- --------------------------------------------------------------------------------
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, 2005.
[ ] 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 (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
805 LAS CIMAS PARKWAY, SUITE 400 78746
AUSTIN, TX (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] 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 12,615,000 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 4, 2005.
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2005
TABLE OF CONTENTS
PAGE
NO.
------
PART I.
Item 1. Consolidated and Combined Financial Statements
Consolidated Balance Sheets as of March 31, 2005 (unaudited) and December 31, 2004. 1
Consolidated and Combined Statements of Operations for the Company for the three
months ended March 31, 2005 and for the Predecessor for the three months ended
March 31, 2004 (all unaudited). 2
Consolidated and Combined Statements of Comprehensive Income for the Company for
the three months ended March 31, 2005 and for the Predecessor for the three months
ended March 31, 2004 (all unaudited). 3
Consolidated and Combined Statements of Cash Flows for the Company for the three
months ended March 31, 2005 and for the Predecessor for the three months ended
March 31, 2004 (all unaudited). 4
Notes to Consolidated and Combined Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosure about Market Risk 32
Item 4. Controls and Procedures 33
PART II.
Item 1. Legal Proceedings 33
Item 6. Exhibits and Reports on Form 8-K 33
SIGNATURES 35
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
MARCH 31, 2005 DECEMBER 31, 2004
------------------- -------------------
(UNAUDITED)
ASSETS
Investments in real estate:
Owned off-campus properties, net $ 385,359 $ 250,100
Owned off-campus property - held for sale - 22,350
On-campus participating properties, net 70,271 68,064
------------------- -------------------
Investments in real estate, net 455,630 340,514
Cash and cash equivalents 6,425 4,050
Restricted cash and short-term investments 7,382 9,816
Student contracts receivable, net 3,013 2,164
Other assets 14,037 11,084
------------------- -------------------
TOTAL ASSETS $ 486,487 $ 367,628
------------------- -------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Debt $ 314,385 $ 201,014
Accounts payable and accrued expenses 5,280 5,443
Other liabilities 22,793 20,294
------------------- -------------------
Total liabilities 342,458 226,751
Minority interests 2,649 2,648
Commitments and contingencies (Note 11)
Stockholders' equity:
Common stock, $.01 par value, 800,000,000 shares authorized,
12,615,000 shares issued and outstanding 126 126
Additional paid in capital 135,150 136,259
Accumulated earnings and distributions 5,717 1,802
Accumulated other comprehensive income 387 42
------------------- -------------------
Total stockholders' equity 141,380 138,229
------------------- -------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 486,487 $ 367,628
=================== ===================
See accompanying notes to consolidated and combined financial statements.
1
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
COMPANY PREDECESSOR
--------------------- ---------------------
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2004 MARCH 31, 2004
--------------------- ---------------------
REVENUES:
Owned off-campus properties $ 12,489 $ 7,989
On-campus participating properties 5,493 5,293
Third party development services 609 1,671
Third party development services - on-campus participating properties 36 27
Third party management services - affiliates - 74
Third party management services 710 298
Resident services 204 -
--------------------- ---------------------
TOTAL REVENUES 19,541 15,352
OPERATING EXPENSES:
Owned off-campus properties 5,136 3,459
On-campus participating properties 1,875 1,800
Third party development and management services 1,464 1,264
General and administrative 1,364 453
Depreciation and amortization 3,424 2,259
Ground/facility leases 212 141
--------------------- ---------------------
TOTAL OPERATING EXPENSES 13,475 9,376
--------------------- ---------------------
OPERATING INCOME 6,066 5,976
NONOPERATING INCOME AND (EXPENSES):
Interest income 58 13
Interest expense (3,808) (4,281)
Amortization of deferred financing costs (246) (144)
Other nonoperating income 430 -
--------------------- ---------------------
TOTAL NONOPERATING EXPENSES (3,566) (4,412)
--------------------- ---------------------
Income before income tax provision, minority interests, and discontinued
operations 2,500 1,564
Income tax provision (102) -
Minority interests (87) 21
--------------------- ---------------------
INCOME FROM CONTINUING OPERATIONS 2,311 1,585
Discontinued operations:
Loss attributable to discontinued operations (2) (55)
Gain from disposition of real estate 5,883 -
--------------------- ---------------------
Total discontinued operations 5,881 (55)
--------------------- ---------------------
NET INCOME $ 8,192 $ 1,530
===================== =====================
Income per share - basic:
Income from continuing operations per share $ 0.18
=====================
Net income per share $ 0.65
=====================
Income per share - diluted:
Income from continuing operations per share $ 0.19
=====================
Net income per share $ 0.65
=====================
Weighted average common shares outstanding:
Basic 12,622,145
=====================
Diluted 12,769,939
=====================
Distributions declared per common share $ 0.3375
=====================
See accompanying notes to consolidated and combined financial statements.
2
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
CONSOLIDATED AND COMBINED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)
COMPANY PREDECESSOR
--------------------- ---------------------
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2004 MARCH 31, 2004
--------------------- ---------------------
Net income $ 8,192 $ 1,530
Other comprehensive income (loss):
Change in fair value of interest rate swap 345 (371)
Change in fair value of interest rate cap - 6
--------------------- ---------------------
Net comprehensive income $ 8,537 $ 1,165
===================== =====================
See accompanying notes to consolidated and combined financial statements.
3
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
COMPANY PREDECESSOR
----------------- -----------------
THREE MONTHS THREE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
2005 2004
----------------- -----------------
OPERATING ACTIVITIES
Net income $ 8,192 $ 1,530
Adjustments to reconcile net income to net cash provided by operating activities:
Gain from disposition of real estate (5,883) -
Minority interests 87 (21)
Depreciation and amortization 3,424 2,346
Amortization of deferred financing costs and debt premiums 127 162
Compensation expense recognized for restricted stock awards 24 -
Income tax provision 102 -
Changes in operating assets and liabilities:
Restricted cash and short-term investments 3,013 1,120
Student contracts receivable, net (849) (2,402)
Other assets (1,474) 2,293
Accounts payable and accrued expenses (414) 2,387
Other liabilities (636) (2,178)
----------------- -----------------
Net cash provided by operating activities 5,713 5,237
INVESTING ACTIVITIES
Net proceeds from disposition of real estate 28,023 -
Cash paid for property acquisitions (72,763) -
Investments in owned off-campus properties (10,972) (19,034)
Investments in on-campus participating properties (3,055) (124)
Purchase of furniture, fixtures and equipment (86) (55)
----------------- -----------------
Net cash used in investing activities (58,853) (19,213)
----------------- -----------------
FINANCING ACTIVITIES
Proceeds from revolving credit facility, net of paydowns 21,800 -
Proceeds from bridge loan 37,400 -
Proceeds from construction loans 2,528 12,190
Principal payments on debt (484) (428)
Change in construction accounts payable 681 3,459
Debt issuance and offering costs (913) (1,697)
Distributions to common and restricted stockholders and partnership unit holders (4,277) -
Contributions from Predecessor owners - 370
Distributions to Predecessor owners (1,179) (882)
Distributions to minority partners (41) (8)
----------------- -----------------
Net cash provided by financing activities 55,515 13,004
----------------- -----------------
Net change in cash and cash equivalents 2,375 (972)
Cash and cash equivalents at beginning of period 4,050 5,227
----------------- -----------------
Cash and cash equivalents at end of period $ 6,425 $ 4,255
================= =================
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Change in fair value of derivative instruments, net $ 345 $ (365)
================= =================
Loans assumed in connection with property acquisitions $ (47,169) $ -
================= =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 4,496 $ 5,736
================= =================
See accompanying notes to consolidated and combined financial statements.
4
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
American Campus Communities, Inc. (the "Company") commenced operations as a
fully integrated real estate investment trust ("REIT") effective with the
completion of its initial public offering (the "IPO") on August 17, 2004.
Through the Company's controlling interest in American Campus Communities
Operating Partnership, L.P. (the "Operating Partnership"), of which the Company
is the sole general partner, and the subsidiaries of the Operating Partnership,
including its Taxable REIT Subsidiary, American Campus Communities Services,
Inc. (the "TRS"), the Company is one of the largest private 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.
The Company was formed to succeed certain businesses of the American Campus
Communities Predecessor (the "Predecessor"), which was not a legal entity but
rather a combination of real estate entities under common ownership and voting
control collectively doing business as American Campus Communities, L.L.C. and
Affiliated Student Housing Properties. The Company's Predecessor entities were
engaged in the student housing business since 1993. The Company was incorporated
in Maryland on March 9, 2004. Additionally, the Operating Partnership was formed
and the TRS was incorporated in Maryland on July 14, 2004 and August 17, 2004,
respectively, each in anticipation of the IPO. The IPO was consummated on August
17, 2004, concurrent with the consummation of various formation transactions,
and consisted of the sale of 12,100,000 shares of the Company's common stock at
a price per share of $17.50, generating gross proceeds of approximately $211.8
million. The aggregate proceeds to the Company, net of the underwriters'
discount and offering costs, were approximately $189.4 million. In connection
with the exercise of the underwriters' over-allotment option on September 15,
2004, the Company issued an additional 515,000 shares of common stock at the IPO
price per share, generating an additional $9.0 million of gross proceeds and
$8.4 million in net proceeds after the underwriters' discount and offering
costs. Also in connection with the IPO formation transactions, the Company used
approximately $85.9 million of IPO proceeds to redeem the ownership interests of
the Predecessor owners. During the three months ended March 31, 2005, the
Company also distributed approximately $1.2 million to the Predecessor owners
related to savings in the budgeted completion cost of three owned off-campus
properties that were completed in the third quarter 2004. These payments were
accounted for as equity distributions. The Company's operations commenced on
August 17, 2004 after completion of the IPO and the formation transactions, and
are carried on primarily through the Operating Partnership and its wholly owned
subsidiaries, including the TRS.
