Form 10-Q
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
x |
Quarterly
Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934
|
For
the
quarterly period ended March 31, 2007.
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 001-32265
AMERICAN
CAMPUS COMMUNITIES, INC.
(Exact
name of registrant as specified in its charter)
Maryland
|
|
76-0753089
|
(State
or Other Jurisdiction of
Incorporation
or Organization)
|
|
(IRS
Employer Identification No.)
|
|
|
|
805
Las Cimas Parkway, Suite 400
Austin,
TX
(Address
of Principal Executive Offices)
|
|
78746
(Zip
Code)
|
(512)
732-1000
Registrant’s
telephone number, including area code
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 filer” 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
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
There
were 23,169,059 shares of American Campus Communities, Inc.’s common stock
with a par value of $0.01 per share outstanding as of the close of business
on
May 7, 2007.
FORM
10-Q
FOR
THE QUARTER ENDED MARCH 31, 2007
TABLE
OF CONTENTS
|
PAGE
NO.
|
|
|
PART
I.
|
|
|
|
|
Item
1.
|
Consolidated
Financial Statements
|
|
|
|
|
|
|
1
|
|
|
|
|
|
2
|
|
|
|
|
|
3
|
|
|
|
|
|
4
|
|
|
|
|
|
5
|
|
|
|
|
|
17
|
|
|
|
|
|
32
|
|
|
|
|
|
32
|
|
|
PART
II.
|
|
|
|
|
|
|
32
|
|
|
|
33
|
|
|
AMERICAN
CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
(in
thousands, except share and per share data)
|
|
March
31, 2007
|
|
December
31, 2006
|
|
|
|
(Unaudited)
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Investments
in real estate:
|
|
|
|
|
|
Owned
properties, net
|
|
$
|
836,470
|
|
$
|
694,197
|
|
On-campus
participating properties, net
|
|
|
75,693
|
|
|
76,688
|
|
Investments
in real estate, net
|
|
|
912,163
|
|
|
770,885
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
25,037
|
|
|
79,107
|
|
Restricted
cash
|
|
|
10,219
|
|
|
11,260
|
|
Student
contracts receivable, net
|
|
|
6,499
|
|
|
3,129
|
|
Other
assets
|
|
|
22,247
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
976,165
|
|
$
|
884,381
|
|
|
|
|
|
|
|
|
|
Liabilities
and stockholders’ equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Secured
debt
|
|
$
|
528,133
|
|
$
|
432,294
|
|
Accounts
payable and accrued expenses
|
|
|
18,710
|
|
|
13,616
|
|
Other
liabilities
|
|
|
31,869
|
|
|
29,436
|
|
Total
liabilities
|
|
|
578,712
|
|
|
475,346
|
|
|
|
|
|
|
|
|
|
Minority
interests
|
|
|
37,710
|
|
|
39,561
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Note 11)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
Common
shares, $.01 par value, 800,000,000 shares authorized, 23,141,059
and
22,903,073 shares issued and outstanding at March 31, 2007 and
December
31, 2006, respectively
|
|
|
231
|
|
|
229
|
|
Additional
paid in capital
|
|
|
385,942
|
|
|
382,367
|
|
Accumulated
earnings and distributions
|
|
|
(26,009
|
)
|
|
(13,533
|
)
|
Accumulated
other comprehensive (loss) income
|
|
|
(421
|
)
|
|
411
|
|
Total
stockholders’ equity
|
|
|
359,743
|
|
|
369,474
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
976,165
|
|
$
|
884,381
|
|
See
accompanying notes to consolidated financial statements.
AMERICAN
CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
(Unaudited,
in thousands, except share and per share data)
|
|
Three
Months Ended March 31,
|
|
|
|
2007
|
|
2006
|
|
Revenues:
|
|
|
|
|
|
Owned
off-campus properties
|
|
$
|
27,145
|
|
$
|
18,125
|
|
On-campus
participating properties
|
|
|
6,337
|
|
|
5,982
|
|
Third
party development services
|
|
|
369
|
|
|
1,602
|
|
Third
party development services - on-campus participating
properties
|
|
|
36
|
|
|
36
|
|
Third
party management services
|
|
|
722
|
|
|
662
|
|
Resident
services
|
|
|
341
|
|
|
320
|
|
Total
revenues
|
|
|
34,950
|
|
|
26,727
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
Owned
off-campus properties
|
|
|
11,862
|
|
|
7,766
|
|
On-campus
participating properties
|
|
|
2,026
|
|
|
1,950
|
|
Third
party development and management services
|
|
|
1,294
|
|
|
1,638
|
|
General
and administrative
|
|
|
11,328
|
|
|
1,587
|
|
Depreciation
and amortization
|
|
|
6,970
|
|
|
5,018
|
|
Ground/facility
lease
|
|
|
295
|
|
|
192
|
|
Total
operating expenses
|
|
|
33,775
|
|
|
18,151
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
1,175
|
|
|
8,576
|
|
|
|
|
|
|
|
|
|
Nonoperating
income and (expenses):
|
|
|
|
|
|
|
|
Interest
income
|
|
|
707
|
|
|
185
|
|
Interest
expense
|
|
|
(6,460
|
)
|
|
(5,336
|
)
|
Amortization
of deferred financing costs
|
|
|
(298
|
)
|
|
(355
|
)
|
Total
nonoperating expenses
|
|
|
(6,051
|
)
|
|
(5,506
|
)
|
|
|
|
|
|
|
|
|
(Loss)
income before income taxes, minority interests, and discontinued
operations
|
|
|
(4,876
|
)
|
|
3,070
|
|
Income
tax provision
|
|
|
(60
|
)
|
|
—
|
|
Minority
interests
|
|
|
258
|
|
|
(128
|
)
|
(Loss)
income from continuing operations
|
|
|
(4,678
|
)
|
|
2,942
|
|
|
|
|
|
|
|
|
|
Discontinued
operations:
|
|
|
|
|
|
|
|
Income
attributable to discontinued operations
|
|
|
—
|
|
|
722
|
|
Net
(loss) income
|
|
$
|
(4,678
|
)
|
$
|
3,664
|
|
|
|
|
|
|
|
|
|
(Loss)
income per share - basic:
|
|
|
|
|
|
|
|
(Loss)
income from continuing operations per share
|
|
$
|
(0.20
|
)
|
$
|
0.17
|
|
Net
(loss) income per share
|
|
$
|
(0.20
|
)
|
$
|
0.21
|
|
(Loss)
income per share - diluted:
|
|
|
|
|
|
|
|
(Loss)
income from continuing operations per share
|
|
$
|
(0.20
|
)
|
$
|
0.17
|
|
Net
(loss) income per share
|
|
$
|
(0.20
|
)
|
$
|
0.21
|
|
Weighted-average
common shares outstanding:
|
|
|
|
|
|
|
|
Basic
|
|
|
22,942,737
|
|
|
17,209,779
|
|
Diluted
|
|
|
25,241,190
|
|
|
18,176,189
|
|
|
|
|
|
|
|
|
|
Distributions
declared per common share
|
|
$
|
0.3375
|
|
$
|
0.3375
|
|
See
accompanying notes to consolidated financial statements.
AMERICAN
CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
(Unaudited,
in thousands)
|
|
Three
Months Ended March 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
Net
(loss) income
|
|
$
|
(4,678
|
)
|
$
|
3,664
|
|
|
|
|
|
|
|
|
|
Other
comprehensive (loss) income:
|
|
|
|
|
|
|
|
Change
in fair value of interest rate swaps
|
|
|
(802
|
)
|
|
118
|
|
Net
comprehensive (loss) income
|
|
$
|
(5,480
|
)
|
$
|
3,782
|
|
See
accompanying notes to consolidated financial statements.
AMERICAN
CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
(Unaudited,
in thousands)
|
|
Three
Months Ended March 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
Operating
activities
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$
|
(4,678
|
)
|
$
|
3,664
|
|
Adjustments
to reconcile net (loss) income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
Minority
interests share of (loss) income
|
|
|
(258
|
)
|
|
128
|
|
Depreciation
and amortization
|
|
|
6,970
|
|
|
5,275
|
|
Amortization
of deferred financing costs and debt premiums/discounts
|
|
|
(70
|
)
|
|
106
|
|
Share-based
compensation
|
|
|
229
|
|
|
121
|
|
Amortization
of gain on interest rate swap termination
|
|
|
(30
|
)
|
|
—
|
|
Income
tax provision
|
|
|
60
|
|
|
—
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Restricted
cash
|
|
|
1,690
|
|
|
(1,211
|
)
|
Student
contracts receivable, net
|
|
|
(3,320
|
)
|
|
706
|
|
Other
assets
|
|
|
285
|
|
|
(605
|
)
|
Accounts
payable and accrued expenses
|
|
|
4,390
|
|
|
367
|
|
Other
liabilities
|
|
|
(2,048
|
)
|
|
(2,471
|
)
|
Net
cash provided by operating activities
|
|
|
3,220
|
|
|
6,080
|
|
Investing
activities
|
|
|
|
|
|
|
|
Cash
paid for property acquisitions
|
|
|
(38,330
|
)
|
|
(69,241
|
)
|
Investments
in owned properties
|
|
|
(17,113
|
)
|
|
(14,684
|
)
|
Investments
in on-campus participating properties
|
|
|
(65
|
)
|
|
(49
|
)
|
Purchase
of corporate furniture, fixtures and equipment
|
|
|
(235
|
)
|
|
(139
|
)
|
Net
cash used in investing activities
|
|
|
(55,743
|
)
|
|
(84,113
|
)
|
Financing
activities
|
|
|
|
|
|
|
|
Proceeds
from revolving credit facility, net of paydowns
|
|
|
—
|
|
|
67,000
|
|
Proceeds
from construction loans
|
|
|
9,646
|
|
|
5,708
|
|
Principal
payments on debt
|
|
|
(1,569
|
)
|
|
(1,098
|
)
|
Change
in construction accounts payable
|
|
|
108
|
|
|
(5
|
)
|
Debt
issuance and assumption costs
|
|
|
(1,153
|
)
|
|
(1,204
|
)
|
Distributions
to common and restricted stockholders
|
|
|
(7,791
|
)
|
|
(5,841
|
)
|
Distributions
to minority partners
|
|
|
(788
|
)
|
|
(143
|
)
|
Net
cash (used) provided by financing activities
|
|
|
(1,547
|
)
|
|
64,417
|
|
Net
change in cash and cash equivalents
|
|
|
(54,070
|
)
|
|
(13,616
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
79,107
|
|
|
24,641
|
|
Cash
and cash equivalents at end of period
|
|
$
|
25,037
|
|
$
|
11,025
|
|
Supplemental
disclosure of non-cash investing and financing
activities
|
|
|
|
|
|
|
|
Loans
assumed in connection with property acquisitions
|
|
$
|
(88,307
|
)
|
$
|
(123,649
|
)
|
Contribution
of land from minority partner in development joint venture
|
|
$
|
2,756
|
|
$
|
—
|
|
Issuance
of Common Units in connection with property acquisitions
|
|
$
|
—
|
|
$
|
(49,096
|
)
|
Issuance
of Preferred Units in connection with property
acquisitions
|
|
$
|
—
|
|
$
|
(3,075
|
)
|
Change
in fair value of derivative instruments, net
|
|
$
|
(802
|
)
|
$
|
118
|
|
Supplemental
disclosure of cash flow information
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
7,772
|
|
$
|
6,251
|
|
See
accompanying notes to consolidated financial statements.
AMERICAN
CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
1. Organization
and Description of Business
American
Campus Communities, Inc. (the “Company”) is a real estate investment trust
(“REIT”) that was incorporated on March 9, 2004 and commenced operations
effective with the completion of an initial public offering (“IPO”) on August
17, 2004. Through the Company’s controlling interest in American Campus
Communities Operating Partnership LP (the “Operating Partnership”) and American
Campus Communities Services, Inc., (the Company’s taxable REIT subsidiary or
“TRS”), the Company is one of the largest owners, managers and developers of
high quality student housing properties in the United States in terms of beds
owned and under management. The Company is a fully integrated, self-managed
and
self-administered equity REIT with expertise in the acquisition, design,
financing, development, construction management, leasing and management of
student housing properties.
As
of
March 31, 2007, the Company’s property portfolio contained 43 student housing
properties with approximately 26,800 beds and approximately 8,900 apartment
units, consisting of 39 owned properties that are in close proximities to
colleges and universities and four on-campus participating properties operated
under ground/facility leases with the related university systems. These
communities contain modern housing units, offer resort-style amenities and
are
supported by a classic resident assistant system and other student-oriented
programming.
Through
the TRS, the Company also provides construction management and development
services for student housing properties owned by colleges and universities,
charitable foundations, and others. As of March 31, 2007, the Company provided
third party management and leasing services for 15 student housing properties
(ten of which the Company served as the third party developer and construction
manager) that represented approximately 9,600 beds in approximately 3,300 units.
Third party management and leasing services are typically provided pursuant
to
multi-year management contracts that have initial terms that range from one
to
five years. As of March 31, 2007, the Company’s total owned and managed
portfolio included 58 properties with approximately 36,400 beds in approximately
12,200 units.
2.
Summary
of Significant Accounting Policies
Principles
of Consolidation and Combination
The
accompanying consolidated financial statements include all of the accounts
of
the Company, the Operating Partnership and the subsidiaries of the Operating
Partnership. The Company consolidates entities in which it has an ownership
interest and over which it exercises significant control over major operating
decisions, such as budgeting, investment and financing decisions. The real
estate entities included in the consolidated financial statements have been
consolidated only for the periods that such entities were under control by
the
Company. All significant intercompany balances and transactions have been
eliminated in consolidation. All dollar amounts in the tables herein, except
share and per share amounts, are stated in thousands unless otherwise indicated.
Recent
Accounting Pronouncements
In
June
2006, the FASB issued FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes - an interpretation of FASB Statement No.
