- --------------------------------------------------------------------------------
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 September 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
November 4, 2005.
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2005
TABLE OF CONTENTS
PAGE NO.
---------
PART I.
Item 1. Consolidated and Combined Financial Statements
Consolidated Balance Sheets as of September 30, 2005
(unaudited) and December 31, 2004. 1
Consolidated and Combined Statements of Operations for
the Company for the three months ended September 30,
2005 and for the period from August 17, 2004 through
September 30, 2004 and for the Predecessor for the
period from July 1, 2004 through August 16, 2004 (all
unaudited). 2
Consolidated and Combined Statements of Operations for
the Company for the nine months ended September 30,
2005 and for the period from August 17, 2004 through
September 30, 2004 and for the Predecessor for the
period from January 1, 2004 through August 16, 2004
(all unaudited). 3
Consolidated and Combined Statements of Comprehensive
Income for the Company for the nine months ended
September 30, 2005 and for the period from August 17,
2004 through September 30, 2004 and for the Predecessor
for the period from January 1, 2004 through August 16,
2004 (all unaudited). 4
Consolidated and Combined Statements of Cash Flows for
the Company for the nine months ended September 30, 2005
and for the period from August 17, 2004 through September
30, 2004 and for the Predecessor for the period from
January 1, 2004 through August 16, 2004 (all unaudited). 5
Notes to Consolidated and Combined Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 20
Item 3. Quantitative and Qualitative Disclosure about Market Risk 41
Item 4. Controls and Procedures 41
PART II.
Item 6. Exhibits 41
SIGNATURES 42
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
SEPTEMBER 30, 2005 DECEMBER 31, 2004
---------------------- ---------------------
(UNAUDITED)
ASSETS
Investments in real estate:
Owned off-campus properties, net $ 409,712 $ 250,100
Owned off-campus property - held for sale - 22,350
On-campus participating properties, net 81,750 68,064
---------------------- ---------------------
Investments in real estate, net 491,462 340,514
Cash and cash equivalents 5,879 4,050
Restricted cash and other investments 8,547 9,816
Investments in commercial paper 31,682 -
Student contracts receivable, net 2,284 2,164
Other assets 14,615 11,084
---------------------- ---------------------
TOTAL ASSETS $ 554,469 $ 367,628
====================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Secured debt $ 291,762 $ 201,014
Accounts payable and accrued expenses 8,564 5,443
Other liabilities 26,275 20,294
---------------------- ---------------------
Total liabilities 326,601 226,751
Minority interests 2,816 2,648
Commitments and contingencies (Note 11)
Stockholders' equity:
Common stock, $.01 par value, 800,000,000 shares authorized,
17,190,000 and 12,615,000 shares issued and outstanding
at September 30, 2005 and December 31, 2004, respectively 172 126
Additional paid in capital 231,253 136,259
Accumulated (deficit) earnings and distributions (6,777) 1,802
Accumulated other comprehensive income 404 42
---------------------- ---------------------
Total stockholders' equity 225,052 138,229
---------------------- ---------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 554,469 $ 367,628
====================== =====================
See accompanying notes to consolidated and combined financial statements.
1
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
COMPANY PREDECESSOR
--------------------------------------------- ---------------------
THREE MONTHS PERIOD FROM PERIOD FROM
ENDED AUGUST 17, 2004 JULY 1, 2004
SEPTEMBER 30, TO TO
2005 SEPTEMBER 30, 2004 AUGUST 16, 2004
---------------------- ---------------------- ---------------------
REVENUES:
Owned off-campus properties $ 15,184 $ 4,799 $ 4,145
On-campus participating properties 3,637 2,483 845
Third party development services 1,979 332 178
Third party development services - on-campus
participating properties 38 13 14
Third party management services - affiliates - - 19
Third party management services 783 340 176
Resident services 256 114 -
---------------------- ---------------------- ---------------------
TOTAL REVENUES 21,877 8,081 5,377
OPERATING EXPENSES:
Owned off-campus properties 8,386 2,307 2,947
On-campus participating properties 2,173 431 1,601
Third party development and management services 1,609 718 612
General and administrative 1,534 2,888 24
Depreciation and amortization 4,269 1,335 1,284
Ground/facility leases 245 100 202
---------------------- ---------------------- ---------------------
TOTAL OPERATING EXPENSES 18,216 7,779 6,670
---------------------- ---------------------- ---------------------
OPERATING INCOME (LOSS) 3,661 302 (1,293)
NONOPERATING INCOME AND (EXPENSES):
Interest income 396 14 18
Interest expense (4,319) (2,006) (2,672)
Amortization of deferred financing costs (318) (610) (81)
Other nonoperating income - - 371
---------------------- ---------------------- ---------------------
TOTAL NONOPERATING EXPENSES (4,241) (2,602) (2,364)
---------------------- ---------------------- ---------------------
Loss before income taxes, minority interests, and
discontinued operations (580) (2,300) (3,657)
Income tax (provision) benefit (6) 757 -
Minority interests (10) 1 85
---------------------- ---------------------- ---------------------
LOSS FROM CONTINUING OPERATIONS (596) (1,542) (3,572)
Discontinued operations:
Income (loss) attributable to discontinued
operations - 4 (98)
---------------------- ---------------------- ---------------------
Total discontinued operations - 4 (98)
---------------------- ---------------------- ---------------------
NET LOSS $ (596) $ (1,538) $ (3,670)
====================== ====================== =====================
Loss per share - basic:
Loss from continuing operations per share $ (0.04) $ (0.13)
====================== ======================
Net loss per share $ (0.04) $ (0.13)
====================== ======================
Loss per share - diluted:
Loss from continuing operations per share $ (0.03) $ (0.12)
====================== ======================
Net loss per share $ (0.03) $ (0.12)
====================== ======================
Weighted average common shares outstanding:
Basic 17,005,462 12,290,256
====================== ======================
Diluted 17,126,462 12,411,256
====================== ======================
Distributions declared per common share $ 0.3375
======================
See accompanying notes to consolidated and combined financial statements.
2
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
COMPANY PREDECESSOR
--------------------------------------------- ---------------------
NINE MONTHS PERIOD FROM PERIOD FROM
ENDED AUGUST 17, 2004 JANUARY 1, 2004
SEPTEMBER 30, TO TO
2005 SEPTEMBER 30, 2004 AUGUST 16, 2004
------------------- ---------------------- ---------------------
REVENUES:
Owned off-campus properties $ 42,437 $ 4,799 $ 19,860
On-campus participating properties 12,263 2,483 9,340
Third party development services 3,882 332 3,896
Third party development services - on-campus
participating properties 112 13 497
Third party management services - affiliates - - 178
Third party management services 2,055 340 789
Resident services 676 114 -
------------------- ---------------------- ---------------------
TOTAL REVENUES 61,425 8,081 34,560
OPERATING EXPENSES:
Owned off-campus properties 20,395 2,307 10,150
On-campus participating properties 6,034 431 5,442
Third party development and management services 4,646 718 3,403
General and administrative 4,823 2,888 1,032
Depreciation and amortization 12,143 1,335 5,815
Ground/facility leases 697 100 564
------------------- ---------------------- ---------------------
TOTAL OPERATING EXPENSES 48,738 7,779 26,406
------------------- ---------------------- ---------------------
OPERATING INCOME 12,687 302 8,154
NONOPERATING INCOME AND (EXPENSES):
Interest income 498 14 43
Interest expense (12,761) (2,006) (11,142)
Amortization of deferred financing costs (840) (610) (369)
Other nonoperating income 430 - 371
------------------- ---------------------- ---------------------
TOTAL NONOPERATING EXPENSES (12,673) (2,602) (11,097)
------------------- ---------------------- ---------------------
Income (loss) before income taxes, minority
interests, and discontinued operations 14 (2,300) (2,943)
Income tax (provision) benefit (6) 757 -
Minority interests (85) 1 129
------------------- ---------------------- ---------------------
LOSS FROM CONTINUING OPERATIONS (77) (1,542) (2,814)
Discontinued operations:
(Loss) income attributable to discontinued
operations (2) 4 (288)
Gain (loss) from disposition of real estate 5,883 - (39)
------------------- ---------------------- ---------------------
Total discontinued operations 5,881 4 (327)
------------------- ---------------------- ---------------------
NET INCOME (LOSS) $ 5,804 $ (1,538) $ (3,141)
=================== ====================== =====================
(Loss) income per share - basic:
Loss from continuing operations per share $ (0.01) $ (0.13)
=================== ======================
Net income (loss) per share $ 0.41 $ (0.13)
=================== ======================
(Loss) income per share - diluted:
Loss from continuing operations per share $ (0.00) $ (0.12)
=================== ======================
Net income (loss) per share $ 0.41 $ (0.12)
=================== ======================
Weighted average common shares outstanding:
Basic 14,100,631 12,290,256
=================== ======================
Diluted 14,263,981 12,411,256
=================== ======================
Distributions declared per common share $ 1.0125
===================
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 COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)
COMPANY PREDECESSOR
--------------------------------------------- ---------------------
NINE MONTHS PERIOD FROM PERIOD FROM
ENDED AUGUST 17, 2004 JANUARY 1, 2004
SEPTEMBER 30, TO TO
2005 SEPTEMBER 30, 2004 AUGUST 16, 2004
------------------- ---------------------- ---------------------
Net income (loss) $ 5,804 $ (1,538) $ (3,141)
Other comprehensive income:
Change in fair value of interest rate swap 362 40 3
Change in fair value of interest rate cap - 45 -
------------------- ---------------------- ---------------------
NET COMPREHENSIVE INCOME (LOSS) $ 6,166 $ (1,453) $ (3,138)
=================== ====================== =====================
See accompanying notes to consolidated and combined financial statements.
