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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 June 30, 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 IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
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 17,190,000 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
August 5, 2005.
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2005
TABLE OF CONTENTS
PAGE
NO.
--------
PART I.
Item 1. Consolidated and Combined Financial Statements
Consolidated Balance Sheets as of June 30, 2005 (unaudited) and December 31, 2004. 1
Consolidated and Combined Statements of Operations for the Company for the three and
six months ended June 30, 2005 and for the Predecessor for the three and six months
ended June 30, 2004 (all unaudited). 2
Consolidated and Combined Statements of Comprehensive Income for the Company for the
six months ended June 30, 2005 and for the Predecessor for the six months ended June
30, 2004 (all unaudited). 3
Consolidated and Combined Statements of Cash Flows for the Company for the six months
ended June 30, 2005 and for the Predecessor for the six months ended June 30, 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 18
Item 3. Quantitative and Qualitative Disclosure about Market Risk 37
Item 4. Controls and Procedures 37
PART II.
Item 4. Submission of Matters to a Vote of Security Holders 38
Item 6. Exhibits 38
SIGNATURES 39
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
JUNE 30, 2005 DECEMBER 31, 2004
------------------------ ------------------------
(UNAUDITED)
ASSETS
Investments in real estate:
Owned off-campus properties, net $ 397,419 $ 250,100
Owned off-campus property - held for sale - 22,350
On-campus participating properties, net 77,317 68,064
------------------------ ------------------------
Investments in real estate, net 474,736 340,514
Cash and cash equivalents 3,864 4,050
Restricted cash and short-term investments 13,479 9,816
Student contracts receivable, net 1,059 2,164
Other assets 14,118 11,084
------------------------ ------------------------
TOTAL ASSETS $ 507,256 $ 367,628
======================== ========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Secured debt $ 287,161 $ 201,014
Unsecured revolving credit facility 50,225 -
Accounts payable and accrued expenses 7,872 5,443
Other liabilities 25,938 20,294
------------------------ ------------------------
Total liabilities 371,196 226,751
Minority interests 2,580 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 133,559 136,259
Accumulated earnings and distributions (355) 1,802
Accumulated other comprehensive income 150 42
------------------------ ------------------------
Total stockholders' equity 133,480 138,229
------------------------ ------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 507,256 $ 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 COMPANY PREDECESSOR
--------------- --------------- --------------- ---------------
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------------- ----------------------------------
2005 2004 2005 2004
--------------- --------------- --------------- ---------------
REVENUES:
Owned off-campus properties $ 14,764 $ 7,726 $ 27,253 $ 15,715
On-campus participating properties 3,133 3,202 8,626 8,495
Third party development services 1,294 2,047 1,903 3,718
Third party development services - on-campus
participating properties 38 456 74 483
Third party management services - affiliates - 85 - 159
Third party management services 562 315 1,272 613
Resident services 216 - 420 -
--------------- --------------- --------------- ---------------
TOTAL REVENUES 20,007 13,831 39,548 29,183
OPERATING EXPENSES:
Owned off-campus properties 6,873 3,744 12,009 7,203
On-campus participating properties 1,986 2,041 3,861 3,841
Third party development and management services 1,573 1,527 3,037 2,791
General and administrative 1,925 555 3,289 1,008
Depreciation and amortization 4,450 2,272 7,874 4,531
Ground/facility leases 240 221 452 362
--------------- --------------- --------------- ---------------
TOTAL OPERATING EXPENSES 17,047 10,360 30,522 19,736
--------------- --------------- --------------- ---------------
OPERATING INCOME 2,960 3,471 9,026 9,447
NONOPERATING INCOME AND (EXPENSES):
Interest income 44 12 102 25
Interest expense (4,634) (4,189) (8,442) (8,470)
Amortization of deferred financing costs (276) (144) (522) (288)
Other nonoperating income - - 430 -
--------------- --------------- --------------- ---------------
TOTAL NONOPERATING EXPENSES (4,866) (4,321) (8,432) (8,733)
--------------- --------------- --------------- ---------------
(Loss) income before income tax benefit, minority
interests, and discontinued operations (1,906) (850) 594 714
Income tax benefit 102 - - -
Minority interests 12 23 (75) 44
--------------- --------------- --------------- ---------------
(LOSS) INCOME FROM CONTINUING OPERATIONS (1,792) (827) 519
758
Discontinued operations:
Loss attributable to discontinued operations - (135) (2) (190)
(Loss) gain from disposition of real estate - (39) 5,883 (39)
--------------- --------------- --------------- ---------------
Total discontinued operations - (174) 5,881 (229)
--------------- --------------- --------------- ---------------
NET (LOSS) INCOME $ (1,792) $ (1,001) $ 6,400 $ 529
=============== =============== =============== ===============
(Loss) income per share - basic:
(Loss) income from continuing operations per share $ (0.14) $ 0.04
=============== ===============
Net (loss) income per share $ (0.14) $ 0.51
=============== ===============
(Loss) income per share - diluted:
(Loss) income from continuing operations per share $ (0.14) $ 0.05
=============== ===============
Net (loss) income per share $ (0.14) $ 0.51
=============== ===============
Weighted average common shares outstanding:
Basic 12,626,118 12,624,142
=============== ===============
Diluted 12,747,118 12,785,413
=============== ===============
Distributions declared per common share $ 0.3375 $ 0.675
=============== ===============
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
------------------ -----------------
SIX MONTHS ENDED JUNE 30,
-------------------------------------
2005 2004
------------------ -----------------
Net income $ 6,400 $ 529
Other comprehensive income:
Change in fair value of interest rate swap 108 356
Change in fair value of interest rate cap - 16
------------------ -----------------
NET COMPREHENSIVE INCOME $ 6,508 $ 901
================== =================
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
---------------- -----------------
SIX MONTHS ENDED JUNE 30,
-------------------------------------
2005 2004
---------------- -----------------
OPERATING ACTIVITIES
Net income $ 6,400 $ 529
Adjustments to reconcile net income to net cash provided by
operating activities:
(Gain) loss from disposition of real estate (5,883) 39
Minority interests share of income (loss) 75 (44)
Depreciation and amortization 7,874 4,706
Amortization of deferred financing costs and debt premiums 208 340
Compensation expense recognized for awards of restricted stock 246 -
Changes in operating assets and liabilities:
Restricted cash and short-term investments (3,084) (1,188)
Student contracts receivable, net 1,105 716
Other assets (2,148) 2,613
Accounts payable and accrued expenses 948 237
Other liabilities 119 (870)
---------------- -----------------
Net cash provided by operating activities 5,860 7,078
INVESTING ACTIVITIES
Net proceeds from disposition of real estate 28,023 -
Cash paid for property acquisitions (72,763) -
Investments in owned off-campus properties (25,321) (42,225)
Investments in on-campus participating properties (10,950) (187)
Purchase of furniture, fixtures and equipment (359) (134)
---------------- -----------------
Net cash used in investing activities (81,370) (42,546)
---------------- -----------------
FINANCING ACTIVITIES
Proceeds from revolving credit facility and line of credit,
net of paydowns 38,425 1,796
Proceeds from bridge/mortgage loan 38,800 -
Proceeds from construction loans 8,277 33,692
Principal payments on debt (1,061) (1,109)
Change in construction accounts payable 2,597 4,492
Debt issuance costs (1,297) (2,377)
Offering costs (107) -
Distributions to common and restricted stockholders (8,557) -
Contributions from Predecessor owners - 800
Distributions to Predecessor owners (1,671) (2,004)
Distributions to minority partners (82) (14)
---------------- -----------------
Net cash provided by financing activities 75,324 35,276
---------------- -----------------
Net change in cash and cash equivalents (186) (192)
Cash and cash equivalents at beginning of period 4,050 5,227
---------------- -----------------
Cash and cash equivalents at end of period $ 3,864 $ 5,035
================ =================
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES
Change in fair value of derivative instruments, net $ 108 $ 372
================ =================
Loans assumed in connection with property acquisitions $ (47,169) $ -
================ =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 8,664 $ 8,536
================ =================
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 a wholly
owned subsidiary of 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 and six months ended June 30, 2005, the
Company also distributed approximately $1.2 million and $1.7 million,
respectively, to the Predecessor owners related to savings in the budgeted
completion cost of three owned off-campus properties that completed construction
in the third quarter 2004 and insurance proceeds related to a fire that occurred
at an owned off-campus property in 2003. 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 subsidiaries, including the
TRS.
As of June 30, 2005, the Company's property portfolio contained 24 student
housing properties with approximately 15,600 beds and 5,200 apartment units,
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 June 30, 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 initial
terms that range from two to five years. As of June 30, 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
5
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
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 to the
accounting policies of the separate entities.