109
(“FIN
48”). FIN 48 clarifies the accounting for uncertainty in income taxes by
prescribing a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to
be
taken in a tax return. The interpretation also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The
adoption of this statement did not have a material impact on the Company’s
consolidated financial statements.
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards No. 157, Fair
Value Measurements
(“SFAS
157”). SFAS 157 defines fair value, establishes guidelines for measuring fair
value and expands disclosures regarding fair value measurements. SFAS 157 does
not require any new fair value measurements but rather eliminates
inconsistencies in guidance found in various prior accounting pronouncements.
SFAS 157 is effective for fiscal years beginning after November 15, 2007.
The Company does not expect its adoption to
have a
material impact on the Company’s consolidated financial statements.
AMERICAN
CAMPUS COMMUNITIES, INC. AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
In
February 2007, the FASB issued Statement of Financial Accounting Standards
No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities
(“SFAS
159”), which gives entities the option to measure eligible financial assets,
financial liabilities and firm commitments at fair value on an
instrument-by-instrument basis (i.e., the fair value option), which are
otherwise not permitted to be accounted for at fair value under other accounting
standards. The election to use the fair value option is available when an entity
first recognizes a financial asset or financial liability or upon entering
into
a firm commitment. Subsequent changes in fair value must be recorded in
earnings. Additionally, SFAS No. 159 allows for a one-time election for existing
positions upon adoption, with the transition adjustment recorded to beginning
retained earnings. This statement is effective for fiscal years beginning after
November 15, 2007. The Company does not expect its adoption to have a
material impact on the Company’s consolidated financial statements.
Interim
Financial Statements
The
accompanying interim financial statements are unaudited, but have been prepared
in accordance with U.S. generally accepted accounting principles (“GAAP”) for
interim financial information and in conjunction with the rules and regulations
of the Securities and Exchange Commission. Accordingly, they do not include
all
disclosures required by GAAP for complete financial statements. In the opinion
of management, all adjustments (consisting solely of normal recurring matters)
necessary for a fair presentation of the financial statements for these interim
periods have been included. Because of the seasonal nature of the Company’s
operations, the results of operations and cash flows for any interim period
are
not necessarily indicative of results for other interim periods or for the
full
year. These financial statements should be read in conjunction with the
financial statements and the notes thereto included in the Company’s Annual
Report on Form 10-K for the year ended December, 31, 2006.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets
and
liabilities, disclosures of contingent assets and liabilities at the date of
the
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
Investments
in Real Estate
Investments
in real estate are recorded at historical cost. Major improvements that extend
the life of an asset are capitalized and depreciated over the remaining useful
life of the asset. The cost of ordinary repairs and maintenance is charged
to
expense when incurred. Depreciation and amortization are recorded on a
straight-line basis over the estimated useful lives of the assets as
follows:
Buildings
and improvements
|
|
7-40
years
|
Leasehold
interest - on-campus
participating
properties
|
|
25-34
years (shorter of useful life or respective lease term)
|
Furniture,
fixtures and equipment
|
|
3-7
years
|
The
cost
of buildings and improvements includes the purchase price of the property,
including legal fees and acquisition costs. Project costs directly associated
with the development and construction of an owned real estate project, which
include interest, property taxes, and amortization of deferred finance costs,
are capitalized as construction in progress. Upon completion of the project,
costs are transferred into the applicable asset category and depreciation
commences. Interest totaling approximately $1.1 million and $0.5 million was
capitalized during the three months ended March 31, 2007, and 2006,
respectively. Amortization of deferred financing costs totaling approximately
$80,000 and $30,000 was capitalized during the three months ended March 31,
2007, and 2006, respectively.
Management
assesses whether there has been an impairment in the value of the Company’s
investments in real estate whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Impairment is
recognized when estimated expected future cash flows (undiscounted and before
interest charges) are less than the carrying value of the property. The
estimation of expected future net cash flows is inherently uncertain and relies
on assumptions regarding current and future economics and market conditions.
If
such conditions change, then an adjustment to the carrying value of the
Company’s long-lived assets could occur in the future period in which the
conditions change. To the extent that a property is impaired, the excess of
the
carrying amount of the property over its estimated fair value is charged to
earnings. The Company believes that there were no impairments of the carrying
values of its investments in real estate as of March 31, 2007.
AMERICAN
CAMPUS COMMUNITIES, INC. AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
Company allocates the purchase price of acquired properties to net tangible
and
identified intangible assets based on relative fair values in accordance with
Statement of Financial Accounting Standard (“SFAS”) No. 141, Business
Combinations.
Fair
value estimates are based on information obtained from a number of sources,
including independent appraisals that may be obtained in connection with the
acquisition or financing of the respective property and other market data.
Information obtained about each property as a result of due diligence, marketing
and leasing activities is also considered. The value of in-place leases is
based
on the difference between (i) the property valued with existing in-place leases
adjusted to market rental rates and (ii) the property valued “as-if” vacant. As
lease terms are typically one year or less, rates on in-place leases generally
approximate market rental rates. Factors considered in the valuation of in-place
leases include an estimate of the carrying costs during the expected lease-up
period considering current market conditions, nature of the tenancy, and costs
to execute similar leases. Carrying costs include estimates of lost rentals
at
market rates during the expected lease-up period, as well as marketing and
other
operating expenses. The value of in-place leases is amortized over the remaining
initial term of the respective leases, generally less than one year. The
purchase price of property acquisitions is not expected to be allocated to
tenant relationships, considering the terms of the leases and the expected
levels of renewals. The Company’s allocation of purchase price is contingent
upon the final true-up of certain prorations.
Intangible
Assets
In
connection with property acquisitions completed during the three months ended
March 31, 2007 and 2006, the Company capitalized approximately $1.2 million
and
$2.3 million, respectively, related to management’s estimate of the fair value
of the in-place leases assumed. These intangible assets are amortized on a
straight-line basis over a term of approximately six months, which represents
the average remaining term of the underlying leases. The amortization is
included in depreciation expense in the accompanying consolidated statements
of
operations. See Note 3 for a detailed discussion of the property acquisitions
completed during the three months ended March 31, 2007.
Debt
Premiums and Discounts
Debt
premiums and discounts represent fair value adjustments to account for the
difference between the stated rates and market rates of debt assumed in
connection with the Company’s property acquisitions. The debt premiums and
discounts are amortized to interest expense over the term of the related loans
using the effective-interest method. As of March 31, 2007 and December 31,
2006,
unamortized debt premiums were $6.1 million and $6.4 million, respectively,
and
unamortized debt discounts were $0.7 million and $0.4 million, respectively.
Debt premiums and discounts are included in secured debt on the accompanying
consolidated balance sheets.
Third-Party
Development Services Revenue and Costs
Development
revenues are generally recognized based on a proportionate performance method
based on contract deliverables, while construction revenues are recognized
using
the percentage of completion method, as determined by construction costs
incurred relative to total estimated construction costs. Costs associated with
such projects are deferred and recognized in relation to the revenues earned
on
executed contracts. For projects where the Company’s fee is based on a fixed
price, any cost overruns incurred during construction, as compared to the
original budget, will reduce the net fee generated on those projects. Incentive
fees are generally recognized when the project is complete and performance
has
been agreed upon by all parties, or when performance has been verified by an
independent third-party.
The
Company also evaluates the collectibility of fee income and expense
reimbursements generated through the provision of development and construction
management services based upon the individual facts and circumstances, including
the contractual right to receive such amounts in accordance with the terms
of
the various projects, and reserves any amounts that are deemed to be
uncollectible.
Pre-development
expenditures such as architectural fees, permits and deposits associated with
the pursuit of third-party and owned development projects are expensed as
incurred, until such time that management believes it is probable that the
contract will be executed and/or construction will commence. Because the Company
frequently incurs these pre-development expenditures before a financing
commitment and/or required permits and authorizations have been obtained, the
Company bears the risk of loss of these pre-development expenditures if
financing cannot ultimately be arranged on acceptable terms or the Company
is
unable to successfully obtain the required permits and authorizations. As such,
management evaluates the status of third-party and owned projects that have
not
yet commenced construction on a periodic basis and expenses any deferred costs
related to projects whose current status indicates the commencement of
construction is unlikely and/or the costs may not provide future value to the
Company in the form of revenues. Such write-offs are included in third-party
development and management services expenses (in the case of third-party
development projects) or general and administrative expenses (in the case of
owned development projects) on the accompanying consolidated statements of
operations. As of March 31, 2007, we have deferred approximately $3.7 million
in
pre-development costs related to third-party and owned development projects
that
have not yet commenced construction. Such costs are included in other assets
on
the accompanying consolidated balance sheets.
AMERICAN
CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Stock-Based
Compensation
The
Company accounts for equity based awards in accordance with SFAS No. 123 (R),
Share-Based
Payment.
Accordingly, the Company has recognized compensation expense related to certain
restricted stock awards (see Note 9) over the underlying vesting periods, which
amounted to approximately $0.2 million and $0.1 million during the three months
ended March 31, 2007 and 2006, respectively.
Income
Taxes
The
Company has elected to be taxed as a REIT under the Internal Revenue Code of
1986, as amended (the “Code”). To qualify as a REIT, the Company must meet a
number of organizational and operational requirements, including a requirement
that it currently distribute at least 90% of its adjusted taxable income to
its
stockholders. As a REIT, the Company will generally not be subject to corporate
level federal income tax on taxable income it currently distributes to its
stockholders. If the Company fails to qualify as a REIT in any taxable year,
it
will be subject to federal income taxes at regular corporate rates (including
any applicable alternative minimum tax) and may not be able to qualify as a
REIT
for the subsequent four taxable years. Even if the Company qualifies for
taxation as a REIT, the Company may be subject to certain state and local income
and excise taxes on its income and property, and to federal income and excise
taxes on its undistributed income.
The
TRS
manages the Company’s non-REIT activities and is subject to federal, state and
local income taxes.
Earnings
Per Share
Basic
earnings per share is computed using net income (loss) and the weighted average
number of shares of the Company’s common stock outstanding during the period,
including restricted stock units (“RSUs”) issued to outside directors. RSUs are
included in both basic and diluted weighted average common shares outstanding
because they were fully vested on the date of grant and all conditions required
in order for the recipients to earn the RSUs have been satisfied. Diluted
earnings per share reflects weighted average common shares issuable from the
assumed conversion of restricted stock awards (“RSAs”) granted to employees and
common and preferred units of limited partnership interest in the Operating
Partnership (“Common Units” and “Series A Preferred Units,” respectively). See
Note 7 for a discussion of Common Units and Series A Preferred
Units.
AMERICAN
CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
following is a summary of the elements used in calculating basic and diluted
earnings per share:
|
|
|
Three
Months Ended March 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
Basic
earnings per share calculation:
|
|
|
|
|
|
|
(Loss)
income from continuing operations
|
|
$
|
(4,678
|
)
|
$
|
2,942
|
|
|
Discontinued
operations
|
|
|
—
|
|
|
722
|
|
|
Net
(loss) income
|
|
$
|
(4,678
|
)
|
$
|
3,664
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income from continuing operations - per share
|
|
$
|
(0.20
|
)
|
$
|
0.17
|
|
|
Income
from discontinued operations - per share
|
|
$
|
—
|
|
$
|
0.04
|
|
|
Net
(loss) income - per share
|
|
$
|
(0.20
|
)
|
$
|
0.21
|
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average common shares outstanding
|
|
|
22,942,737
|
|
|
17,209,779
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share calculation:
|
|
|
|
|
|
|
|
|
(Loss)
income from continuing operations
|
|
$
|
(4,678
|
)
|
$
|
2,942
|
|
|
Series
A Preferred Unit distributions
|
|
|
46
|
|
|
15
|
|
|
(Loss)
income from continuing operations allocated to
Common
Units
|
|
|
(362
|
)
|
|
47
|
|
|
(Loss)
income from continuing operations, as adjusted
|
|
|
(4,994
|
)
|
|
3,004
|
|
|
Discontinued
operations
|
|
|
—
|
|
|
722
|
|
|
Income
from discontinued operations allocated to
Common
Units
|
|
|
—
|
|
|
30
|
|
|
Income
from discontinued operations, as adjusted
|
|
|
—
|
|
|
752
|
|
|
Net
(loss) income, as adjusted
|
|
$
|
(4,994
|
)
|
$
|
3,756
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income from continuing operations - per share
|
|
$
|
(0.20
|
)
|
$
|
0.17
|
|
|
Income
from discontinued operations - per share
|
|
$
|
—
|
|
$
|
0.04
|
|
|
Net
(loss) income - per share
|
|
$
|
(0.20
|
)
|
$
|
0.21
|
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average common shares outstanding
|
|
|
22,942,737
|
|
|
17,209,779
|
|
|
Common
Units
|
|
|
2,183,490
|
|
|
838,607
|
|
|
Series
A Preferred Units
|
|
|
114,963
|
|
|
39,599
|
|
|
Restricted
stock awards (1)
|
|
|
—
|
|
|
88,204
|
|
|
Diluted
weighted average common shares outstanding
|
|
|
25,241,190
|
|
|
18,176,189
|
|
(1) |
153,360
weighted average restricted stock awards are excluded from diluted
weighted average common shares outstanding for the three months ended
March 31, 2007 because they would be anti-dilutive due to the Company’s
loss position for the period.
|
3.
Property Acquisitions
In
January 2007, the Company acquired a 248-unit, 752-bed property (Village on
Sixth) located near the campus of Marshall University in Huntington, West
Virginia, for a purchase price of $25.6 million, which excludes $1.7 million
of
anticipated transaction costs, initial integration expenses and capital
expenditures necessary to bring this property up to the Company’s operating
standards. As part of the transaction, the Company assumed two fixed-rate
mortgage loans, which includes one for $16.2 million with an annual interest
rate of 5.5% and remaining term to maturity of 7.5 years and a second loan
for
$1.4 million with an annual interest rate of 6.6% and remaining term to maturity
of 9.9 years.
