GMH Communities Trust
GMH Communities Trust
A PROBLEM WITH “TONE AT THE TOP”
10 Campus Boulevard
Newtown Square, Pennsylvania 19073
Telephone: (610) 355-8000
Fax: (610) 355-8001
Web site: http://www.gmhcommunities.com
Incorporated: 1985 as GMH Associates
Sales: $293.13 million (2006)
Stock Exchanges: New York
Ticker Symbol: GCT
NAIC: 525930 Real Estate Investment Trusts
GMH Communities Trust is a real estate investment trust that specializes in housing at colleges and military bases. Originally a renovator of student housing, GMH began competing for military housing privatization contracts in the late 1990s.
Although the company’s founder, Gary M. Holloway, began his career at an accounting firm (Touche Ross), the firm that bears his initials spent much of 2006 getting its financial house in order. This included restating results and firing a CFO who had complained of trouble at the top.
The story of GMH Communities Trust begins in 1985, when Philadelphia area developer Gary M. Holloway, Sr., formed GMH Associates. This was originally a fictitious business name used to describe Holloway’s development activities; a new entity, GMH Associates, Inc., was incorporated in 1990.
Holloway formed a property management firm as well in the late 1980s and a construction company was launched a few years later. GMH Realty, Inc., was formed in 1993 to sell the properties. This was not Holloway’s first experience in the industry. After working at accounting firm Touche Ross, he had become chief financial officer of his father’s business, Holloway Corp., before launching GMH in 1985.
Holloway invested in a variety of residential and commercial properties through partnerships. These holdings were worth about $35 million by 1994, according to the Philadelphia Business Journal.
Based in Newton Square, Pennsylvania, GMH Associates soon developed a specialty in taking over distressed campus housing projects at colleges and universities. GE Capital joined GMH in many of these deals; a joint venture between the two called GMH Capital Partners LP was formed around 2000.
The market for student housing was extremely fragmented, controlled by the schools themselves and local landlords. There seemed to be opportunity for a consolidator, but critics wondered why the academic institutions were willing to give up such a lucrative sideline.
INTO MILITARY HOUSING IN 1999
In 1999, GMH began competing to develop and manage military housing projects. The U.S. armed forces had found their stock of on-base housing to be severely dilapidated, so Congress authorized the Department of Defense to work with private parties to develop or rehabilitate communities at military bases. This was intended to accelerate the pace of development while shifting most of the capital burden to the private sector and saving money on construction costs.
GMH Associates boasted a real estate portfolio worth more than $1 billion by 2000. In 2002, GMH had revenues of $13.7 million, resulting in a net profit of $428,000.
PUBLIC IN 2004
A new entity, GMH Communities Trust, was created in May 2004 to take over a handful of predecessor companies that had been known as GMH Associates (College Park Management, Inc.; GMH Military Housing, LLC; 353 Associates, L.P.; and Corporate Flight Services, LLC). Founder Gary M. Holloway, Sr., remained chairman and CEO, while his son, Gary Holloway, Jr., was given responsibility for properties not folded into the company.
When formed, GMH Communities owned 38 properties totaling 22,000 beds and managed another 25 properties with 16,640 beds. The company had revenues of $75.85 million in 2004 and 1,200 employees. GMH reckoned itself the nation’s leader in the college housing market: though there were a few other firms with national reach (two of these also went public around the same time as GMH), 97 percent of the $159 billion student housing industry was not yet controlled by large corporations or REITs (according to company figures reported by Dow Jones). GMH also claimed to be the third largest provider of privatized housing to the U.S. military, though it had a couple of serious rivals there, too.
Although it had lost $3 million on revenues of $18.8 million the previous year, GMH Communities conducted an initial public offering (IPO) on the New York Stock Exchange. The IPO, completed in early November 2004, raised $343 million, which was less than desired. During the year, GMH opted for status as a REIT, or real estate investment trust, which conveyed certain tax advantages. It acquired the sole general partnership interest in the operating company, GMH Communities LP. GMH had a couple of taxable REIT subsidiaries, College Park Management TRS, Inc., and GMH Military Housing Investments, LLC, which were owned by the GMH Communities TRS, Inc., subsidiary of the operating partnership.
The elder Holloway continued to own a stake in GMH after the IPO. Other leading shareholders included retired Admiral James Eastwood, and the former CEO of GE Capital Corporation, Denis Nayden. Another REIT, Vornado Realty, began investing in GMH in July 2004.
In spite of having what CEO Gary Holloway, Sr., called a “captive audience” for its campus and military properties, GMH Communities posted another large loss, $37 million, in 2004, though revenues quadrupled to nearly $84 million.
The IPOs of GMH and two other student housing REITs provided more capital for acquisitions, and seemed to drive up the price of available properties. (GMH also had a secondary offering in October 2005.) Nonetheless, GMH managed to post a $6.1 million net profit in 2005, as total revenues rose to $224 million. By this time, rental revenues had come to represent more than half of GMH’s total.
A PROBLEM WITH “TONE AT THE TOP”
GMH delayed the reporting of its 2005 figures and lowered forecasts due to an internal investigation into “material weaknesses” in its accounting. The company’s share price fell 25 percent immediately following this news.
GMH Communities Trust is 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.
Perhaps mitigating the damage was the assertion that Chairman and CEO Gary Holloway, who owned 20 percent of shares, was considering the purchase of the remainder of the company, though he backed down from this a few months later. The board was said to be discussing other “strategic alternatives” as well. GMH’s chief financial officer, Bradley Harris, was fired and replaced in the interim by board member and key shareholder Dennis O’Leary. (It was Harris’s March letter complaining of “tone at the top” that had prompted the internal investigation.) Almost inevitably, a class-action suit alleging securities fraud followed.
The company’s auditor, Ernst & Young L.L.P., dropped the account in June 2006 without announcing a reason. The next month, the company hired a permanent CFO, J. Patrick O’Grady, a former partner with KPMG L.L.P. and Arthur Andersen L.L.P. At the end of July, GMH finally released its 2005 annual report.
In December 2006, the company announced it was not up for sale any more. Instead, it trimmed its quarterly dividend and focused on streamlining operations and finding better financing. Revenues had continued to climb in 2006, reaching $293 million for the year. However, profits were another story. GMH lost $5 million, roughly the same amount it spent on committees investigating its accounting controls in the first half. GMH emerged from the challenging year placing less emphasis on acquisitions.
Frederick C. Ingram
College Park Management TRS, Inc.; GMH Communities TRS, Inc.; GMH Military Housing Investments, LLC.
Actus Lend Lease; American Campus Communities Inc.; Clark Realty Capital LLC; Education Realty Trust Inc.; Hunt Building Corporation; Lincoln Properties.
- GMH Associates is established in Philadelphia area.
- GMH enters market for military housing privatization projects.
- GMH Communities Trust REIT is formed; company goes public on the New York Stock Exchange.
- Accounting concerns delay annual report, punish share price.
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