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 cost 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 $0.5 million and $1.0
million was capitalized during the three months ended June 30, 2005 and 2004,
respectively, and $0.8 million and $1.2 million was capitalized during the six
months ended June 30, 2005 and 2004, respectively. Amortization of deferred
financing costs totaling approximately $32,000 and $0.1 million was capitalized
during the three months ended June 30, 2005, and 2004, respectively, and $0.1
million and $0.2 million was capitalized during the six months ended June 30,
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
6
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
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
June 30, 2005.
The Company allocates the purchase price of acquired properties to net tangible
and identified intangible assets based on relative fair values in accordance
with Statement of Financial Accounting Standard ("SFAS") No. 141, BUSINESS
COMBINATIONS. Fair value estimates are based on information obtained from a
number of sources, including independent appraisals that may be obtained in
connection with the acquisition or financing of the respective property and
other market data. Information obtained about each property as a result of due
diligence, marketing and leasing activities is also considered. The value of
in-place leases is based on the difference between (i) the property valued with
existing in-place leases adjusted to market rental rates and (ii) the property
valued "as-if" vacant. As lease terms are typically one year or less, rates on
in-place leases generally approximate market rental rates. Factors considered in
the valuation of in-place leases include an estimate of the carrying costs
during the expected lease-up period considering current market conditions,
nature of the tenancy, and costs to execute similar leases. Carrying costs
include estimates of lost rentals at market rates during the expected lease-up
period, as well as marketing and other operating expenses. The value of in-place
leases is amortized over the remaining initial term of the respective leases,
generally less than one year. The purchase price of property acquisitions is not
expected to be allocated to tenant relationships, considering the terms of the
leases and the expected levels of renewals. The Company's allocation of purchase
price is contingent upon the final true-up of certain prorations.
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 June 30, 2005 and December 31, 2004, net unamortized debt premiums were
$4.8 million and $-0-, respectively, and are included in secured 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 chose 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 intends to elect to be taxed as a REIT under the Internal Revenue
Code of 1986, as amended (the "Code"). To qualify as a REIT, the Company must
meet a number of organizational and operational requirements, including a
requirement that it currently distribute at least 90% of its adjusted taxable
income to its stockholders. As a REIT, the Company will generally not be subject
to corporate level federal income tax on taxable income it currently distributes
to its stockholders. If the Company fails to qualify as a REIT in any taxable
year, it will be subject to federal income taxes at regular corporate rates
(including any applicable alternative minimum tax) and may not be able to
qualify as a REIT for the subsequent four taxable years. Even if the Company
qualifies for taxation as a REIT, the Company may be subject to certain state
and local income and excise taxes on its income and property, and to federal
income and excise taxes on its undistributed income.
The TRS manages the Company's non-REIT activities and is subject to federal,
state and local income taxes.
7
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
OTHER NONOPERATING INCOME
Other nonoperating income of approximately $0.4 million for the six months ended
June 30, 2005 represents 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.
INCOME (LOSS) PER SHARE
Basic income (loss) per share is computed using net income (loss) and the
weighted average number of shares of the Company's common stock outstanding
during the period, including restricted stock units ("RSUs") issued to outside
directors. Diluted income (loss) 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 (loss) per share:
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2005 JUNE 30, 2005
------------------- ------------------
Basic net (loss) income per share calculation:
(Loss) income from continuing operations $ (1,792) $ 519
Discontinued operations - 5,881
------------------- ------------------
Net (loss) income $ (1,792) $ 6,400
=================== ==================
(Loss) income from continuing operations - per share $ (0.14) $ 0.04
=================== ==================
Income from discontinued operations - per share $ - $ 0.47
=================== ==================
$ (0.14) $ 0.51
=================== ==================
Basic weighted average common shares outstanding 12,626,118 12,624,142
=================== ==================
Diluted net (loss) income per share calculation:
(Loss) income from continuing operations $ (1,792) $ 519
(Loss) income allocated to PIU holders (12) 75
------------------- ------------------
(Loss) income from continuing operations, as adjusted (1,804) 594
Discontinued operations - 5,881
------------------- ------------------
Net (loss) income, as adjusted $ (1,804) $ 6,475
=================== ==================
(Loss) income from continuing operations - per share $ (0.14) $ 0.05
=================== ==================
(Loss) income from discontinued operations - per share $ - $ 0.46
=================== ==================
Net (loss) income - per share $ (0.14) $ 0.51
=================== ==================
Basic weighted average common shares outstanding 12,626,118 12,624,142
PIUs 121,000 121,000
Restricted stock awards (1) - 40,271
------------------- ------------------
Diluted weighted average common shares outstanding 12,747,118 12,785,413
=================== ==================
(1) Weighted average restricted stock awards are excluded from diluted weighted
average common shares outstanding for the three months ended June 30, 2005
because they would be anti-dilutive due to the Company's loss position in
that period.
8
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
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 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 and
six months ended June 30, 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
the earliest 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 JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------------- ---------------------------------
2005 2004 2005 2004
-------------- --------------- --------------- --------------
Total revenues $ 20,007 $ 17,525 $ 42,332 $ 36,564
Net (loss) income $ (1,153) $ (1,448) $ 7,374 $ 145
Net (loss) income per share - basic and diluted $ (0.09) $ (0.11) $ 0.58 $ 0.01
4. PROPERTY DISPOSITION AND DISCONTINUED OPERATIONS
In November 2004, California State University - San Bernardino exercised its
option to purchase from the Company 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 six months ended June 30, 2005.
Discontinued operations for the three and six months ended June 30, 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.
9
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
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 JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------------- ----------------------------------
2005 2004 2005 2004
--------------- --------------- -------------- ---------------
Total revenues $ - $ 500 $ 29 $ 1,320
Total operating expenses - (391) (31) (954)
--------------- --------------- -------------- ---------------
Operating income (loss) - 109 (2) 366
Total nonoperating expenses - (244) - (556)
--------------- --------------- -------------- ---------------
Net loss $ - $ (135) $ (2) $ (190)
=============== =============== ============== ===============
As of June 30, 2005 and December 31, 2004, assets and liabilities attributable
to the properties held for sale consisted of the following:
JUNE 30, 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:
JUNE 30, 2005 DECEMBER 31, 2004
---------------------- -----------------------
Owned off-campus properties:
Land $ 51,955 $ 33,778
Buildings and improvements 328,698 219,841
Furniture, fixtures and equipment 14,458 10,104
Construction in progress 30,055 9,087
---------------------- -----------------------
425,166 272,810
Less accumulated depreciation (27,747) (22,710)
---------------------- -----------------------
Owned off-campus properties, net $ 397,419 $ 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 (each, a "Lessor") for the purpose
of developing, constructing, and operating student housing facilities on
university campuses. Under the terms of the Leases, title to the constructed
facilities is held by the applicable Lessor and such Lessor receives a de
minimus base rent paid at inception and 50% of defined net cash flows on an
annual basis through the term of the lease. The Leases terminate upon the
earlier to occur of the final repayment of the related debt, the amortization
period of which is contractually stipulated, or the end of the lease term.
Pursuant to the Leases, in the event the leasehold estates do not achieve
Financial Break Even (defined as revenues less operating expenses, excluding
management fees, less debt service), the applicable Lessor would be required to
make a rental payment, also known as the Contingent Payment, sufficient to
achieve Financial Break Even 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 either the
Prairie View A&M University Village or University College Leases. The Contingent
Payment obligation continues to be in effect for the University of Houston and
Texas A&M International University facilities.
10
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
In the event the Company seeks to sell its leasehold interest, the Leases
provide the applicable Lessor the right of first refusal of a bona fide purchase
offer and an option to purchase the lessee's rights under the applicable Lease.
In conjunction with the execution of each Lease, the Company has entered into
separate five-year agreements to manage the related facilities for 5% of defined
gross receipts. The five-year terms of the management agreements are not
contingent upon the continuation of the Leases. Upon expiration of the initial
five year terms, the agreements continue on a month-to-month basis.
On-campus participating properties are as follows:
HISTORICAL COST
-----------------------------------------
LEASE REQUIRED DEBT
LESSOR/UNIVERSITY COMMENCEMENT REPAYMENT (1) JUNE 30, 2005 DECEMBER 31, 2004
- ----------------------------------------------- ---------------- ----------------- ------------------- -------------------
Texas A&M University System/Prairie View 2/1/96 9/1/23 $ 37,886 $ 37,840
A&M University (2)
Texas A&M University System/Texas A&M
International 2/1/96 9/1/23 5,910 5,909
Texas A&M University System/Prairie View
A&M University (3) 10/1/99 8/31/25 / 8/31/28 23,710 23,663
University of Houston System/University of
Houston - Phase I 9/27/00 8/31/35 18,145 18,123
University of Houston System/University of
Houston - Phase II (4) 9/27/00 8/31/35 11,732 835
------------------- -------------------
97,383 86,370
Less accumulated amortization (20,066) (18,306)
------------------- -------------------
On-campus participating properties, net $ 77,317 $ 68,064
=================== ===================
(1) Represents the lease termination date. The Leases terminate upon the
earlier to occur of the final repayment of the related debt or the end of
the contractual lease term.