4
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
COMPANY PREDECESSOR
-------------------------------------- ------------------
NINE MONTHS PERIOD FROM PERIOD FROM
ENDED AUGUST 17, JANUARY 1,
SEPTEMBER 30, TO SEPTEMBER 30, TO AUGUST 16,
2005 2004 2004
---------------- ------------------- ------------------
OPERATING ACTIVITIES
Net income (loss) $ 5,804 $ (1,538) $ (3,141)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
(Gain) loss from disposition of real estate (5,883) - 39
Minority interests share of income (loss) 85 (1) (129)
Depreciation and amortization 12,143 1,487 5,949
Amortization of deferred financing costs and debt premiums 329 702 421
Compensation expense recognized for award of profit interest units - 2,100 -
Compensation expense recognized for awards of restricted stock 323 136 -
Income tax provision (benefit) 6 (757) -
Changes in operating assets and liabilities:
Restricted cash and other investments 1,848 6,816 (5,016)
Student contracts receivable, net (120) (563) 860
Other assets (1,767) 558 2,321
Accounts payable and accrued expenses 2,777 (6,497) 2,591
Other liabilities 401 3,014 932
---------------- ------------------- ------------------
Net cash provided by operating activities 15,946 5,457 4,827
---------------- ------------------- ------------------
INVESTING ACTIVITIES
Net proceeds from disposition of real estate 28,023 - -
Cash paid for property acquisitions (72,763) - -
Investments in owned off-campus properties (39,032) (3,032) (47,900)
Investments in on-campus participating properties (16,280) (550) (565)
Purchase of furniture, fixtures and equipment (520) (85) (219)
Net purchase of investments with secondary offering proceeds (31,682) - -
---------------- ------------------- ------------------
Net cash used in investing activities (132,254) (3,667) (48,684)
---------------- ------------------- ------------------
FINANCING ACTIVITIES
Proceeds from revolving credit facility and line of credit,
net of paydowns (11,800) 2,305 1,796
Proceeds from bridge/mortgage loan 38,800 - -
Proceeds from construction loans 15,135 - 41,170
Principal payments on debt (3,120) (106,970) (1,403)
Change in construction accounts payable 694 (7,322) 2,044
Debt issuance costs (2,082) - (1,653)
Proceeds from sale of common stock 102,938 220,763 -
Offering costs (6,251) (19,380) (1,348)
Distributions to common and restricted stockholders (14,383) - -
Contributions from Predecessor owners - - 860
Distributions to Predecessor owners (1,671) (450) (2,212)
Redemption of ownership interest of Predecessor owners - (85,853) -
Distributions to minority partners (123) - (16)
---------------- ------------------- ------------------
Net cash provided by financing activities 118,137 3,093 39,238
---------------- ------------------- ------------------
Net change in cash and cash equivalents 1,829 4,883 (4,619)
Cash and cash equivalents at beginning of period 4,050 608 5,227
---------------- ------------------- ------------------
Cash and cash equivalents at end of period $ 5,879 $ 5,491 $ 608
================ =================== ==================
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES
Change in fair value of derivative instruments, net $ 362 $ 85 $ 3
================ =================== ==================
Loans assumed in connection with property acquisitions $ (47,169) $ - $ -
================ =================== ==================
Contribution of land from minority partner in development
joint venture $ - $ 1,220 $ -
================ =================== ==================
Distribution of assets of The Village at Riverside and other
non-core assets to Predecessor owners, net of liabilities $ - $ (13,968) $ -
================ =================== ==================
Distribution of liabilities of The Village at Riverside and
other non-core assets to Predecessor owners, net of
liabilities $ - $ 11,842 $ -
================ =================== ==================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 14,282 $ 5,290 $ 9,960
================ =================== ==================
Taxes paid $ 22 $ 67 $ -
================ =================== ==================
See accompanying notes to consolidated and combined financial statements.
5
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 nine months ended September 30,
2005, the Company also distributed approximately $-0- 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.
On July 5, 2005, the Company completed 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 exercise of
the underwriters' overallotment option in full at closing. The offering
generated gross proceeds of $102.9 million. The aggregate proceeds to the
Company, net of the underwriters' discount and offering costs, were
approximately $96.6 million.
As of September 30, 2005, the Company's property portfolio contained 25 student
housing properties with approximately 17,100 beds and 5,600 apartment units,
consisting of 21 owned off-campus properties that are in close proximities to
public colleges and universities and four on-campus participating properties
operated under ground/facility leases with the related university systems. The
four on-campus participating properties include an additional phase (Phase II)
at Cullen Oaks, consisting of 354 beds and 180 units, which was completed in
August 2005. 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 September 30, 2005, the Company also
provided third party property management and leasing services for 18 student
housing properties (12 of which the Company served as the third party developer
and construction manager) that represented approximately 10,600 beds in
approximately 4,200 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 September 30, 2005, the Company's
total owned and managed portfolio included 43 properties that represented
approximately 27,700 beds in approximately 9,800 units.
6
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND COMBINATION
The accompanying consolidated financial statements include all of the accounts
of the Company, the Operating Partnership and the subsidiaries of the Operating
Partnership. Ownership interests contributed to the Operating Partnership by the
Predecessor entities have been accounted for as a reorganization of entities
under common control in a manner similar to a pooling-of-interests. Accordingly,
the contributed assets and assumed liabilities were recorded at the
Predecessor's historical cost basis. This method of accounting also requires the
reporting of results of operations for the period in which the reorganization
occurred as though the entities had been combined at either the beginning of the
period or inception. The reorganization did not require any material adjustments
to conform 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
Leasehold interest - On-campus 25-34 years (shorter of useful
participating properties life or respective lease term)
Furniture, fixtures and equipment 3-7 years
7
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
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 $0.6 million and $0.5
million was capitalized during the three months ended September 30, 2005 and
2004, respectively, and $1.4 million and $1.7 million was capitalized during the
nine months ended September 30, 2005 and 2004, respectively. Amortization of
deferred financing costs totaling approximately $38,000 and $33,000 was
capitalized during the three months ended September 30, 2005 and 2004,
respectively, and $0.1 million and $0.2 million was capitalized during the nine
months ended September 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 the carrying value of the property. The
estimation of expected future net cash flows is inherently uncertain and relies
on assumptions regarding current and future economics and market conditions. If
such conditions change, then an adjustment to the carrying value of the
Company's long-lived assets could occur in the future period in which the
conditions change. To the extent that a property is impaired, the excess of the
carrying amount of the property over its estimated fair value is charged to
earnings. The Company believes that there were no impairments of the carrying
values of its investments in real estate as of September 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.
INVESTMENTS IN COMMERCIAL PAPER
The Company accounts for its investments in commercial paper in accordance with
SFAS No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES.
The Company has the positive intent and ability to hold the investments to
maturity and, accordingly, has classified them as held-to-maturity and reported
them at amortized cost on the accompanying consolidated balance sheet. The
contractual maturities of these investments in commercial paper range from one
week to three months. As of September, 30, 2005, the amortized cost of the
Company's investments in commercial paper was approximately $31.7 million. As of
September 30, 2005, the estimated fair value of the investments was
approximately $31.7 million with an immaterial gross unrealized loss. The
Company did not own any held-to-maturity investments as of December 31, 2004.
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 September 30, 2005 and December 31, 2004, net unamortized debt premiums
were $4.6 million and $-0-, respectively, and are included in secured debt on
the accompanying consolidated balance sheets.
8
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
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 September 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 has elected to be taxed as a REIT under the Internal Revenue Code of
1986, as amended (the "Code"). To qualify as a REIT, the Company must meet a
number of organizational and operational requirements, including a requirement
that it currently distribute at least 90% of its adjusted taxable income to its
stockholders. As a REIT, the Company will generally not be subject to corporate
level federal income tax on taxable income it currently distributes to its
stockholders. If the Company fails to qualify as a REIT in any taxable year, it
will be subject to federal income taxes at regular corporate rates (including
any applicable alternative minimum tax) and may not be able to qualify as a REIT
for the subsequent four taxable years. Even if the Company qualifies for
taxation as a REIT, the Company may be subject to certain state and local income
and excise taxes on its income and property, and to federal income and excise
taxes on its undistributed income.
The TRS manages the Company's non-REIT activities and is subject to federal,
state and local income taxes.
OTHER NONOPERATING INCOME
Other nonoperating income of approximately $0.4 million for the nine months
ended September 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. Other nonoperating income of approximately $0.4
million for the nine months ended September 30, 2004 represents a gain
recognized related to insurance proceeds received for hail damage that occurred
at one of the Company's on-campus participating 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 common units of limited partnership interest in the Operating
Partnership (formerly PIUs). See Note 9 for a discussion of RSUs, common units,
and RSAs.
9
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
The following is a summary of the elements used in calculating basic and diluted
income (loss) per share:
THREE MONTHS NINE MONTHS PERIOD FROM
ENDED ENDED AUGUST 17,2004 TO
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2005 2005 2004
-------------------- ----------------- ---------------------
Basic net (loss) income per share calculation:
Loss from continuing operations $ (596) $ (77) $ (1,542)
Discontinued operations - 5,881 4
-------------------- ----------------- ---------------------
Net (loss) income $ (596) $ 5,804 $ (1,538)
==================== ================= =====================
Loss from continuing operations - per share $ (0.04) $ (0.01) $ (0.13)
==================== ================= =====================
Income from discontinued operations - per share $ - $ 0.42 $ -
==================== ================= =====================
Net (loss) income - per share $ (0.04) $ 0.41 $ (0.13)
==================== ================= =====================
Basic weighted average common shares outstanding 17,005,462 14,100,631 12,290,256
==================== ================= =====================
Diluted net (loss) income per share calculation:
Loss from continuing operations $ (596) $ (77) $ (1,542)
(Loss) income allocated to PIU holders (1) 74 (1)
-------------------- ----------------- ---------------------
Loss from continuing operations, as adjusted (597) (3) (1,543)
Discontinued operations - 5,881 4
-------------------- ----------------- ---------------------
Net (loss) income, as adjusted $ (597) $ 5,878 $ (1,539)
==================== ================= =====================
Loss from continuing operations - per share $ (0.03) $ (0.00) $ (0.12)
==================== ================= =====================
Income from discontinued operations - per share $ - $ 0.41 $ -
==================== ================= =====================
Net (loss) income - per share $ (0.03) $ 0.41 $ (0.12)
==================== ================= =====================
Basic weighted average common shares outstanding 17,005,462 14,100,631 12,290,256
Common units/PIUs (1) 121,000 121,000 121,000
Restricted stock awards (2) - 42,350 -
-------------------- ----------------- ---------------------
Diluted weighted average common shares outstanding 17,126,462 14,263,981 12,411,256
==================== ================= =====================
(1) In connection with the Company's secondary equity offering in July
2005, all PIUs were converted to common units of limited partnership
interest in the Operating Partnership, as contemplated in the Amended
and Restated Agreement of Limited Partnership of the Operating
Partnership (the "OP Agreement").