In
February 2007, the Company acquired a three property portfolio (the “Edwards
Portfolio”) for a purchase price of $102.0 million, which excludes $3.7 million
of anticipated transaction costs, initial integration expenses and capital
expenditures necessary to bring these properties up to the Company’s operating
standards. As part of the transaction, the Company assumed $70.7 million in
fixed-rate mortgage debt with a weighted average annual interest rate of 5.7%
and an average remaining term to maturity of 8.5 years. The transaction also
includes the pre-purchase of an additional phase at one of the existing
properties containing 84 beds currently under construction for $4.6 million,
subject to the satisfaction of certain conditions. The completion of the
additional phase is expected in August 2007.
AMERICAN
CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
Edwards Portfolio consists of one property in Lexington, Kentucky located near
the campus of the University of Kentucky, one property in Toledo, Ohio located
near the campus of the University of Toledo and one property in Ypsilanti,
Michigan located near the campus of Eastern Michigan University. These three
properties contain 740 units and 1,887 beds.
The
acquired properties’ results of operations have been included in the
accompanying consolidated statements of operations since their respective
acquisition closing dates. The following pro forma information for the three
months ended March 31, 2007 and 2006 presents consolidated financial information
for the Company as if the property acquisitions discussed above, the Company’s
2006 acquisitions and the Company’s September 2006 equity offering had occurred
at the beginning of the earliest period presented. The unaudited pro forma
information is provided for informational purposes only and is not indicative
of
results that would have occurred or which may occur in the future:
|
|
Three
Months Ended March 31,
|
|
|
|
2007
|
|
2006
|
|
Total
revenues
|
|
$
|
37,188
|
|
$
|
35,518
|
|
Net
(loss) income
|
|
$
|
(4,054
|
)
|
$
|
2,891
|
|
Net
(loss) income per share - basic
|
|
$
|
(0.18
|
)
|
$
|
0.13
|
|
Net
(loss) income per share - diluted
|
|
$
|
(0.17
|
)
|
$
|
0.13
|
|
4.
Property Disposition and Discontinued Operations
The
Village on University, an owned property, was sold in December 2006 for
approximately $51.0 million, resulting in net cash proceeds of approximately
$50.0 million. As such, the net income attributable to this property is
reflected in the accompanying consolidated statements of operations as
discontinued operations in accordance with SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets.
Below
is a summary of the results of operations of the aforementioned property for
all
periods presented:
|
|
Three
Months Ended March 31,
|
|
|
|
2007
|
|
2006
|
|
Total
revenues
|
|
$
|
—
|
|
$
|
1,362
|
|
Total
operating expenses
|
|
|
—
|
|
|
(640
|
)
|
Net
income
|
|
$
|
—
|
|
$
|
722
|
|
5.
Investments in Owned Properties
Owned
properties consisted of the following:
|
|
March
31, 2007
|
|
December
31, 2006
|
|
Land
|
|
$
|
91,648
|
|
$
|
75,263
|
|
Buildings
and improvements
|
|
|
686,416
|
|
|
579,906
|
|
Furniture,
fixtures and equipment
|
|
|
35,077
|
|
|
28,111
|
|
Construction
in progress
|
|
|
74,839
|
|
|
56,958
|
|
|
|
|
887,980
|
|
|
740,238
|
|
Less
accumulated depreciation
|
|
|
(51,510
|
)
|
|
(46,041
|
)
|
Owned
properties, net
|
|
$
|
836,470
|
|
$
|
694,197
|
|
6.
On-Campus Participating Properties
The
Company is a party to ground/facility lease agreements (“Leases”) with certain
state university systems and colleges (each, a “Lessor”) for the purpose of
developing, constructing, and operating student housing facilities on university
campuses. Under the terms of the Leases, title to the constructed facilities
is
held by the applicable Lessor and such Lessor receives a de minimus base rent
paid at inception and 50% of defined net cash flows on an annual basis through
the term of the lease. The Leases terminate upon the earlier to occur of the
final repayment of the related debt, the amortization period of which is
contractually stipulated, or the end of the lease term.
AMERICAN
CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Pursuant
to the Leases, in the event the leasehold estates do not achieve Financial
Break
Even (defined as revenues less operating expenses, excluding management fees,
less debt service), the applicable Lessor would be required to make a rental
payment, also known as the Contingent Payment, sufficient to achieve Financial
Break Even. The Contingent Payment provision remains in effect until such time
as any financing placed on the facilities would receive an investment grade
rating without the Contingent Payment provision. In the event that the Lessor
is
required to make a Contingent Payment, future net cash flow distributions would
be first applied to repay such Contingent Payments and then to unpaid management
fees prior to normal distributions. Beginning in November 1999 and December
2002, as a result of the debt financing on the facilities achieving investment
grade ratings without the Contingent Payment provision, the Texas A&M
University System is no longer required to make Contingent Payments under either
the Prairie View A&M University Village or University College Leases. The
Contingent Payment obligation continues to be in effect for the Texas A&M
International University and University of Houston leases.
In
the
event the Company seeks to sell its leasehold interest, the Leases provide
the
applicable Lessor the right of first refusal of a bona fide purchase offer
and
an option to purchase the lessee’s rights under the applicable
Lease.
In
conjunction with the execution of each Lease, the Company has entered into
separate five-year agreements to manage the related facilities for 5% of defined
gross receipts. The five-year terms of the management agreements are not
contingent upon the continuation of the Leases. Upon expiration of the initial
five year terms, the agreements continue on a month-to-month basis.
On-campus
participating properties are as follows:
|
|
|
|
|
|
Historical
Cost
|
|
Lessor/University
|
|
Lease
Commencement
|
|
Required
Debt
Repayment
(1)
|
|
March
31, 2007
|
|
December
31, 2006
|
|
Texas
A&M University System /
Prairie
View A&M University (2)
|
|
|
2/1/96
|
|
|
9/1/23
|
|
$
|
38,302
|
|
$
|
38,277
|
|
Texas
A&M University System /
Texas
A&M International
|
|
|
2/1/96
|
|
|
9/1/23
|
|
|
6,015
|
|
|
6,009
|
|
Texas
A&M University System /
Prairie
View A&M University (3)
|
|
|
10/1/99
|
|
|
8/31/25
/ 8/31/28
|
|
|
23,889
|
|
|
23,872
|
|
University
of Houston System /
University
of Houston (4)
|
|
|
9/27/00
|
|
|
8/31/35
|
|
|
34,645
|
|
|
34,628
|
|
|
|
|
|
|
|
|
|
|
102,851
|
|
|
102,786
|
|
Less
accumulated amortization
|
|
|
|
|
|
|
|
|
(27,158
|
)
|
|
(26,098
|
)
|
On-campus
participating properties, net
|
|
|
|
|
|
|
|
$
|
75,693
|
|
$
|
76,688
|
|
(1) |
Represents
the effective lease termination date. The Leases terminate upon
the
earlier to occur of the final repayment of the related debt or
the end of
the contractual lease term.
|
(2) |
Consists
of three phases placed in service between 1996 and
1998.
|
(3) |
Consists
of two phases placed in service in 2000 and
2003.
|
(4) |
Consists
of two phases placed in service in 2001 and 2005.
|
AMERICAN
CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
7.
Minority Interests
The
Company consolidates the accounts of the Operating Partnership and its
subsidiaries into its consolidated financial statements. However, the Company
does not own 100% of the Operating Partnership and certain consolidated real
estate joint ventures. The amounts reported as minority interests on the
Company’s consolidated balance sheet reflect the portion of these consolidated
entities’ equity that the Company does not own. Accordingly, the amounts
reported as minority interest on the Company’s consolidated statements of
operations reflect the portion of these consolidated entities’ net income or
loss not allocated to the Company.
Equity
interests in the Operating Partnership not owned by the Company are held
in the
form of Common Units and Series A Preferred Units. Such Common Units and
Series
A Preferred Units are exchangeable into an equal number of shares of the
Company’s common stock, or, at the Company’s election, cash. A Common Unit and a
share of the Company’s common stock have essentially the same economic
characteristics, as they effectively participate equally in the net income
and
distributions of the Operating Partnership. Series A Preferred Units have
a
cumulative preferential per annum cash distribution rate of 5.99%, payable
quarterly concurrently with the payment of dividends on the Company’s common
stock.
Income
or
loss allocated to minority interests on the Company’s consolidated statements of
operations includes the Series A Preferred Unit distributions as well as
the pro
rata share of the Operating Partnership’s net income or loss allocated to Common
Units. The Common Unitholders’ minority interest in the Operating Partnership is
reported at an amount equal to their ownership percentage of the net equity
of
the Operating Partnership at the end of each reporting period. Common Units
and
Series A Preferred Units issued in connection with the 2006 acquisition of
the
Royal Portfolio became exchangeable into an equal number of shares of the
Company’s common stock on March 1, 2007. As a result, 219,913 Common Units were
converted into shares of the Company’s common stock during the three months
ended March 31, 2007. As of March 31, 2007 and December 31, 2006, approximately
8% and 9%, respectively, of the equity interests of the Operating Partnership
was held by persons affiliated with Royal Properties and certain current
and
former members of management in the form of Common Units and Series A Preferred
Units.
Minority
interests also include the equity interests of unaffiliated joint venture
partners in four joint ventures. Two of the joint ventures own and operate
the
Company’s Callaway House and University Village at Sweet Home owned-off campus
properties, which are located near the campuses of Texas A&M University and
the State University of New York - Buffalo, respectively. The other two joint
ventures own properties that are currently under development. One joint venture
was formed to develop, own, and operate the Company’s University Centre owned
off-campus property, which is scheduled to open for occupancy in Fall 2007
and
is located near the campuses of Rutgers University, New Jersey Institute
of
Technology and Essex County Community College. The other joint venture was
formed to develop, own, and operate the Company’s Chestnut Ridge owned
off-campus property, which is scheduled to open for occupancy in Fall 2008
and
is located near the campus of the State University of New York — Buffalo.
8.
Debt
A
summary
of the Company’s outstanding consolidated indebtedness, including unamortized
debt premiums and discounts, is as follows:
|
|
March
31, 2007
|
|
December
31, 2006
|
|
Debt
secured by owned off-campus properties:
|
|
|
|
|
|
Mortgage
loans payable
|
|
$
|
401,847
|
|
$
|
315,044
|
|
Construction
loan payable
|
|
|
31,032
|
|
|
21,386
|
|
|
|
|
432,879
|
|
|
336,430
|
|
Debt
secured by on-campus participating properties:
|
|
|
|
|
|
|
|
Mortgage
loans payable
|
|
|
33,156
|
|
|
16,513
|
|
Construction
loan payable
|
|
|
—
|
|
|
16,710
|
|
Bonds
payable
|
|
|
56,675
|
|
|
56,675
|
|
|
|
|
89,831
|
|
|
89,898
|
|
Unamortized
debt premiums/discounts
|
|
|
5,423
|
|
|
5,966
|
|
Total
debt
|
|
$
|
528,133
|
|
$
|
432,294
|
|
AMERICAN
CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Loans
Assumed or Entered Into in Conjunction with Property
Acquisitions
In
connection with the January 2007 acquisition of The Village on Sixth (see
Note
3), an owned off-campus property, the Company assumed approximately $17.6
million of fixed-rate mortgage debt, which is comprised of one $16.2 million
mortgage loan with an annual interest rate of 5.5% and May 2014 maturity
date,
and a second mortgage loan for $1.4 million with an annual interest rate
of 6.6%
and October 2016 maturity date. Upon assumption of this debt, the Company
recorded a debt discount of approximately $0.3 million on the $16.2 million
mortgage loan and a debt premium of approximately $0.1 million on the $1.4
million mortgage loan, in each case to reflect the estimated fair value of
the
debt assumed. These mortgage loans are secured by liens on the related
properties.
In
connection with the February 2007 acquisition of the Edwards Portfolio (see
Note
3), the Company assumed approximately $70.7 million in fixed-rate mortgage
debt.
At the time of assumption, the debt had a weighted average interest rate
of 5.7%
and an average remaining term to maturity of 8.3 years. Upon assumption of
these
three loans, the Company recorded debt premiums of approximately $0.1 million,
to reflect the estimated fair value of the debt assumed. These three mortgage
loans are secured by liens on the related properties.
Cullen
Oaks Loans
In
addition, in February 2007, the Company extended the maturity date of the
Cullen
Oaks Phase I and Phase II loans to February 2014. The extended loans bear
interest at a rate of LIBOR plus 1.35% and require payments of interest only
through May 2008 and monthly payments of principal and interest from May
2008
through the maturity date. In connection with these loan extensions, the
Company
terminated an existing interest rate swap agreement and entered into a new
interest rate swap agreement (see Note 10).
Revolving
Credit Facility
The
Operating Partnership has a $115 million revolving credit facility, which
may be
expanded by up to an additional $110 million upon the satisfaction of certain
conditions. The maturity date of the facility is August 17, 2009 and the
Company
guarantees the Operating Partnership’s obligations under the facility.
Availability
under the revolving credit facility is limited to an “aggregate borrowing base
amount” equal to the lesser of (i) 65% of the value of certain properties,
calculated as set forth in the credit facility, and (ii) the adjusted net
operating income from these properties divided by a formula amount. The facility
bears interest at a variable rate, at the Company’s option, based upon a base
rate or one-, two-, three-, or six-month LIBOR plus, in each case, a spread
based upon the Company’s total leverage. Additionally, the Company is required
to pay an unused commitment fee ranging from 0.15% to 0.20% per annum, depending
on the aggregate unused balance. As of March 31, 2007, the total availability
under the facility (subject to the satisfaction of certain financial covenants)
was approximately $107.5 million.