As of March 31, 2005, the Company's property portfolio contained 24 student
housing properties with approximately 5,200 apartment units and 15,600 beds,
consisting of 19 owned off-campus properties that are in close proximities to
public colleges and universities and five 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 provides construction management and development
services for student housing properties owned by colleges and universities,
charitable foundations, and others. As of March 31, 2005, the Company also
provided third party property management and leasing services for 19 student
housing properties (13 of which the Company served as the third party developer
and construction manager) that represented approximately 11,300 beds in
approximately 4,500 units. Third party management and leasing services are
typically provided pursuant to multi-year management contracts that have an
initial term that ranges from two to five years. As of March 31, 2005, the
Company's total owned and managed portfolio included 43 properties that
represented approximately 26,900 beds in approximately 9,700 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. Ownership interests contributed to the Operating Partnership by the
Predecessor entities have been accounted for as a reorganization of entities
under common control in a manner similar to a pooling-of-interests. Accordingly,
the contributed assets and assumed liabilities were recorded at the
Predecessor's historical cost basis. This method of accounting also requires the
reporting of results of operations for the period in which the reorganization
occurred as though the entities had been combined at either the beginning of the
period or inception. The reorganization did not require any material adjustments
to conform the accounting policies of the separate entities.
5
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
The historical financial data prior to August 17, 2004 presented in this report
is the historical data for the Predecessor and reflects the combined historical
results of operations and financial position of the Predecessor including the
operations of The Village at Riverside and certain other non-core assets which
were distributed to the Predecessor owners as a part of the formation
transactions. As a result, the historical results of operations and financial
position prior to the IPO are not indicative of, or in some instances directly
comparable to, the Company's results of operations and financial position after
the IPO.
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 and combined financial statements have been consolidated or
combined only for the periods that such entities were under control by the
Company or the Predecessor. All significant intercompany balances and
transactions have been eliminated in consolidation or combination.
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, 2004.
All dollar amounts in the tables herein, except share and per share amounts, are
stated in thousands unless otherwise indicated.
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 costs of ordinary repairs and
maintenance are 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
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 $0.3 million and $0.2
million was capitalized during the three months ended March 31, 2005 and 2004,
respectively. Amortization of deferred financing costs totaling approximately
$30,000 and $0.1 million was capitalized during the three months ended March 31,
2005, and 2004, 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 are no impairments of the carrying
values of its investments in real estate as of March 31, 2005.
6
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED 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 typically will be 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 real estate taxes, insurance 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.
DEBT PREMIUMS
Debt premiums represent the excess of the estimated fair value of debt over the
principal value of debt assumed in connection with the Company's property
acquisitions. The debt premiums are being amortized as an offset to interest
expense over the term of the related loans using the effective-interest method.
As of March 31, 2005 and 2004, the net unamortized debt premiums were $5.0
million and $-0-, respectively, and are included in debt on the accompanying
consolidated balance sheets.
STOCK-BASED COMPENSATION
The Company accounts for equity based awards in accordance with SFAS No. 123(R),
SHARE-BASED PAYMENT. Although public companies are not required to adopt this
statement until the first annual period beginning after June 15, 2005, the
Company has chosen to adopt this statement in the first quarter of 2005.
Accordingly, the Company has recognized compensation expense related to certain
restricted stock awards (see Note 9) over the underlying vesting periods. The
adoption of this statement did not have a material impact on the Company's
consolidated or combined financial position or results of operations and did not
require any cumulative adjustments to previously reported results.
INCOME TAXES
The Company has maintained and intends to maintain its election 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.
OTHER NONOPERATING INCOME
Other nonoperating income of approximately $0.4 million for the three months
ended March 31, 2005 consists of a gain recognized related to insurance proceeds
received for a fire that occurred at one of the Company's owned off-campus
properties in 2003.
7
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
INCOME PER SHARE
Basic income per share is computed using net income and the weighted average
number of shares of the Company's common stock outstanding during the period,
including restricted stock units ("RSUs") issued to directors. Diluted income
per share reflects weighted average common shares issuable from the assumed
conversion of restricted stock awards ("RSAs") granted and profits interest
units ("PIUs") in the Operating Partnership that are convertible into common
shares. See Note 9 for a discussion of RSUs, PIUs, and RSAs.
The following is a summary of the elements used in calculating basic and diluted
income per share:
THREE MONTHS
ENDED
MARCH 31, 2005
----------------
Basic net income per share calculation:
Income from continuing operations $ 2,311
Discontinued operations 1 5,881
----------------
Net income $ 8,192
================
Income from continuing operations - per share $ 0.18
================
Income from discontinued operations - per share 1 $ 0.47
================
Net income - per share $ 0.65
================
Basic weighted average common shares outstanding 12,622,145
================
Diluted net income per share calculation:
Income from continuing operations $ 2,311
Add back income allocated to PIU holders 87
----------------
Income from continuing operations, as adjusted 2,398
Discontinued operations 1 5,881
----------------
Net income, as adjusted $ 8,279
================
Income from continuing operations - per share $ 0.19
================
Income from discontinued operations - per share 1 $ 0.46
================
Net income - per share $ 0.65
================
Basic weighted average common shares outstanding 12,622,145
PIUs 121,000
Restricted stock awards 26,794
----------------
Diluted weighted average common shares outstanding 12,769,939
================
1. Includes $5.9 million gain on disposition of University Village at San
Bernardino.
3. PROPERTY ACQUISITIONS
In March 2005, the Company acquired a 396-unit, 1,044-bed off-campus student
housing property (Exchange at Gainesville, to be renamed) located near the
University of Florida campus in Gainesville, Florida, for a contract purchase
price of $47.5 million, not including anticipated capital expenditures and
initial integration expenses necessary to bring the property up to the Company's
operating standards. The Company also incurred an additional $0.5 million in
closing costs and other external acquisition costs related to this acquisition.
In addition, as discussed in Note 8, the Company entered into a bridge loan in
the amount of $37.4 million in connection with this acquisition.
In March 2005, the Company acquired a 136-unit, 418-bed off-campus student
housing property (City Parc at Fry Street) located near the University of North
Texas in Denton, Texas, for a contract purchase price of $19.2 million, not
including anticipated capital expenditures and initial integration expenses
necessary to bring the property up to the Company's
8
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
operating standards. The Company also incurred an additional $0.1 million in
closing costs and other external acquisition costs related to this acquisition.
In addition, as discussed in Note 8, the Company assumed fixed rate mortgage
debt with an outstanding principal balance of approximately $11.8 million in
connection with this acquisition.
In February 2005, the Company acquired a five-property portfolio (the "Proctor
Portfolio") for a contract purchase price of approximately $53.5 million, not
including anticipated capital expenditures and initial integration expenses
necessary to bring the properties up to the Company's operating standards. Four
of the properties are located in Tallahassee, Florida and one property is
located in Gainesville, Florida. These five communities total 53 buildings, 446
units, and 1,656 beds. The Company also incurred an additional $0.3 million in
closing costs and other external acquisition costs related to this acquisition.
In addition, as discussed in Note 8, the Company assumed fixed rate mortgage
debt with an outstanding principal balance of approximately $35.4 million in
connection with this acquisition.
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, 2005 and 2004 presents consolidated and combined
information for the Company and the Predecessor, respectively, as if the
property acquisitions and IPO discussed above had occurred at the beginning of
each period presented. The 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,
------------------------------
2005 2004
-------------- --------------
Total revenues $ 22,325 $ 19,039
============== ==============
Net income $ 8,413 $ 1,477
============== ==============
Net income per share - basic and diluted $ 0.67 $ 0.12
============== ==============
4. PROPERTY DISPOSITION AND DISCONTINUED OPERATIONS
In November 2004, California State University - San Bernardino exercised its
option to purchase the University Village at San Bernardino off-campus student
housing property for an aggregate purchase price of approximately $28.3 million.
In accordance with the provision of SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT
OR DISPOSAL OF LONG-LIVED ASSETS, this property is reflected as Owned Off-Campus
Property - Held for Sale as of December 31, 2004. This transaction was
consummated in January 2005, resulting in net proceeds of approximately $28.1
million. The resulting gain on disposition of approximately $5.9 million is
included in discontinued operations in the accompanying consolidated statement
of operations for the three months ended March 31, 2005.
Discontinued operations for the three months ended March 31, 2004 includes The
Village at Riverside and certain other non-core assets that were distributed to
an affiliate of the Company's Predecessor owners in connection with the IPO, and
the Company's leasehold interest in Coyote Village, which was transferred to
Weatherford College in April 2004 as contemplated in the structuring of the
related ground lease agreement.
The related net loss for the afore-mentioned properties is reflected in the
accompanying consolidated and combined statements of operations as discontinued
operations for the periods presented in accordance with SFAS No. 144. Below is a
summary of the results of operations for the properties sold or distributed
through their respective sale or distribution dates:
THREE MONTHS ENDED MARCH 31,
------------------------------
2005 2004
-------------- --------------
Total revenues $ 29 $ 820
Total operating expenses (31) (563)
-------------- --------------
Operating (loss) income (2) 257
Total nonoperating expenses - (312)
-------------- --------------
Net loss $ (2) $ (55)
============== ==============
9
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
As of March 31, 2005 and December 31, 2004, assets and liabilities attributable
to the properties held for sale consisted of the following:
MARCH 31, 2005 DECEMBER 31, 2004
------------------- -------------------
Cash and cash equivalents $ - $ 176
=================== ===================
Other assets $ - $ 119
=================== ===================
Land, buildings and improvements, and furniture,
fixtures, and equipment, net of accumulated
depreciation $ - $ 22,350
=================== ===================
Accounts payable and accrued expenses $ - $ 126
=================== ===================
Other liabilities $ - $ 311
=================== ===================
5. INVESTMENTS IN OWNED OFF-CAMPUS PROPERTIES
Owned off-campus properties consist of the following:
MARCH 31, 2005 DECEMBER 31, 2004
------------------- -------------------
Owned off-campus properties:
Land $ 48,115 $ 33,778
Buildings and improvements 328,228 219,841
Furniture, fixtures and equipment 14,099 10,104
Construction in progress 19,848 9,087
------------------- -------------------
410,290 272,810
Less accumulated depreciation (24,931) (22,710)
------------------- -------------------
Owned off-campus properties, net $ 385,359 $ 250,100
=================== ===================
6. ON-CAMPUS PARTICIPATING PROPERTIES
The Company is a party to ground/facility lease agreements ("Leases") with
certain state university systems and colleges (the "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 Lessor and the 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 of the final repayment of
the related debt, the amortization period of which is contractually stipulated,
or the lease term.