(2) Weighted average restricted stock awards issued in February 2005 are
excluded from diluted weighted average common shares outstanding for
the three months ended September 30, 2005 because they would be
anti-dilutive due to the Company's loss position in that period.
3. PROPERTY ACQUISITIONS
In March 2005, the Company acquired a 396-unit, 1,044-bed off-campus student
housing property (The Estates) 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.
10
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
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
nine months ended September 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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------- ---------------------------------
2005 2004 2005 2004
-------------- -------------- -------------- --------------
Total revenues $ 21,877 $ 17,498 $ 64,209 $ 54,062
Net (loss) income $ (358) $ (5,202) $ 7,016 $ (5,057)
Net (loss) income per share - basic $ (0.09) $ (0.41) $ 0.50 $ (0.40)
Net (loss) income per share - diluted $ (0.08) $ (0.41) $ 0.50 $ (0.40)
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 nine months ended September 30,
2005.
Discontinued operations for the three and nine months ended September 30, 2004
includes University Village at San Bernardino, which was sold in January 2005,
The Village at Riverside and certain other non-core assets that were distributed
to an affiliate of the Company's Predecessor owners in connection with the IPO,
and the Company's leasehold interest in Coyote Village, which was transferred to
Weatherford College in April 2004, as contemplated in the structuring of the
related ground lease agreement.
The related net income or 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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------- ---------------------------------
2005 2004 2005 2004
-------------- -------------- -------------- --------------
Total revenues $ - $ 513 $ 29 $ 1,833
Total operating expenses - (406) (31) (1,360)
-------------- -------------- -------------- --------------
Operating income (loss) - 107 (2) 473
Total nonoperating expenses - (201) - (757)
-------------- -------------- -------------- --------------
Net loss $ - $ (94) $ (2) $ (284)
============== ============== ============== ==============
11
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
As of September 30, 2005 and December 31, 2004, assets and liabilities
attributable to the properties held for sale consisted of the following:
SEPTEMBER 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
As of September 30, 2005, the Company's owned off-campus property portfolio
included 21 properties that are in close proximities to public colleges and
universities, including two projects currently under development that are
scheduled to open for occupancy in Fall 2006 and Fall 2007. Owned off-campus
properties consisted of the following:
SEPTEMBER 30, 2005 DECEMBER 31, 2004
---------------------- ---------------------
Owned off-campus properties:
Land $ 52,018 $ 33,778
Buildings and improvements 362,551 219,841
Furniture, fixtures and equipment 17,783 10,104
Construction in progress 8,107 9,087
---------------------- ---------------------
440,459 272,810
Less accumulated depreciation (30,747) (22,710)
---------------------- ---------------------
Owned off-campus properties, net $ 409,712 $ 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. The Contingent Payment provision remains in effect
until such time as any financing placed on the facilities would receive an
investment grade rating without the Contingent Payment provision. In the event
that the Lessor is required to make a Contingent Payment, future net cash flow
distributions would be first applied to repay such Contingent Payments and then
to unpaid management fees prior to normal distributions. Beginning in November
1999 and December 2002, as a result of the debt financing on the facilities
achieving investment grade ratings without the Contingent Payment provision, the
Texas A&M University System is no longer required to make Contingent Payments
under either the Prairie View A&M University Village or University College
Leases. In July 2005, Texas A&M International University made a Contingent
Payment to achieve Financial Break Even under the Texas A&M International
University lease. The Contingent Payment obligation continues to be in effect
for the Texas A&M International University and University of Houston leases.
In the event the Company seeks to sell its leasehold interest, the Leases
provide the applicable Lessor the right of first refusal of a bona fide purchase
offer and an option to purchase the lessee's rights under the applicable Lease.
In conjunction with the execution of each Lease, the Company has entered into
separate five-year agreements to manage the related facilities for 5% of defined
gross receipts. The five-year terms of the management agreements are not
contingent upon the continuation of the Leases. Upon expiration of the initial
five year terms, the agreements continue on a month-to-month basis.
12
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
On-campus participating properties are as follows:
HISTORICAL COST
-----------------------------------------
LEASE REQUIRED DEBT
LESSOR/UNIVERSITY COMMENCEMENT REPAYMENT (1) SEPTEMBER 30, 2005 DECEMBER 31, 2004
- ------------------------------------------ ------------------ ------------------ -------------------- -------------------
Texas A&M University System/Prairie View
A&M University (2) 2/1/96 9/1/23 $ 38,026 $ 37,840
Texas A&M University System/Texas A&M
International 2/1/96 9/1/23 5,914 5,909
Texas A&M University System/Prairie View
A&M University (3) 10/1/99 8/31/25 / 8/31/28 23,766 23,663
University of Houston
System/University of Houston - (4) 9/27/00 8/31/35 35,024 18,958
-------------------- -------------------
102,730 86,370
Less accumulated amortization (20,980) (18,306)
-------------------- -------------------
On-campus participating properties, net $ 81,750 $ 68,064
==================== ===================
(1) Represents the effective lease termination date. The Leases terminate upon
the earlier to occur of the final repayment of the related debt or the end
of the contractual lease term.
(2) Consists of three phases placed in service between 1996 and 1998.
(3) Consists of two phases placed in service in 2000 and 2003.
(4) Consists of two phases placed in service in 2001 and 2005.
7. JOINT VENTURES AND MINORITY INTERESTS
In August 2004, the Operating Partnership formed a limited liability company,
1772 Sweet Home Road, LLC ("Sweet Home LLC"), with a local landowner to develop
and own an off-campus student housing property located in Buffalo, New York. The
community consists of nine residential buildings containing 269 units and 828
beds and was completed in August 2005 in connection with the commencement of the
2005/2006 academic year at State University of New York - Buffalo. 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 funded
all remaining development and construction costs of the project. A subsidiary of
the TRS served 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 operating agreement. This entity is consolidated and
the non-managing member's equity interest in and share of the net income of
Sweet Home LLC is reflected as a minority interest in the accompanying
consolidated balance sheets and statements of operations, respectively.
In August 2005, an affiliate of the Operating Partnership executed an amended
and restated limited liability company agreement for Village at Newark Urban
Renewal LLC ("Newark LLC") with Titan Investments V, LLC ("Titan"), an affiliate
of a joint venture partner with whom the Predecessor had previously developed
student housing communities. The purpose of Newark LLC is to ground lease,
develop and operate an off-campus student housing property located in Newark,
New Jersey. The community will consist of two residential buildings containing
at least 221 units and 812 beds and is scheduled to open for occupancy in Fall
2007. An affiliate of the Operating Partnership is the managing member of Newark
LLC and Titan is the non-managing member. The managing member receives a return
on its investment and both members participate in additional returns, as defined
in Newark LLC's limited liability company agreement. This entity is
consolidated. As of September 30, 2005, Titan has made no capital contributions
to the joint venture. Titan's interest in Newark LLC will be reflected as a
minority interest in the accompanying consolidated 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.
13
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Minority interests also include common units held by current and former
executive and senior officers in the Operating Partnership. These interests were
granted to such employees on the IPO date in the form of Profits Interest Units
("PIUs") (see Note 9). In connection with the Company's secondary equity
offering that was consummated on July 5, 2005, the PIUs were converted to common
units of limited partnership interest in the Operating Partnership, as
contemplated in the OP Agreement. A common unit and a share of the Company's
common stock have essentially the same economic characteristics, as they
effectively participate equally in the net income and distributions of the
Operating Partnership. The unitholders' minority interest in the Operating
Partnership is reported at an amount equal to their ownership percentage of the
net equity of the Operating Partnership at the end of each reporting period
(0.7% at September 30, 2005.)
8. DEBT
A summary of the Company's outstanding consolidated indebtedness, including
unamortized debt premiums, is as follows:
SEPTEMBER 30, 2005 DECEMBER 31, 2004
------------------------ -----------------------
Debt secured by owned off-campus properties:
Mortgage loans $ 196,456 $ 111,974
Debt secured by on-campus participating properties:
Mortgage loan payable 16,853 17,045
Construction loan payable 15,675 540
Bonds payable 58,215 59,655
------------------------ -----------------------
287,199 189,214
Revolving credit facility - 11,800
Unamortized debt premiums 4,563 -
------------------------ -----------------------
Total debt $ 291,762 $ 201,014
======================== =======================
LOANS ASSUMED OR ENTERED INTO IN CONJUNCTION WITH PROPERTY ACQUISITIONS
In connection with the March 2005 acquisition of The Estates, 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 Operating Partnership 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.
14
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
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. In July 2005, the Company paid off
the entire balance on the revolving credit facility using proceeds from its
secondary equity offering. As of September 30, 2005, the total availability
under the facility (subject to certain financial covenants) totaled
approximately $89.4 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
September 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
September 30, 2005 and December 31, 2004, the Company has issued or granted the
following stock-based incentive awards under the Plan:
SEPTEMBER 30, 2005 DECEMBER 31, 2004
------------------------ -----------------------
Common Units/PIUs (1) 121,000 121,000
Restricted Stock Units ("RSUs") 14,375 7,145
Restricted Stock Awards ("RSAs") (2) 46,216 -
Outperformance bonus plan 367,682 367,682
------------------------ -----------------------
Total shares issued under the Plan 549,273 495,827
======================== =======================
(1) In connection with the Company's secondary equity offering in July
2005, all PIUs were converted to common units of limited partnership
interest in the Operating Partnership, as contemplated in the OP
Agreement.
(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
and $0.2 million during the three and nine months ended September 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
for Cullen Oaks, an on-campus participating property, the Predecessor entered
into an interest rate swap on November 19, 2003 (effective December 15, 2003
through November 15, 2008) that was designated to hedge its exposure to
fluctuations on interest payments attributed to changes in interest rates
associated with payments on its advancing construction note payable. Under the
terms of the interest rate swap agreement, the Company pays a fixed rate of 5.5%
and receives a floating rate of LIBOR plus 1.9%. The interest rate swap had an
estimated fair value of approximately $0.4 million and $40,000 at September 30,
2005 and December 31, 2004, respectively, and is reflected in other assets in
the accompanying consolidated balance sheets.
15
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
The Company does not expect to reclassify a material amount of net gains on
hedge instruments from accumulated other comprehensive income to earnings in
2005. Ineffectiveness resulting from the Company's hedges is not material.
11. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
DEVELOPMENT-RELATED GUARANTEES: The Company commonly provides alternate housing
and project cost guarantees, subject to force majeure. These guarantees are
typically limited, on an aggregate basis, to the amount of the projects' related
development fees or a contractually agreed-upon maximum exposure amount.