(2) Consists of three phases placed in service between 1996 and 1998
(3) Consists of two phases placed in service between 2000 and 2003.
(4) 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 LLC"), 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 LLC, an affiliate of the Operating Partnership (the
"Managing Member") caused Sweet Home LLC to admit the local landowner (which was
a partner in the selling partnership) as a non-managing member of Sweet Home LLC
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 Sweet Home LLC's agreement. This entity is
consolidated and the non-managing member's interest in Sweet Home LLC is
reflected as a minority interest in the accompanying financial statements.
In connection with the IPO, a wholly-owned subsidiary of the Company acquired
Titan Investments II, 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.
11
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
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
June 30, 2005.)
8. DEBT
A summary of the Company's outstanding consolidated indebtedness, including
unamortized debt premiums, is as follows:
JUNE 30, 2005 DECEMBER 31, 2004
-------------------- ---------------------
Debt secured by owned off-campus properties:
Mortgage loans $ 197,012 $ 111,974
Debt secured by on-campus participating properties:
Mortgage loan payable 16,916 17,045
Construction loan payable 8,818 540
Bonds payable 59,655 59,655
-------------------- ---------------------
282,401 189,214
Revolving credit facility 50,225 11,800
Unamortized debt premiums 4,760 -
-------------------- ---------------------
Total debt $ 337,386 $ 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 bridge loan bore interest at a
fixed rate of 5.1% through the initial maturity date of September 2005. In May
2005, the Company amended the bridge loan. The amended loan is a mortgage
facility with a total principal amount of $38.8 million, bearing interest at a
fixed rate of 5.2% and maturing in June 2015. In connection with this amendment,
the Company received approximately $1.3 million of additional proceeds, after
the payment of related financing costs.
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. At the
time of assumption, the debt had 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 mortgage loans are secured by the related properties.
REVOLVING CREDIT FACILITY
On June 17, 2005, the Company amended its $75 million revolving credit facility
to increase the size of the facility to $100 million. The amended facility may
be expanded by up to an additional $100 million upon the satisfaction of certain
conditions. In addition, the facility was converted from a secured facility to
an unsecured facility. The maturity date of the facility remains at August 2007
and the Company continues to guarantee the Operating Partnership's obligations
under the facility.
Availability under the revolving credit facility is limited to an "aggregate
borrowing base amount" equal to the lesser of (i) 65% of the value of certain
properties, calculated as set forth in the credit facility, and (ii) the
adjusted net operating income from these properties divided by a formula amount.
The facility bears interest at a variable rate, at the Company's option, based
upon a base rate or one-, two-, three-, or six-month LIBOR plus, in each case, a
spread based upon the Company's total
12
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
leverage. Additionally, the Company is required to pay an unused commitment fee
ranging from 0.15% to 0.20% per annum, depending on the aggregate unused
balance. As of June 30, 2005, the balance outstanding on the revolving credit
facility totaled $50.2 million, bearing interest at a weighted average rate of
5.1%, with remaining availability (subject to certain financial covenants)
totaling approximately $31.8 million.
The terms of the facility include certain restrictions and covenants, which
limit, among other items, the incurrence of additional indebtedness, liens, and
the disposition of assets. The facility contains customary affirmative and
negative covenants and also contains financial covenants that, among other
things, require the Company to maintain certain minimum ratios of "EBITDA"
(earnings before interest, taxes, depreciation and amortization) for interest
expense and fixed charges. Before June 30, 2006, the Company may not pay
distributions that exceed 100% of funds from operations for any four consecutive
quarters. After June 30, 2006, the Company may not pay distributions that exceed
95% of funds from operations for any four consecutive quarters. The financial
covenants also include consolidated net worth and leverage ratio tests. As of
June 30, 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, 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
June 30, 2005 and December 31, 2004, the Company has issued or granted the
following stock-based incentive awards under the Plan:
JUNE 30, 2005 DECEMBER 31, 2004
------------------- ----------------------
PIUs 121,000 121,000
Restricted Stock Units ("RSUs") (1) 14,375 7,145
Restricted Stock Awards ("RSAs") (2) 53,598 -
Outperformance bonus plan 367,682 367,682
------------------- ----------------------
Total shares issued under the Plan 556,655 495,827
=================== ======================
(1) In May 2005, each outside member of the Board of Directors was granted
RSUs valued at $25,000. All awards vested immediately on the date of
grant; accordingly, a compensation charge of $0.2 million was recorded
during the three months ended June 30, 2005 related to these awards.
(2) On February 16, 2005, the Company granted RSAs to its executive
officers and certain employees that vest in equal annual installments
over five years (for executive officers) or three years (for all other
employees). Unvested awards are forfeited upon the termination of an
individual's employment with the Company. In accordance with SFAS No.
123(R), the Company recognizes the value of these awards as an expense
over the vesting periods, which amounted to approximately $0.1 million
during both the three and six months ended June 30, 2005,
respectively. Recipients of RSAs receive dividends, as declared by the
Company's Board of Directors, on unvested shares, provided that the
recipients continue to be employees of the Company.
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 $0.1 million and $40,000
at June 30, 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.
13
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
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).
At June 30, 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.
SEPARATION AGREEMENT: Pursuant to a separation agreement with a former executive
officer, the Company is required to make periodic payments totaling
approximately $0.4 million through June 2006. This amount was charged to expense
during the three months ended June 30, 2005, and is included in general and
administrative expenses in the accompanying consolidated statements of
operations. The remaining amount owed under this agreement is included in other
liabilities in the accompanying consolidated balance sheet as of June 30, 2005.
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.
14
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
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.
15
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------------- --------------------------------
2005 2004 2005 2004
--------------- --------------- -------------- --------------
OWNED OFF-CAMPUS PROPERTIES
Rental revenues $ 14,980 $ 7,726 $ 27,673 $ 15,715
Interest income 17 8 50 9
--------------- --------------- -------------- --------------
Total revenues from external customers 14,997 7,734 27,723 15,724
Operating expenses before depreciation and amortization 6,747 3,890 11,812 7,429
Interest expense 3,263 2,800 5,719 5,710
Insurance gain - - 430 -
--------------- --------------- -------------- --------------
Operating income before depreciation and amortization,
minority interests and allocation of corporate overhead $ 4,987 $ 1,044 $ 10,622 $ 2,585
=============== =============== ============== ==============
Depreciation and amortization $ 3,472 $ 1,450 $ 5,927 $ 2,874
=============== =============== ============== ==============
Capital expenditures $ 14,349 $ 23,191 $ 25,321 $ 42,225
=============== =============== ============== ==============
Total segment assets at June 30, $ 410,229 $ 276,474 $ 410,229 $ 276,474
=============== =============== ============== ==============
ON-CAMPUS PARTICIPATING PROPERTIES
Rental revenues $ 3,133 $ 3,202 $ 8,626 $ 8,495
Interest income 27 4 52 16
--------------- --------------- -------------- --------------
Total revenues from external customers 3,160 3,206 8,678 8,511
Operating expenses before depreciation, amortization, and
ground/facility leases 1,835 1,872 3,504 3,503
Ground/facility leases 240 221 452 362
Interest expense 1,353 1,370 2,700 2,741
--------------- --------------- -------------- --------------
Operating (loss) income before depreciation and
amortization, minority interests and allocation of
corporate overhead $ (268) $ (257) $ 2,022 $ 1,905
=============== =============== ============== ==============
Depreciation and amortization $ 882 $ 856 $ 1,762 $ 1,710
=============== =============== ============== ==============
Capital expenditures $ 7,895 $ 64 $ 10,950 $ 188
=============== =============== ============== ==============
Total segment assets at June 30, $ 89,053 $ 80,231 $ 89,053 $ 80,231
=============== =============== ============== ==============
DEVELOPMENT SERVICES
Development and construction management fees from
external customers $ 1,332 $ 2,503 $ 1,977 $ 4,201
Intersegment revenues 66 - 158 -
--------------- --------------- -------------- --------------
Total revenues 1,398 2,503 2,135 4,201
Operating expenses 960 1,110 1,872 1,874
--------------- --------------- -------------- --------------
Operating income before depreciation and amortization,
minority interests and allocation of corporate overhead $ 438 $ 1,393 $ 263 $ 2,327
=============== =============== ============== ==============
Total segment assets at June 30, $ 1,554 $ 2,326 $ 1,554 $ 2,326
=============== =============== ============== ==============
PROPERTY MANAGEMENT SERVICES
Property management fees from external customers $ 562 $ 400 $ 1,272 $ 772
Intersegment revenues 595 418 1,252 915
--------------- --------------- -------------- --------------
Total revenues 1,157 818 2,524 1,687
Operating expenses 448 357 866 730
--------------- --------------- -------------- --------------
Operating income before depreciation and amortization,
minority interests and allocation of corporate overhead $ 709 $ 461 $ 1,658 $ 957
=============== =============== ============== ==============
Total segment assets at June 30, $ 1,563 $ 452 $ 1,563 $ 452
=============== =============== ============== ==============
RECONCILIATIONS
Total segment revenues $ 20,712 $ 14,261 $ 41,060 $ 30,123
Elimination of intersegment revenues (661) (418) (1,410) (915)
--------------- --------------- -------------- --------------
Total consolidated revenues $ 20,051 $ 13,843 $ 39,650 $ 29,208
=============== =============== ============== ==============
Segment operating income before depreciation, amortization,
minority interests and allocation of corporate overhead $ 5,866 $ 2,641 $ 14,565 $ 7,774
Depreciation and amortization, including amortization of
deferred financing costs 4,726 2,416 8,396 4,819
Net unallocated expenses relating to corporate overhead 3,046 1,075 5,575 2,241
Income tax benefit (provision) 102 - - -
Minority interests 12 23 (75) 44
--------------- --------------- -------------- --------------
Income (loss) from continuing operations $ (1,792) $ (827) $ 519 $ 758
=============== =============== ============== ==============
Total segment assets $ 502,399 $ 359,483 $ 502,399 $ 359,483
Unallocated corporate assets 4,857 985 4,857 985
--------------- --------------- -------------- --------------
Total assets $ 507,256 $ 360,468 $ 507,256 $ 360,468
=============== =============== ============== ==============
16
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
13. SUBSEQUENT EVENTS
SECONDARY EQUITY OFFERING: On July 5, 2005, the Company consummated a secondary
equity offering, consisting of the sale of 4,575,000 shares of the Company's
common stock at a price per share of $22.50, including 575,000 shares issued as
a result of the underwriters' exercise of their over-allotment option in full at
the closing. The offering generated gross proceeds of $102.9 million. The
aggregate proceeds to the Company, net of the underwriters' discount and
offering costs, are anticipated to be approximately $96.0 million. Approximately
$50.2 million of these proceeds was used to repay the Company's balance under
its revolving credit facility in July 2005.