The
terms
of the facility include certain restrictions and covenants, which limit,
among
other items, the incurrence of additional indebtedness, liens, and the
disposition of assets. The facility contains customary affirmative and negative
covenants and also contains financial covenants that, among other things,
require the Company to maintain certain minimum ratios of “EBITDA” (earnings
before interest, taxes, depreciation and amortization) to fixed charges.
The
Company may not pay distributions that exceed 100% of funds from operations
for
any four consecutive quarters. The financial covenants also include consolidated
net worth and leverage ratio tests. As of March 31, 2007, the Company was
in
compliance with all such covenants.
AMERICAN
CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
9.
Incentive Award Plan
The
Company has adopted the 2004 Incentive Award Plan (the “Plan”). The Plan
provides for the grant to selected employees and directors of the Company
and
the Company’s affiliates of stock options, RSUs, RSAs, and other stock-based
incentive awards. The Company has reserved a total of 1,210,000 shares
of the
Company’s common stock for issuance pursuant to the Plan, subject to certain
adjustments for changes in the Company’s capital structure, as defined in the
Plan. As of March 31, 2007, the Company has issued 701,228 awards under
the
Plan. A summary of the Company’s stock-based incentive awards under the Plan as
of March 31, 2007 and changes during the three months ended March 31, 2007,
is
presented below:
|
|
Common
Units
|
|
Restricted
Stock Units (RSUs)
|
|
Restricted
Stock Awards (RSAs)
|
|
Outperformance
Bonus Plan (1)
|
|
Total
|
|
Outstanding
at December 31, 2006
|
|
110,000
|
|
20,555
|
|
100,047
|
|
367,682
|
|
598,284
|
|
Granted
(2)
|
|
—
|
|
—
|
|
91,607
|
|
—
|
|
91,607
|
|
Vested
|
|
—
|
|
—
|
|
(18,073
|
) |
—
|
|
(18,073
|
) |
Forfeited
|
|
|
—
|
|
|
—
|
|
|
(9,236
|
)
|
|
—
|
|
|
(9,236
|
)
|
Outstanding
at March 31, 2007
|
|
|
110,000
|
|
|
20,555
|
|
|
164,345
|
|
|
367,682
|
|
|
662,582
|
|
Vested
at March 31, 2007
|
|
|
110,000
|
|
|
20,555
|
|
|
27,646
|
|
|
—
|
|
|
158,201
|
|
(1) |
The
achievement of certain performance measures was considered
probable as of
March 31, 2007 and the Company recorded a compensation charge
of
approximately $9.6 million during the three months ended
March 31,
2007.
|
(2) |
On
January 29, 2007, the Company granted 91,607 RSAs to its executive
officers and certain employees that vest in equal annual installments
over
five years. Unvested awards are forfeited upon the termination
of an
individual’s employment with the Company. Recipients of RSAs receive
dividends, as declared by the Company’s Board of Directors, on unvested
shares provided that the respective recipient continues to be an
employee
of the Company.
|
Outperformance
Bonus Plan
The
outperformance bonus plan was adopted at the consummation of the Company’s IPO
in August 2004 and contains performance hurdles that must be achieved by
the
third anniversary of the IPO in order for the awards granted under the Plan
to
vest. As of March 31, 2007, management has determined the achievement of
these
performance measures is probable and, therefore, the Company has recognized
a
prorated compensation charge of $9.6 million for the three-year service period,
which began on the Company’s IPO date and ends in August 2007. Additional
compensation charges may be recorded in future quarters, to the extent
management continues to believe the achievement of these performance measures
is
probable.
10.
Interest
Rate Hedges
In
February 2007, the Company extended the maturity date of the Cullen Oaks
Phase I
and Phase II loans to February 2014. The extended loans bear interest at
a rate
of LIBOR plus 1.35% and require payments of interest only through May 2008
and
monthly payments of principal and interest from May 2008 through the maturity
date. In connection with these loan extensions, the Company terminated the
existing interest rate swap agreement and received a termination payment
from
the lender of approximately $0.4 million. In accordance with SFAS No. 133,
the
$0.4 million gain will be amortized from accumulated other comprehensive
income
to earnings over the remaining term of the terminated interest rate swap
agreement (through November 2008).
In
addition, the Company entered into an interest rate swap agreement effective
February 15, 2007 through February 15, 2014, that is designated to hedge
its
exposure to fluctuations in interest payments attributed to changes in interest
rates associated with payments on the Cullen Oaks Phase I and Phase II loans.
Under the terms of the interest rate swap agreement, the Company pays a fixed
rate of 6.69% and receives a floating rate of LIBOR plus 1.35%. The interest
rate swap had an estimated negative fair value of approximately $0.8 million
at
March 31, 2007 and is reflected in other liabilities in the accompanying
consolidated balance sheets. Ineffectiveness
resulting from the Company’s hedges is not material.
11.
Commitments and Contingencies
Commitments
Development-related
guarantees: The
Company commonly provides alternate housing and project cost guarantees,
subject
to force majeure. These guarantees are typically limited, on an aggregate
basis,
to the amount of the projects’ related development fees or a contractually
agreed-upon maximum exposure amount. Alternate housing guarantees typically
expire five days after construction is complete and generally require the
Company to provide substitute living quarters and transportation for students
to
and from the university if the project is not complete by an agreed-upon
completion date. Under project cost guarantees, the Company is responsible
for
the construction cost of a project in excess of an approved budget. The budget
consists primarily of costs included in the general contractors’ guaranteed
maximum price contract (“GMP”). In most cases, the GMP obligates the general
contractor, subject to force majeure and approved change orders, to provide
completion date guarantees and to cover cost overruns and liquidated damages.
In
addition, the GMP is typically secured with payment and performance bonds.
Project cost guarantees expire upon completion of certain developer obligations,
which are normally satisfied within one year after completion of the project.
AMERICAN
CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
On
one
completed project, the Company has guaranteed losses up to $3.0 million in
excess of the development fee if the loss is due to any failure of the Company
to maintain, or cause its professionals to maintain, required insurance for
a
period of five years after completion of the project (August 2009).
The
Company’s estimated maximum exposure amount under the above guarantees is
approximately $10.4 million
At
March
31, 2007, management does not anticipate any material deviations from schedule
or budget related to third-party development projects currently in
progress. The Company has estimated the fair value of guarantees entered
into or modified after December 31, 2002, the effective date of FASB
Interpretation No. 45, Guarantor’s
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others,
to be
immaterial.
In
the
normal course of business, the Company enters into various development-related
purchase commitments with parties that provide development-related goods
and
services. In the event that the Company was to terminate development
services prior to the completion of projects under construction, the Company
could potentially be committed to satisfy outstanding purchase orders with
such
parties.
Contingencies
Litigation:
In
the
normal course of business, the Company is subject to claims, lawsuits, and
legal
proceedings. While it is not possible to ascertain the ultimate outcome of
such
matters, management believes that the aggregate amount of such liabilities,
if
any, in excess of amounts provided or covered by insurance, will not have
a
material adverse effect on the consolidated financial position or results
of
operations of the Company.
Letters
of Intent:
In the
ordinary course of the Company’s business, the Company enters into letters
of intent indicating a willingness to negotiate for acquisitions, dispositions
or joint ventures. Such letters of intent are non-binding, and neither party
to
the letter of intent is obligated to pursue negotiations unless and until
a
definitive contract is entered into by the parties. Even if definitive contracts
are entered into, the letters of intent relating to the acquisition and
disposition of real property and resulting contracts generally contemplate
that
such contracts will provide the acquirer with time to evaluate the property
and
conduct due diligence, during which periods the acquiror will have the ability
to terminate the contracts without penalty or forfeiture of any deposit or
earnest money. There can be no assurance that definitive contracts will be
entered into with respect to any matter covered by letters of intent or that
the
Company will consummate any transaction contemplated by any definitive contract.
Furthermore, due diligence periods for real property are frequently extended
as
needed. An acquisition or disposition of real property becomes probable at
the
time that the due diligence period expires and the definitive contract has
not
been terminated. The Company is then at risk under a real property acquisition
contract, but only to the extent of any earnest money deposits associated
with
the contract, and is obligated to sell under a real property sales
contract.
Environmental
Matters: The
Company is not aware of any environmental liability with respect to the
properties that would have a material adverse effect on the Company’s business,
assets or results of operations. However, there can be no assurance that
such a
material environmental liability does not exist. The existence of any such
material environmental liability could have an adverse effect on the Company’s
results of operations and cash flows.
12.
Segments
The
Company defines business segments by their distinct customer base and service
provided. The Company has identified four reportable segments: Owned Off-Campus
Properties, On-Campus Participating Properties, Development Services, and
Property Management Services. Management evaluates each segment’s performance
based on operating income before depreciation, amortization, minority interests
and allocation of corporate overhead. Intercompany fees are reflected at
the
contractually stipulated amounts.
|
|
Three
Months Ended March 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
Owned
Off-Campus Properties
|
|
|
|
|
|
|
|
Rental
revenues
|
|
$
|
27,486
|
|
$
|
18,445
|
|
Interest
and other income
|
|
|
71
|
|
|
16
|
|
Total
revenues from external customers
|
|
|
27,557
|
|
|
18,461
|
|
Operating
expenses before depreciation and amortization
|
|
|
11,766
|
|
|
7,631
|
|
Interest
expense
|
|
|
5,464
|
|
|
3,775
|
|
Operating
income before depreciation, amortization, minority
interests
and allocation of corporate overhead
|
|
$
|
10,327
|
|
$
|
7,055
|
|
Depreciation
and amortization
|
|
$
|
5,837
|
|
$
|
3,866
|
|
Capital
expenditures
|
|
$
|
17,113
|
|
$
|
14,684
|
|
Total
segment assets at March 31,
|
|
$
|
865,119
|
|
$
|
666,748
|
|
On-Campus
Participating Properties
|
|
|
|
|
|
|
|
Rental
revenues
|
|
$
|
6,337
|
|
$
|
5,982
|
|
Interest
and other income
|
|
|
78
|
|
|
63
|
|
Total
revenues from external customers
|
|
|
6,415
|
|
|
6,045
|
|
Operating
expenses before depreciation, amortization,
ground/facility
lease, and allocation of corporate overhead
|
|
|
1,866
|
|
|
1,801
|
|
Ground/facility
lease
|
|
|
295
|
|
|
192
|
|
Interest
expense
|
|
|
1,573
|
|
|
1,587
|
|
Operating
income before depreciation, amortization, minority
interests
and allocation of corporate overhead
|
|
$
|
2,681
|
|
$
|
2,465
|
|
Depreciation
and amortization
|
|
$
|
1,060
|
|
$
|
1,032
|
|
Capital
expenditures
|
|
$
|
65
|
|
$
|
49
|
|
Total
segment assets at March 31,
|
|
$
|
89,679
|
|
$
|
92,528
|
|
Development
Services
|
|
|
|
|
|
|
|
Development
and construction management fees from
external
customers
|
|
$
|
405
|
|
$
|
1,638
|
|
Intersegment
revenues
|
|
|
—
|
|
|
—
|
|
Total
revenues
|
|
|
405
|
|
|
1,638
|
|
Operating
expenses
|
|
|
1,213
|
|
|
1,310
|
|
Operating
(loss) income before depreciation, amortization,
minority
interests and allocation of corporate overhead
|
|
$
|
(808
|
)
|
$
|
328
|
|
Total
segment assets at March 31,
|
|
$
|
1,344
|
|
$
|
4,431
|
|
Property
Management Services
|
|
|
|
|
|
|
|
Property
management fees from external customers
|
|
$
|
722
|
|
$
|
662
|
|
Intersegment
revenues
|
|
|
1,058
|
|
|
833
|
|
Total
revenues
|
|
|
1,780
|
|
|
1,495
|
|
Operating
expenses
|
|
|
694
|
|
|
640
|
|
Operating
income before depreciation, amortization, minority
interests
and allocation of corporate overhead
|
|
$
|
1,086
|
|
$
|
855
|
|
Total
segment assets at March 31,
|
|
$
|
1,770
|
|
$
|
1,253
|
|
Reconciliations
|
|
|
|
|
|
|
|
Total
segment revenues
|
|
$
|
36,157
|
|
$
|
27,639
|
|
Unallocated
interest income earned on corporate cash
|
|
|
558
|
|
|
106
|
|
Elimination
of intersegment revenues
|
|
|
(1,058
|
)
|
|
(833
|
)
|
Total
consolidated revenues, including interest income
|
|
$
|
35,657
|
|
$
|
26,912
|
|
Segment
operating income before depreciation, amortization,
minority
interests and allocation of corporate overhead
|
|
$
|
13,286
|
|
$
|
10,703
|
|
Depreciation
and amortization
|
|
|
(7,268
|
)
|
|
(5,373
|
)
|
Net
unallocated expenses relating to corporate overhead
|
|
|
(10,894
|
)
|
|
(2,260
|
)
|
Income
tax provision
|
|
|
(60
|
)
|
|
—
|
|
Minority
interests
|
|
|
258
|
|
|
(128
|
)
|
Income
from continuing operations
|
|
$
|
(4,678
|
)
|
$
|
2,942
|
|
Total
segment assets
|
|
$
|
957,912
|
|
$
|
764,960
|
|
Unallocated
corporate assets and assets held for sale
|
|
|
18,253
|
|
|
36,956
|
|
Total
assets
|
|
$
|
976,165
|
|
$
|
801,916
|
|
Item
2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Forward-looking
Statements
This
report contains forward-looking statements within the meaning of the federal
securities laws. We caution investors that any forward-looking statements
presented in this report, or which management may make orally or in writing
from
time to time, are based on management’s beliefs and assumptions made by, and
information currently available to, management. When used, the words
“anticipate,” “believe,” “expect,” “intend,” “may,” “might,” “plan,” “estimate,”
“project,” “should,” “will,” “result” and similar expressions, which do not
relate solely to historical matters, are intended to identify forward-looking
statements. Such statements are subject to risks, uncertainties and assumptions
and may be affected by known and unknown risks, trends, uncertainties and
factors that are beyond our control. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, estimated or
projected. We caution you that while forward-looking statements reflect our
good
faith beliefs when we make them, they are not guarantees of future performance
and are impacted by actual events when they occur after we make such statements.