Alternate housing guarantees typically expire five days after construction is
complete and generally require the Company to provide substitute living quarters
and transportation for students to and from the university if the project is not
complete by an agreed-upon completion date. Project cost guarantees hold the
Company responsible for the cost of a project in excess of an approved budget.
The budget consists primarily of costs included in the general contractors'
guaranteed maximum price contract ("GMP"). In most cases, the GMP obligates the
general contractor, subject to force majeure and approved change orders, to
provide completion date guarantees and to cover cost overruns and liquidated
damages. In addition, the GMP is typically secured with payment and performance
bonds. Project cost guarantees expire upon completion of certain developer
obligations, which are normally satisfied within one year after completion of
the project. The Company's estimated maximum exposure amount under the above
guarantees is approximately $3.5 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 September 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, LLC'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
in May 2005 in connection with the execution of the separation agreement, and is
included in general and administrative expenses in the accompanying consolidated
statements of operations for the nine months ended September 30, 2005. The
remaining amount owed under this agreement is included in other liabilities in
the accompanying consolidated balance sheet as of September 30, 2005.
16
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
CONTINGENCIES
LITIGATION: In the normal course of business, the Company is subject to claims,
lawsuits, and legal proceedings. While it is not possible to ascertain the
ultimate outcome of such matters, management believes that the aggregate amount
of such liabilities, if any, in excess of amounts provided or covered by
insurance, will not have a material adverse effect on the consolidated financial
position or results of operations of the Company.
LETTERS OF INTENT: In the ordinary course of the Company's business, the Company
enters into letters of intent indicating a willingness to negotiate for
acquisitions, dispositions or joint ventures. Such letters of intent are
non-binding, and neither party to the letter of intent is obligated to pursue
negotiations unless and until a definitive contract is entered into by the
parties. Even if definitive contracts are entered into, the letters of intent
relating to the acquisition and disposition of real property and resulting
contracts generally contemplate that such contracts will provide the acquirer
with time to evaluate the property and conduct due diligence, during which
periods the acquiror will have the ability to terminate the contracts without
penalty or forfeiture of any deposit or earnest money. There can be no assurance
that definitive contracts will be entered into with respect to any matter
covered by letters of intent or that the Company will consummate any transaction
contemplated by any definitive contract. Furthermore, due diligence periods for
real property are frequently extended as needed. An acquisition or disposition
of real property becomes probable at the time that the due diligence period
expires and the definitive contract has not been terminated. The Company is then
at risk under a real property acquisition contract, but only to the extent of
any earnest money deposits associated with the contract, and is obligated to
sell under a real property sales contract.
ENVIRONMENTAL MATTERS: The Company is not aware of any environmental liability
with respect to the properties that would have a material adverse effect on the
Company's business, assets or results of operations. However, there can be no
assurance that such a material environmental liability does not exist. The
existence of any such material environmental liability could have an adverse
effect on the Company's results of operations and cash flows.
12. SEGMENTS
The Company defines business segments by their distinct customer base and
service provided. The Company has identified four reportable segments: Owned
Off-Campus Properties, On-Campus Participating Properties, Development Services,
and Property Management Services. Management evaluates each segment's
performance based on operating income before depreciation, amortization,
minority interests and allocation of corporate overhead. Intercompany fees are
reflected at the contractually stipulated amounts.
17
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------- ----------------------------------
2005 2004 2005 2004
--------------- --------------- --------------- ---------------
OWNED OFF-CAMPUS PROPERTIES
Rental revenues $ 15,440 $ 9,058 $ 43,113 $ 24,773
Interest income 2 8 52 17
--------------- --------------- --------------- ---------------
Total revenues from external customers 15,442 9,066 43,165 24,790
Operating expenses before depreciation and amortization 8,291 4,941 20,103 12,370
Interest expense 3,290 3,205 9,008 8,915
Insurance gain - - 430 -
--------------- --------------- --------------- ---------------
Operating income before depreciation and amortization,
minority interests and allocation of corporate overhead $ 3,861 $ 920 $ 14,484 $ 3,505
=============== =============== =============== ===============
Depreciation and amortization $ 3,250 $ 1,714 $ 9,177 $ 4,588
=============== =============== =============== ===============
Capital expenditures $ 13,711 $ 8,707 $ 39,032 $ 50,932
=============== =============== =============== ===============
Total segment assets at September 30, $ 426,471 $ 278,128 $ 426,471 $ 278,128
=============== =============== =============== ===============
ON-CAMPUS PARTICIPATING PROPERTIES
Rental revenues $ 3,637 $ 3,328 $ 12,263 $ 11,823
Interest income 58 24 110 40
--------------- --------------- --------------- ---------------
Total revenues from external customers 3,695 3,352 12,373 11,863
Operating expenses before depreciation, amortization, and
ground/facility leases 2,006 1,892 5,510 5,395
Ground/facility leases 245 302 697 664
Interest expense 1,403 1,380 4,103 4,121
Insurance gain - 371 - 371
--------------- --------------- --------------- ---------------
Operating income before depreciation and amortization,
minority interests and allocation of corporate overhead $ 41 $ 149 $ 2,063 $ 2,054
=============== =============== =============== ===============
Depreciation and amortization $ 913 $ 950 $ 2,675 $ 2,660
=============== =============== =============== ===============
Capital expenditures $ 5,330 $ 927 $ 16,280 $ 1,115
=============== =============== =============== ===============
Total segment assets at September 30, $ 92,484 $ 77,775 $ 92,484 $ 77,775
=============== =============== =============== ===============
DEVELOPMENT SERVICES
Development and construction management fees from
external customers $ 2,017 $ 537 $ 3,994 $ 4,738
Intersegment revenues 15 - 173 -
--------------- --------------- --------------- ---------------
Total revenues 2,032 537 4,167 4,738
Operating expenses 1,057 861 2,929 2,735
--------------- --------------- --------------- ---------------
Operating income (loss) before depreciation and
amortization, minority interests and allocation of
corporate overhead $ 975 $ (324) $ 1,238 $ 2,003
=============== =============== =============== ===============
Total segment assets at September 30, $ 2,272 $ 1,642 $ 2,272 $ 1,642
=============== =============== =============== ===============
PROPERTY MANAGEMENT SERVICES
Property management fees from external customers $ 783 $ 535 $ 2,055 $ 1,307
Intersegment revenues 614 444 1,866 1,359
--------------- --------------- --------------- ---------------
Total revenues 1,397 979 3,921 2,666
Operating expenses 501 358 1,367 1,088
--------------- --------------- --------------- ---------------
Operating income before depreciation and amortization,
minority interests and allocation of corporate overhead $ 896 $ 621 $ 2,554 $ 1,578
=============== =============== =============== ===============
Total segment assets at September 30, $ 1,652 $ 1,253 $ 1,652 $ 1,253
=============== =============== =============== ===============
RECONCILIATIONS
Total segment revenues $ 22,566 $ 13,934 $ 63,626 $ 44,057
Unallocated interest income earned on corporate cash 336 - 336 -
Elimination of intersegment revenues (629) (444) (2,039) (1,359)
--------------- --------------- --------------- ---------------
Total consolidated revenues $ 22,273 $ 13,490 $ 61,923 $ 42,698
=============== =============== =============== ===============
Segment operating income before depreciation,
amortization, minority interests and allocation of
corporate overhead $ 5,773 $ 1,366 $ 20,339 $ 9,140
Depreciation and amortization, including amortization of
deferred financing costs 4,587 3,310 12,983 8,129
Net unallocated expenses relating to corporate overhead 1,766 4,013 7,342 6,254
Income tax (provision) benefit (6) 757 (6) 757
Minority interests (10) 86 (85) 130
--------------- --------------- --------------- ---------------
Loss from continuing operations $ (596) $ (5,114) $ (77) $ (4,356)
=============== =============== =============== ===============
Total segment assets $ 522,879 $ 358,798 $ 522,879 $ 358,798
Unallocated corporate assets 31,590 3,352 31,590 3,352
--------------- --------------- --------------- ---------------
Total assets $ 554,469 $ 362,150 $ 554,469 $ 362,150
=============== =============== =============== ===============
18
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
13. SUBSEQUENT EVENTS
DISTRIBUTION: On November 10, 2005, the Company declared a distribution per
share of $0.3375 which will be paid on December 1, 2005 to all common
stockholders of record as of November 21, 2005. At the same time, the Operating
Partnership will pay an equivalent amount per unit to holders of common units
(see Note 9).
19
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
September 30, 2005, our property portfolio contained 25 high-quality student
housing properties with approximately 17,100 beds and 5,600 apartment units,
consisting of 21 off-campus student housing properties within close proximity to
public colleges and universities in ten states, and four on-campus participating
properties owned through ground/facility leases with the respective university
systems. The four on-campus participating properties include an additional phase
(Phase II) at Cullen Oaks, consisting of 354 beds and 180 units that was
completed in August 2005. 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 18 student
housing properties that represent approximately 10,600 beds in approximately
4,200 units. We provided development and construction management services for 12
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 September 30, 2005, our
total owned and managed portfolio included 43 properties that represented
approximately 27,700 beds in approximately 9,800 units.
20
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 September 30, 2005, development fees of approximately $3.7
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 completed in 2005 and those under construction
as of September 30, 2005:
RECENTLY COMPLETED PROJECTS
PROJECT LOCATION UNITS BEDS TOTAL FEES COMPLETION DATE
- --------------------------------- ------------------- ------------ ------------ -------------- --------------------
Cullen Oaks Phase II (1) Houston, TX 180 354 $ 1,117 Aug 2005
Saint Leo University Phase II Saint Leo, FL 87 320 375 Aug 2005
--------------
$ 1,492
==============
(1) Cullen Oaks Phase II is an on-campus participating property.