DISTRIBUTION: On August 4, 2005, the Company declared a distribution per share
of $0.3375 which will be paid on August 29, 2005 to all common stockholders of
record as of August 16, 2005. At the same time, the Company will pay an
equivalent amount per unit to holders of PIUs (see Note 9).
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the
federal securities laws. We caution investors that any forward-looking
statements presented in this report, or which management may make orally or in
writing from time to time, are based on management's beliefs and assumptions
made by, and information currently available to, management. When used, the
words "anticipate," "believe," "expect," "intend," "may," "might," "plan,"
"estimate," "project," "should," "will," "result" and similar expressions, which
do not relate solely to historical matters, are intended to identify
forward-looking statements. Such statements are subject to risks, uncertainties
and assumptions and may be affected by known and unknown risks, trends,
uncertainties and factors that are beyond our control. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated, estimated
or projected. We caution you that while forward-looking statements reflect our
good faith beliefs when we make them, they are not guarantees of future
performance and are impacted by actual events when they occur after we make such
statements. We expressly disclaim any responsibility to update forward-looking
statements, whether as a result of new information, future events or otherwise.
Accordingly, investors should use caution in relying on past forward-looking
statements, which are based on results and trends at the time they were made, to
anticipate future results or trends.
Some of the risks and uncertainties that may cause our actual results,
performance or achievements to differ materially from those expressed or implied
by forward-looking statements include, among others, the following: general
risks affecting the real estate industry (including, without limitation, the
inability to enter into or renew leases, dependence on tenants' financial
condition, and competition from other developers, owners and operators of real
estate); risks associated with changes in University admission or housing
policies; risks associated with the availability and terms of financing and the
use of debt to fund acquisitions and developments; failure to manage effectively
our growth and expansion into new markets or to integrate acquisitions
successfully; risks and uncertainties affecting property development and
construction (including, without limitation, construction delays, cost overruns,
inability to obtain necessary permits and public opposition to such activities);
risks associated with downturns in the national and local economies, increases
in interest rates, and volatility in the securities markets; costs of compliance
with the Americans with Disabilities Act and other similar laws; potential
liability for uninsured losses and environmental contamination; risks associated
with our potential failure to qualify as a REIT under the Internal Revenue Code
of 1986 (the "Code"), as amended, and possible adverse changes in tax and
environmental laws; and risks associated with our dependence on key personnel
whose continued service is not guaranteed.
The risks included here are not exhaustive, and additional factors could
adversely affect our business and financial performance, including factors and
risks included in other sections of this report. Moreover, we operate in a very
competitive and rapidly changing environment. New risk factors emerge from time
to time and it is not possible for management to predict all such risk factors,
nor can it assess the impact of all such risk factors on our business or the
extent to which any factor, or combination of factors, may cause actual results
to differ materially from those contained in any forward-looking statements.
Given these risks and uncertainties, investors should not place undue reliance
on forward-looking statements as a prediction of actual results.
OUR COMPANY AND OUR BUSINESS
American Campus Communities, Inc. ("us," "we," "our," or "the Company") is one
of the largest owners, managers and developers of high quality student housing
properties in the United States in terms of beds owned and under management. 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 June 30,
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 June 30, 2005, our total
owned and managed portfolio included 43 properties that represented
approximately 26,900 beds in approximately 9,700 units.
18
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
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.
THIRD PARTY DEVELOPMENT SERVICES
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 June 30, 2005, development fees of approximately $4.1
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 June 30, 2005:
CONTRACTED PROJECTS
BALANCE TO BE
TOTAL FEES PREVIOUSLY EARNED AND
CONTRACTUAL FEE EARNED AND RECOGNIZED IN SCHEDULED
PROJECT LOCATION AMOUNT RECOGNIZED 2005 AND 2006 COMPLETION
- ------------------------------- ------------------- ----------------- ----------------- ----------------- -------------
Saint Leo University Phase II Saint Leo, FL $ 375 $ 325 $ 50 Aug 2005
Vista del Campo Phase II Irvine, CA 3,501 874 2,627 Aug 2006
West Virginia University -
Evansdale (1) Morgantown, WV 425 414 11 Aug 2005
Fenn Tower Renovation Cleveland, OH 1,509 200 1,309 Aug 2006
Lamar University Dining Hall Beaumont, TX 110 55 55 Nov 2005
----------------- ----------------- -----------------
Total $ 5,920 $ 1,868 $ 4,052
================= ================= =================
(1) Represents portion of West Virginia University - Evansdale project
consisting of pre-development and design services. Contractual fee amount
is shown net of approximately $0.7 million of costs anticipated to be
incurred to complete the project.
In addition to our contracted projects listed above, we have also been selected
to provide development and construction management services for the following
projects:
AWARDED PROJECTS
PROJECT LOCATION ANTICIPATED COMMENCEMENT ESTIMATED FEES
- --------------------------------------------- -------------------- ----------------------------- -----------------
West Virginia University - Evansdale (1) Morgantown, WV Third Quarter 2005 $ 300
The Inn at Auraria Denver, CO Third Quarter 2005 300
Blinn College Brenham, TX Fourth Quarter 2005 650
University of New Orleans New Orleans, LA Fourth Quarter 2005 1,651
University of Hawaii - Manoa (2) Honolulu, HI Second or Third Quarter 2006 2,285
West Virginia University - Potomac State (3) Keyser, WV Third Quarter 2005 700
West Virginia University - Downtown (3) Morgantown, WV Third Quarter 2005 550
Arizona State University (4) (5) Tempe, AZ Third Quarter 2006
Hope International University (5) Fullerton, CA Undetermined
(1) Represents portion of West Virginia University - Evansdale project
consisting of construction administration services. Estimated fees are
shown net of approximately $0.1 million of costs anticipated to be incurred
to complete the project.
(2) We were awarded this project subsequent to June 30, 2005.
(3) Projects consist of pre-development, design, and construction
administration services. Estimated fees are shown net of approximately $0.6
million of costs anticipated to be incurred to complete the projects.
(4) We have received a "Notice of Intent to Award" from the University.
(5) Fees are currently under negotiation.
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
19
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 February and March 2005, we acquired seven properties totaling 978 units and
3,118 beds located near the campuses of the University of Florida, Florida State
University, Florida A&M University, and the University of North Texas, for a
total contract purchase price of approximately $120.2 million. In connection
with these acquisitions, we assumed or entered into approximately $84.6 million
of bridge and mortgage loan indebtedness.
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 six months ended June 30, 2005.
