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Education Management's profit falls 51%; sale-leaseback of Art Institute studied

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By Thomas Olson
Wednesday, Jan. 30, 2013, 6:36 p.m.

Education Management Corp. might sell and lease back its Art Institute of Pittsburgh building to free up cash for student scholarships and take other steps to combat slumping enrollment, executives said on Thursday.

The Downtown-based company is the nation's second-largest owner of for-profit, post-secondary schools. It operates 110 schools in 32 states and Canada.

The company faces federal lawsuits by former employees and the Justice Department that seek to recover about $11 billion in federal and state student aid it received. The claimants argue Education Management obtained the money by violating a federal ban on paying recruiters based on the number of students they enrolled.

The company denies the claim.

Shares closed at $4.33, up 80 cents, or 22.7 percent. Shares traded at over $25 a year ago.

Profit dropped 51 percent in the October-December quarter as enrollments fell at its schools, the company said.

“It's about the new-student side, which is down 20 percent overall, and 80 percent of that is due to a drop in online enrollments,” CEO Edward West told analysts in a conference call.

New enrollments fell 21.9 percent to 24,000 in the current quarter from 30,700 in the same quarter a year ago.

Total average enrollment at its schools fell 12.7 percent to 131,500 in the current quarter from 150,600 a year ago.

With lower enrollments, revenue fell 11 percent to about $655 million from $737 million. Net income fell to $31 million, or 25 cents a share, from more than $63 million, or 49 cents a share, in the year-ago quarter.

Most analysts expected 19 cents a share, so “results themselves were better than expected,” said Jeffrey Meuler at Robert W. Baird & Co., Milwaukee, who has a neutral rating on EDMC.

“The overall number of enrollments was disappointing but the weakness was concentrated in the art institutes and the online business,” said Meuler.

But given that art institutes represent about half of all EDMC schools, “we'd like to see some improvement there,” he said.

Results included a net loss of $3.5 million on five sale-leaseback transactions in the current period that produced net proceeds of $65 million.

To raise cash, EDMC might sell and lease back three properties, said West, including the Art Institute of Pittsburgh, Downtown.

“We're evaluating that, but nothing is definitive,” he said.

The property at 420 Boulevard of the Allies has a market value of $7.4 million, according to Allegheny County records.

Under a sale-leaseback, a company receives cash for its property but continues to operate at the site under a lease.

West said EDMC would increase spending on scholarships since students are struggling to pay for school in the tough economy and with less government aid available.

EDMC is on track to spend nearly $100 million on art institute scholarships in the year ending June 30, said West, compared with about $80 million the prior fiscal year.

“While the operating environment remains challenging, we continue to see several encouraging signs,” said West.

The company expects operating earnings to fall 20 cents to 22 cents a share in the quarter ending March 31, excluding one-time charges. It estimates operating earnings would be 38 to 44 cents for the year.

Thomas Olson is a staff writer for Trib Total Media.

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