CONTRACTED PROJECTS
BALANCE TO BE
EARNED AND
TOTAL FEES EARNED RECOGNIZED IN
CONTRACTUAL AND RECOGNIZED 2005 AND SCHEDULED
PROJECT LOCATION FEE AMOUNT TO DATE THEREAFTER COMPLETION
- ----------------------------- ------------------ ---------------- ---------------- ------------------ --------------
Vista del Campo Phase II Irvine, CA $ 3,500 $ 1,622 $ 1,878 Aug 2006
West Virginia University
- Evansdale (1) Morgantown, WV 725 455 270 Aug 2006
Fenn Tower Renovation Cleveland, OH 1,510 576 934 Aug 2006
Cardinal Village Dining Hall Beaumont, TX 110 88 22 Nov 2005
The Inn at Auraria Denver, CO 300 188 112 Aug 2006
West Virginia University
- Potomac State (2) Keyser, WV 700 230 470 Aug 2007
---------------- ---------------- ------------------
Total $ 6,845 $ 3,159 $ 3,686
================ ================ ==================
(1) Project consists of pre-development and design services which were
completed in the third quarter 2005 and construction administration
services which are currently in progress. Contractual fee amount is shown
net of approximately $0.9 million of costs anticipated to be incurred to
complete the project.
(2) Project consists of pre-development and design services which are currently
in progress and construction administration services which are scheduled to
commence in the third quarter of 2006. Contractual fee amount is shown net
of approximately $0.5 million of costs anticipated to be incurred to
complete the project.
21
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
- --------------------------------------------- -------------------- ----------------------------- -----------------
Blinn College Brenham, TX Fourth Quarter 2005 $ 650
West Virginia University - Downtown (1) Morgantown, WV Fourth Quarter 2005 650
University of Hawaii - Manoa Honolulu, HI Second or Third Quarter 2006 2,285
University of New Orleans (2) New Orleans, LA Undetermined 1,550
Hope International University (3) Fullerton, CA Undetermined -
-----------------
$ 5,135
=================
(1) Project consists 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 project.
(2) Hurricane Katrina has caused a delay in the commencement of construction
for the third-party development of the University of New Orleans housing
project. The University has expressed their commitment to this project
moving forward and we are in the process of establishing a definitive
timeline.
(3) Currently in the strategic planning phase and in the process of determining
project size and scope.
We believe that the ownership and operation of student housing communities in
close proximity to selected colleges and universities present an attractive
long-term investment opportunity for our investors. We intend to continue to
execute our strategy of identifying existing differentiated, typically highly
amenitized, student housing communities or development opportunities in close
proximity to university campuses. In addition, our strategy includes identifying
properties with high barriers to entry that are projected to experience
substantial increases in enrollment and/or are under-serviced in terms of
existing on- and/or off-campus student housing. While fee revenue from our third
party development/construction management and property management services
allows us to develop strong and key relationships with colleges and
universities, this area has over time become a smaller portion of our operations
due to the continued focus on and growth of our owned property portfolio.
Nevertheless, we believe these services continue to provide synergies with
respect to our ability to identify, acquire or develop, and successfully operate
student housing properties.
ACQUISITIONS
In 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 nine months ended September 30,
2005.
2005/2006 LEASE-UP
During the third quarter 2005, we completed the lease-up process for the
2005/2006 academic year. Our owned off-campus portfolio was leased to 98.8%
occupancy as of September 30, 2005 at an average monthly rent per occupied bed
of $491. This rental rate includes nine-month leases at The Callaway House,
which represent all leases at that property, and 10-month leases at The Village
on University, which represent approximately 50% of leases at that property.
When the effect of these less than 12-month leases is considered on an
annualized basis, the average monthly rent per occupied bed is $473.
RECENTLY COMPLETED PROJECTS
UNIVERSITY VILLAGE AT SWEET HOME: In August 2005, we completed the final stages
of construction on this owned off-campus property, which contains 828 beds in
269 units. Total development costs incurred for the project were approximately
$36.1 million.
22
CULLEN OAKS PHASE II: In August 2005, we completed the final stages of
construction on this additional phase of the Cullen Oaks on-campus participating
property, which contains an additional 354 beds in 180 units. Total development
costs incurred for the project were approximately $17.0 million.
OWNED DEVELOPMENT ACTIVITIES
OVERVIEW: As of September 30, 2005, we were in the process of constructing two
owned off-campus properties. We anticipate the total development costs relating
to these activities to be approximately $110.4 million. As of September 30,
2005, we have incurred development costs of approximately $12.4 million in
connection with these properties, with the remaining development costs estimated
at approximately $98.0 million. The activities are described below:
VILLAGE AT NEWARK: As of September 30, 2005, our Village at Newark owned
off-campus property was under construction with total development costs
estimated to be approximately $72.9 million. The project is scheduled to open
for occupancy in Fall 2007 in connection with the 2007/2008 academic year. As of
September 30, 2005, the project was approximately 1% complete, and we anticipate
incurring remaining development costs of approximately $70.3 million.
Approximately $27.4 million of the project budget will be funded by the Company
and the remaining $45.5 million will be funded with a construction loan.
CALLAWAY VILLAS: As of September 30, 2005, our Callaway Villas owned off-campus
property was under construction with total development costs estimated to be
approximately $37.5 million. The project is scheduled to be completed in August
2006 in connection with the 2006/2007 academic year. As of September 30, 2005,
the project was approximately 7% complete, and we anticipate incurring remaining
development costs of approximately $27.7 million. Approximately $15.7 million of
the project budget will be funded by the Company and the remaining $21.8 million
will be funded with a construction loan.
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.
23
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).
24
PROPERTY PORTFOLIO
As of September 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
The University of Central
7. The Village at Alafaya Club 2000 Orlando, FL Florida 228 840
The University of Central
8. The Village at Science Drive 2001 Orlando, FL Florida 192 732
9. University Village at The University of Colorado
Boulder Creek 2002 Boulder, CO at Boulder 82 309
California State
10. University Village at Fresno 2004 Fresno, CA University, Fresno 105 406
11. University Village at TU 2004 Philadelphia, PA Temple University 220 749
12. University Village at Sweet State University of New
Home (2) 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. The Estates 2005 Gainesville, FL University of Florida 396 1,044
College Station,
20. Callaway Villas (3) 2006 TX Texas A&M University 236 704
Rutgers University, NJIT,
21. Village at Newark (4) 2006 Newark, NJ Essex CCC 221 812
--------- -------
Total owned off campus properties 3,757 12,588
ON-CAMPUS PARTICIPATING PROPERTIES:
22. University Village--PVAMU 1996 / 97 / 98 Prairie View, TX Prairie View A&M University 612 1,920
23. University College--PVAMU 2000 / 03 Prairie View, TX Prairie View A&M University 756 1,470
Texas A&M International
24. University Village--TAMIU 1997 Laredo, TX University 84 252
25. Cullen Oaks - Phase I and II (5) 2001 / 05 Houston, TX The University of Houston 411 879
--------- -------
Total on campus participating properties 1,863 4,521
--------- -------
TOTAL - ALL PROPERTIES 5,620 17,109
========= =======
(1) As of September 30, 2005, the average age of our operating properties was
approximately 5.7 years.
(2) Construction was completed and property commenced operations in August
2005.
(3) Currently under development - scheduled to open for occupancy in August
2006.
(4) Currently under development - scheduled to open for occupancy in Fall 2007.
Pending approval from the City of Newark's Central Planning Board, the
project's capacity can be increased to 838 beds without modifying the
existing building area.
(5) Includes an additional phase consisting of 180 units and 354 beds that was
completed in August 2005.
25
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2005 AND SEPTEMBER
30, 2004
The following table presents our results of operations for the three months
ended September 30, 2005 and 2004, including the amount and percentage change in
these results between the two periods:
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------------
2005 2004 CHANGE ($) CHANGE (%)
-------------- -------------- -------------- --------------
REVENUES:
Owned off-campus properties $ 15,184 $ 8,944 $ 6,240 69.8%
On-campus participating properties 3,637 3,328 309 9.3%
Third party development and management services 2,800 1,072 1,728 161.2%
Resident services 256 114 142 124.6%
-------------- -------------- -------------- --------------
TOTAL REVENUES 21,877 13,458 8,419 62.6%
OPERATING EXPENSES:
Owned off-campus properties 8,386 5,254 3,132 59.6%
On-campus participating properties 2,173 2,032 141 6.9%
Third party development and management services 1,609 1,330 279 21.0%
General and administrative 1,534 2,912 (1,378) (47.3%)
Depreciation and amortization 4,269 2,619 1,650 63.0%
Ground/facility leases 245 302 (57) (18.9%)
-------------- -------------- -------------- --------------
TOTAL OPERATING EXPENSES 18,216 14,449 3,767 26.1%
-------------- -------------- -------------- --------------
OPERATING INCOME (LOSS) 3,661 (991) 4,652 (469.4%)
NONOPERATING INCOME AND (EXPENSES):
Interest income 396 32 364 1,137.5%
Interest expense (4,319) (4,678) 359 (7.7%)
Amortization of deferred financing costs (318) (691) 373 (54.0%)
Other nonoperating income - 371 (371) (100.0%)
-------------- -------------- -------------- --------------
TOTAL NONOPERATING EXPENSES (4,241) (4,966) 725 (14.6%)
-------------- -------------- -------------- --------------
Loss before income taxes, minority interests, and
discontinued operations (580) (5,957) 5,377 (90.3%)
Income tax (provision) benefit (6) 757 (763) (100.8%)
Minority interests (10) 86 (96) (111.6%)
-------------- -------------- -------------- --------------
LOSS FROM CONTINUING OPERATIONS (596) (5,114) 4,518 (88.3%)
Discontinued operations:
Loss attributable to discontinued operations - (94) 94 (100.0%)
-------------- -------------- -------------- --------------
Total discontinued operations - (94) 94 (100.0%)
-------------- -------------- -------------- --------------
NET LOSS $ (596) $ (5,208) $ 4,612 (88.6%)
============== ============== ============== ==============
OWNED OFF-CAMPUS PROPERTIES OPERATIONS
Revenues and operating expenses from our owned off-campus properties increased
by $6.2 million and $3.1 million, respectively, for the three months ended
September 30, 2005 compared with the same period in 2004. These increases were
primarily due to the acquisition of seven properties during the first quarter of
2005, the completion of construction and opening of two properties in August
2004, the completion of construction and opening of one property in August 2005,
and higher occupancy at a majority of the same store properties operated during
both periods, as described below.
NEW PROPERTY OPERATIONS. 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. Additionally, 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. We also
completed construction of and opened an 828-bed property serving the State
University of New York - Buffalo in August 2005. These new properties
contributed $6.3 million of additional revenues and $3.2 million of additional
operating expenses during the three months ended September 30, 2005 as compared
to the three months ended September 30, 2004.