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 Lessor would be required to make a
rental payment, also known as the Contingent Payment, sufficient to achieve
Financial Break Even until the facilities receive investment grade ratings.
Future net cash flow distributions would be first applied to repay such
Contingent Payments. Beginning in November 1999 and December 2002, as a result
of the facilities achieving investment grade ratings, the Texas A&M University
System is no longer required to make Contingent Payments under the Prairie View
A&M University Village and University College Leases, respectively. The
Contingent Payment obligation continues to be in effect for the University of
Houston and Texas A&M International University facilities.
In the event the Company seeks to sell its leasehold interest, the Leases
provide the Lessors the right of first refusal of a bona fide purchase offer and
an option to purchase the lessee's rights under the Lease.
In conjunction with the execution of each Lease, the Company has entered into
separate five-year agreements to manage the facilities for 5% of defined gross
receipts. The five-year terms of the management agreements are not contingent
upon the continuation of the facility leases. Upon expiration of the initial
five year terms, the agreements continue on a month-to-month basis.
10
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
On-campus participating properties are as follows:
LEASE COMMENCEMENT/ REQUIRED DEBT
LESSOR/UNIVERSITY EXPIRATION REPAYMENT MARCH 31, 2005 DECEMBER 31, 2003
- --------------------------------------------- --------------------- -------------------- ------------------- -------------------
Texas A&M University System/Prairie View 2/1/96 / 8/31/38 9/1/23 $ 37,844 $ 37,840
A&M University (1)
Texas A&M University System/Texas A&M
International 2/1/96 / 8/31/38 9/1/23 5,908 5,909
Texas A&M University System/Prairie View
A&M University (2) 10/1/99 / 8/31/39 8/31/25 / 8/31/28 23,680 23,663
University of Houston System/University
of Houston - Phase I 9/27/00 / 8/31/41 8/31/35 18,127 18,123
University of Houston System/University
of Houston - Phase II (3) 9/27/00 / 8/31/41 8/31/35 3,896 835
------------------- -------------------
89,455 86,370
Less accumulated amortization (19,184) (18,306)
------------------- -------------------
On-campus participating properties, net $ 70,271 $ 68,064
=================== ===================
- -------------------
(1) Consists of three phases placed in service between 1996 and 1998
(2) Consists of two phases placed in service between 2000 and 2003.
(3) Phase II is covered under the original Cullen Oaks ground lease. This
facility is under development and is scheduled to be placed in service
in August 2005.
7. JOINT VENTURE AND MINORITY INTERESTS
In August 2004, the Operating Partnership formed a limited liability company,
1772 Sweet Home Road, L.L.C. ("Sweet Home"), with a local landowner to develop
and own an off-campus student housing property located in Buffalo, New York. The
community will consist of nine residential buildings containing 269 units and
828 beds and is scheduled to be completed in the Fall of 2005. Upon the
formation of Sweet Home, an affiliate of the Operating Partnership (the
"Managing Member") caused Sweet Home to admit the local landowner (which was a
partner in the selling partnership) as a non-managing member of Sweet Home as
partial consideration for the land. In addition, the Managing Member will fund
all remaining development and construction costs of the project. A subsidiary of
the TRS will serve as developer and construction manager of the project. Each
member receives a return on its investment and participates in additional
returns, as defined in the Operating Agreement. This entity is consolidated and
the non-managing member's interest in Sweet Home is reflected as a minority
interest in the accompanying financial statements.
In connection with the IPO, a wholly-owned affiliate of the Company acquired
Titan Investments II ("Titan"), which held a minority ownership in three
development properties and one operating property, in exchange for approximately
$5.7 million in cash. One of these properties was sold in January 2005 (see Note
4). The three remaining properties are now wholly owned by the Operating
Partnership. This transaction was accounted for using the purchase method and
the purchase price was allocated to the assets and liabilities acquired based on
their respective estimated fair values.
Minority interests also include PIUs received by certain executive and senior
officers on the IPO date (see Note 9). A PIU 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. The PIU holders' minority interest in the Operating Partnership is
reported at an amount equal to the PIU holders' ownership percentage of the net
equity of the Operating Partnership at the end of each reporting period (1.0% at
March 31, 2005.)
11
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
8. DEBT
A summary of the Company's outstanding consolidated indebtedness, including
unamortized debt premiums, is as follows:
MARCH 31, 2005 DECEMBER 31, 2004
-------------------- --------------------
Debt secured by owned off-campus properties:
Revolving credit facility $ 33,600 $ 11,800
Mortgage and bridge loans payable 196,127 111,974
Debt secured by on-campus participating properties:
Mortgage loan payable 16,978 17,045
Construction loan payable 3,069 540
Bonds payable 59,655 59,655
-------------------- --------------------
309,429 201,014
Unamortized debt premiums 4,956 -
-------------------- --------------------
Total debt $ 314,385 $ 201,014
==================== ====================
LOANS ASSUMED OR ENTERED INTO IN CONJUNCTION WITH PROPERTY ACQUISITIONS
In connection with the March 2005 acquisition of Exchange at Gainesville (to be
renamed), an off-campus student housing property, the Company entered into a
bridge loan in the amount of $37.4 million. The loan bears interest at a fixed
rate of 5.1% through the initial maturity date of September 2005, at which time
the Company has the option to extend the loan for an additional six months. If
the Company chooses to exercise such extension, the rate will be LIBOR plus 1.8%
through the extension period.
In connection with the March 2005 acquisition of City Parc at Fry Street, an
off-campus student housing property, the Company assumed approximately $11.8
million of fixed-rate mortgage debt. The debt bears interest at 5.96% and
matures in 2014. Upon assumption of this debt, the Company recorded a debt
premium of approximately $0.6 million to reflect the estimated fair value of the
debt assumed.
In connection with the February 2005 acquisition of the Proctor Portfolio, the
Company assumed approximately $35.4 million of fixed-rate mortgage debt. The
debt has a weighted average interest rate of 7.4% and an average term to
maturity of 6 years. Upon assumption of this debt, the Company recorded debt
premiums of approximately $4.5 million to reflect the estimated fair value of
the debt assumed.
The above loans are secured by the related properties.
REVOLVING CREDIT FACILITY
In connection with the IPO, the Operating Partnership obtained a senior secured
revolving credit facility. The credit facility has a term of 36 months and
provides a maximum capacity of $75 million, subject to certain conditions as
contained in the Credit Agreement (the "Agreement"). The maximum capacity may be
increased by up to an additional $25 million, subject to certain borrowing base
requirements, as outlined in the Agreement. 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 0.20% to 0.25% per annum, depending on the aggregate
unused balance. The credit facility is secured by the Company's ownership
interests in a minimum of four unlevered owned off-campus properties. The
Company guarantees the Operating Partnership's obligations under the credit
facility. As of March 31, 2005, the balance outstanding on the revolving credit
facility totaled $33.6 million, bearing interest at a weighted average rate of
4.31%, with remaining availability (subject to certain financial covenants)
totaling $31.5 million.
The terms of the Agreement include certain restrictions and covenants, which
limit, among other things, the payment of distributions (as discussed below),
the incurrence of additional indebtedness, liens, and the disposition of assets.
The terms also require compliance with financial ratios relating to consolidated
net worth and leverage requirements. The Company is also subject to compliance
with additional fixed charge and debt coverage ratios. The distribution
restriction previously mentioned provides that, except to enable the Company to
continue to qualify as a REIT for federal income tax purposes, before December
31, 2005, the Company may not pay distributions greater than $5 million in any
given quarter. Subsequent to December 31, 2005, the Company will be prohibited
from making distributions which exceed 95% of the Company's
12
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
funds from operations, as defined, over any four consecutive fiscal quarters. As
of March 31, 2005, the Company was in compliance with all such covenants.
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, profits interest units ("PIUs") in
the Operating Partnership, restricted stock units ("RSUs"), restricted stock,
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 both March 31, 2005 and December 31,
2004, the Company has issued or granted 121,000 PIUs and 7,145 RSUs.
Additionally, as of both March 31, 2005 and December 31, 2004, the Company has
also granted 367,682 shares under an outperformance bonus plan.
Also under the Plan, on February 16, 2005, the Company granted to its executive
officers and certain employees 55,130 shares of restricted stock awards ("RSAs")
that vest in equal annual installments over five years (for executive officers)
or three years (for all other employees) beginning in February 2006. Unvested
awards will be forfeited upon the termination of the individuals' employment
with the Company. The Company recognizes the value of these awards as an expense
over the vesting periods in compliance with SFAS No. 123(R), SHARE BASED
PAYMENT. The value of the awards is based on the market value of the Company's
common stock on the grant date. Recipients of RSAs will receive dividends, as
declared by the Board of Directors, on unvested shares provided that the
recipients continue to be employees of the Company. During the three months
ended March 31, 2005, the Company recognized approximately $24,000 of
compensation expense related to such awards.
10. INTEREST RATE HEDGES
In connection with the December 2003 extension of a construction note payable,
the Predecessor entered into an interest rate swap on November 19, 2003
(effective December 15, 2003 through November 15, 2008) that was designated to
hedge its exposure to fluctuations on interest payments attributed to changes in
interest rates associated with payments on its advancing construction note
payable. Under the terms of the interest rate swap agreement, the Company pays a
fixed rate of 5.5% and receives a floating rate of LIBOR plus 1.9%. The interest
rate swap had an estimated fair value of approximately $0.4 million and $40,000
at March 31, 2005 and December 31, 2004, respectively, and is reflected in other
assets in the accompanying consolidated balance sheets.
The Company does not expect to reclassify a material amount of net gains on
hedge instruments from accumulated other comprehensive income to earnings in
2005. 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. Project cost guarantees hold the
Company responsible for the cost of a project in excess of budget. The budget
consists primarily of costs included in the general contractors' guaranteed
maximum price contract ("GMP"). 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 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. The Company's
estimated maximum exposure amount under the above guarantees is approximately
$4.7 million.
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).