OWNED DEVELOPMENT ACTIVITIES
OVERVIEW: As of June 30, 2005, we were in the process of constructing one owned
off-campus property and are in pre-development on two additional off-campus
owned properties. We were also in the process of constructing one owned
on-campus participating property. We anticipate that the total development cost
relating to these activities will be approximately $152.0 million. As of June
30, 2005, we have incurred pre-development and development costs of
approximately $47.9 million in connection with these properties, with the
remaining development costs estimated at $104.1 million. The activities are
described below:
UNIVERSITY VILLAGE AT SWEET HOME: In August 2004, we acquired a land parcel near
the State University of New York - Buffalo and commenced development of an owned
off-campus property containing 828 beds in 269 units. Total development cost is
estimated to be $36.1 million. This property is currently in the final stages of
construction and is pre-leased to 100% occupancy for its upcoming opening in
August 2005. As of June 30, 2005, the project was approximately 94% complete,
and we anticipate incurring remaining development costs of approximately $5.7
million.
VILLAGE AT NEWARK: As of June 30, 2005, we were in the later stages of design
and pre-development on an 812-bed project located in Newark, New Jersey near the
campuses of the New Jersey Institute of Technology, Rutgers University and Essex
County Community College. As of June 30, 2005, we anticipate that development
costs will total approximately $62.3 million, subject to completion of our
pre-development activities. We have incurred approximately $1.1 million of
pre-development costs related to this project as of June 30, 2005. Subsequent to
June 30, 2005, we entered into a ground lease agreement for the 2.0 acre
development site and executed a joint venture agreement with Titan Investments,
a partner with whom we have previously developed four off-campus student housing
properties. Construction is scheduled to commence this fall, and the full
community is scheduled to open for occupancy in August of 2007 with the
potential for partial occupancy in August of 2006 or January of 2007, dependent
upon construction progress.
CALLAWAY VILLAS: As of June 30, 2005, we were also in the later stages of design
and pre-development on a project located in close proximity to Texas A&M
University in College Station, Texas, and we estimate the total development
costs of this property to be approximately $36.6 million. As of June 30, 2005,
we have incurred approximately $4.3 million of land and pre-development costs
related to this project. This project commenced construction in July 2005. This
project has a scheduled completion date of August 2006, with the property
anticipated to open concurrently with the beginning of the 2006/2007 academic
year.
20
CULLEN OAKS PHASE II: As of June 30, 2005, our Cullen Oaks Phase II on-campus
participating property, located on the campus of the University of Houston was
under construction with total development costs estimated to be $17.0 million.
The project is scheduled to be completed in August 2005 in connection with the
2005/2006 academic year. As of June 30, 2005, the project was approximately 76%
complete, and we anticipate incurring remaining development costs of
approximately $4.9 million.
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.
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 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).
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).
21
PROPERTY PORTFOLIO
As of June 30, 2005, our property portfolio consisted of the following:
YEAR ACQUIRED /
PROPERTY DEVELOPED 1 LOCATION PRIMARY UNIVERSITY SERVED UNITS BEDS
- --------------------------------- ------------------ ------------------ ----------------------------- --------- -------
OWNED OFF CAMPUS PROPERTIES:
Arizona State University
1. Commons On Apache 1999 Tempe, AZ Main Campus 111 444
Virginia Polytechnic
Institute and State
2. The Village at Blacksburg 2000 Blacksburg, VA University 288 1,056
Arizona State University
3. The Village on University 1999 Tempe, AZ Main 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
College Station,
6. The Callaway House 2001 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
Boulder Creek 2002 Boulder, CO at Boulder 82 309
10. University Village at California State
Fresno 2004 Fresno, CA University, Fresno 105 406
11. University Village at TU 2004 Philadelphia, PA Temple University 220 749
12. University Village at State University of New
Sweet Home 2005 Amherst, NY York - 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) As of June 30, 2005, the average age of our properties was approximately 4.7 years.
22
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2005 AND JUNE 30, 2004
The following table presents our results of operations for the three months
ended June 30, 2005 and 2004, including the amount and percentage change in
these results between the two periods:
THREE MONTHS ENDED JUNE 30,
-------------------------------
2005 2004 CHANGE ($) CHANGE (%)
-------------- ------------- -------------- --------------
REVENUES:
Owned off-campus properties $ 14,764 $ 7,726 $ 7,038 91.1%
On-campus participating properties 3,133 3,202 (69) (2.2%)
Third party development and management services 1,894 2,903 (1,009) (34.8%)
Resident services 216 - 216 100.0%
-------------- ------------- -------------- --------------
TOTAL REVENUES 20,007 13,831 6,176 44.7%
OPERATING EXPENSES:
Owned off-campus properties 6,873 3,744 3,129 83.6%
On-campus participating properties 1,986 2,041 (55) (2.7%)
Third party development and management services 1,573 1,527 46 3.0%
General and administrative 1,925 555 1,370 246.8%
Depreciation and amortization 4,450 2,272 2,178 95.9%
Ground/facility leases 240 221 19 8.6%
-------------- ------------- -------------- --------------
TOTAL OPERATING EXPENSES 17,047 10,360 6,687 64.5%
-------------- ------------- -------------- --------------
OPERATING INCOME 2,960 3,471 (511) (14.7%)
NONOPERATING INCOME AND (EXPENSES):
Interest income 44 12 32 266.7%
Interest expense (4,634) (4,189) (445) 10.6%
Amortization of deferred financing costs (276) (144) (132) 91.7%
-------------- ------------- -------------- --------------
TOTAL NONOPERATING EXPENSES (4,866) (4,321) (545) 12.6%
-------------- ------------- -------------- --------------
Loss before income tax benefit, minority interests, and
discontinued operations (1,906) (850) (1,056) 124.2%
Income tax benefit 102 - 102 100.0%
Minority interests 12 23 (11) (47.8%)
-------------- ------------- -------------- --------------
LOSS FROM CONTINUING OPERATIONS (1,792) (827) (965) 116.7%
Discontinued operations:
Loss attributable to discontinued operations - (135) 135 100.0%
Loss from disposition of real estate - (39) 39 100.0%
-------------- ------------- -------------- --------------
Total discontinued operations - (174) 174 100.0%
-------------- ------------- -------------- --------------
NET LOSS $ (1,792) $ (1,001) $ (791) 79.0%
============== ============= ============== ==============
OWNED OFF-CAMPUS PROPERTIES OPERATIONS
Revenues from our owned off-campus properties for the three months ended June
30, 2005 compared with the same period in 2004 increased by $7.0 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 occupancy at a majority of the same store properties operated
during both periods, as described below. Operating expenses increased
approximately $3.1 million for the three months ended June 30, 2005 compared
with the same period in 2004.
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 $6.7 million of additional revenues and $3.1 million
of additional operating expenses during the three months ended June 30, 2005 as
compared to the three months ended June 30, 2004.
23
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 June 30, 2005 and 2004, and which had average occupancy
rates during these periods of 90.6% and 84.0%, respectively. These properties
produced revenues of $8.3 million and $7.7 million during the three month
periods ended June 30, 2005 and 2004, respectively, an increase of $0.6 million.
Excluding resident services revenues, which are provided through our TRS
subsequent to our IPO, these properties produced revenues of $8.1 million during
the three months ended June 30, 2005, resulting in an increase of $0.4 million
from the three months ended June 30, 2004. This increase was the result of the
improved Fall 2004 lease up. 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
$3.8 million for the three months ended June 30, 2005 compared to $3.7 million
for the three months ended June 30, 2004. 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 which were operating during both the three month periods ended June
30, 2005 and 2004. As of June 30, 2005, the Cullen Oaks Phase II property was
under construction and scheduled to commence operations in August 2005. Revenues
from our on-campus participating properties remained relatively constant at $3.1
million for the three months ended June 30, 2005, as compared to $3.2 million
for the three months ended June 30, 2004. This decrease was primarily due to a
slight increase in rental rates, which was offset by a decrease in average
occupancy from 40.1% for the three months ended June 30, 2004 to 39.9% for the
three months ended June 30, 2005. Occupancy at our on-campus participating
properties is typically low in the second and third quarter of each calendar
year due to the expiration of the 9 month leases at these properties concurrent
with the end of the spring semester. 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 also remained
relatively constant at $2.0 million for both the three months ended June 30,
2005 and 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.
THIRD PARTY DEVELOPMENT AND MANAGEMENT SERVICES
Third party development and management services revenue decreased $1.0 million
from $2.9 million for the three months ended June 30, 2004 to $1.9 million in
the three months ended June 30, 2005, primarily due to the factors discussed in
the paragraphs below. Third party development and management services operating
expenses remained relatively constant at $1.6 million for the three months ended
June 30, 2005, as compared to $1.5 million for the same period in 2004.