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 September 30, 2005 and 2004. These properties produced
revenues of $8.1 million and $8.0 million during the three month periods ended
September 30, 2005 and 2004, respectively, an increase of $0.1 million. While
average occupancy increased significantly from 89.0% during the third quarter of
2004 to 93.0% during the third quarter of 2005, this growth was tempered by the
introduction of 10-month leases at The Village on University, one of our largest
properties, in August 2004. Prior to the introduction of 10-month leases at this
property, we
26
experienced an even revenue stream throughout the academic year. The
introduction of these 10-month leases resulted in a decrease in revenue upon
expiration of the leases in summer 2005. As such, the full effect of these
expiring leases on our revenue stream is seen during the quarter ended September
30, 2005. Excluding resident services revenues, which are provided through our
TRS subsequent to our IPO, these properties produced revenues of $7.8 million
during the three months ended September 30, 2005, as compared to $7.9 million
for the same period in 2004. This slight decrease was primarily due to the fact
that a full quarter of resident services revenues is reflected for the three
months ended September 30, 2005, whereas only approximately 1.5 months of
resident services revenues are reflected for the three months ended September
30, 2004. This is due to the fact that resident services revenues were not
recorded prior to our IPO and the related formation of our TRS, which occurred
on August 17, 2004. Future revenues will be dependent on, among other items, our
ability to maintain our current leases in effect for the 2005/2006 academic year
and our ability to obtain appropriate rental rates and desired occupancy for the
2006/2007 academic year at our various properties during our leasing period,
which typically begins in January and ends in August.
At our existing properties, operating expenses remained relatively constant at
$4.5 million for both the three month periods ended September 30, 2005 and 2004.
We anticipate that operating expenses for the full year 2005 will increase
slightly as compared with 2004, primarily as a result of expected increases in
utility costs, property taxes and general inflation.
ON-CAMPUS PARTICIPATING PROPERTIES ("OCPP") OPERATIONS
NEW PROPERTY OPERATIONS. In August 2005, we completed construction of and opened
an additional phase at our Cullen Oaks property, consisting of 180 units and 354
beds. This added phase contributed approximately $0.2 million of additional
revenues and approximately $0.1 million of additional operating expenses during
the three months ended September 30, 2005.
SAME STORE OCPP OPERATIONS. We had four participating properties containing
4,167 beds which were operating during both the three month periods ended
September 30, 2005 and 2004. Revenues from our same-store on-campus
participating properties increased by $0.2 million to $3.5 million for the three
months ended September 30, 2005, as compared to $3.3 million for the three
months ended September 30, 2004. This increase was largely due to increased
rental rates and summer conference business.
Operating expenses for our same-store on-campus participating properties also
remained relatively constant at $2.1 million for the three months ended
September 30, 2005 as compared to $2.0 million for the three months ended
September 30, 2004. We anticipate that operating expenses for the full year 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 increased $1.7 million
to $2.8 million for the three months ended September 30, 2005 from $1.1 million
for the same period in 2004. Both third party development services and third
party management services revenues increased in the third quarter of 2005 as
compared to the third quarter of 2004. Third party development and management
services operating expenses increased $0.3 million to $1.6 million for the three
months ended September 30, 2005 from $1.3 million for the same period in 2004.
This increase was primarily due to expenses incurred in the third quarter of
2005 in relation to the West Virginia University projects previously discussed.
DEVELOPMENT SERVICES. Third party development services revenue for the three
months ended September 30, 2005 represented an increase of $1.5 million compared
with the same period in 2004. This increase was primarily due to a combination
of more projects in progress and a higher percentage of the contractual fees
recognized during the three months ended September 30, 2005 as compared to the
same period in 2004. This increase was offset by a slightly lower average
contractual fee per project during the third quarter of 2005 as compared to the
third quarter of 2004. We had eight projects in progress during the three months
ended September 30, 2005 with an average contractual fee of $1.1 million
compared to the three months ended September 30, 2004 in which we had six
projects in progress with an average contractual fee of $1.2 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 23.5% was recognized (on a
percentage of completion basis) during the three months ended September 30, 2005
compared with approximately 7.0% for the same period in 2004.
Development services revenues are dependent on our ability to successfully be
awarded such projects, the amount of the contractual fee related to the project
and the timing and completion of the construction of the project. In addition,
to the extent projects are completed under budget, the Company may be entitled
to a portion of such savings, which are recognized as revenue upon third party
verification of the project costs. It is possible that projects for which we
have expended pre-development costs will not close and that we will not be
reimbursed for such costs. The pre-development costs associated therewith will
ordinarily be charged against income for the then-current period.
27
MANAGEMENT SERVICES. Third party management revenues increased $0.2 million for
the three months ended September 30, 2005 compared with the same period in 2004.
The increase was due to a full quarter of revenues earned during the three
months ended September 30, 2005 related to new management contracts that
commenced in Fall 2004. We expect third party property management revenues to
continue to increase throughout the remainder of 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 increased by $0.1 million
for the three months ended September 30, 2005 as compared to the same period in
2004. This increase was due to the three months ended September 30, 2004
reflecting approximately 1.5 months of resident services revenue, which was
classified as such beginning with our IPO and concurrent formation of our TRS on
August 17, 2004. Accordingly, resident services revenue for the three months
ended September 30, 2005 reflects a full quarter of revenue. 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)
decreased $1.4 million for the three months ended September 30, 2005 compared
with the same period in 2004. This decrease resulted primarily from a
compensation charge of approximately $2.1 million recorded during the three
months ended September 30, 2004 in connection with the issuance of profits
interest units ("PIUs") to certain of our executive and senior officers in
connection with our IPO. This decrease was offset by a full quarter of expenses
incurred as a public company during the three months ended September 30, 2005,
additional expenses incurred in 2005 related to Sarbanes-Oxley Section 404
compliance costs, and general increases in corporate staffing due to normal
inflationary increases in such items as payroll costs, benefits, and other
related corporate items. Due to the nature of our operations as a public
company, we anticipate our annual 2005 general and administrative expenses will
exceed those of our Predecessor.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased $1.7 million for the three months ended
September 30, 2005 compared with the same period in 2004 primarily due to the
acquisition of seven properties during the first quarter of 2005, as described
above, the opening of two owned off-campus properties in August 2004, and the
opening of the one owned off-campus property in August 2005. In conjunction with
the acquisition of the seven previously mentioned properties, a valuation was
assigned to in-place leases which is amortized over the average remaining lease
terms of the acquired leases (generally less than one year). This contributed
approximately $0.2 million of additional depreciation and amortization expense
for the three months ended September 30, 2005. We expect depreciation and
amortization for the full year 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, additional depreciation on the owned
off-campus property that opened in August 2005, and the $120.2 million of
acquisitions closed during the first quarter of 2005.
Amortization of deferred financing costs decreased $0.4 million for the three
months ended September 30, 2005 compared with the same period in 2004 primarily
due to two mortgage loans paid off in connection with our IPO. This decrease was
offset by additional finance cost amortization recorded during the three months
ended September 30, 2005 related to debt assumed or incurred in connection with
the property acquisitions closed during the first quarter of 2005.
INTEREST INCOME
Interest income increased approximately $0.4 million from $32,000 for the three
months ended September 30, 2004 as compared to $0.4 million for the three months
ended September 30, 2005. This increase was due to interest earned on remaining
proceeds from our secondary equity offering that occurred in July 2005, which
are invested in commercial paper.
28
INTEREST EXPENSE
Interest expense of $4.3 million for the three months ended September 30, 2005
represented a decrease of $0.4 million from $4.7 million during the same period
in 2004. Interest expense decreased primarily due to two mortgage loans that
were paid off in connection with our IPO as well as additional capitalized
interest recorded during the three months ended September 30, 2005 related to
our owned off-campus properties under development during the quarter. These
decreases were offset by additional interest on debt assumed or incurred in
connection with the acquisition of the seven previously mentioned properties in
the first quarter 2005. We anticipate that interest expense for the full year
2005 will increase from 2004 levels primarily due to the debt assumed or
incurred in connection with previously mentioned property acquisitions.
OTHER NONOPERATING INCOME
Other nonoperating income for the three months ended September 30, 2004
represents a gain recognized related to insurance proceeds received for hail
damage that occurred at one of our on-campus participating properties in 2003.
INCOME TAXES
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. Accordingly, for the three months ended September 30, 2005,
the TRS recorded an income tax provision of approximately $6,000, as compared to
an initial income tax benefit of $0.8 million recorded in connection with our
IPO during the three months ended September 30, 2004.
Unlike our Predecessor, we are subject to federal, state and local income taxes
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,
unlike our Predecessor and our results from our owned off-campus properties, is
subject to a new level of taxation. The amount of income taxes to be recognized
is dependent on the operating results of the TRS.
MINORITY INTERESTS
Minority interests for the three months ended September 30, 2005 represent the
0.7% interest in the net equity of our Operating Partnership held by common
unitholders as well as a minority partner's interest in the University Village
at Sweet Home property, which commenced operations in August 2005. Minority
interests for the three months ended September 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. See Note 7 in the
accompanying Notes to Consolidated and Combined Financial Statements for a
detailed description of minority interests.
DISCONTINUED OPERATIONS
Statement of Financial Accounting Standards ("SFAS") No. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, requires, among other items, that
the operating results of real estate properties sold or classified as held for
sale be included in discontinued operations in the statements of operations for
all periods presented. The properties included in discontinued operations for
the three months ended September 30, 2004 include University Village at San
Bernardino, which was sold in January 2005, 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 Weatherford College in April 2004.