13
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
At March 31, 2005, all projects were anticipated to complete on schedule and
within budget. 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. The Company's most significant and common
commitments rest with general contractors and furniture suppliers.
DEBT-RELATED GUARANTEES: RAP Student Housing Properties, L.L.C.'s ("RAP SHP"),
an entity wholly owned by the Operating Partnership, limited guaranty of certain
obligations of the borrower in connection with the mortgage loan for The Village
at Riverside, a property which was retained by the Predecessor owners in
connection with the IPO, continues to be in effect. In December 2004, the
property was foreclosed upon by the lender. Pursuant to the guaranty, RAP SHP
agreed to indemnify the lender against, among other things, the borrower's fraud
or misrepresentation, the borrower's failure to maintain insurance, certain
environmental matters, and the borrower's criminal acts. As part of the
formation transactions, the Predecessor owners have indemnified the Company and
its affiliates from and against all claims, costs, expenses, losses and damages
incurred by the Company under or in connection with this guaranty. Even if the
Company was required to perform under the guaranty, the Predecessor owners would
be obligated to reimburse the Company for the amount of such liability under the
indemnity. The Company does not expect to incur material exposure under this
guarantee.
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.
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.
14
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31,
----------------------------------------
2005 2004
------------------ ------------------
OWNED OFF-CAMPUS PROPERTIES
Rental revenues $ 12,692 $ 7,989
Interest income 34 1
------------------ ------------------
Total revenues from external customers 12,726 7,990
Operating expenses before depreciation and amortization 5,065 3,539
Interest expense 2,456 2,910
Insurance gain 430 -
------------------ ------------------
Operating income before depreciation and amortization, minority
interests and allocation of corporate overhead $ 5,635 $ 1,541
================== ==================
Depreciation and amortization $ 2,455 $ 1,424
================== ==================
Capital expenditures $ 10,972 $ 19,034
================== ==================
Total segment assets at March 31, $ 396,663 $ 251,215
================== ==================
ON-CAMPUS PARTICIPATING PROPERTIES
Rental revenues $ 5,493 $ 5,293
Interest income 25 12
------------------ ------------------
Total revenues from external customers 5,518 5,305
Operating expenses before depreciation, amortization, and
ground/facility leases 1,669 1,631
Ground/facility leases 212 141
Interest expense 1,347 1,371
------------------ ------------------
Operating income before depreciation and amortization, minority
interests and allocation of corporate overhead $ 2,290 $ 2,162
================== ==================
Depreciation and amortization $ 880 $ 854
================== ==================
Capital expenditures $ 3,055 $ 124
================== ==================
Total segment assets at March 31, $ 83,423 $ 90,654
================== ==================
DEVELOPMENT SERVICES
Development and construction management fees from
external customers $ 645 $ 1,698
Intersegment revenues 92 -
------------------ ------------------
Total revenues 737 1,698
Operating expenses 912 764
------------------ ------------------
Operating (loss) income before depreciation and amortization,
minority interests and allocation of corporate overhead $ (175) $ 934
================== ==================
Total segment assets at March 31, $ 1,406 $ 2,258
================== ==================
PROPERTY MANAGEMENT SERVICES
Property management fees from external customers $ 710 $ 372
Intersegment revenues 657 497
------------------ ------------------
Total revenues 1,367 869
Operating expenses 418 373
------------------ ------------------
Operating income before depreciation and amortization, minority
interests and allocation of corporate overhead $ 949 $ 496
================== ==================
Total segment assets at March 31, $ 2,051 $ 475
================== ==================
RECONCILIATIONS
Total segment revenues $ 20,348 $ 15,862
Elimination of intersegment revenues (749) (497)
------------------ ------------------
Total consolidated revenues $ 19,599 $ 15,365
================== ==================
Segment operating income before depreciation, amortization,
minority interests and allocation of corporate overhead $ 8,699 $ 5,133
Depreciation and amortization, including amortization of deferred
financing costs 3,670 2,403
Net unallocated expenses relating to corporate overhead 2,529 1,166
Income tax provision 102 -
Minority interests (87) 21
------------------ ------------------
Income from continuing operations $ 2,311 $ 1,585
================== ==================
Total segment assets $ 483,543 $ 344,602
Unallocated corporate assets 2,944 2,381
------------------ ------------------
Total assets $ 486,487 $ 346,983
================== ==================
15
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
13. SUBSEQUENT EVENTS
On April 28, 2005, the Company entered into a Separation Agreement and Mutual
General Release (the "Separation Agreement") with Mark J. Hager, the Company's
Executive Vice President, Chief Financial and Accounting Officer, and Treasurer.
In accordance with the Separation Agreement, the Company is obligated to pay Mr.
Hager approximately $0.4 million, payable in 12 equal monthly installments
commencing on July 15, 2005. At his option, Mr. Hager may elect to receive such
payment in a lump sum discounted at 4%.
16
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 Company's 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 Company's 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
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, 2005, our property portfolio contained 24 high-quality student
housing properties with approximately 5,200 apartment units and 15,600 beds,
consisting of 19 off-campus student housing properties within close proximity to
22 colleges and universities in nine states, and five on-campus participating
properties owned through ground/facility leases with the respective 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.
We also provide third party management and leasing services for 19 student
housing properties that represent approximately 11,300 beds in approximately
4,500 units. We provided development and construction management services for 13
of these properties. Our third party management and leasing services are
typically provided pursuant to multi-year management contracts that have an
initial term that ranges from two to five years. As of March 31, 2005, our total
owned and managed portfolio included 43 properties that represented
approximately 26,900 beds in approximately 9,700 units.
The net operating income of these student housing communities, which is one of
the financial measures that we use to evaluate community performance, is
affected by the demand and supply dynamics within our markets, which drives our
17
rental rates and occupancy levels and is affected by our ability to control
operating costs. Our overall operating performance is also impacted by the
general availability and cost of capital and the performance of our newly
developed and acquired student housing communities. We create long-term
stockholder value by accessing capital on cost effective terms, deploying that
capital to develop, redevelop and acquire student housing communities and
selling communities when they no longer meet our long-term investment strategy
and when market conditions are favorable.
We also provide third party development and construction management services for
student housing properties owned by universities, 501(c)3 foundations and
others. We have developed student housing properties for these clients and, a
majority of the time, have been retained to manage these properties following
their opening. As of March 31, 2005, development fees of approximately $5.1
million remained to be earned by us with respect to contracted third party
development projects. The following table provides certain information with
respect to third party properties under construction as of March 31, 2005:
FEES BALANCE TO BE
TOTAL PREVIOUSLY EARNED AND
CONTRACTUAL FEE EARNED AND RECOGNIZED IN SCHEDULED
PROPERTY AMOUNT RECOGNIZED 2005 AND 2006 COMPLETION
- ------------------------------- ----------------- ---------------- ----------------- ---------------
Saint Leo University Phase II $ 375 $ 199 $ 176 Aug 2005
Vista del Campo Phase II 3,501 168 3,333 Aug 2006
West Virginia University -
pre-development services 400 (1) 370 30 Jun 2005
Fenn Tower Renovation 1,509 10 1,499 Aug 2006
Lamar University Dining Hall 110 22 88 Nov 2005
----------------- ---------------- -----------------
Total $ 5,895 $ 769 $ 5,126
================= ================ =================
(1) Contractual fee amount is shown net of approximately $0.6 million of costs
anticipated to be incurred to complete the project.
In addition, as of March 31, 2005, we have been selected to perform construction
administration services related to a student housing property for West Virginia
University. These services provide a net construction administration fee of
approximately $0.3 million and are anticipated to commence in August 2005. We
have also received a "Notice of Intent to Award" from Arizona State University
("ASU") indicating that we have been selected to provide design, development and
management of student housing on the Tempe Campus. In addition, we have also
been selected by Hope International University ("Hope") in Fullerton,
California, to design and oversee a comprehensive redevelopment of its campus,
including the development of residence halls, student apartments and faculty
housing. Subject to the successful structuring and closing of the ASU and Hope
transactions, we anticipate that the projects will commence construction during
the second or third quarter of 2006.
We believe that the ownership and operation of student housing communities in
close proximity to selected colleges and universities present an attractive
long-term investment opportunity for our investors. We intend to continue to
execute our strategy of identifying existing differentiated, typically highly
amenitized, student housing communities or development opportunities in close
proximity to university campuses. In addition, our strategy includes identifying
properties with high barriers to entry that are projected to experience
substantial increases in enrollment and/or are under-serviced in terms of
existing on- and/or off-campus student housing. While fee revenue from our third
party development/construction management and property management services
allows us to develop strong and key relationships with colleges and
universities, 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 March 2005, we acquired a 396-unit, 1,044-bed off-campus student housing
property (Exchange at Gainesville, to be renamed) located near the University of
Florida campus in Gainesville, Florida, for a contract purchase price of $47.5
million. In addition, we anticipate spending approximately $1.1 million in
closing and other external transactions costs, including capital expenditures
necessary to bring the property up to our operating standards. We also
anticipate spending approximately $45,000 of initial integration expenses to
bring the property up to our operating standards. We entered into a bridge loan
in the amount of $37.4 million in connection with this acquisition.
In March 2005, we acquired a 136-unit, 418-bed off-campus student housing
property (City Parc at Fry Street) located near the University of North Texas in
Denton, Texas, for a contract purchase price of $19.2 million. In addition, we
18
anticipate spending approximately $0.4 million in closing and other external
transactions costs, including capital expenditures necessary to bring the
property up to our operating standards. We also anticipate spending
approximately $35,000 of initial integration expenses to bring the property up
to our operating standards. We assumed approximately $11.8 million of fixed-rate
mortgage debt in connection with this acquisition.
In February 2005, we acquired a five-property portfolio (the "Proctor
Portfolio") for a contract purchase price of approximately $53.5 million. Four
of the properties are located in Tallahassee, Florida and one property is
located in Gainesville, Florida. These five communities total 53 buildings, 446
units, and 1,656 beds. In addition, we anticipate spending approximately $1.7
million in closing and other external transactions costs, including capital
expenditures necessary to bring the property up to our operating standards. We
also anticipate spending approximately $0.1 million of initial integration
expenses to bring the property up to our operating standards. We assumed
approximately $35.4 million of fixed-rate mortgage debt in connection with this
acquisition.