We expressly disclaim any responsibility to update forward-looking statements,
whether as a result of new information, future events or otherwise. Accordingly,
investors should use caution in relying on past forward-looking statements,
which are based on results and trends at the time they were made, to anticipate
future results or trends.
Some
of
the risks and uncertainties that may cause our actual results, performance
or
achievements to differ materially from those expressed or implied by
forward-looking statements include, among others, the following: general risks
affecting the real estate industry (including, without limitation, the inability
to enter into or renew leases, dependence on tenants’ financial condition, and
competition from other developers, owners and operators of real estate); risks
associated with changes in University admission or housing policies; risks
associated with the availability and terms of financing and the use of debt
to
fund acquisitions and developments; failure to manage effectively our growth
and
expansion into new markets or to integrate acquisitions successfully; risks
and
uncertainties affecting property development and construction (including,
without limitation, construction delays, cost overruns, inability to obtain
necessary permits and public opposition to such activities); risks associated
with downturns in the national and local economies, increases in interest rates,
and volatility in the securities markets; costs of compliance with the Americans
with Disabilities Act and other similar laws; potential liability for uninsured
losses and environmental contamination; risks associated with our potential
failure to qualify as a REIT under the Internal Revenue Code of 1986 (the
“Code”), as amended, and possible adverse changes in tax and environmental laws;
and risks associated with our dependence on key personnel whose continued
service is not guaranteed.
The
risks
included here are not exhaustive, and additional factors could adversely affect
our business and financial performance, including factors and risks included
in
other sections of this report. Moreover, we operate in a very competitive and
rapidly changing environment. New risk factors emerge from time to time and
it
is not possible for management to predict all such risk factors, nor can it
assess the impact of all such risk factors on our business or the extent to
which any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statements. Given these
risks and uncertainties, investors should not place undue reliance on
forward-looking statements as a prediction of actual results.
Our
Company and Our Business
American
Campus Communities, Inc. (referred to herein as “the Company,” “us,” “we,” and
“our”) is a real estate investment trust (“REIT”) that was incorporated on March
9, 2004 and commenced operations effective with the completion of our initial
public offering (“IPO”) on August 17, 2004. Through our controlling interest in
American Campus Communities Operating Partnership LP (the “Operating
Partnership”) and American Campus Communities Services, Inc., (our taxable REIT
subsidiary or “TRS”), we are one of the largest owners, managers and developers
of high quality student housing properties in the United States in terms of
beds
owned and under management. We are a fully integrated, self-managed and
self-administered equity REIT with expertise in the acquisition, design,
financing, development, construction management, leasing and management of
student housing properties.
As
of
March 31, 2007, our property portfolio contained 43 student housing properties
with approximately 26,800 beds and approximately 8,900 apartment units,
consisting of 39 owned properties that are in close proximities to colleges
and
universities and four on-campus participating properties operated under
ground/facility leases with the related university systems. These communities
contain modern housing units, offer resort-style amenities and are supported
by
a resident assistant system and other student-oriented programming.
Through
the TRS, we also provide construction management and development services for
student housing properties owned by colleges and universities, charitable
foundations, and others. As of March 31, 2007, we provided third party
management and leasing services for 15 student housing properties (ten of which
we served as the third party developer and construction manager) that
represented approximately 9,600 beds in approximately 3,300 units. Third party
management and leasing services are typically provided pursuant to multi-year
management contracts that have initial terms that range from one to five years.
As of March 31, 2007, our total owned and managed portfolio included 58
properties with approximately 36,400 beds in approximately 12,200
units.
Third-Party
Development Services
Our
third-party development and construction management services as of March 31,
2007 consisted of four projects under contract and currently in progress with
fees ranging from $0.4 million to $3.1 million. As of March 31, 2007, fees
of
approximately $2.5 million remained to be earned by us with respect to these
projects, which have scheduled completion dates of August 2007 through July
2008.
While
we
believe that our third party development/construction management and property
management services allow us to develop strong and key relationships with
colleges and universities, revenue from this area has over time become a smaller
portion of our operations due to the continued focus on and growth of our owned
property portfolio. Nevertheless, we believe these services continue to provide
synergies with respect to our ability to identify, acquire or develop, and
successfully operate, student housing properties.
Acquisitions
In
January 2007, we acquired a 248-unit, 752-bed property (Village on Sixth)
located near the campus of Marshall University in Huntington, West Virginia,
for
a purchase price of $25.6 million, which excludes $1.7 million of anticipated
transaction costs, initial integration expenses and capital expenditures
necessary to bring this property up to our operating standards. As part of
the
transaction, we assumed two fixed-rate mortgage loans, which includes one for
$16.2 million with an annual interest rate of 5.5% and remaining term to
maturity of 7.5 years and a second loan for $1.4 million with an annual interest
rate of 6.6% and remaining term to maturity of 9.9 years.
In
February 2007, we acquired a three property portfolio (the “Edwards Portfolio”)
for a purchase price of $102.0 million, which excludes $3.7 million of
anticipated transaction costs, initial integration expenses and capital
expenditures necessary to bring these properties up to our operating standards.
As part of the transaction, we assumed $70.7 million in fixed-rate mortgage
debt
with a weighted average annual interest rate of 5.7% and an average remaining
term to maturity of 8.5 years. The transaction also includes the pre-purchase
of
an additional phase at one of the existing properties containing 84 beds
currently under construction for $4.6 million, subject to the satisfaction
of
certain conditions. The completion of the additional phase is expected in August
2007.
The
Edwards Portfolio consists of one property in Lexington, Kentucky located near
the campus of the University of Kentucky, one property in Toledo, Ohio located
near the campus of the University of Toledo and one property in Ypsilanti,
Michigan located near the campus of Eastern Michigan University. These three
properties contain 740 units and 1,887 beds.
Owned
Development Activities
Overview:
As of
March 31, 2007, we were in the process of constructing two owned off-campus
properties and one owned on-campus property. We estimate that the total
development costs relating to these activities will be approximately $246.7
million. As of March 31, 2007, we have incurred development costs of
approximately $74.1 million in connection with these properties, with the
remaining development costs estimated at approximately $172.6 million. The
activities are described below:
University
Centre (formerly Village at Newark):
As of
March 31, 2007, our University Centre owned off-campus property was under
construction with total development costs estimated to be approximately $74.4
million. The project is scheduled to complete construction and open for
occupancy in Fall 2007, in connection with the commencement of the 2007/2008
academic year. As of March 31, 2007, the project was approximately 89% complete,
and we estimate that remaining development costs will be approximately $13.5
million. As of March 31, 2007, we have funded $29.9 million of the project’s
development costs internally, with the remaining development costs to be funded
through a construction loan.
Arizona
State University - South Campus Residential Community:
As of
March 31, 2007, our Arizona State University - South Campus Residential
Community (“ASU-SCRC”) owned on-campus property was under construction with
total development costs estimated to be approximately $137.5 million. The
project is scheduled to complete construction and open for occupancy in August
2008, in connection with the commencement of the 2008/2009 academic year. As
of
March 31, 2007, the project was approximately 5% complete, and we estimate
that
remaining development costs will be approximately $126.3 million. We expect
that
we will fund approximately $37.5 million of the project budget internally and
the remaining $100.0 million will be funded with a construction loan.
Chestnut
Ridge: As
of
March 31, 2007, our Chestnut Ridge owned off-campus property was under
construction with total development costs estimated to be approximately $34.8
million. The project is scheduled to complete construction and open for
occupancy in August 2008, in connection with the commencement of the 2008/2009
academic year. As of March 31, 2007, the project was approximately 2% complete,
and we estimate that remaining development costs will be approximately $32.8
million. We expect that we will fund approximately $3.2 million of the project
budget internally and the remaining $31.6 million will be funded with a
construction loan.
Property
Operations
As
of
March 31, 2007, our property portfolio consisted of the following:
PROPERTY
|
|
YEAR
ACQUIRED
/ DEVELOPED (1)
|
|
LOCATION
|
|
PRIMARY
UNIVERSITY SERVED
|
|
UNITS
|
|
BEDS
|
Owned
properties:
|
|
|
|
|
|
|
|
|
|
|
1.
Villas on Apache
|
|
1999
|
|
Tempe,
AZ
|
|
Arizona
State University Main Campus
|
|
111
|
|
288
|
2.
The Village at Blacksburg
|
|
2000
|
|
Blacksburg,
VA
|
|
Virginia
Polytechnic Institute and
State
University
|
|
288
|
|
1,056
|
3.
River Club Apartments
|
|
1999
|
|
Athens,
GA
|
|
The
University of Georgia-Athens
|
|
266
|
|
792
|
4.
River Walk Townhomes
|
|
1999
|
|
Athens,
GA
|
|
The
University of Georgia-Athens
|
|
100
|
|
336
|
5.
The Callaway House
|
|
2001
|
|
College
Station, TX
|
|
Texas
A&M University
|
|
173
|
|
538
|
6.
The Village at Alafaya Club
|
|
2000
|
|
Orlando,
FL
|
|
The
University of Central Florida
|
|
228
|
|
839
|
7.
The Village at Science Drive
|
|
2001
|
|
Orlando,
FL
|
|
The
University of Central Florida
|
|
192
|
|
732
|
8.
University Village at Boulder Creek
|
|
2002
|
|
Boulder,
CO
|
|
The
University of Colorado at Boulder
|
|
82
|
|
309
|
9.
University Village at Fresno
|
|
2004
|
|
Fresno,
CA
|
|
California
State University, Fresno
|
|
105
|
|
406
|
10.
University Village at TU
|
|
2004
|
|
Philadelphia,
PA
|
|
Temple
University
|
|
220
|
|
749
|
11.
University Club Tallahassee
|
|
2005
|
|
Tallahassee,
FL
|
|
Florida
State University
|
|
152
|
|
608
|
12.
The Grove at University Club
|
|
2005
|
|
Tallahassee,
FL
|
|
Florida
State University
|
|
64
|
|
128
|
13.
College Club Tallahassee
|
|
2005
|
|
Tallahassee,
FL
|
|
Florida
A&M University
|
|
96
|
|
384
|
14.
The Greens at College Club
|
|
2005
|
|
Tallahassee,
FL
|
|
Florida
A&M University
|
|
40
|
|
160
|
15.
University Club Gainesville
|
|
2005
|
|
Gainesville,
FL
|
|
University
of Florida
|
|
94
|
|
376
|
16.
City Parc at Fry Street
|
|
2005
|
|
Denton,
TX
|
|
University
of North Texas
|
|
136
|
|
418
|
17.
The Estates
|
|
2005
|
|
Gainesville,
FL
|
|
University
of Florida
|
|
396
|
|
1,044
|
18.
University Village at Sweet Home
|
|
2005
|
|
Amherst,
NY
|
|
State
University of New York - Buffalo
|
|
269
|
|
828
|
19.
Entrada Real
|
|
2006
|
|
Tucson,
AZ
|
|
University
of Arizona
|
|
98
|
|
363
|
20.
Royal Oaks
|
|
2006
|
|
Tallahassee,
FL
|
|
Florida
State University
|
|
82
|
|
224
|
21.
Royal Pavilion
|
|
2006
|
|
Tallahassee,
FL
|
|
Florida
State University
|
|
60
|
|
204
|
22.
Royal Village Tallahassee
|
|
2006
|
|
Tallahassee,
FL
|
|
Florida
State University
|
|
75
|
|
288
|
23.
Royal Village Gainesville
|
|
2006
|
|
Gainesville,
FL
|
|
University
of Florida
|
|
118
|
|
448
|
24.
Northgate Lakes
|
|
2006
|
|
Orlando,
FL
|
|
The
University of Central Florida
|
|
194
|
|
710
|
25.
Royal Lexington
|
|
2006
|
|
Lexington,
KY
|
|
University
of Kentucky
|
|
94
|
|
364
|
26.
The Woods at Greenland
|
|
2006
|
|
Murfreesboro,
TN
|
|
Middle
Tennessee State University
|
|
78
|
|
276
|
27.
Raiders Crossing
|
|
2006
|
|
Murfreesboro,
TN
|
|
Middle
Tennessee State University
|
|
96
|
|
276
|
28.
Raiders Pass
|
|
2006
|
|
Lubbock,
TX
|
|
Texas
Tech University
|
|
264
|
|
828
|
29.
Aggie Station
|
|
2006
|
|
College
Station, TX
|
|
Texas
A&M University
|
|
156
|
|
450
|
30.
The Outpost San Marcos
|
|
2006
|
|
San
Marcos, TX
|
|
Texas
State University - San Marcos
|
|
162
|
|
486
|
31.
The Outpost San Antonio
|
|
2006
|
|
San
Antonio, TX
|
|
University
of Texas - San Antonio
|
|
276
|
|
828
|
32.
Callaway Villas (2)
|
|
2006
|
|
College
Station, TX
|
|
Texas
A&M University
|
|
236
|
|
704
|
33.
Village on Sixth
|
|
2007
|
|
Huntington,
WV
|
|
Marshall
University
|
|
248
|
|
752
|
34.
Newtown Crossing (3)
|
|
2007
|
|
Lexington,
KY
|
|
University
of Kentucky
|
|
332
|
|
858
|
35.
Olde Towne University Square
|
|
2007
|
|
Toledo,
OH
|
|
University
of Toledo
|
|
224
|
|
550
|
36.
Peninsular Place
|
|
2007
|
|
Ypsilanti,
MI
|
|
Eastern
Michigan University
|
|
184
|
|
479
|
37.
University Centre (4)
|
|
2007
|
|
Newark,
NJ
|
|
Rutgers
University, NJIT, Essex CCC
|
|
234
|
|
838
|
38.