DEVELOPMENT SERVICES. Third party development services revenue for the three
months ended June 30, 2005 represented a decrease of $1.2 million compared with
the same period in 2004. This decrease was primarily due to a combination of
fewer projects in progress and a lower percentage of the contractual fees
recognized during 2005 as compared to 2004. This decrease was offset by a
slightly higher average contractual fee per project during 2005 as compared to
2004. We had five projects in progress during the three months ended June 30,
2005 with an average contractual fee of $1.3 million compared to the three
months ended June 30, 2004 in which we had seven projects in progress with an
average contractual fee of $1.1 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,
approximately 20% was recognized (on a percentage of completion basis) during
the three months ended June 30, 2005 compared with approximately 27% for the
same period in 2004. In addition, upon the transfer of one of our on-campus
participating properties (Coyote Village) to Weatherford College in April 2004,
we recognized approximately $0.4 million in deferred development and
construction revenue during the three months ended June 30, 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-
24
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 $0.2 million for
the three months ended June 30, 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
June 30, 2005 approximated $0.2 million and is included in the discussion of
owned off campus property revenues above. 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 $1.4 million for the three months ended June 30, 2005 compared with
the same period in 2004. This increase resulted from a compensation charge of
approximately $0.4 million recorded during the three months ended June 30, 2005
to reflect a separation agreement entered into with an executive officer in
April 2005. The remaining 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. Due to the nature of our operations as a public company, we
anticipate our future general and administrative expenses will exceed those of
our Predecessor.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased $2.2 million for the three months ended
June 30, 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 approximately $0.7 million of additional depreciation and
amortization expense for the three months ended June 30, 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 June 30, 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 the amortization of additional
finance costs incurred in relation 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 $4.6 million for the three months ended June 30, 2005
represented an increase of $0.4 million from $4.2 million during the same period
in 2004. Interest expense increased primarily due to debt assumed or incurred in
connection with the acquisition of the seven previously mentioned properties in
the first quarter 2005. These increases were partially offset by the retirement
of two mortgage loans in connection with the IPO. 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.
25
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 June 30, 2005, the TRS recorded
approximately $0.1 million of income tax benefit.
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 June 30, 2004 represent 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 June 30, 2005 represent the 1.0% interest
in the net equity of our Operating Partnership held by recipients of profits
interest units ("PIUs"). See Note 7 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. The properties included in discontinued operations for
the three months ended June 30, 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 (Coyote Village) whose ground
lease was transferred to the Weatherford College in April 2004.
26
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2005 AND JUNE 30, 2004
The following table presents our results of operations for the six months ended
June 30, 2005 and 2004, including the amount and percentage change in these
results between the two periods:
SIX MONTHS ENDED JUNE 30,
-------------------------------
2005 2004 CHANGE ($) CHANGE (%)
-------------- ------------- -------------- ------------
REVENUES:
Owned off-campus properties $ 27,253 $ 15,715 $ 11,538 73.4%
On-campus participating properties 8,626 8,495 131 1.5%
Third party development and management services 3,249 4,973 (1,724) (34.7%)
Resident services 420 - 420 100.0%
-------------- ------------- -------------- ------------
TOTAL REVENUES 39,548 29,183 10,365 35.5%
OPERATING EXPENSES:
Owned off-campus properties 12,009 7,203 4,806 66.7%
On-campus participating properties 3,861 3,841 20 0.5%
Third party development and management services 3,037 2,791 246 8.8%
General and administrative 3,289 1,008 2,281 226.3%
Depreciation and amortization 7,874 4,531 3,343 73.8%
Ground/facility leases 452 362 90 24.9%
-------------- ------------- -------------- ------------
TOTAL OPERATING EXPENSES 30,522 19,736 10,786 54.7%
-------------- ------------- -------------- ------------
OPERATING INCOME 9,026 9,447 (421) (4.5%)
NONOPERATING INCOME AND (EXPENSES):
Interest income 102 25 77 308.0%
Interest expense (8,442) (8,470) 28 (0.3%)
Amortization of deferred financing costs (522) (288) (234) 81.3%
Other nonoperating income 430 - 430 100.0%
-------------- ------------- -------------- ------------
TOTAL NONOPERATING EXPENSES (8,432) (8,733) 301 (3.4%)
-------------- ------------- -------------- ------------
Income before income tax provision, minority interests,
and discontinued operations 594 714 (120) (16.8%)
Income tax provision - - - -
Minority interests (75) 44 (119) (270.5%)
-------------- ------------- -------------- ------------
INCOME FROM CONTINUING OPERATIONS 519 758 (239) (31.5%)
Discontinued operations:
Loss attributable to discontinued operations (2) (190) 188 (98.9%)
Gain (loss) from disposition of real estate 5,883 (39) 5,922 (15,184.6%)
-------------- ------------- -------------- ------------
Total discontinued operations 5,881 (229) 6,110 (2,668.1%)
-------------- ------------- -------------- ------------
NET INCOME $ 6,400 $ 529 $ 5,871 1,109.8%
============== ============= ============== ============
OWNED OFF-CAMPUS PROPERTIES OPERATIONS
Revenues from our owned off-campus properties for the six months ended June 30,
2005 compared with the same period in 2004 increased by $11.5 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 year-to-date occupancy at a majority of the same store properties
operated during both periods, as described below. Operating expenses increased
approximately $4.8 million for the six months ended June 30, 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 $10.6 million of additional revenues and $4.7 million
of additional operating expenses during the six months ended June 30, 2005 as
compared to six months ended June 30, 2004.
27
SAME STORE PROPERTY OPERATIONS (EXCLUDING NEW PROPERTY ACTIVITY). We had nine
properties containing 5,971 beds which were operating during both the six month
periods ended June 30, 2005 and 2004, and which had average occupancy rates
during these periods of 94.2% and 86.4%, respectively. These properties produced
revenues of $17.1 million and $15.7 million during the six month periods ended
June 30, 2005 and 2004, respectively, an increase of $1.4 million. Excluding
resident services revenues, which are provided through our TRS subsequent to our
IPO, these properties produced revenues of $16.7 million during the six months
ended June 30, 2005, resulting in an increase of $1.0 million from the six
months ended June 30, 2004. This increase was the result of the improved Fall
2004 lease up.
At these existing properties, operating expenses remained relatively constant at
$7.3 million for the six months ended June 30, 2005 compared to $7.2 million for
the six months ended June 30, 2004.
ON-CAMPUS PARTICIPATING PROPERTIES ("OCPP") OPERATIONS
SAME STORE OCPP OPERATIONS. We had four participating properties containing
4,167 beds which were operating during both the six month periods ended June 30,
2005 and 2004. Revenues from our on-campus participating properties increased to
$8.6 million for the six months ended June 30, 2005 from $8.5 million for the
six months ended June 30, 2004, an increase of $0.1 million. This increase was
primarily due to an increase in rental rates, which was slightly offset by a
decrease in average occupancy from 68.1% for the six months ended June 30, 2004
to 67.1% for the six months ended June 30, 2005. Occupancy at our on-campus
participating properties is typically low in the second and third quarter of
each calendar year due to the expiration of the 9 month leases at these
properties concurrent with the end of the spring semester.
THIRD PARTY DEVELOPMENT AND MANAGEMENT SERVICES
Third party development and management services revenue decreased $1.8 million
from $5.0 million for the six months ended June 30, 2004 to $3.2 million in the
six months ended June 30, 2005, primarily due to the factors discussed in the
paragraphs below. Third party development and management services operating
expenses increased approximately $0.2 million, from $2.8 million for the six
months ended June 30, 2004, as compared to $3.0 million for the six months ended
June 30, 2005. This increase in expenses was primarily due to 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 six
months ended June 30, 2005 represented a decrease of $2.2 million compared with
the same period in 2004. This decrease was primarily due to a combination of
fewer projects in progress and a lower percentage of the contractual fees
recognized during 2005 as compared to 2004. This decrease was offset by a
slightly higher average contractual fee per project during 2005 as compared to
2004. We had five projects in progress during the six months ended June 30, 2005
with an average contractual fee of $1.3 million compared to the six months ended
June 30, 2004 in which we had eight projects in progress with an average
contractual fee of $1.0 million. Also, 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, approximately 29% was
recognized (on a percentage of completion basis) during the six months ended
June 30, 2005 compared with approximately 44% for the same period in 2004. In
addition, upon the transfer of one of our on-campus participating properties
(Coyote Village) to Weatherford College in April 2004, we recognized
approximately $0.4 million in deferred development and construction revenue
during the six months ended June 30, 2004. The decrease in third party
development services revenues is also due to the recognition of $0.2 million in
construction savings revenue on a previously completed project during the six
months ended June 30, 2004.
MANAGEMENT SERVICES. Third party management revenues increased $0.5 million for
the six months ended June 30, 2005 compared with the same period in 2004. The
increase was due to five 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 six months ended
June 30, 2005 approximated $0.4 million and is included in the discussion of
owned off campus property revenues above. 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.
28
GENERAL AND ADMINISTRATIVE
General and administrative expenses (relating primarily to corporate operations)
increased $2.3 million for the six months ended June 30, 2005 compared with the
same period in 2004. This increase resulted from a compensation charge of
approximately $0.4 million recorded during the three months ended June 30, 2005
to reflect a separation agreement entered into with an executive officer in
April 2005. The remaining 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.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased $3.3 million for the six months ended
June 30, 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 approximately $0.9 million of additional depreciation and
amortization expense for the six months ended June 30, 2005.