DISPOSITION
In November 2004, California State University - San Bernardino exercised its
option to purchase the University Village at San Bernardino off-campus student
housing property for an aggregate purchase price of approximately $28.3 million.
This transaction was consummated in January 2005, resulting in net proceeds of
approximately $28.1 million. The resulting gain on disposition of approximately
$5.9 million is included in discontinued operations in the accompanying
consolidated statement of operations for the three months ended March 31, 2005.
OWNED DEVELOPMENT ACTIVITIES
Our Sweet Home development project, located near the campus of the State
University of New York - Buffalo, is currently on schedule to be completed in
August 2005 in connection with the 2005/2006 academic year. As of March 31,
2005, the project was approximately 68% complete, and we anticipate incurring
remaining development costs of approximately $14.8 million.
Our Cullen Oaks Phase II development project, located on the campus of the
University of Houston, is currently on schedule to be completed in August 2005
in connection with the 2005/2006 academic year. As of March 31, 2005, the
project was approximately 23% complete, and we anticipate incurring remaining
development costs of approximately $12.7 million.
In addition, we are in the initial stage of two development projects with
anticipated total development costs of approximately $92.0 million. One project
is currently in the initial design/development phase and is located in Newark,
New Jersey near the campuses of the New Jersey Institute of Technology, Rutgers
University, and Essex Community College. We anticipate development costs on this
project to total approximately $57.0 million and plan to own this project
through a joint venture with Titan Investments, a partner with whom we have
previously developed four off-campus student housing properties. We are also
actively pursing the development of a project located in close proximity to
Texas A&M University in College Station, Texas, with total estimated development
costs of approximately $35.0 million. Both properties are anticipated to
complete construction in Fall 2006, subject to the finalization of
pre-development due diligence and completion of the municipal approval process.
OUR RECENT FORMATION AS A REIT
We were formed to succeed the business of the American Campus Communities
Predecessor (the "Predecessor"), which was not a legal entity but rather a
combination of real estate entities under common ownership and voting control
collectively doing business as American Campus Communities, L.L.C. and
Affiliated Student Housing Properties, entities engaged in the student housing
business since 1993. Our Company was incorporated in Maryland on March 9, 2004.
Additionally, American Campus Communities Operating Partnership, L.P. (the
"Operating Partnership") was formed and our taxable REIT subsidiary ("TRS") was
incorporated in Maryland on July 14, 2004 and August 17, 2004, respectively,
each in anticipation of our initial public offering of common stock (the "IPO").
The IPO was consummated on August 17, 2004, concurrent with the consummation of
various formation transactions, and consisted of the sale of 12,100,000 shares
of our common stock at a price per share of $17.50, generating gross proceeds of
approximately $211.8 million. The aggregate proceeds to our Company, net of the
underwriters' discount and offering costs, were approximately $189.4 million. In
connection with the exercise of the underwriters' over-allotment option on
September 15, 2004, we issued an additional 515,000 shares of common stock at
the IPO price per share, generating an additional $9.0 million of gross proceeds
and $8.4 million in net proceeds after the underwriters' discount. Our
operations commenced on August 17, 2004 after completion of the IPO and the
formation transactions, and are conducted substantially through the Operating
Partnership and its wholly owned subsidiaries, including the TRS.
19
In connection with the IPO we completed the following formation transactions:
|X| Redeemed 100% of the ownership interests of the Predecessor owner in
RAP Student Housing Properties L.L.C. ("RAP SHP") for approximately
$80.2 million.
|X| Acquired the minority ownership interest of Titan Investments II
("Titan") in certain owned off-campus properties in exchange for
approximately $5.7 million.
|X| Repaid certain construction and permanent indebtedness totaling
approximately $105.5 million.
|X| Distributed The Village at Riverside and certain other non-core assets
to our Predecessor owner (by RAP SHP).
|X| Entered into a senior secured revolving credit facility with a maximum
limit of $75 million, subject to certain ratios and covenants.
As our Predecessor was not a REIT and provided certain services to residents
which are impermissible under IRS REIT regulations, in conjunction with the
formation of our Company we restructured our operations relative to the
provision of these services. Subsequent to the commencement of our operations as
a REIT, these resident services have been provided by our TRS, resulting in
lower rental revenue and higher resident services revenue.
CRITICAL ACCOUNTING POLICIES
ALLOCATION OF FAIR VALUE TO ACQUIRED PROPERTIES: The price that we pay to
acquire a property is impacted by many factors, including the condition of the
buildings and improvements, the occupancy of the building, favorable or
unfavorable financing, and numerous other factors. Accordingly, we are required
to make subjective assessments to allocate the purchase price paid to acquire
investments in real estate among the assets acquired and liabilities assumed
based on our estimate of the fair values of such assets and liabilities. This
includes, among other items, determining the value of the buildings and
improvements, land, in-place tenant leases, and any debt assumed from the
seller. Each of these estimates requires a great deal of judgment and some of
the estimates involve complex calculations. Our calculation methodology is
summarized in Note 2 to our consolidated and combined financial statements
contained in Item 1 herein. These allocation assessments have a direct impact on
our results of operations because if we were to allocate more value to land
there would be no depreciation with respect to such amount or if we were to
allocate more value to the buildings as opposed to allocating to the value of
in-place tenant leases, this amount would be recognized as an expense over a
much longer period of time, since the amounts allocated to buildings are
depreciated over the estimated lives of the buildings whereas amounts allocated
to in-place tenant leases are amortized over the terms of the leases (generally
less than one year).
20
PROPERTY OPERATIONS
As of March 31, 2005, our property portfolio consisted of the following:
YEAR
ACQUIRED / PRIMARY UNIVERSITY
PROPERTY DEVELOPED LOCATION SERVED UNITS BEDS
- ---------------------------------- -------------- ------------------- -------------------------------- --------- ----------
OWNED OFF CAMPUS PROPERTIES:
Arizona State University Main
1. Commons On Apache 1999 Tempe, AZ Campus 111 444
Virginia Polytechnic
2. The Village at Blacksburg 2000 Blacksburg, VA Institute and State University 288 1,056
Arizona State University Main
3. The Village on University 1999 Tempe, AZ Campus 288 918
The University of Georgia-
4. River Club Apartments 1999 Athens, GA Athens 266 794
The University of Georgia-
5. River Walk Townhomes 1999 Athens, GA Athens 100 340
6. The Callaway House 2001 College Station, TX Texas A&M University 173 538
7. The Village at Alafaya The University of Central
Club 2000 Orlando, FL Florida 228 840
8. The Village at Science The University of Central
Drive 2001 Orlando, FL Florida 192 732
9. University Village at The University of Colorado at
Boulder Creek 2002 Boulder, CO Boulder 82 309
10. University Village at California State University,
Fresno 2004 Fresno, CA Fresno 105 406
11. University Village at TU 2004 Philadelphia, PA Temple University 220 749
12. University Village at State University of New York
Sweet Home 2005 Amherst, NY - Buffalo 269 828
13. University Club
Tallahassee 2005 Tallahassee, FL Florida State University 152 608
14. The Grove at University
Club 2005 Tallahassee, FL Florida State University 64 128
15. College Club Tallahassee 2005 Tallahassee, FL Florida A&M University 96 384
16. The Greens at College
Club 2005 Tallahassee, FL Florida A&M University 40 160
17. University Club
Gainesville 2005 Gainesville, FL University of Florida 94 376
18. City Parc at Fry Street 2005 Denton, TX University of North Texas 136 418
19. Exchange at Gainesville
(to be renamed) 2005 Gainesville, FL University of Florida 396 1,044
--------- ----------
Total owned off campus properties 3,300 11,072
ON CAMPUS PARTICIPATING PROPERTIES:
20. University Village--PVAMU 1996/97/98 Prairie View, TX Prairie View A&M University 612 1,920
21. University College--PVAMU 2000/2003 Prairie View, TX Prairie View A&M University 756 1,470
Texas A&M International
22. University Village--TAMIU 1997 Laredo, TX University 84 252
23. Cullen Oaks 2001 Houston, TX The University of Houston 231 525
24. Cullen Oaks Phase II 2005 Houston, TX The University of Houston 180 354
--------- ----------
Total on campus participating properties 1,863 4,521
--------- ----------
TOTAL - ALL PROPERTIES 5,163 15,593
========= ==========
(1) The average age of our properties is 4.7 years.
21
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2005 AND MARCH 31, 2004
The following table presents our results of operations for the three months
ended March 31, 2005 and 2004, including the amount and percentage change in
these results between the two periods:
THREE MONTHS ENDED MARCH 31,
-----------------------------
2005 2004 CHANGE ($) CHANGE (%)
-------------- ------------- -------------- ------------
REVENUES:
Owned off-campus properties $ 12,489 $ 7,989 $ 4,500 56.3%
On-campus participating properties 5,493 5,293 200 3.8%
Third party development and management services 1,355 2,070 (715) (34.5%)
Resident services 204 - 204 100.0%
-------------- ------------- -------------- ------------
TOTAL REVENUES 19,541 15,352 4,189 27.3%
OPERATING EXPENSES:
Owned off-campus properties 5,136 3,459 1,677 48.5%
On-campus participating properties 1,875 1,800 75 4.2%
Third party development and management services 1,464 1,264 200 15.8%
General and administrative 1,364 453 911 201.1%
Depreciation and amortization 3,424 2,259 1,165 51.6%
Ground/facility leases 212 141 71 50.4%
-------------- ------------- -------------- ------------
TOTAL OPERATING EXPENSES 13,475 9,376 4,099 43.7%
-------------- ------------- -------------- ------------
Operating income 6,066 5,976 90 1.5%
NONOPERATING INCOME AND (EXPENSES):
Interest income 58 13 45 346.2%
Interest expense (3,808) (4,281) 473 (11.0%)
Amortization of deferred financing costs (246) (144) (102) 70.8%
Other nonoperating income 430 - 430 100.0%
-------------- ------------- -------------- ------------
TOTAL NONOPERATING EXPENSES (3,566) (4,412) 846 (19.2%)
-------------- ------------- -------------- ------------
Income before income tax provision, minority interests,
and discontinued operations 2,500 1,564 936 59.8%
Income tax provision (102) - (102) (100.0%)
Minority interests (87) 21 (108) (514.3%)
-------------- ------------- -------------- ------------
INCOME FROM CONTINUING OPERATIONS 2,311 1,585 726 45.8%
Discontinued operations:
Loss attributable to discontinued operations (2) (55) 53 (96.4%)
Gain from disposition of real estate 5,883 - 5,883 100.0%
-------------- ------------- -------------- ------------
Total discontinued operations 5,881 (55) 5,936 10,792.7%
-------------- ------------- -------------- ------------
NET INCOME $ 8,192 $ 1,530 $ 6,662 435.4%
============== ============= ============== ============
OWNED OFF-CAMPUS PROPERTIES OPERATIONS
Revenues from our owned off-campus properties for the three months ended March
31, 2005 compared with the same period in 2004 increased by $4.5 million
primarily due to the completion of construction and opening of two properties in
August 2004, the acquisition of seven properties during the first quarter of
2005 and higher first quarter occupancy at a majority of the same store
properties operated during both periods, as described below. Operating expenses
increased approximately $1.7 million for the three months ended March 31, 2005
compared with the same period in 2004. University Village at San Bernardino,
which also opened in August of 2004, was sold in January 2005 and is therefore
not reflected in operating revenues and expenses but is included in discontinued
operations.