ASU-SCRC Component I (5)
|
|
2008
|
|
Tempe,
AZ
|
|
Arizona
State University
|
|
613
|
|
1,866
|
39.
Chestnut Ridge (5)
|
|
2008
|
|
Amherst,
NY
|
|
State
University of New York - Buffalo
|
|
196
|
|
552
|
Total
owned properties
|
|
|
|
|
|
|
|
7,032
|
|
22,335
|
PROPERTY
|
|
YEAR
ACQUIRED
/ DEVELOPED (1)
|
|
LOCATION
|
|
PRIMARY
UNIVERSITY SERVED
|
|
UNITS
|
|
BEDS
|
On-campus
participating properties:
|
|
|
|
|
|
|
|
|
|
|
40.
University Village—PVAMU
|
|
1996
/ 97 / 98
|
|
Prairie
View, TX
|
|
Prairie
View A&M University
|
|
612
|
|
1,920
|
41.
University College—PVAMU
|
|
2000
/ 2003
|
|
Prairie
View, TX
|
|
Prairie
View A&M University
|
|
756
|
|
1,470
|
42.
University Village—TAMIU
|
|
1997
|
|
Laredo,
TX
|
|
Texas
A&M International University
|
|
84
|
|
250
|
43.
Cullen Oaks - Phase I and II
|
|
2001
/ 2006
|
|
Houston,
TX
|
|
The
University of Houston
|
|
411
|
|
879
|
Total
on-campus participating properties
|
|
1,863
|
|
4,519
|
|
|
|
|
|
|
|
|
|
|
|
Total
— all properties
|
|
|
|
|
|
|
|
8,895
|
|
26,854
|
(1) |
As
of March 31, 2007, the average age of our operating properties
was
approximately 6.3 years.
|
(2) |
Construction
was completed and property commenced operations in August
2006.
|
(3) |
Excludes
the pre-purchase of an additional phase containing 84 beds currently
under
construction for $4.6 million, subject to the satisfaction of certain
conditions. The completion of the additional phase is expected
in August
2007.
|
(4) |
Currently
under development with a scheduled completion date of Fall 2007.
|
(5) |
Currently
under development with a scheduled completion date of August 2008.
|
Results
of Operations
Comparison
of the Three Months Ended March 31, 2007 and March 31,
2006
The
following table presents our results of operations for the three months ended
March 31, 2007 and 2006, including the amount and percentage change in these
results between the two periods:
|
|
|
Three
Months Ended March 31,
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
($)
|
|
|
Change
(%)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned
off-campus properties
|
|
$
|
27,145
|
|
$
|
18,125
|
|
$
|
9,020
|
|
|
49.8
|
%
|
|
On-campus
participating properties
|
|
|
6,337
|
|
|
5,982
|
|
|
355
|
|
|
5.9
|
%
|
|
Third
party development services
|
|
|
405
|
|
|
1,638
|
|
|
(1,233
|
)
|
|
(75.3
|
%)
|
|
Third
party management services
|
|
|
722
|
|
|
662
|
|
|
60
|
|
|
9.1
|
%
|
|
Resident
services
|
|
|
341
|
|
|
320
|
|
|
21
|
|
|
6.6
|
%
|
|
Total
revenues
|
|
|
34,950
|
|
|
26,727
|
|
|
8,223
|
|
|
30.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned
off-campus properties
|
|
|
11,862
|
|
|
7,766
|
|
|
4,096
|
|
|
52.7
|
%
|
|
On-campus
participating properties
|
|
|
2,026
|
|
|
1,950
|
|
|
76
|
|
|
3.9
|
%
|
|
Third
party development and management services
|
|
|
1,294
|
|
|
1,638
|
|
|
(344
|
)
|
|
(21.0
|
%)
|
|
General
and administrative
|
|
|
11,328
|
|
|
1,587
|
|
|
9,741
|
|
|
613.8
|
%
|
|
Depreciation
and amortization
|
|
|
6,970
|
|
|
5,018
|
|
|
1,952
|
|
|
38.9
|
%
|
|
Ground/facility
leases
|
|
|
295
|
|
|
192
|
|
|
103
|
|
|
53.6
|
%
|
|
Total
operating expenses
|
|
|
33,775
|
|
|
18,151
|
|
|
15,624
|
|
|
86.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
1,175
|
|
|
8,576
|
|
|
(7,401
|
)
|
|
(86.3
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonoperating
income and (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
707
|
|
|
185
|
|
|
522
|
|
|
282.2
|
%
|
|
Interest
expense
|
|
|
(6,460
|
)
|
|
(5,336
|
)
|
|
(1,124
|
)
|
|
21.1
|
%
|
|
Amortization
of deferred financing costs
|
|
|
(298
|
)
|
|
(355
|
)
|
|
57
|
|
|
(16.1
|
%)
|
|
Total
nonoperating expenses
|
|
|
(6,051
|
)
|
|
(5,506
|
)
|
|
(545
|
)
|
|
9.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income before income tax provision, minority interests, and discontinued
operations
|
|
|
(4,876
|
)
|
|
3,070
|
|
|
(7,946
|
)
|
|
(258.8
|
%)
|
|
Income
tax provision
|
|
|
(60
|
)
|
|
—
|
|
|
(60
|
)
|
|
(100.0
|
%)
|
|
Minority
interests
|
|
|
258
|
|
|
(128
|
)
|
|
386
|
|
|
(301.6
|
%)
|
|
(Loss)
income from continuing operations
|
|
|
(4,678
|
)
|
|
2,942
|
|
|
(7,620
|
)
|
|
(259.0
|
%)
|
|
Discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
attributable to discontinued operations
|
|
|
—
|
|
|
722
|
|
|
(722
|
)
|
|
(100.0
|
%)
|
|
Net
(loss) income
|
|
$
|
(4,678
|
)
|
$
|
3,664
|
|
$
|
(
8,342
|
)
|
|
(227.7
|
%)
|
Owned
Properties Operations
Revenues
from our owned properties for the three months ended March 31, 2007 compared
with the same period in 2006 increased by $9.0 million primarily due to the
acquisition of four properties during the three months ended March 31, 2007,
the
acquisition of a thirteen-property portfolio (the “Royal Portfolio”) in March
2006, and the completion of construction and opening of an owned development
project in August 2006. Operating expenses increased approximately $4.1 million
for the three months ended March 31, 2007 compared with the same period in
2006,
primarily due to the same factors which affected the increase in revenues.
New
Property Operations.
In
January 2007, we acquired a 752-bed property (Village on Sixth) located near
the
campus of Marshall University in Huntington, West Virginia. In addition, In
February 2007, we acquired a three-property portfolio consisting of 1,887 beds
and serving students attending The University of Kentucky, the University of
Toledo, and Eastern Michigan University (the “Edwards Portfolio”). In March
2006, we also acquired the thirteen-property Royal Portfolio, consisting of
5,745 beds. Finally, in August 2006, we completed construction of and opened
Callaway Villas, a 704-bed property serving students attending Texas A&M
University. These new properties contributed $8.4 million of additional revenues
and $3.8 million of additional operating expenses during the three months ended
March 31, 2007 as compared to the three months ended March 31,
2006.
Same
Store Property Operations (Excluding New Property Activity).
We had
18 properties containing 9,991 beds which were operating during both the three
months ended March 31, 2007 and 2006. These properties produced revenues of
$16.8 million and $16.1 million during the three months ended March 31, 2007
and
2006, respectively, an increase of $0.7 million. This increase was primarily
due
to an increase in average rental rates and other income during the three months
ended March 31, 2007 as compared to the same period in 2006, which were offset
by a slight decrease in average occupancy rates from 99.0% during the three
months ended March 31, 2006 to 98.6% during the three months ended March 31,
2007. Revenues in 2007 will be dependent on our ability to maintain our current
leases in effect for the 2006/2007 academic year and our ability to obtain
appropriate rental rates and desired occupancy for the 2007/2008 academic year
at our various properties during our leasing period, which typically begins
in
January and ends in August.
At
these
existing properties, operating expenses increased by $0.3 million from $6.7
million during the three months ended March 31, 2006 to $7.0 million during
the
three months ended March 31, 2007. This increase was primarily the result of
an
increase in property taxes and insurance. We anticipate that operating expenses
for the full year 2007 will increase slightly as compared with 2006 as a result
of expected increases in insurance costs, utility costs, property taxes and
general inflation.
On-Campus
Participating Properties (“OCPP”) Operations
Same
Store OCPP Operations.
We had
four participating properties containing 4,519 beds which were operating during
both the three month periods ended March 31, 2007 and 2006. Revenues from our
same store on-campus participating properties increased to $6.3 million during
the three months ended March 31, 2007 from $6.0 million for the three months
ended March 31, 2006, an increase of $0.3 million. This increase was primarily
due to an increase in average occupancy from 89.5% during the three months
ended
March 31, 2006 to 93.3% for the three months ended March 31, 2007, as well
as an
increase in average rental rates during the three months ended March 31, 2007
as
compared to the same period in 2006.
At
these
properties, operating expenses remained relatively constant at $2.0 million
during both the three month periods ended March 31, 2007 and 2006. We anticipate
that operating expenses for the full year 2007 will increase slightly as
compared with 2006 as a result of expected increases in insurance costs, utility
costs and general inflation.
Third
Party Development Services Revenue
Third
party development services revenue decreased by $1.2 million from $1.6 million
during the three months ended March 31, 2006 to $0.4 million for the three
months ended March 31, 2007. This decrease was primarily due to fewer projects
in progress as well as a lower average contractual fee per project during the
three months ended March 31, 2007 as compared to the same period in 2006. In
addition, a lower percentage of the total contractual fees was recognized during
the three months ended March 31, 2007 as compared to the same period in 2006.
We
had four projects in progress during the three months ended March 31, 2007
with
an average contractual fee of approximately $1.6 million, as compared to the
three months ended March 31, 2006 in which we had seven projects in progress
with an average contractual fee of $1.8 million. Also, due to differences in
the
percentage of construction completed during the periods, approximately 5.8%
of
the total contractual fees was recognized during the three months ended March
31, 2007, compared to approximately 12.7% for the three months ended March
31,
2006.
Development
services revenues are dependent on our ability to successfully be awarded such
projects, the amount of the contractual fee related to the project and the
timing and completion of the development and construction of the project. In
addition, to the extent projects are completed under budget, we may be entitled
to a portion of such savings, which are recognized as revenue when performance
has been agreed upon by all parties, or when performance has been verified
by an
independent third-party. It is possible that projects for which we have deferred
pre-development costs will not close and that we will not be reimbursed for
such
costs. The pre-development costs associated therewith will ordinarily be charged
against income for the then-current period.
Third
Party Management Services Revenues
Third
party management services revenues increased by $60,000 for the three months
ended March 31, 2007 as compared to the same period in 2006. This increase
was
primarily the result of the commencement of four management contracts in August
2006, which was slightly offset by the discontinuation of the Texas State
University System management contracts in July 2006. We anticipate that
third-party management services revenues in 2007 will increase slightly as
compared with 2006, as a result of the four management contracts obtained in
August 2006 and anticipated new contracts in 2007.
Third
Party Development and Management Services Expenses
Third
party development and management services expenses decreased by $0.3 million,
from $1.6 million during the three months ended March 31, 2006, to $1.3 million
for the three months ended March 31, 2007. This decrease was primarily due
to a
decrease in payroll and related costs of $0.1 million as a result of fewer
projects in progress. In addition, expenses incurred for the West Virginia
University projects decreased by approximately $0.1 million as a result of
the
progress of those projects during the respective periods. Third-party
development and management services expenses for the full year 2007 will be
dependent on the level of awards we pursue, and as previously mentioned, any
pre-development costs charged against income for projects which did not close.
General
and Administrative
General
and administrative expenses increased approximately $9.7 million, from $1.6
million during the three months ended March 31, 2006, to $11.3 million for
the
three months ended March 31, 2007. This increase was primarily due to a
compensation charge recorded during the three months ended March 31, 2007
related to the Company’s 2004 Outperformance Bonus Plan, which is more fully
discussed in Note 9 to the accompanying Notes to Consolidated Financial
Statements contained in Item 1 herein. We anticipate general and administrative
expenses to increase substantially in 2007 (assuming that our current stock
price does not significantly decrease) as a result of additional compensation
expense recorded to reflect the value of the 2004 Outperformance Bonus Plan,
should management continue to deem the achievement of certain performance
measures under the plan as probable. In addition, we anticipate increases in
payroll and other related costs for the full year 2007 due to increases in
corporate staffing levels experienced as a result of the recent growth of our
owned portfolio.
Depreciation
and Amortization
Depreciation
and amortization increased by $2.0 million, from $5.0 million during the three
months ended March 31, 2006 to $7.0 million for the three months ended March
31,
2007. This increase was due to the acquisition of four properties during the
three months ended March 31, 2007, the acquisition of a thirteen-property
portfolio in March 2006, and the completion of construction and opening of
an
owned development project in August 2006. We expect depreciation and
amortization in 2007 to increase significantly from 2006 primarily due to a
full
year’s depreciation on properties acquired and placed in service during 2006 and
the recently completed 2007 acquisitions. .
Interest
Income
Interest
income increased by $0.5 million, from $0.2 million during the three months
ended March 31, 2006 to $0.7 million for the three months ended March 31, 2007.
This increase was primarily due to interest earned during the three months
ended
March 31, 2007 on the remaining proceeds from our September 2006 equity offering
and net proceeds from the disposition of an owned property in December 2006.
Interest
Expense
Interest
expense increased $1.1 million, from $5.3 million during the three months ended
March 31, 2006, to $6.4 million for the three months ended March 31, 2007.