Amortization of deferred financing costs increased $0.2 million for the six
months ended June 30, 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 the amortization of additional
finance costs incurred in relation 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 remained relatively constant at $8.4 million for the six months
ended June 30, 2005, compared to $8.5 million for the six months ended June 30,
2004. This slight decrease was due to the retirement of two mortgage loans in
connection with the IPO, offset by increases in interest related to debt assumed
or incurred in relation to the acquisition of the seven previously mentioned
properties in the first quarter 2005.
MINORITY INTERESTS
Minority interests during the six months ended June 30, 2004 represent 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 six months ended June 30, 2005 represent the 1.0% interest in
the net equity of our Operating Partnership held by recipients of profits
interest units ("PIUs"). See Note 7 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 six months ended June 30,
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 six months ended June 30, 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 (Coyote Village) whose ground lease was transferred to the Weatherford
College in April 2004.
29
CASH FLOWS
COMPARISON OF SIX MONTHS ENDED JUNE 30, 2005 AND JUNE 30, 2004
OPERATING ACTIVITIES
Changes in working capital accounts utilized approximately $3.1 million for the
six months ended June 30, 2005 while approximately $1.5 million was provided by
working capital for the six months ended June 30, 2004, a decrease of $4.6
million. The utilization of approximately $3.1 million of working capital during
the six months ended June 30, 2005 was primarily due to furniture and other
related deposits made in advance of the opening of our University Village at
Sweet Home owned off-campus development project (scheduled for August 2005), a
general company-wide increase in prepaid insurance due to the annual renewal of
insurance policies in May 2005, and new restricted cash and prepaid expenses
recorded in relation to the seven new properties we acquired in the first
quarter 2005. In addition, our short-term investments balance increased during
the six months ended June 30, 2005 due to the temporary investment of cash
received from draws on our revolving credit facility that was subsequently used
to fund development costs related to our University Village at Sweet Home
project. Our operations provided approximately $1.5 million in working capital
during the six months ended June 30, 2004, primarily due to the use of
restricted funds during that period to fund redevelopment costs at one of our
owned off campus properties that was destroyed by a fire in 2003.
INVESTING ACTIVITIES
Investing activities utilized $81.4 million and $42.5 million during the six
months ended June 30, 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 six months ended June 30, 2005 and 2004, our cash used in
investing activities was comprised of the following:
SIX MONTHS ENDED JUNE 30,
-------------------------------------
2005 2004
------------------ -----------------
Property acquisitions $ (72,763) $ -
Property dispositions 28,023 -
Capital expenditures for on-campus participating properties (120) (187)
Capital expenditures for owned off campus properties (1,329) (567)
Investments in on-campus participating properties under
development (10,830) -
Investment in owned off-campus properties under development (23,992) (41,658)
Purchase of non-real estate furniture, fixtures, and equipment (359) (134)
------------------ -----------------
Total $ (81,370) $ (42,546)
================== =================
FINANCING ACTIVITIES
Cash provided by financing activities totaled $75.3 million and $35.3 million
for the six months ended June 30, 2005 and 2004, respectively. The increase was
primarily due to draws under our revolving credit facility in 2005 as well as a
bridge loan (subsequently modified to a mortgage facility) 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
30
not increase our economic interest in these properties since our interest,
including our right to share in the net cash available for distribution from the
properties, terminates upon the amortization of their indebtedness. Our economic
interest in these properties is therefore limited to our interest in the net
cash flow and management and development fees from these properties, as
reflected in our calculation of Funds from Operations modified for the
operational performance of on-campus participating properties ("FFOM") contained
herein. Accordingly, when considering these properties' contribution to our
operations, we focus upon our share of these properties' net cash available for
distribution and the management fees that we receive from these properties,
rather than upon their contribution to our gross revenues and expenses for
financial reporting purposes.
The following table reflects the amounts related to our on-campus participating
properties included in our consolidated/combined financial statements for the
three and six months ended June 30, 2005 and 2004:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------------- -------------------------------------
2005 2004 2005 2004
----------------- --------------- ---------------- -----------------
Revenues $ 3,133 $ 3,198 $ 8,626 $ 8,807
Direct operating expenses (1) 1,881 1,904 3,603 3,690
Amortization 883 856 1,762 1,710
Amortization of deferred financing costs 46 78 92 145
Ground/facility leases (2) 240 221 452 396
----------------- --------------- ---------------- -----------------
Net operating income 83 139 2,717 2,866
Interest income 27 6 52 12
Interest expense (3) (1,351) (1,372) (2,700) (2,820)
Loss on disposition of property - (39) - (39)
----------------- --------------- ---------------- -----------------
NET (LOSS) INCOME (4) $ (1,241) $ (1,266) $ 69 $ 19
================= =============== ================ =================
(1) Excludes property management fees of $0.1 million for both the three month
periods ended June 30, 2005 and 2004, and $0.4 million during both the six
month periods ended June 30, 2005 and 2004. 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) Interest expense is net of approximately $33,000 and $0.1 million of
capitalized interest for the three and six months ended June 30, 2005,
respectively, related to Cullen Oaks Phase II, an on-campus participating
property that is currently under development with a scheduled completion
date of August 2005.
(4) 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.
LIQUIDITY AND CAPITAL RESOURCES
CASH BALANCES AND LIQUIDITY
As of June 30, 2005, excluding our on-campus participating properties, we had
$9.4 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 June 30, 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 $23.4 million based on an
anticipated annual distribution of $1.35 per share or unit, including additional
common shares issued in connection with our secondary equity offering in July
2005 (as discussed below), and including distribution amounts required to
maintain our REIT status and satisfy our current distribution policy, (ii)
remaining development costs on our University Village at Sweet Home owned
off-campus development project, estimated to be approximately $5.7 million,
(iii) remaining development costs on our Callaway Villas owned off-campus
development project, estimated to be approximately $32.3 million, and (iv) funds
for other potential future acquisitions or development projects. We expect to
meet our short-term liquidity requirements through proceeds from our recent
secondary equity offering, net cash provided by operations, borrowings under our
revolving credit facility, and permanent property level debt.
31
We may seek additional funds to undertake initiatives not contemplated by our
business plan or obtain additional cushion against possible shortfalls. We may
also 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.
SECONDARY EQUITY OFFERING
On July 5, 2005, we consummated a secondary equity offering, consisting of the
sale of 4,575,000 shares of our common stock at a price per share of $22.50,
including 575,000 shares issued as a result of the underwriters' exercise of
their over-allotment option in full at the closing. The offering generated
estimated gross proceeds of $102.9 million. The aggregate proceeds to us, net of
the underwriters' discount and offering costs, are anticipated to be
approximately $96.0 million. Approximately $50.2 million of these proceeds was
used to repay the outstanding balance under our revolving credit facility.
REVOLVING CREDIT FACILITY
On June 17, 2005, the Company amended its $75 million revolving credit facility
to increase the size of the facility to $100 million. The amended facility may
be expanded by up to an additional $100 million upon the satisfaction of certain
conditions. In addition, the facility was converted from a secured facility to
an unsecured facility. The maturity date of the facility remains at August 2007
and the Company continues to guarantee the Operating Partnership's obligations
under the facility.
Availability under the revolving credit facility is limited to an "aggregate
borrowing base amount" equal to the lesser of (i) 65% of the value of certain
properties, calculated as set forth in the credit facility, and (ii) the
adjusted net operating income from these properties divided by a formula amount.
The facility bears interest at a variable rate, at the Company's option, based
upon a base rate or one-, two-, three-, or six-month LIBOR plus, in each case, a
spread based upon the Company's total leverage. Additionally, the Company is
required to pay an unused commitment fee ranging from 0.15% to 0.20% per annum,
depending on the aggregate unused balance. As of June 30, 2005, the balance
outstanding on the revolving credit facility totaled $50.2 million, bearing
interest at a weighted average rate of 5.1%, with remaining availability
(subject to certain financial covenants) totaling approximately $31.8 million.
As discussed above, we repaid the $50.2 million outstanding balance under this
facility in July 2005 using proceeds from our recently completed secondary
equity offering.
The terms of the facility include certain restrictions and covenants, which
limit, among other items, the incurrence of additional indebtedness, liens, and
the disposition of assets. The facility contains customary affirmative and
negative covenants and also contains financial covenants that, among other
things, require us to maintain certain minimum ratios of "EBITDA" (earnings
before interest, taxes, depreciation and amortization) for interest expense and
fixed charges. Before June 30, 2006, the Company may not pay distributions that
exceed 100% of funds from operations for any four consecutive quarters. After
June 30, 2006, the Company may not pay distributions that exceed 95% of funds
from operations for any four consecutive quarters. The financial covenants also
include consolidated net worth and leverage ratio tests. As of June 30, 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 August 4, 2005, the Company declared a distribution per share of $0.3375
which will be paid on August 29, 2005 to all common stockholders of record as of
August 16, 2005. At the same time, the Company will pay an equivalent amount per
unit to holders of PIUs.