NEW PROPERTY OPERATIONS. In August of 2004 we completed construction of and
opened a 406-bed property serving California State University, Fresno and a
749-bed property serving Temple University. Additionally, we acquired seven
properties containing 3,118 beds at various times during the first quarter of
2005, located in Florida (Gainesville and Tallahassee) and Denton, Texas. These
new properties contributed $3.8 million of additional revenues and $1.6 million
of additional operating expenses in the first quarter of 2005 as compared to the
first quarter of 2004.
22
SAME STORE PROPERTY OPERATIONS (EXCLUDING NEW PROPERTY ACTIVITY). We had nine
properties containing 5,971 beds which were operating during both the three
month periods ended March 31, 2005 and 2004, and which had average occupancy
rates during these periods of 97.9% and 88.8%, respectively. These properties
produced revenues of $8.7 million and $8.0 million during the three month
periods ended March 31, 2005 and 2004, respectively. This increase of $0.7
million was the result of the improved Fall 2004 lease up and was offset by
certain non-rental revenues reflected as property revenues by the Predecessor
which are now reflected as resident services revenues in our TRS. Future
revenues will be dependent on our ability to maintain our current leases in
effect for the 2004/2005 academic year and our ability to obtain appropriate
rental rates and desired occupancy for the 2005/2006 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 remained relatively constant at
$3.6 million for the three months ended March 31, 2005 compared to $3.5 million
for the three months ended March 31, 2004. This slight increase was the result
of increases in operating expenses such as marketing, maintenance, employee
benefits, utilities and taxes. These increases were due to a combination of
increases in inflation and overall higher occupancy rates. We anticipate that
operating expenses in 2005 will continue to increase slightly as compared with
2004 as a result of expected increases in utility costs, property taxes and
general inflation.
ON-CAMPUS PARTICIPATING PROPERTIES ("OCPP") OPERATIONS
SAME STORE OCPP OPERATIONS. We had four participating properties containing
4,167 beds (including the additional 210 beds at our Prairie View A&M property
that opened in August 2003) which were operating during both the three month
periods ended March 31, 2005 and 2004. The Cullen Oaks Phase II property is
currently under construction and is scheduled to commence operations in August
2005. Revenues from our on-campus participating properties increased to $5.5
million for the three months ended March 31, 2005 from $5.3 million for the
three months ended March 31, 2004, an increase of $0.2 million. This increase
was primarily due to an increase in rental rates, which was slightly offset by a
decrease in average occupancy from 96.2% for the three months ended March 31,
2004 to 94.4% for the three months ended March 31, 2005. Coyote Village, an
on-campus participating property that commenced operations in August 2003, had
its ground lease transferred to Weatherford College in April 2004; therefore, it
is not reflected in operating revenues and expenses but is included in
discontinued operations.
Operating expenses for our on-campus participating properties remained
relatively constant at $1.9 million for the three months ended March 31, 2005
compared to $1.8 million for the three months ended March 31, 2004. We
anticipate that operating expenses during 2005 will increase slightly as
compared with 2004 as a result of expected increases in utility costs and
general inflation.
Ground/facility lease expense remained relatively constant at $0.2 million for
the three months ended March 31, 2005 as compared to $0.1 million for the three
months ended March 31, 2004.
THIRD PARTY DEVELOPMENT AND MANAGEMENT SERVICES
Third party development and management services revenue decreased $0.7 million
from $2.1 million for the three months ended March 31, 2004 to $1.4 million in
2005, primarily due to the factors discussed in the paragraphs below. Third
party development and management services operating expenses increased $0.2
million for the three months ended March 31, 2005 compared with the same period
in 2004, primarily due expenses incurred in 2005 in relation to the
pre-development and design services provided under the West Virginia University
project previously discussed.
DEVELOPMENT SERVICES. Third party development services revenue for the three
months ended March 31, 2005 represented a decrease of $1.1 million compared with
the same period in 2004. This decrease was primarily due to the UCI Phase I
development project being completed in Fall 2004 and therefore earning no
revenue during the three months ended March 31, 2005 as compared to earning
approximately $0.8 million of revenue during the three months ended March 31,
2004. We also recognized $0.2 million in construction savings on a previously
completed third party development project during the three months ended March
31, 2004. In addition, this decrease was due to a combination of fewer projects,
a lower average project development cost and corresponding contractual fee per
project and the percentage of the contractual fee recognized during the
respective periods. We had four projects in progress during the three months
ended March 31, 2005 with an average contractual fee of $1.2 million compared to
the three months ended March 31, 2004 in which we had five projects in progress
with an average contractual fee of $1.4 million. In addition, due to the
differences in the percentage of construction completed during the periods, of
the total contractual fees of the projects in progress during the respective
periods, 12.3% was recognized (on a percentage of completion basis) during the
three months ended March 31, 2005 compared with 20.4%
23
for the same period in 2004. 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 construction of
the project. In addition, to the extent projects are completed under budget, the
Company may be entitled to a portion of such savings, which are recognized as
revenue upon third party verification of the project costs. It is possible that
projects for which we have expended 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.
MANAGEMENT SERVICES. Third party management revenues increased $0.3 million for
the three months ended March 31, 2005 compared with the same period in 2004. The
increase was due to five new contracts that commenced in Fall 2004. We expect
third party property management revenues to continue to increase during 2005 as
compared with 2004, primarily as a result of a full year of fees on the new
contracts that commenced in Fall 2004.
RESIDENT SERVICES
Concurrent with our commencement of operations and our designation as a REIT,
certain services previously provided to residents by our properties are now
provided by our TRS. These services generally consist of food service and
housekeeping (at Callaway House), and certain resident programming activities.
These services are provided to the residents at market rates and, under an
agreement between the TRS and the Operating Partnership, payments from residents
are collected by the properties on behalf of the TRS in conjunction with their
collection of rents. Revenue from resident services for the three months ended
March 31, 2005 approximated $0.2 million. As a business strategy, our level of
services provided to residents by the TRS is only incidental to that which is
necessary to maintain or increase occupancy. As a result of the timing of the
formation of the TRS in 2004, we expect revenue from resident services in 2005
to be significantly higher than in 2004.
GENERAL AND ADMINISTRATIVE
General and administrative expenses (relating primarily to corporate operations)
increased $0.9 million for the three months ended March 31, 2005 compared with
the same period in 2004. The increase was primarily a result of expenses
incurred as a public company which were not present in the Predecessor's
operations such as directors' compensation, investor relations, increased
professional services fees, Sarbanes-Oxley Section 404 compliance costs and
director and officer liability insurance. As a result of being a public company
and a separation agreement entered into with an executive officer in April 2005,
we anticipate our future general and administrative expenses will exceed those
of our Predecessor.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased $1.2 million for the three months ended
March 31, 2005 compared with the same period in 2004 primarily due to the
opening of the two owned off-campus properties in August 2004 and the
acquisition of seven properties during the first quarter of 2005, as described
above. In conjunction with the acquisition of the seven previously mentioned
properties, a valuation was assigned to in-place leases which are amortized over
the average remaining lease terms of the acquired leases (generally less than
one year). This contributed $0.2 million of additional depreciation and
amortization expense for the three months ended March 31, 2005. We expect
depreciation and amortization in 2005 to increase significantly from 2004
primarily due to a full year's depreciation on the two owned off-campus
properties that opened in August 2004 and the $120.2 million of acquisitions
closed during the first quarter of 2005.
Amortization of deferred financing costs increased $0.1 million for the three
months ended March 31, 2005 compared with the same period in 2004 primarily due
to debt assumed or incurred in connection with the property acquisitions closed
during the first quarter of 2005 as well as additional finance costs incurred in
2004 related to our revolving credit facility obtained in connection with the
IPO. These increases were offset by a decrease in amortization related to two
mortgage loans that were paid off in connection with our IPO.
INTEREST EXPENSE
Interest expense of $3.8 million the three months ended March 31, 2005
represented a decrease of $0.5 million from $4.3 million during the same period
in 2004. Interest expense decreased due to the retirement of two mortgage loans
in connection with the IPO. This was partially offset by $0.5 million of
additional interest expense from the debt assumed or incurred in relation to the
acquisition of the seven previously mentioned properties in the first quarter
2005, as well as increased interest expense in 2005 related to our revolving
credit facility. We anticipate that interest expense in 2005 will continue to
increase from 2004 levels due to the debt assumed or incurred in connection with
previously mentioned property acquisitions or any increase in borrowing rates
that may impact the floating rate on our revolving credit facility.
24
OTHER INCOME
Other income increased $0.4 million for the three months ended March 31, 2005
compared with the same period in 2004 due to a gain recognized related to a
property insurance settlement.