29
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND SEPTEMBER 30, 2004
The following table presents our results of operations for the nine months ended
September 30, 2005 and 2004, including the amount and percentage change in these
results between the two periods:
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------
2005 2004 CHANGE ($) CHANGE (%)
-------------- -------------- -------------- --------------
REVENUES:
Owned off-campus properties $ 42,437 $ 24,659 $ 17,778 72.1%
On-campus participating properties 12,263 11,823 440 3.7%
Third party development and management
services 6,049 6,045 4 0.1%
Resident services 676 114 562 493.0%
-------------- -------------- -------------- --------------
TOTAL REVENUES 61,425 42,641 18,784 44.1%
OPERATING EXPENSES:
Owned off-campus properties 20,395 12,457 7,938 63.7%
On-campus participating properties 6,034 5,873 161 2.7%
Third party development and management
services 4,646 4,121 525 12.7%
General and administrative 4,823 3,920 903 23.0%
Depreciation and amortization 12,143 7,150 4,993 69.8%
Ground/facility leases 697 664 33 5.0%
-------------- -------------- -------------- --------------
TOTAL OPERATING EXPENSES 48,738 34,185 14,553 42.6%
-------------- -------------- -------------- --------------
OPERATING INCOME 12,687 8,456 4,231 50.0%
NONOPERATING INCOME AND (EXPENSES):
Interest income 498 57 441 773.7%
Interest expense (12,761) (13,148) 387 (3.0%)
Amortization of deferred financing costs (840) (979) 139 (14.2%)
Other nonoperating income 430 371 59 15.9%
-------------- -------------- -------------- --------------
TOTAL NONOPERATING EXPENSES (12,673) (13,699) 1,026 (7.5%)
-------------- -------------- -------------- --------------
Income before income taxes, minority
interests, and discontinued operations 14 (5,243) 5,257 (100.3%)
Income tax (provision) benefit (6) 757 (763) (100.8%)
Minority interests (85) 130 (215) (165.4%)
-------------- -------------- -------------- --------------
LOSS FROM CONTINUING OPERATIONS (77) (4,356) 4,279 (98.2%)
Discontinued operations:
Loss attributable to discontinued operations (2) (284) 282 (99.3%)
Gain (loss) from disposition of real estate 5,883 (39) 5,922 (15,184.6%)
-------------- -------------- -------------- --------------
Total discontinued operations 5,881 (323) 6,204 (1,920.7%)
-------------- -------------- -------------- --------------
NET INCOME (LOSS) $ 5,804 $ (4,679) $ 10,483 (224.0%)
============== ============== ============== ==============
OWNED OFF-CAMPUS PROPERTIES OPERATIONS
Revenues and operating expenses from our owned off-campus properties increased
by $17.8 million and $7.9 million, respectively, for the nine months ended
September 30, 2005 compared with the same period in 2004. These increases were
primarily due to the acquisition of seven properties during the first quarter of
2005, the completion of construction and opening of two properties in August
2004, the completion of construction and opening of one property in August 2005,
and higher year-to-date occupancy at a majority of the same store properties
operated during both periods, as described below. 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. 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. Additionally, in August 2004 we completed
construction of and opened a 406-bed property serving California State
University, Fresno and a 749-bed property serving Temple University. We also
completed construction of and opened an 828-bed property serving the State
University of New York - Buffalo in August 2005. These new properties
contributed $16.8 million of additional revenues and $7.9 million of additional
operating expenses during the nine months ended September 30, 2005 as compared
to the same period in 2004.
SAME STORE PROPERTY OPERATIONS (EXCLUDING NEW PROPERTY ACTIVITY). We had nine
properties containing 5,971 beds which were operating during both the nine month
periods ended September 30, 2005 and 2004. These properties produced revenues of
$25.2 million and $23.7 million during the nine month periods ended September
30, 2005 and 2004, respectively, an increase of $1.5 million. Excluding resident
services revenues, which are provided through our TRS subsequent to our IPO,
these properties produced revenues of $24.5 million during the nine months ended
September 30, 2005, as compared to $23.6 million for the same period in 2004, an
increase of $0.9 million. These increases were due primarily to the improved
lease up
30
for the 2005/2006 academic year, which resulted in average occupancy rates
increasing to 93.8% for the nine months ended September 30, 2005 from 87.2%
during the same period in 2004.
At these existing properties, operating expenses remained relatively constant at
$11.8 million for the nine months ended September 30, 2005 compared to $11.7
million for the nine months ended September 30, 2004.
ON-CAMPUS PARTICIPATING PROPERTIES ("OCPP") OPERATIONS
NEW PROPERTY OPERATIONS. In August 2005, we completed construction of and opened
an additional phase of our Cullen Oaks property, consisting of 180 units and 354
beds. This additional phase contributed approximately $0.2 million of additional
revenues and approximately $0.1 million of additional operating expenses during
the nine months ended September 30, 2005.
SAME STORE OCPP OPERATIONS. We had four participating properties containing
4,167 beds which were operating during both the nine month periods ended
September 30, 2005 and 2004. Revenues from our same store on-campus
participating properties increased to $12.1 million for the nine months ended
September 30, 2005 from $11.8 million for the nine months ended September 30,
2004, an increase of $0.3 million. This increase was primarily due to increased
rental rates, which were slightly offset by a decrease in average occupancy from
69.0% for the nine months ended September 30, 2004 to 66.7% for the nine months
ended September 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 nine 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 remained relatively
constant at $6.1 million for both the nine month periods ended September 30,
2005 and 2004. Third party development services decreased in the nine months
ended September 30, 2005 as compared to the same period in 2004, while third
party management services increased in the nine months ended September 30, 2005
as compared to the same period in 2004. Third party development and management
services operating expenses increased approximately $0.5 million, from $4.1
million for the nine months ended September 30, 2004, as compared to $4.6
million for the same period in 2005. This increase was primarily due to expenses
incurred in 2005 in relation to the West Virginia University projects previously
discussed.
DEVELOPMENT SERVICES. Third party development services revenue for the nine
months ended September 30, 2005 represented a decrease of $0.7 million compared
with the same period in 2004. This decrease was primarily due to a combination
of fewer projects in progress and a slightly lower percentage of the contractual
fees recognized during the nine months ended September 30, 2005 as compared to
the same period in 2004. This decrease was offset by a slightly higher average
contractual fee per project during the nine months ended September 30, 2005 as
compared to the same period in 2004. We had eight projects in progress during
the nine months ended September 30, 2005 with an average contractual fee of $1.1
million compared to the nine months ended September 30, 2004 in which we had ten
projects in progress with an average contractual fee of $0.8 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 46.1% was recognized (on a percentage of
completion basis) during the nine months ended September 30, 2005 compared with
approximately 47.2% for the same period in 2004. In addition, revenues for the
nine months ended September 30, 2004 include approximately $0.4 million of
deferred development and construction revenue recognized upon the transfer of
one of our on-campus participating properties (Coyote Village) to Weatherford
College in April 2004.
MANAGEMENT SERVICES. Third party management revenues increased $0.7 million for
the nine months ended September 30, 2005 compared with the same period in 2004.
The increase was due to a full period of revenues earned during the nine months
ended September 30, 2005 related to new management 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 increased by $0.6 million
for the nine months ended September 30, 2005 as compared to the same period in
2004. This increase is due to the nine months ended September 30, 2004
reflecting only approximately 1.5 months of resident services revenue, which was
classified as such beginning with our IPO and concurrent formation of our TRS on
August 17, 2004. Accordingly, resident services revenue for the nine months
ended September 30, 2005 reflects a full period of revenue. As a business
strategy, our
31
level of services provided to residents by the TRS is only incidental to that
which is necessary to maintain or increase occupancy.
GENERAL AND ADMINISTRATIVE
General and administrative expenses (relating primarily to corporate operations)
increased $0.9 million for the nine months ended September 30, 2005 compared
with the same period in 2004. This increase resulted primarily from a
compensation charge of approximately $0.4 million recorded during the nine
months ended September 30, 2005 to reflect a separation agreement entered into
with an executive officer in April 2005. In addition, the increase is also due
to a full nine months of expenses incurred as a public company during 2005,
additional expenses incurred in 2005 related to Sarbanes-Oxley Section 404
compliance costs, and general increases in corporate staffing due to normal
inflationary increases in such items as payroll costs, benefits, and other
related corporate items. These increases were offset by a compensation charge of
approximately $2.1 million recorded during the nine months ended September 30,
2004 in connection with the issuance of profits interest units ("PIUs") to
certain of our executive and senior officers in connection with our IPO.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased $5.0 million for the nine months ended
September 30, 2005 compared with the same period in 2004 primarily due to the
acquisition of seven properties during the first quarter of 2005, the opening of
two owned off-campus properties in August 2004, and the opening of the one owned
off-campus property in August 2005. In conjunction with the acquisition of the
seven previously mentioned properties, a valuation was assigned to in-place
leases which is amortized over the average remaining lease terms of the acquired
leases (generally less than one year). This contributed approximately $1.1
million of additional depreciation and amortization expense for the nine months
ended September 30, 2005.
Amortization of deferred financing costs decreased $0.1 million for the nine
months ended September 30, 2005 compared with the same period in 2004 primarily
due to two mortgage loans paid off in connection with our IPO. These decreases
were offset by additional finance cost amortization during the nine months ended
September 30, 2005 related to debt assumed or incurred in connection with the
property acquisitions closed during the first quarter of 2005 as well as finance
costs incurred under our revolving credit facility.
INTEREST EXPENSE
Interest expense decreased $0.4 million for the nine months ended September 30,
2005 compared with the same period in 2004. This 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. These
decreases were offset by an increase in interest expense incurred under our
revolving credit facility. The nine months ended September 30, 2004 represented
only approximately 1.5 months of interest on our revolving credit facility
obtained in connection with the IPO, whereas the nine months ended September 30,
2005 represented approximately 6 months of interest on the facility, which was
fully paid off in early July 2005.
OTHER NONOPERATING INCOME
Other nonoperating income of approximately $0.4 million for the nine months
ended September 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. Other nonoperating income of approximately $0.4
million for the nine months ended September 30, 2004 represents a gain
recognized related to insurance proceeds received for hail damage that occurred
at one of our on-campus participating properties in 2003.
MINORITY INTERESTS
Minority interests during the nine months ended September 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 nine months ended September 30, 2005 represent the 0.7%
interest in the net equity of our Operating Partnership held by common
unitholders as well as a minority partner's interest in the University Village
at Sweet Home property, which commenced operations in August 2005. See Note 7 in
the accompanying Notes to Consolidated and Combined Financial Statements for a
description of common units and the University Village at Sweet Home joint
venture.
32
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. University Village at San Bernardino, which was sold to
Cal State University - San Bernardino in January 2005, is included in
discontinued operations for both the nine month periods ended September 30, 2005
and 2004. The properties included in discontinued operations for the nine months
ended September 30, 2004 also includes 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.
