

Nine months ended September 30, 2005

 

 

 

Basic

 

Diluted

 

Basic

 

Diluted

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

(32

)

$

(32

)

$

2,239

 

$

2,239

 

Minority interest

 

 

(34

)

 

2,183

 

Income available to common shareholders

 

$

(32

)

$

(66

)

$

2,239

 

$

4,422

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

30,350,989

 

30,350,989

 

30,350,989

 

30,350,989

 

Warrant

 

 

2,435,628

 

 

2,107,644

 

Units of limited partnership held by minority interest holders

 

 

31,627,317

 

 

31,627,317

 

Restricted common shares

 

 

 

 

 

Total weighted-average shares outstanding

 

30,350,989

 

64,413,934

 

30,350,989

 

64,085,950

 

Earnings per common share

 

$

(0.00

)

$

(0.00

)

$

0.07

 

$

0.07

 

 

25




The computation of diluted earnings per share for the three and nine month periods ended September 30, 2005 excludes the restricted common shares because they have an anti-dilutive effect on earnings per share.

In March 2005, June 2005 and September 2005, the Company declared quarterly dividends of $0.2275 per outstanding common share. The March dividend of $6.9 million was paid in April 2005 to common shareholders of record on March 30, 2005. The June dividend of $6.9 million was paid in July 2005 to common shareholders of record on June 29, 2005.  The September dividend of $6.9 million was paid in October 2005 to common shareholders of record on September 22, 2005.

13. Acquisition of Real Estate Investments

During the year ended December 31, 2004, the three months ended September 30, 2005 and the nine months ended September 30, 2005, the Company acquired 30, six, and 22 student housing properties, respectively, for an aggregate acquisition cost of $1.1 billion. The results of operations for each of the acquired properties have been included in our statements of operations from the respective purchase dates.  All pro forma financial information presented within this footnote is not necessarily indicative of the results which actually would have occurred if the purchases had been consummated on January 1, 2004, nor does the pro forma information purport to represent the results of operations for future periods.

The following unaudited pro forma financial information for the three and nine month periods ended September 30, 2005 and 2004 gives effect to the acquisition of the 52 student housing properties as if the transactions had occurred on January 1, 2004 (in thousands).  The pro-forma financial information for the three and nine months ended September 30, 2004 excludes the $33.2 million of profits interest expense due to its material non-recurring nature.

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2005

 

2004

 

2005

 

2004

 

 

 

(restated)

 

 

 

(restated)

 

 

 

 

 

 

 

 

 

 

 

 

 

Pro forma revenue

 

$

65,978

 

$

33,634

 

$

175,339

 

$

100,903

 

Pro forma net (loss) income

 

$

(10

)

$

4,416

 

$

2,858

 

$

13,249

 

Pro forma EPS – Basic

 

$

(0.00

)

 

 

$

0.09

 

 

 

Pro forma EPS – Diluted

 

$

(0.00

)

 

 

$

0.09