INCOME TAX
Subsequent to our IPO formation transactions, our TRS manages our non-REIT
activities. The TRS is subject to federal, state and local income taxes and is
required to recognize the future tax benefits attributable to deductible
temporary differences between book and tax basis, to the extent that the asset
will be realized. For the three months ended March 31, 2005, the TRS recorded
$0.1 million of income tax expense.
Unlike our Predecessor, we will be subject to federal, state and local income
taxes in the future as a result of the services provided by our TRS, which
include our third party services revenues, resident services revenues and the
operations of our on-campus participating properties. As a result, the income
earned by our TRS will, unlike our Predecessor and our results from our owned
off-campus properties, be subject to a new level of taxation. The amount of
income taxes to be recognized in the future will be dependent on the operating
results of the TRS.
MINORITY INTERESTS
Minority interests during the three months ended March 31, 2004 represented a
minority partner's share of the net loss of four owned off-campus properties. We
redeemed this minority partner's interest in connection with our IPO. Minority
interests for the three months ended March 31, 2005 represent the 1.0% interest
in the net equity of our Operating Partnership held by recipients of profits
interest units ("PIUs"). See Note 9 in the accompanying Notes to Consolidated
and Combined Financial Statements for a description of PIUs.
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. Discontinued operations for the three months ended March
31, 2005 includes The Village at San Bernardino, which was sold to Cal State
University - San Bernardino in January 2005. The properties included in
discontinued operations for the three months ended March 31, 2004 include the
Village at Riverside and other non-core assets that were distributed to our
Predecessor owners as part of the IPO as well as an on-campus participating
property whose ground lease was transferred to the Weatherford College in April
2004.
CASH FLOWS
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2005 AND MARCH 31, 2004
OPERATING ACTIVITIES
For the three months ended March 31, 2005, net cash provided by operating
activities before changes in working capital accounts provided approximately
$6.1 million, as compared to $4.0 million for the three months ended March 31,
2004, an increase of $2.1 million. This increase was primarily due to an
increase in net income of approximately $6.7 million, resulting primarily from a
gain on disposition of approximately $5.9 million. Additionally, operations for
the three months ended March 31, 2005 were impacted by a $1.1 million increase
in depreciation and amortization resulting from the seven new properties that we
acquired during the first quarter of 2005 as well as a full quarter of
depreciation from two owned off-campus properties that completed construction in
the third quarter 2004.
Changes in working capital accounts utilized approximately $0.4 million for the
three months ended March 31, 2005 while approximately $1.2 million was provided
by working capital for the three months ended March 31, 2004, a decrease of $1.6
million. This change was primarily due to an increase in accrued expenses during
the three months ended March 31, 2004 related to our IPO and a decrease in
restricted cash during the same period that was used to fund the rebuild of an
off-campus property that was destroyed by a fire in 2003. These items were
offset by the release of restricted cash to our Predecessor owners in the first
quarter 2005 in relation to the completion of three owned off-campus properties
in the third quarter 2004.
25
INVESTING ACTIVITIES
Investing activities utilized $58.9 million and $19.2 million for the three
months ended March 31, 2005 and 2004, respectively. The increase in 2005 related
primarily to the acquisition of the seven properties previously discussed. This
increase was offset by proceeds received from the sale of University Village at
San Bernardino in January 2005 as well as a decrease in cash used to fund three
owned off-campus development properties that were completed in the third quarter
2004. For the three months ended March 31, 2005 and 2004, our cash used in
investing activities was comprised of the following:
THREE MONTHS ENDED MARCH 31,
-------------------------------------
2005 2004
------------------ -----------------
Property acquisitions $ (72,763) $ -
Property dispositions 28,023 -
Capital expenditures for on-campus participating properties (28) (124)
Capital expenditures for owned off campus properties (852) (168)
Investments in on-campus participating properties under
development (3,027) -
Investment in owned off-campus properties under development (10,120) (18,866)
Purchase of non-real estate furniture, fixtures, and equipment (86) (55)
------------------ -----------------
Total $ (58,853) $ (19,213)
================== =================
FINANCING ACTIVITIES
Cash provided by financing activities totaled $55.5 million and $13.0 million
for the three months ended March 31, 2005 and 2004, respectively. The increase
was primarily due to draws under our revolving credit facility in 2005 as well
as a bridge loan we obtained in connection with the March 2005 acquisition of
Exchange at Gainesville (to be renamed). These increases were offset by a
decrease in proceeds from construction loans due to the completion of three
owned off-campus development projects in the third quarter 2004, as well as
distributions paid to our stockholders in 2005 as a result of our new public
ownership structure.
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.
26
The following table reflects the amounts included in our consolidated/combined
financial statements for the three months ended March 31, 2005 and 2004:
THREE MONTHS ENDED MARCH 31,
-------------------------------------
2005 2004
------------------ -----------------
Revenues $ 5,491 $ 5,608
Direct operating expenses (1) 1,722 1,785
Amortization 879 854
Amortization of deferred financing costs 46 66
Ground/facility leases (2) 212 175
------------------ -----------------
Net operating income 2,632 2,728
Interest income 25 6
Interest expense (1,347) (1,449)
------------------ -----------------
NET INCOME (3) $ 1,310 $ 1,285
================== =================
(1) Excludes the property management fees described below. This expense and the
corresponding fee revenue recognized by us have been eliminated in
consolidation/combination. 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) Includes the results of Coyote Village, which was transferred to
Weatherford College in April 2004. This property is classified as
discontinued operations in the accompanying Consolidated and Combined
Financial Statements contained in Item 1. Excludes income taxes associated
with these properties, which are owned by our TRS subsequent to the IPO.
We earned $0.3 million in management fees under these arrangements for both the
three month periods ended March 31, 2005 and 2004. Additionally, our share of
the net cash flows of these properties for both the three month periods ended
March 31, 2005 and 2004 was $0.2 million.
LIQUIDITY AND CAPITAL RESOURCES
CASH BALANCES AND LIQUIDITY
As of March 31, 2005, excluding our on-campus participating properties, we had
$6.7 million in cash and cash equivalents, restricted cash, and short-term
investments, as compared to $7.0 million in cash and cash equivalents,
restricted cash, and short-term investments as of as of December 31, 2004.
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 December 31, 2004 also included $0.8 million of funds held
in escrow that were paid to our Predecessor owners in February 2005 in
accordance with the terms of the Contribution Agreement executed in conjunction
with the IPO.
As of March 31, 2005, our short-term liquidity needs included, but were not
limited to, the following: (i) anticipated distribution payments to our
stockholders and unitholders totaling approximately $17.2 million based on an
anticipated annual distribution of $1.35 per share or unit, including those
required to maintain our REIT status and satisfy our current distribution
policy, (ii) remaining development costs on our Sweet Home development project,
estimated to be approximately $14.8 million, and (iii) funds for other potential
future development projects. We expect to meet our short-term liquidity
requirements generally through net cash provided by operations, borrowings under
our revolving credit facility, and permanent property level debt.
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.
27
REVOLVING CREDIT FACILITY
The Operating Partnership has a senior secured revolving credit facility with a
term of 36 months that provides a maximum capacity of $75 million, subject to
certain conditions as contained in the Credit Agreement (the "Agreement"). The
maximum capacity may be increased by up to an additional $25 million, subject to
certain borrowing base requirements, as outlined in the Agreement. 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 0.20% to 0.25% per annum, depending
on the aggregate unused balance. The credit facility is secured by the Company's
ownership interests in a minimum of four unlevered owned off-campus properties.
The Company guarantees the Operating Partnership's obligations under the credit
facility. As of March 31, 2005, the balance outstanding on the revolving credit
facility totaled $33.6 million, bearing interest at a weighted average rate of
4.31%, with remaining availability (subject to certain financial covenants)
totaling $31.5 million.
The terms of the Agreement include certain restrictions and covenants, which
limit, among other things, the payment of distributions (as discussed below),
the incurrence of additional indebtedness, liens, and the disposition of assets.
The terms also require compliance with financial ratios relating to consolidated
net worth and leverage requirements. The Company is also subject to compliance
with additional fixed charge and debt coverage ratios. The distribution
restriction previously mentioned provides that, except to enable the Company to
continue to qualify as a REIT for federal income tax purposes, before December
31, 2005, the Company may not pay distributions greater than $5 million in any
given quarter. Subsequent to December 31, 2005, the Company will be prohibited
from making distributions which exceed 95% of the Company's funds from
operations, as defined, over any four consecutive fiscal quarters. As of March
31, 2005, the Company was 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 PIU holders.
All such distributions 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.
On February 17, 2005, the Company declared a distribution per share of $0.3375
which was paid on March 8, 2005 to all common stockholders of record as of
February 25, 2005. At the same time, the Company paid an equivalent amount per
unit to holders of PIUs and RSAs.
DISTRIBUTIONS TO PREDECESSOR OWNERS
An entity newly formed by our Predecessor owners was entitled to any savings in
the budgeted completion cost of three of our owned off-campus construction
properties that were completed in Fall 2004. Accordingly, in February 2005, we
distributed approximately $0.4 million of designated unspent funds to an entity
affiliated with our Predecessor owners and accounted for the payment as an
equity distribution. The $0.8 million in escrowed funds described above were
also released to an entity affiliated with our Predecessor owners. We do not
have any ownership interest in such entity and the entity does not have any
ownership interest in the Company.
In April 2005, our Predecessor owners also received approximately $0.4 million
relating to insurance proceeds received by the Company in connection with a fire
that occurred at the University Village at Fresno. This payment was also
accounted for as an equity distribution.
RECURRING CAPITAL EXPENDITURES
Our properties require periodic investments of capital for general capital
expenditures and improvements. Our policy is to capitalize costs related to the
acquisition, development, rehabilitation, construction, and improvement of
properties, including interest and certain internal personnel costs related to
the communities under rehabilitation and construction. Capital improvements are
costs that increase the value and extend the useful life of an asset. Ordinary
repair and maintenance costs that do not extend the useful life of the asset are
expensed as incurred. Recurring capital expenditures represent non-incremental
building improvements required to maintain current revenues and typically
include: appliances, carpeting and flooring, HVAC equipment, kitchen/bath
cabinets, new roofs, site improvements and various exterior building
28
improvements. Non-recurring capital expenditures include expenditures that were
taken into consideration when underwriting the purchase of a property which were
considered necessary to bring the property up to "operating standard," and
incremental improvements that include, among other items: community centers, new
windows, and kitchen/bath apartment upgrades. Additionally, we are required by
certain of our lenders to contribute amounts to reserves for capital repairs and
improvements at their mortgaged properties. These annual contributions may
exceed the amount of capital expenditures actually incurred in such year at such
properties.