This
increase was primarily due to additional interest incurred during the three
months ended March 31 2007 associated with debt assumed or incurred in
connection with the previously mentioned 2007 and 2006 property acquisitions,
net of the amortization of debt premiums and discounts recorded to reflect
the
market value of debt assumed. These increases were offset by a decrease of
$0.4
million due to a zero balance on our revolving credit facility during the three
months ended March 31, 2007. In addition, capitalized interest increased by
$0.2
million as a result of more owned properties being under development during
the
three months ended March 31, 2007 as compared to the same period in 2006. We
anticipate that interest expense in 2007 will increase from 2006 levels due
to
interest expense assumed or incurred in connection with property acquisitions
and increases in potential borrowing rates that may impact our floating rate
on
our credit facility.
Minority
Interests
The
variance in minority interests is primarily due to the Company being in a net
income position for the three months ended March 31, 2006 as compared to a
net
loss position for the three months ended March 31, 2007. Minority interests
represent external partners in our Operating Partnership as well as certain
third-party partners in joint ventures consolidated by us for financial
reporting purposes. Accordingly, these external partners are allocated their
share of income/loss during the respective reporting periods. See Note 7 in
the
accompanying Notes to Consolidated Financial Statements contained in Item 1
herein for a detailed discussion of minority interests.
Discontinued
Operations
Statement
of Financial Accounting Standards (“SFAS”) No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets,
requires, among other items, that the operating results of real estate
properties sold or classified as held for sale be included in discontinued
operations in the statements of operations for all periods presented. The
Village on University, an owned property, was sold in December 2006. As such,
the net income attributable to this property is included in discontinued
operations for the three months ended March 31, 2006. Refer to Note 4 in the
accompanying Notes to Consolidated Financial Statements contained in Item 1
herein for a more detailed description of discontinued operations.
Cash
Flows
Comparison
of Three Months Ended March 31, 2007 and March 31,
2006
Operating
Activities
For
the
three months ended March 31, 2007, net cash provided by operating activities
before changes in working capital accounts provided approximately $2.2 million,
as compared to $9.3 million for the three months ended March 31, 2006, a
decrease of $7.1 million. Changes in working capital accounts provided
$1.0 million for the three months ended March 31, 2007 while working capital
accounts utilized $3.2 million for the three months ended March 31, 2006.
These changes were primarily due to an increase in depreciation and amortization
and operating cash flow generated from the properties acquired during both
periods and the opening of one owned off-campus property in August 2006.
Investing
Activities
Investing
activities utilized $55.7 million and $84.1 million for the three months ended
March 31, 2007 and 2006, respectively. The decrease in cash utilized in
investing activities during the three months ended March 31, 2007 related
primarily to a $30.9 million decrease in the use of cash to acquire properties.
We acquired the 13-property Royal Portfolio during the first quarter of 2006
as
compared to four properties acquired during the first quarter of 2007. This
decrease was offset by a $2.3 million increase in cash used to fund the
construction of our owned development properties. During the three months ended
March 31, 2007, three owned properties were under development while two
properties were under development during the three months ended March 31, 2006,
one of which was completed in Fall 2006. For the three months ended March 31,
2007 and 2006, our cash utilized in investing activities was comprised of the
following:
|
|
Three
Months Ended March 31,
|
|
|
|
2007
|
|
|
2006
|
|
Property
acquisitions
|
|
$
|
(38,330
|
)
|
$
|
(69,241
|
)
|
Capital
expenditures for on-campus participating properties
|
|
|
(65
|
)
|
|
(49
|
)
|
Capital
expenditures for owned properties
|
|
|
(637
|
)
|
|
(545
|
)
|
Investment
in owned properties under development
|
|
|
(16,476
|
)
|
|
(14,139
|
)
|
Purchase
of corporate furniture, fixtures, and equipment
|
|
|
(235
|
)
|
|
(139
|
)
|
Total
|
|
$
|
(55,743
|
)
|
$
|
(84,113
|
)
|
Financing
Activities
Cash
used
for financing activities totaled $1.5 million for the three months ended March
31, 2007 as compared to $64.4 million provided by financing activities for
the
three months ended March 31, 2006. The decrease in cash provided by financing
activities was primarily the result of a $67.0 million decrease in proceeds
received from our revolving credit facility, which was used to fund the
acquisition of the Royal Portfolio during the first quarter of 2006. In
addition, there was a $2.6 million increase in distributions to common and
restricted stockholders and minority partners as a result of the September
2006
equity offering and the issuance of common and preferred units in the Operating
Partnership as partial consideration for the purchase of the Royal Portfolio.
These decreases were offset by a $3.9 million increase in proceeds from
construction loans used to fund our owned development properties.
Structure
of On-campus Participating Properties
At
our
on-campus participating properties, the subject universities own both the land
and improvements. We then have a leasehold interest under a ground/facility
lease. Under the lease, we receive an annual distribution representing 50%
of
these properties’ net cash available for distribution after payment of operating
expenses (which includes our management fees), debt service (which includes
repayment of principal) and capital expenditures. We also manage these
properties under multi-year management agreements and are paid a management
fee
representing 5% of receipts.
We
do not
have access to the cash flows and working capital of these participating
properties except for the annual net cash distribution as described above.
Additionally, a substantial portion of these properties’ cash flow is dedicated
to capital reserves required under the applicable property indebtedness and
to
the amortization of such indebtedness. These amounts do not increase our
economic interest in these properties since our interest, including our right
to
share in the net cash available for distribution from the properties, terminates
upon the amortization of their indebtedness. Our economic interest in these
properties is therefore limited to our interest in the net cash flow and
management and development fees from these properties, as reflected in our
calculation of Funds from Operations modified for the operational performance
of
on-campus participating properties (“FFOM”) contained herein. Accordingly, when
considering these properties’ contribution to our operations, we focus upon our
share of these properties’ net cash available for distribution and the
management fees that we receive from these properties, rather than upon their
contribution to our gross revenues and expenses for financial reporting
purposes.
The
following table reflects the amounts included in our consolidated financial
statements for the three months ended March 31, 2007 and 2006:
|
|
Three
Months Ended March 31,
|
|
|
|
2007
|
|
|
2006
|
|
Revenues
|
|
$
|
6,337
|
|
$
|
5,982
|
|
Direct
operating expenses (1)
|
|
|
(1,866
|
)
|
|
(1,801
|
)
|
Amortization
|
|
|
(1,061
|
)
|
|
(1,032
|
)
|
Amortization
of deferred financing costs
|
|
|
(43
|
)
|
|
(78
|
)
|
Ground/facility
leases (2)
|
|
|
(295
|
)
|
|
(192
|
)
|
Net
operating income
|
|
|
3,072
|
|
|
2,879
|
|
Interest
income
|
|
|
78
|
|
|
63
|
|
Interest
expense
(3)
|
|
|
(1,573
|
)
|
|
(1,587
|
)
|
Net
income
|
|
$
|
1,577
|
|
$
|
1,355
|
|
(1) |
Excludes
property management fees of $0.3 million for both the three month
periods
ended March 31, 2007 and 2006. This expense and the corresponding
fee
revenue we recognized have been eliminated in consolidation. Also
excludes
allocation of expenses related to corporate management and
oversight.
|
(2) |
Represents
the universities’ 50% share of the properties’ net cash available for
distribution after payment of operating expenses, debt service
(including
payment of principal) and capital
expenditures.
|
(3) |
Debt
service expenditures for these properties totaled $2.2 million
and $2.1
million for the three months ended March 31, 2007 and 2006, respectively.
|
Liquidity
and Capital Resources
Cash
Balances and Liquidity
As
of
March 31, 2007, excluding our on-campus participating properties, we had $29.1
million in cash and cash equivalents and restricted cash as compared to $83.5
million in cash and cash equivalents and restricted cash as of December 31,
2006. This decrease was primarily due to the use of the remaining proceeds
from
our December 2006 disposition of an owned off-campus property, The Village
on
University, to fund our recent property acquisitions and the construction of
our
owned development projects. Restricted cash primarily consists of escrow
accounts held by lenders and resident security deposits, as required by law
in
certain states. Additionally, restricted cash as of March 31, 2007 also included
$0.1 million of funds held in escrow in connection with potential development
opportunities.
As
of
March 31, 2007, our short-term liquidity needs included, but were not limited
to, the following: (i) anticipated distribution payments to our common and
restricted stockholders totaling approximately $31.5 million based on an
anticipated annual distribution of $1.35 per share based on the number of our
shares outstanding as of March 31, 2007, including those distributions required
to maintain our REIT status and satisfy our current distribution policy, (ii)
anticipated distribution payments to our Operating Partnership unitholders
totaling approximately $2.9 million based on an anticipated annual distribution
of $1.35 per Common Unit and a cumulative preferential per annum cash
distribution rate of 5.99% on our Series A Preferred Units based on the number
of units outstanding as of March 31, 2007, (iii) remaining development costs
on
our ASU-SCRC owned development project funded outside of the construction loan,
estimated to be approximately $28.6 million, (iv) remaining development costs
on
our Chestnut Ridge owned development project funded outside of the construction
loan, estimated to be approximately $1.8 million, (v) funds for other potential
future acquisitions and development projects, including remaining
pre-development expenditures for component II and III of the Arizona State
University project which are estimated to range from $6.8 to $7.0 million,
and
(vi) potential payments to certain members of management and key employees
under
the 2004 Outperformance Bonus Plan, should the Compensation Committee of the
Board of Directors elect to settle such awards in cash. We expect to meet our
short-term liquidity requirements by using remaining proceeds from our recent
equity offering, net proceeds from the disposition of The Village on University,
net cash provided by operations, borrowings under our revolving credit facility,
and offerings under a shelf registration statement under which we may offer
up
to $360 million of debt securities, preferred stock, common stock and securities
warrants.
We
may
seek additional funds to undertake initiatives not contemplated by our business
plan or obtain additional cushion against possible shortfalls. We also may
pursue additional financing as opportunities arise. Future financings may
include a range of different sizes or types of financing, including the sale
of
additional debt or equity securities. While we believe we will be able to obtain
such funds, these funds may not be available on favorable terms or at all.
Our
ability to obtain additional financing depends on several factors, including
future market conditions, our success or lack of success in penetrating our
markets, our future creditworthiness, and restrictions contained in agreements
with our investors or lenders, including the restrictions contained in the
agreements governing our revolving credit facility. These financings could
increase our level of indebtedness or result in dilution to our equity holders.
Revolving
Credit Facility
The
Operating Partnership has a $115 million revolving credit facility, which may
be
expanded by up to an additional $110 million upon the satisfaction of certain
conditions. The maturity date of the facility is August 17, 2009 and we
guarantee the Operating Partnership’s obligations under the facility.
Availability
under the revolving credit facility is limited to an "aggregate borrowing base
amount" equal to the lesser of (i) 65% of the value of certain properties,
calculated as set forth in the credit facility, and (ii) the adjusted net
operating income from these properties divided by a formula amount. The facility
bears interest at a variable rate, at the Company’s option, based upon a base
rate or one-, two-, three-, or six-month LIBOR plus, in each case, a spread
based upon the Company’s total leverage. Additionally, we are required to pay an
unused commitment fee ranging from 0.15% to 0.20% per annum, depending on the
aggregate unused balance. As of March 31, 2007, the total availability under
the
facility (subject to the satisfaction of certain financial covenants) was
approximately $107.5 million.
The
terms
of the facility include certain restrictions and covenants, which limit, among
other items, the incurrence of additional indebtedness, liens, and the
disposition of assets. The facility contains customary affirmative and negative
covenants and also contains financial covenants that, among other things,
require us to maintain certain minimum ratios of "EBITDA" (earnings before
interest, taxes, depreciation and amortization) to fixed charges. We may not
pay
distributions that exceed 100% of funds from operations for any four consecutive
quarters. The financial covenants also include consolidated net worth and
leverage ratio tests. As of March 31, 2007, we were in compliance with all
such
covenants.
Distributions
We
are
required to distribute 90% of our REIT taxable income (excluding capital gains)
on an annual basis in order to qualify as a REIT for federal income tax
purposes. Accordingly, we intend to make, but are not contractually bound to
make, regular quarterly distributions to common stockholders and unit holders.
Distributions to common stockholders are at the discretion of the Board of
Directors. We may be required to use borrowings under the credit facility,
if
necessary, to meet REIT distribution requirements and maintain our REIT status.
The Board of Directors considers market factors and our Company’s performance in
addition to REIT requirements in determining distribution levels.
Pre-Development
Expenditures
Our
third-party and owned development activities have historically required us
to
fund pre-development expenditures such as architectural fees, permits and
deposits. The closing and/or commencement of construction of these development
projects is subject to a number of risks such as our inability to obtain
financing on favorable terms and delays or refusals in obtaining necessary
zoning, land use, building, and other required governmental permits and
authorizations As such, we cannot always predict accurately the liquidity needs
of these activities. We frequently incur these pre-development expenditures
before a financing commitment and/or required permits and authorizations have
been obtained. Accordingly, we bear the risk of the loss of these
pre-development expenditures if financing cannot ultimately be arranged on
acceptable terms or we are unable to successfully obtain the required permits
and authorizations. Historically, our third-party and owned development projects
have been successfully structured and financed; however, these developments
have
at times been delayed beyond the period initially scheduled, causing revenue
to
be recognized in later periods. As of March 31, 2007, we had deferred
approximately $3.7 million in pre-development costs related to third-party
and
owned development projects that have not yet commenced construction.
Indebtedness
As
of
March 31, 2007, we had approximately $522.7 million of outstanding consolidated
indebtedness (excluding unamortized debt premiums/discounts of approximately
$5.4 million), comprised of $432.9 million in mortgage and construction loans
secured by 32 of our owned off-campus properties, $33.1 million in mortgage
loans secured by two phases of an on-campus participating property, and $56.7
million in bond issuances secured by three of our on-campus participating
properties. The weighted average interest rate on our consolidated indebtedness
as of March 31, 2007 was 6.51%. As of March 31, 2007, approximately 5.9% of
our
total consolidated indebtedness was variable rate debt, comprised of our
University Centre construction loan discussed below.