32
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 completed construction 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
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 June 30, 2005, we had approximately $332.6 million of outstanding
consolidated indebtedness (excluding unamortized debt premiums of approximately
$4.8 million), comprised of a $50.2 million balance on our revolving credit
facility, $197.0 million in mortgage loan indebtedness secured by 13 of our
owned off-campus properties, $25.7 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 June 30,
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 June 30, 2005, approximately 17.5% of our total
consolidated indebtedness was variable rate debt, comprised of our revolving
credit facility and the construction loan utilized to fund the construction of
the Cullen Oaks Phase II on-campus participating property.
33
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 June 30, 2005:
ASSET ORIGINAL INTEREST MATURITY BALANCE AS OF
DATE RATE DATE JUNE 30, 2005
- ------------------------------------------- ------------------ --------------- ---------------- -------------------
University Village at Boulder Creek 12/01/2002 5.71% Nov 2012 $ 16,421
River Club Apartments 07/28/2000 8.18% Aug 2010 18,434
River Walk Townhomes 08/31/1999 8.00% Sep 2009 7,637
Village at Alafaya Club 07/11/2000 8.16% Aug 2010 (1) 20,369
Village at Blacksburg 12/15/2000 7.50% Jan 2011 21,225
Commons on Apache 05/14/1999 7.66% Jun 2009 7,611
Callaway House 03/30/2001 7.10% Apr 2011 19,601
University Club Tallahassee 11/01/2002 7.99% Oct 2010 13,506
The Grove at University Club 04/01/2003 5.75% Mar 2013 4,375
College Club Tallahassee 01/01/2003 6.74% Dec 2011 8,859
University Club Gainesville 11/01/1999 7.88% Nov 2009 8,491
City Parc at Fry Street 10/05/2004 5.96% Sep 2014 11,728
Exchange at Gainesville (to be renamed) 05/26/2005 5.20% Jun 2015 38,755
-------------------
Total $ 197,012
===================
(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.
The weighted average interest rate of such indebtedness was 6.9% as of June 30,
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 DATE BALANCE AS OF
ASSET DATE TERM JUNE 30, 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.
34
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 June 30, 2005 of approximately $16.9 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 the Prime rate or LIBOR plus 2.0%. The balance on
this construction loan as of June 30, 2005 was approximately $8.8 million,
bearing interest at 5.3%. 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 6.8% at June 30, 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 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 (loss)
income:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------------- -------------------------------
2005 2004 2005 2004
--------------- --------------- --------------- ---------------
Net (loss) income $ (1,792) $ (1,001) $ 6,400 $ 529
Minority interests (12) (23) 75 (44)
Loss (gain) from disposition of real estate - 39 (5,883) 39
Real estate related depreciation and amortization:
Real estate related depreciation and amortization 4,450 2,360 7,874 4,706
Furniture, fixtures, and equipment depreciation (106) (72) (204) (141)
--------------- --------------- --------------- ---------------
FUNDS FROM OPERATIONS $ 2,540 1,303 8,262 5,089
=============== =============== =============== ===============
FFO PER SHARE - BASIC AND DILUTED $ 0.20 $ 0.65
=============== ===============
Weighted average common shares outstanding:
Basic 12,626,118 12,624,142
=============== ===============
Diluted 12,747,118 12,785,413
=============== ===============
35
While our on-campus participating properties contributed $3.1 million and $3.2
million to our revenues for the three months ended June 30, 2005 and 2004, and
$8.6 million and $8.5 million to our revenues for the six months ended June 30,
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.
Funds From Operations--Modified for Operational Performance of On-Campus
Participating Properties:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------------- ---------------------------------
2005 2004 2005 2004
--------------- ------------- -------------- --------------
Funds from operations $ 2,540 $ 1,303 $ 8,262 $ 5,089
Elimination of operations of on-campus participating
properties:
Net loss (income) from on-campus participating properties 1,241 1,227 (69) (58)
(1)
Amortization of investment in on-campus participating
properties (883) (856) (1,762) (1,710)
--------------- ------------- -------------- --------------
2,898 1,674 6,431 3,321
Modifications to reflect operational performance of
on-campus participating properties:
Our share of net cash flow (2) 240 221 452 396
Management fees 158 155 421 428
On-campus participating properties development fees (3) 585 - 815 -
--------------- ------------- -------------- --------------
Impact of on-campus participating properties 983 376 1,688 824
--------------- ------------- -------------- --------------
FUNDS FROM OPERATIONS - MODIFIED FOR OPERATIONAL
PERFORMANCE OF ON-CAMPUS PARTICIPATING PROPERTIES
("FFOM") $ 3,881 $ 2,050 $ 8,119 $ 4,145
=============== ============= ============== ==============
FFOM per share - basic $ 0.31 $ 0.64
=============== ==============
FFOM per share - diluted $ 0.30 $ 0.64
=============== ==============
Weighted average common shares outstanding:
Basic 12,626,118 12,624,142
=============== ==============
Diluted 12,747,118 12,785,413
=============== ==============
(1) Excludes the loss on the sale of an on-campus participating property of
$39,000, which has already been reflected in the calculation of FFO above.
(2) 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.
(3) Development and construction management fees related to the Cullen Oaks
Phase II on-campus participating property, which is currently under
development with a scheduled completion date of August 2005.
36
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.
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.
37
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of shareholders of the Company was held on May 12, 2005.
(b) The following individuals were reelected as members of the Company's Board
of Directors at the annual meeting held on May 12, 2005: William C.
Bayless, Jr., R.D. Burck (Chairman), G. Steven Dawson, Cydney Donnell,
Edward Lowenthal, Brian B. Nickel, Scott H. Rechler, Winston W. Walker.
(c) The following votes were taken in connection with the election of the
members of the Company's Board of Directors at the annual meeting:
BOARD MEMBER VOTES IN FAVOR VOTES WITHHELD
--------------------------------- -------------------- -------------------
William C. Bayless, Jr. 11,636,166 370,817
R.D. Burck 11,677,796 329,187
G. Steven Dawson 10,030,194 1,976,789
Cydney Donnell 11,917,108 89,875
Edward Lowenthal 11,917,359 89,624
Brian B. Nickel 11,669,546 337,437
Scott H. Rechler 11,664,646 342,337
Winston W. Walker 11,677,796 329,187
ITEM 6. EXHIBITS
EXHIBIT NO. DESCRIPTION
- -------------- ----------------------------------------------------------------
10.1 Employment Agreement, dated as of April 28, 2005, between James
C. Hopke and American Campus Communities, Inc. Incorporated by
reference to Exhibit 99.1 to Current Report on Form 8-K of
American Campus Communities, Inc. (File No. 001-32265) filed on
May 3, 2005.
10.2 Employment Agreement, dated as of April 28, 2005, between Greg
A. Dowell and American Campus Communities, Inc. Incorporated by
reference to Exhibit 99.2 to Current Report on Form 8-K of
American Campus Communities, Inc. (File No. 001-32265) filed on
May 3, 2005.
10.3 Separation Agreement, dated as of April 28, 2005, between Mark
J. Hager and American Campus Communities, Inc. Incorporated by
reference to Exhibit 99.4 to Current Report on Form 8-K of
American Campus Communities, Inc. (File No. 001-32265) filed on
May 3, 2005.
10.4 Amendment No. 1 to Employment Agreement, dated as of April 28,
2005, between William C. Bayless, Jr. and American Campus
Communities, Inc. Incorporated by reference to Exhibit 99.6 to
Current Report on Form 8-K of American Campus Communities, Inc.
(File No. 001-32265) filed on May 3, 2005.
10.5 Amendment No. 1 to Employment Agreement, dated as of April 28,
2005, between Brian B. Nickel and American Campus Communities,
Inc. Incorporated by reference to Exhibit 99.7 to Current Report
on Form 8-K of American Campus Communities, Inc. (File No.
001-32265) filed on May 3, 2005.
10.6 Third Amendment to Credit Agreement, dated as of June 17, 2005,
among American Campus Communities Operating Partnership LP,
American Campus Communities, Inc., as Parent Guarantor, the
Subsidiary Guarantors listed on the signature pages thereto,
KeyBank National Association, Deutsche Bank Trust Company
Americas, as the resigning Administrative Agent and resigning
Collateral Agent, the other lenders that are signatories
thereto, and KeyBank National Association, as successor
Administrative Agent. Incorporated by reference to Exhibit 99.1
to Current Report on Form 8-K of American Campus Communities,
Inc. (File No. 001-32265) filed on June 20, 2005.
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
38
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: August 15, 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, CHIEF
FINANCIAL OFFICER AND SECRETARY
BY: /s/ Jonathan A. Graf
-----------------------------------
JONATHAN A. GRAF
SENIOR VICE PRESIDENT,
CHIEF ACCOUNTING OFFICER AND
TREASURER
39