PRE-DEVELOPMENT EXPENDITURES
Our third party development activities have historically required us to fund
pre-development expenditures such as architectural fees, permits and deposits.
Because the closing of a development project's financing is often subject to
third party delay, we cannot always predict accurately the liquidity needs of
these activities. We frequently incur these pre-development expenditures before
a financing commitment has been obtained and, accordingly, bear the risk of the
loss of these pre-development expenditures if financing cannot ultimately be
arranged on acceptable terms. Historically, the development projects that we
have been awarded have been successfully structured and financed; however, their
development has at times been delayed beyond the period initially scheduled,
causing revenue to be recognized in later periods.
INDEBTEDNESS
As of March 31, 2005, we had approximately $309.4 million of outstanding
consolidated indebtedness (excluding unamortized debt premiums of approximately
$5.0 million), comprised of a $33.6 million balance on our revolving credit
facility secured by four of our owned off-campus properties, $196.1 million in
mortgage and bridge loan indebtedness secured by 13 of our owned off-campus
properties, $20.0 million in mortgage and construction loans secured by two
on-campus participating properties, and $59.7 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, 2005 was 6.6%.
All of our outstanding indebtedness is fixed rate except for our revolving
credit facility and the Cullen Oaks Phase II construction loan discussed below.
As of March 31, 2005, approximately 11.9% of our total consolidated indebtedness
was variable rate debt.
OWNED OFF-CAMPUS PROPERTIES
The following table contains certain summary information concerning the mortgage
and bridge loan indebtedness that encumbers our owned off-campus properties,
excluding unamortized debt premiums, as of March 31, 2005:
ORIGINAL INTEREST MATURITY BALANCE AS OF
ASSET DATE RATE DATE MARCH 31, 2005
- -------------------------------------- ------------ ------------ -------------- ----------------
University Village at Boulder Creek 12/01/2002 5.71% Nov 2012 $ 16,479
River Club Apartments 07/28/2000 8.18% Aug 2010 18,482
River Walk Townhomes 08/31/1999 8.00% Sep 2009 7,660
Village at Alafaya Club 07/11/2000 8.16% Aug 2010 (1) 20,418
Village at Blacksburg 12/15/2000 7.50% Jan 2011 21,287
Commons on Apache 05/14/1999 7.66% Jun 2009 7,635
Callaway House 03/30/2001 7.10% Apr 2011 19,661
University Club Tallahassee 11/01/2002 7.99% Oct 2010 13,537
The Grove at University Club 04/01/2003 5.75% Mar 2013 4,389
College Club Tallahassee 01/01/2003 6.74% Dec 2011 8,885
University Club Gainesville 11/01/1999 7.88% Nov 2009 8,518
City Parc at Fry Street 10/05/2004 5.96% Sep 2014 11,776
Exchange at Gainesville (to be
renamed) 03/29/2005 5.13% Sep 2005 (2) 37,400
----------------
Total $ 196,127
================
(1) Represents the Anticipated Repayment Date, as defined in the loan
agreement. If the loan is not repaid on the Anticipated Repayment
Date, then certain monthly payments including excess cash flow, as
defined, become due through the maturity date of August 2030.
(2) We intend to refinance this bridge loan in the second quarter 2005 by
entering into a permanent mortgage loan. We have entered into a rate
lock agreement for 5.2% in relation to this anticipated financing.
29
The weighted average interest rate of such indebtedness was 6.9% as of March 31,
2005. Each of these 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.
ON-CAMPUS PARTICIPATING PROPERTIES
Three of our on-campus participating properties are 100% financed with
project-based taxable bonds, as listed below. 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 REIT,
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.
The following table sets forth certain information concerning these bond
financings:
ORIGINAL ORIGINAL MATURITY BALANCE AS OF
ASSET DATE TERM DATE MARCH 31, 2005
- --------------------------------------- ------------ ------------ ------------- ------------------
University Village-PVAMU (1) Sep 1999 24 years Sep 2023 $ 30,851
University College-PVAMU (Phase I) (2) May 2001 22 years Aug 2025 19,855
University College-PVAMU (Phase II) (2) Jul 2003 25 years Aug 2028 4,230
University Village-TAMIU (1) Sep 1999 24 years Sep 2023 4,719
------------------
Total $ 59,655
==================
(1) Part of combined bond issuance. Separate loan agreements are not
cross-collateralized or cross-defaulted.
(2) Multiple financings of single facility.
Cullen Oaks Phase I is currently encumbered by a mortgage loan originated in
September 2000 in the original principal amount of approximately $17.7 million.
The loan bears interest at the Prime rate, or LIBOR plus 1.9%, at our election
with principal amortizing on a 30 year schedule. We have in place an interest
rate swap agreement which effectively caps the interest on the outstanding
balance as of March 31, 2005 of approximately $17.0 million at 5.5%. The loan
matures in November 2008. The University has a continuing obligation to us to
lease beds at this property for an amount sufficient to pay all property
expenditures, including debt service. In turn, we have guaranteed payment of
this property's indebtedness. In addition, in December 2004, we obtained a
construction loan to finance the Cullen Oaks Phase II on-campus participating
property, which is scheduled to be completed in August 2005. For each borrowing,
we have the option of choosing either the Prime rate or LIBOR plus 2.0%, and we
also have the option to extend the maturity of this loan through November 2008.
The balance on this construction loan as of March 31, 2005 was approximately
$3.1 million, bearing interest at 4.8%. The total availability under this
construction loan is $17.0 million and the loan requires payments of interest
only through June 2006, at which time we have the option to extend the maturity
date to November 2008 and convert the loan to a 30-year amortization basis.
The weighted average interest rate of the indebtedness encumbering our on-campus
participating properties was 6.9% at March 31, 2005.
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
30
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,
-------------------------------------
2005 2004
------------------ -----------------
Net income $ 8,192 $ 1,530
Minority interests 87 (21)
Gain from disposition of real estate (5,883) -
Real estate related depreciation and amortization:
Total depreciation and amortization 3,424 2,259
Discontinued operations depreciation and amortization - 87
Furniture, fixtures, and equipment depreciation (98) (69)
------------------ -----------------
Funds from operations $ 5,722 $ 3,786
================== =================
FFO per share - basic $ 0.45
==================
FFO per share - diluted $ 0.45
==================
Weighted average common shares outstanding:
Basic 12,622,145
==================
Diluted 12,769,939
==================
While our on-campus participating properties contributed $5.5 million and $5.3
million to our revenues for the three months ended March 31, 2005 and 2004,
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 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.
31
Funds From Operations--Modified for Operational Performance of On-Campus
Participating Properties:
THREE MONTHS ENDED MARCH 31,
-------------------------------------
2005 2004
------------------ -----------------
Funds from operations $ 5,722 $ 3,786
Elimination of operations of on-campus participating properties:
Net income from on-campus participating properties (1,310) (1,285)
Amortization of investment in on-campus participating
properties (879) (854)
------------------ -----------------
3,533 1,647
Modifications to reflect operational performance of on-campus
participating properties:
Our share of net cash flow (1) 212 175
Management fees 263 273
On-campus participating properties development fees (2) 230 -
------------------ -----------------
Impact of on-campus participating properties 705 448
------------------ -----------------
FUNDS FROM OPERATIONS - MODIFIED FOR OPERATIONAL PERFORMANCE OF
ON-CAMPUS PARTICIPATING PROPERTIES ("FFOM") $ 4,238 $ 2,095
================== =================
FFOM per share - basic $ 0.34
==================
FFOM per share - diluted $ 0.33
==================
Weighted average common shares outstanding:
Basic 12,622,145
==================
Diluted 12,769,939
==================
(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) Development and construction management fees related to the Cullen
Oaks Phase II on-campus participating property.
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 loan 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, 2004.
32
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We have adopted and maintain disclosure controls and procedures that are
designed to ensure that information required to be disclosed in our Exchange Act
reports is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms and that
such information is accumulated and communicated to our management, including
our Chief Executive Officer and Chief Financial Officer, as appropriate, to
allow for timely decisions regarding required disclosure. In designing and
evaluating the disclosure controls and procedures, management recognizes that
any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives,
and management is required to apply its judgment in evaluating the cost-benefit
relationship of possible 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
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
10.1 Agreement of Sale and Purchase, dated September 22, 2004, by and between
ACC OP Acquisitions, LLC and College Club Apartments at Tallahassee, LLC
10.2 Agreement of Sale and Purchase, dated September 22, 2004, by and between
ACC OP Acquisitions, LLC and The Grove at University Club, LLC
10.3 Agreement of Sale and Purchase, dated September 22, 2004, by and between
ACC OP Acquisitions, LLC and University Club Apartments of Gainesville,
LLC
10.4 Agreement of Sale and Purchase, dated September 22, 2004, by and between
ACC OP Acquisitions, LLC and University Club Apartments of Tallahassee,
LLC
10.5 Agreement of Sale and Purchase, dated September 22, 2004, by and between
ACC OP Acquisitions, LLC and The Greens at College Club, LLC
10.6 Purchase and Sale Agreement, dated February 28, 2005, by and between ACC
OP Acquisitions, LLC and Fairfield Pinehurst Park, Ltd.
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
33
REPORTS ON FORM 8-K
The Company filed the following Current Reports on Form 8-K during the three
months ended March 31, 2005:
On March 1, 2005, we filed a Form 8-K with the Securities and Exchange
Commission under Item 2.02 to announce the release of earnings for the
quarter and year ended December 31, 2004.
34
SIGNATURES
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.
Dated: May 12, 2005
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 AND
SECRETARY
BY: /S/ MARK J. HAGER
----------------------------------
MARK J. HAGER
EXECUTIVE VICE PRESIDENT,
CHIEF FINANCIAL AND ACCOUNTING
OFFICER AND TREASURER
35