Owned
Off-Campus Properties
The
weighted average interest rate of the $401.9 million of owned off-campus
mortgage debt was 6.34% as of March 31, 2007. Each of the 32 mortgages is a
non-recourse obligation subject to customary exceptions. Each of these mortgages
has a 30-year amortization, and none are cross-defaulted or cross-collateralized
to any other indebtedness. The loans generally may not be prepaid prior to
maturity; in certain cases prepayment is allowed, subject to prepayment
penalties.
The
development and construction of University Centre, an owned off-campus property
scheduled to complete construction and open for occupancy in Fall 2007, is
partially financed with a construction loan. The loan amount is $45.5 million
and for each borrowing we have the option of choosing the Prime rate or one-,
two-, or three-month LIBOR plus 1.50%. The loan requires payments of interest
only during the term of the loan and any accrued interest and outstanding
borrowings become due on the maturity date of October 1, 2008. As of March
31,
2007, the balance outstanding on the construction loan totaled $31.0 million,
bearing interest at a rate of 6.82%.
On-Campus
Participating Properties
Three
of
our on-campus participating properties are 100% financed with $56.7 million
of
outstanding project-based taxable bonds. Under the terms of these financings,
one of our special purpose subsidiaries publicly issued three series of taxable
bonds and loaned the proceeds to three special purpose subsidiaries that each
hold a separate leasehold interest. Although a default in payment by these
special purpose subsidiaries could result in a default under one or more series
of bonds, the indebtedness of any of these special purpose subsidiaries is
not
cross-defaulted or cross-collateralized with indebtedness of the Company, the
Operating Partnership or other special purpose subsidiaries. Repayment of
principal and interest on these bonds is insured by MBIA, Inc. The loans
encumbering the leasehold interests are non-recourse, subject to customary
exceptions.
Cullen
Oaks Phase I and Phase II loans are currently encumbered by mortgage loans
with
balances as of March 31, 2007 of approximately $16.5 million and $16.6 million,
respectively. In February 2007, we extended the maturity date of these loans
to
February 2014 and the loans bear interest at a rate of LIBOR plus 1.35%. These
loans require payments of interest only through May 2008 and monthly payments
of
principal and interest from May 2008 through the maturity date. In connection
with these loan extensions, we terminated the existing interest rate swap
agreement on the Cullen Oaks Phase I loan and entered into a new interest rate
swap agreement effective February 15, 2007 through February 15, 2014, that
is
designated to hedge our exposure to fluctuations on interest payments attributed
to changes in interest rates associated with payments on the Cullen Oaks Phase
I
and Phase II loans. Under the terms of the interest rate swap agreement, we
pay
a fixed rate of 6.69% and receive a floating rate of LIBOR plus 1.35%. Pursuant
to the Leases, in the event the leasehold estate does not achieve Financial
Break Even (defined as revenues less operating expenses, excluding management
fees, less debt service), the applicable Lessor would be required to make a
rental payment, also known as the Contingent Payment, sufficient to achieve
Financial Break Even. The Contingent Payment provision remains in effect until
such time as any financing placed on the facilities would receive an investment
grade rating without the Contingent Payment provision. In the event that the
Lessor is required to make a Contingent Payment, future net cash flow
distributions would be first applied to repay such Contingent Payments and
then
to unpaid management fees prior to normal distributions. In turn, we have
guaranteed payment of this property’s indebtedness.
The
weighted average interest rate of the indebtedness encumbering our on-campus
participating properties was 7.16% at March 31, 2007.
Off
Balance Sheet Items
We
do not
have any off-balance sheet arrangements.
Funds
From Operations
As
defined by NAREIT, FFO represents income (loss) before allocation to minority
interests (computed in accordance with GAAP), excluding gains (or losses) from
sales of property, plus real estate related depreciation and amortization
(excluding amortization of loan origination costs) and after adjustments for
unconsolidated partnerships and joint ventures. We present FFO because we
consider it an important supplemental measure of our operating performance
and
believe it is frequently used by securities analysts, investors and other
interested parties in the evaluation of REITs, many of which present FFO when
reporting their results. FFO is intended to exclude GAAP historical cost
depreciation and amortization of real estate and related assets, which assumes
that the value of real estate diminishes ratably over time. Historically,
however, real estate values have risen or fallen with market conditions. Because
FFO excludes depreciation and amortization unique to real estate, gains and
losses from property dispositions and extraordinary items, it provides a
performance measure that, when compared
year
over
year, reflects the impact to operations from trends in occupancy rates, rental
rates, operating costs, development activities and interest costs, providing
perspective not immediately apparent from net income.
We
compute FFO in accordance with standards established by the Board of Governors
of NAREIT in its March 1995 White Paper (as amended in November 1999 and April
2002), which may differ from the methodology for calculating FFO utilized by
other equity REITs and, accordingly, may not be comparable to such other REITs.
Further, FFO does not represent amounts available for management’s discretionary
use because of needed capital replacement or expansion, debt service obligations
or other commitments and uncertainties. FFO should not be considered as an
alternative to net income (loss) (computed in accordance with GAAP) as an
indicator of our financial performance or to cash flow from operating activities
(computed in accordance with GAAP) as an indicator of our liquidity, nor is
it
indicative of funds available to fund our cash needs, including our ability
to
pay dividends or make distributions.
The
following table presents a reconciliation of our FFO to our net
income:
|
|
Three
Months Ended March 31,
|
|
|
|
2007
|
|
2006
|
|
Net
(loss) income
|
|
$
|
(4,678
|
)
|
$
|
3,664
|
|
Minority
interests
|
|
|
(258
|
)
|
|
128
|
|
Real
estate related depreciation and amortization:
|
|
|
|
|
|
|
|
Total
depreciation and amortization
|
|
|
6,970
|
|
|
5,275
|
|
Corporate
furniture, fixtures, and equipment depreciation
|
|
|
(94
|
)
|
|
(120
|
)
|
Funds
from operations (“FFO”) (1)
|
|
$
|
1,940
|
|
$
|
8,947
|
|
|
|
|
|
|
|
|
|
FFO
per share - diluted (1)
|
|
$
|
0.08
|
|
$
|
0.49
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding - diluted
|
|
|
25,394,550
|
|
|
18,176,189
|
|
(1) |
During
the three months ended March 31, 2007, we recorded a compensation
charge
of approximately $9.6 million,
or $0.38 per fully diluted share, related to the 2004 Outperformance
Bonus
Plan. Excluding this compensation
charge, FFO for the three months ended March 31, 2007 would have
been
$11.6 million, or $0.46 per fully
diluted share. For a detailed discussion of the 2004 Outperformance
Bonus
Plan, refer to Note 9 in the
accompanying
Notes to Consolidated Financial Statements contained in Item 1 herein.
|
While
our
on-campus participating properties contributed $6.3 million and $6.0 to our
revenues for the three months ended March 31, 2007 and 2006, respectively,
under
our participating ground leases, we and the participating university systems
each receive 50% of the properties’ net cash available for distribution after
payment of operating expenses, debt service (which includes significant amounts
towards repayment of principal) and capital expenditures. A substantial portion
of our revenues attributable to these properties is reflective of cash that
is
required to be used for capital expenditures and for the amortization of
applicable property indebtedness. These amounts do not increase our economic
interest in these properties or otherwise benefit us since our interest in
the
properties terminates upon the repayment of the applicable property
indebtedness.
As
noted
above, FFO excludes GAAP historical cost depreciation and amortization of real
estate and related assets because these GAAP items assume that the value of
real
estate diminishes over time. However, unlike the ownership of our owned
off-campus properties, the unique features of our ownership interest in our
on-campus participating properties cause the value of these properties to
diminish over time. For example, since the ground/facility leases under which
we
operate the participating properties require the reinvestment from operations
of
specified amounts for capital expenditures and for the repayment of debt while
our interest in these properties terminates upon the repayment of the debt,
such
capital expenditures do not increase the value of the property to us and
mortgage debt amortization only increases the equity of the ground lessor.
Accordingly, when considering our FFO, we believe it is also a meaningful
measure of our performance to modify FFO to exclude the operations of our
on-campus participating properties and to consider their impact on performance
by including only that portion of our revenues from those properties that are
reflective of our share of net cash flow and the management fees that we
receive, both of which increase and decrease with the operating measure of
the
properties, a measure referred to herein as FFOM.
Funds
From Operations—Modified for Operational Performance of On-Campus Participating
Properties:
|
|
Three
Months Ended March 31,
|
|
|
|
2007
|
|
2006
|
|
Funds
from operations
|
|
$
|
1,940
|
|
$
|
8,947
|
|
Elimination
of operations of on-campus participating properties:
|
|
|
|
|
|
|
|
Net
income from on-campus participating properties
|
|
|
(1,577
|
)
|
|
(1,355
|
)
|
Amortization
of investment in on-campus participating properties
|
|
|
(1,061
|
)
|
|
(1,032
|
)
|
|
|
|
(698
|
)
|
|
6,560
|
|
Modifications
to reflect operational performance of on-campus
participating
properties:
|
|
|
|
|
|
|
|
Our
share of net cash flow (1)
|
|
|
295
|
|
|
192
|
|
Management
fees
|
|
|
290
|
|
|
278
|
|
Impact
of on-campus participating properties
|
|
|
585
|
|
|
470
|
|
Funds
from operations - modified for operational performance of
on-campus
participating properties (“FFOM”) (2)
|
|
$
|
(113
|
)
|
$
|
7,030
|
|
|
|
|
|
|
|
|
|
FFOM
per share - diluted (2)
|
|
$
|
—
|
|
$
|
0.39
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding - diluted
|
|
|
25,394,550
|
|
|
18,176,189
|
|
(1)
|
50%
of the properties’ net cash available for distribution after payment of
operating expenses, debt service (including repayment of principal)
and
capital expenditures. Represents amounts accrued for the interim
periods.
|
(2) |
During
the three months ended March 31, 2007, we recorded a compensation
charge
of approximately $9.6 million, or $0.38 per fully diluted share,
related
to the 2004 Outperformance Bonus Plan. Excluding this compensation
charge,
FFOM for the three months ended March 31, 2007 would have been
$9.5
million, or $0.38 per fully diluted share. For a detailed discussion
of
the 2004 Outperformance Bonus Plan, refer to Note 9 in the accompanying
Notes to Consolidated Financial Statements contained in Item
1 herein.
|
This
narrower measure of performance measures our profitability for these properties
in a manner that is similar to the measure of our profitability from our
services business where we similarly incur no initial or ongoing capital
investment in a property and derive only consequential benefits from capital
expenditures and debt amortization. We believe, however, that this narrower
measure of performance is inappropriate in traditional real estate ownership
structures where debt amortization and capital expenditures enhance the property
owner’s long-term profitability from its investment.
Our
FFOM
may have limitations as an analytical tool because it reflects the unique
contractual calculation of net cash flow from our on-campus participating
properties, which is different from that of our off campus owned properties.
Additionally, FFOM reflects features of our ownership interests in our on-campus
participating properties that are unique to us. Companies that are considered
to
be in our industry may not have similar ownership structures; and therefore
those companies may not calculate a FFOM in the same manner that we do, or
at
all, limiting its usefulness as a comparative measure. We compensate for
these
limitations by relying primarily on our GAAP and FFO results and using our
modified FFO only supplementally.
Inflation
Our
leases do not typically provide for rent escalations. However, they typically
do
not have terms that extend beyond 12 months. Accordingly, although on a short
term basis we would be required to bear the impact of rising costs resulting
from inflation, we have the opportunity to raise rental rates at least annually
to offset such rising costs. However, a weak economic environment or declining
student enrollment at our principal universities may limit our ability to raise
rental rates.
Item
3.
Quantitative and Qualitative Disclosures About Market
Risk
Market
risk is the risk of loss from adverse changes in market prices and interest
rates. Our future earnings and cash flows are dependent upon prevailing market
rates. Accordingly, we manage our market risk by matching projected cash inflows
from operating, investing and financing activities with projected cash outflows
for debt service, acquisitions, capital expenditures, distributions to
stockholders and unitholders, and other cash requirements. The majority of
our
outstanding debt has fixed interest rates, which minimizes the risk of
fluctuating interest rates. Our exposure to market risk includes interest rate
fluctuations in connection with our revolving credit facility and variable
rate
construction loans and our ability to incur more debt without stockholder
approval, thereby increasing our debt service obligations, which could adversely
affect our cash flows. No material changes have occurred in relation to
market risk since our Annual Report on Form 10-K for the year ended December
31,
2006.
Item
4.
Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
As
required by SEC Rule 13a-15(b), we have carried out an evaluation, under
the supervision and with the participation of management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures as of the end
of
the quarter covered by this report. Based on the foregoing, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls
and
procedures for the quarter covered by this report were effective at the
reasonable assurance level.
There
has
been no change in our internal controls over financial reporting during our
most
recent fiscal quarter that has materially affected, or is reasonably likely
to
materially affect, our internal controls over financial reporting.
PART
II. OTHER INFORMATION
Exhibit
Number
|
|
Description
of Document
|
31.1
|
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
|
|
31.2
|
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
|
|
32.1
|
|
Certification
of Chief Executive Officer Pursuant to 18 U. S. C. Section 1350,
as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
32.2
|
|
Certification
of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350,
as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
|
|
|
|
AMERICAN
CAMPUS COMMUNITIES, INC.
|
|
|
|
|
By: |
/s/ William
C. Bayless, Jr. |
|
|
|
William
C.
Bayless, Jr.
President
and Chief Executive Officer |
|
|
|
|
|
|
|
By: |
/s/ Brian
B. Nickel |
|
|
|
Brian
B. Nickel Executive Vice President, Chief
Financial
Officer and Secretary
|
|
|
|
|
|
|
|
By: |
/s/ Jonathan
A. Graf |
|
|
|
Jonathan
A. Graf Senior Vice President,
Chief
Accounting Officer and
Treasurer
|