CASH FLOWS
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2005 AND SEPTEMBER 30,
2004
OPERATING ACTIVITIES
Changes in working capital accounts provided approximately $3.1 million for the
nine months ended September 30, 2005 while approximately $5.0 million was
provided by working capital for the nine months ended September 30, 2004, a
decrease of $1.9 million. This decrease was primarily due to an increase in
accounts receivable from our third party development business related to the
progress of projects currently underway, as well as insurance proceeds received
in 2004 related to a fire that occurred at one of our owned off campus
properties in 2003, and the subsequent use of those proceeds to rebuild the
property. These items were slightly offset by an increase in accounts payable
and accrued expenses resulting from the seven properties that we acquired in the
first quarter of 2005.
INVESTING ACTIVITIES
Investing activities utilized $132.3 million and $52.4 million during the nine
months ended September 30, 2005 and 2004, respectively. The increase in 2005
relates to the following items: (i) the acquisition of seven properties in the
first quarter of 2005, (ii) cash used in 2005 to fund the development of an
on-campus participating property, and (iii) the purchase of investments with
secondary equity offering proceeds in July 2005. 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 owned off-campus
development properties. During the nine months ended September 30, 2005, two
owned off-campus properties were under development and one owned off-campus
property was in pre-development, while three properties were under development
during the nine months ended September 30, 2004. For the nine months ended
September 30, 2005 and 2004, our cash used in investing activities was comprised
of the following:
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------
2005 2004
------------------- -------------------
Property acquisitions $ (72,763) $ -
Property dispositions 28,023 -
Capital expenditures for on-campus participating properties (267) (1,115)
Capital expenditures for owned off campus properties (2,980) (3,284)
Investments in on-campus participating properties under
development (16,013) -
Investment in owned off-campus properties under development (36,052) (47,648)
Purchase of non-real estate furniture, fixtures, and equipment (520) (304)
Purchase of investments with secondary offering proceeds (31,682) -
------------------- -------------------
Total $ (132,254) $ (52,351)
=================== ===================
FINANCING ACTIVITIES
Cash provided by financing activities totaled $118.1 million and $42.3 million
for the nine months ended September 30, 2005 and 2004, respectively. Cash flows
provided by financing activities for the nine months ended September 30, 2005
consisted primarily of proceeds received from our secondary equity offering, net
of offering costs, of approximately $96.7 million in July 2005. Other
significant financing activities occurring during the nine months ended
September 30, 2005 included the receipt of proceeds from a bridge loan
(subsequently converted to a mortgage loan) in the amount of $38.8 million and
draws on a construction loan used to fund the development of an on-campus
participating property in the amount of approximately $15.1 million. These
proceeds were offset by the use of cash to fund distributions to our common and
restricted stockholders in the amount of approximately $14.4 million as well as
the use of cash to pay down our revolving credit (net of draws on the
33
facility during the period) in the amount of approximately $11.8 million. Cash
flows provided by financing activities for the nine months ended September 30,
2004 consisted primarily of proceeds received from our initial public offering,
net of offering costs, of approximately $200.0 million in August 2004.
Approximately $105.5 million of these proceeds was used to pay down mortgage and
construction loan indebtedness, and an additional $85.9 million was used to
redeem the interests of our Predecessor owners. In addition, during the nine
months ended September 30, 2004, we received approximately $41.2 million in
proceeds from construction loans used to fund the development of three owned
off-campus properties.
STRUCTURE OF ON-CAMPUS PARTICIPATING PROPERTIES
At our on-campus participating properties, the subject universities own both the
land and improvements. We then have a leasehold interest under a ground/facility
lease. Under the lease, we receive an annual distribution representing 50% of
these properties' net cash available for distribution after payment of operating
expenses (which includes our management fees), debt service (which includes
repayment of principal) and capital expenditures. We also manage these
properties under multi-year management agreements and are paid a management fee
representing 5% of receipts.
We do not have access to the cash flows and working capital of these
participating properties except for the annual net cash distribution as
described above. Additionally, a substantial portion of these properties' cash
flow is dedicated to capital reserves required under the applicable property
indebtedness and to the amortization of such indebtedness. These amounts do not
increase our economic interest in these properties since our interest, including
our right to share in the net cash available for distribution from the
properties, terminates upon the amortization of their indebtedness. Our economic
interest in these properties is therefore limited to our interest in the net
cash flow and management and development fees from these properties, as
reflected in our calculation of Funds from Operations modified for the
operational performance of on-campus participating properties ("FFOM") contained
herein. Accordingly, when considering these properties' contribution to our
operations, we focus upon our share of these properties' net cash available for
distribution and the management fees that we receive from these properties,
rather than upon their contribution to our gross revenues and expenses for
financial reporting purposes.
The following table reflects the amounts related to our on-campus participating
properties included in our consolidated/combined financial statements for the
three and nine months ended September 30, 2005 and 2004:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- --------------------------------
2005 2004 2005 2004
-------------- -------------- -------------- --------------
Revenues $ 3,637 $ 3,328 $ 12,263 $ 12,135
Direct operating expenses (1) 2,032 1,641 5,635 5,330
Amortization 913 950 2,675 2,660
Amortization of deferred financing costs 63 47 155 193
Ground/facility leases (2) 245 302 697 698
-------------- -------------- -------------- --------------
Net operating income 384 388 3,101 3,254
Interest income 53 23 105 36
Interest expense (3) (1,403) (1,379) (4,103) (4,199)
Loss on disposition of property - - - (39)
-------------- -------------- -------------- --------------
NET LOSS (4) $ (966) $ (968) $ (897) $ (948)
============== ============== ============== ==============
(1) Excludes property management fees of $0.2 million for both the three month
periods ended September 30, 2005 and 2004, and $0.6 million during both the
nine month periods ended September 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 $16,000 and $0.1 million of
capitalized interest for the three and nine months ended September 30,
2005, respectively, related to Cullen Oaks Phase II, a recently completed
project that was an additional phase of the Cullen Oaks on-campus
participating property.
(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.
34
LIQUIDITY AND CAPITAL RESOURCES
CASH BALANCES AND LIQUIDITY
As of September 30, 2005, excluding our on-campus participating properties, we
had $40.3 million in cash and cash equivalents, restricted cash, and
investments, as compared to $7.0 million in cash and cash equivalents,
restricted cash, and investments as of as of December 31, 2004. This increase
was due to the completion of our secondary equity offering in July 2005, which
generated net proceeds of approximately $96.6 million. We used $50.2 million of
the proceeds to pay off the balance on our revolving credit facility. An
additional $14.7 million of the proceeds was used to fund development costs on
University Village at Sweet Home, our recently completed owned off-campus
property, and the two owned off-campus properties currently under development.
As of September 30, 2005, our restricted cash and investments balance included
approximately $31.7 million of remaining secondary offering proceeds, which were
invested in commercial paper with varying maturities. Restricted cash at our
properties 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 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 September 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 $3.0 million,
(iii) remaining development costs on our Callaway Villas owned off-campus
development project funded outside of the construction loan, estimated to be
approximately $5.9 million, (iv) remaining development costs on our Village at
Newark owned off-campus development project funded outside of the construction
loan, estimated to be approximately $24.8 million, and (v) funds for other
potential future acquisitions or development projects. We expect to meet our
short-term liquidity requirements by using proceeds from our recent secondary
equity offering, net cash provided by operations, borrowings under our revolving
credit facility, and permanent property level debt.
We may seek additional funds to undertake initiatives not contemplated by our
business plan or obtain additional cushion against possible shortfalls. We 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 gross
proceeds of $102.9 million. The aggregate proceeds to us, net of the
underwriters' discount and offering costs, were approximately $96.6 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,
35
depending on the aggregate unused balance. In July 2005, the Company paid off
the entire balance on the revolving credit facility using proceeds from its
secondary equity offering. As of September 30, 2005, the total availability
under the facility (subject to certain financial covenants) totaled
approximately $89.4 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
September 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 common unit
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 November 10, 2005, the Company declared a distribution per share of $0.3375
which will be paid on December 1, 2005 to all common stockholders of record as
of November 21, 2005. At the same time, the Operating Partnership will pay an
equivalent amount per unit to holders of common units (formerly PIUs - See Note
7 in the accompanying Notes to Consolidated and Combined Financial Statements).
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
36
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 September 30, 2005, we had approximately $287.2 million of outstanding
consolidated indebtedness (excluding unamortized debt premiums of approximately
$4.6 million), comprised of $196.4 million in mortgage loan indebtedness secured
by 13 of our owned off-campus properties, $32.6 million in mortgage and
construction loans secured by two phases of an on-campus participating property,
and $58.2 million in bond issuances secured by three of our on-campus
participating properties. The weighted average interest rate on our consolidated
indebtedness as of September 30, 2005 was 6.8%. 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 September 30,
2005, approximately 5.4% of our total consolidated indebtedness was variable
rate debt, comprised of our construction loan utilized to fund the construction
of the additional phase at our Cullen Oaks on-campus participating property.
OWNED OFF-CAMPUS PROPERTIES
The following table contains certain summary information concerning the mortgage
loan indebtedness that encumbers our owned off-campus properties, excluding
unamortized debt premiums, as of September 30, 2005:
BALANCE AS OF
ORIGINAL INTNEREST MATURITY SEPTEMBER 30,
ASSET DATE RATE DATE 2005
- ------------------------------------------- ----------------- ---------------- ------------------- ----------------
University Village at Boulder Creek 12/01/2002 5.71% Nov 2012 $ 16,364
River Club Apartments 07/28/2000 8.18% Aug 2010 18,389
River Walk Townhomes 08/31/1999 8.00% Sep 2009 7,616
Village at Alafaya Club 07/11/2000 8.16% Aug 2010 (1) 20,320
Village at Blacksburg 12/15/2000 7.50% Jan 2011 21,167
Commons on Apache 05/14/1999 7.66% Jun 2009 7,588
Callaway House 03/30/2001 7.10% Apr 2011 19,543
University Club Tallahassee 11/01/2002 7.99% Oct 2010 13,478
The Grove at University Club 04/01/2003 5.75% Mar 2013 4,360
College Club Tallahassee 01/01/2003 6.74% Dec 2011 8,834
University Club Gainesville 11/01/1999 7.88% Nov 2009 8,464
City Parc at Fry Street 10/05/2004 5.96% Sep 2014 11,703
The Estates 05/26/2005 5.20% Jun 2015 38,630
----------------
Total $ 196,456
================
(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 September
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.
37
The following table sets forth certain information concerning these bond
financings:
BALANCE AS OF
ORIGINAL ORIGINAL MATURITY SEPTEMBER 30,
ASSET DATE TERM DATE 2005
- ------------------------------------------- ----------------- ---------------- ------------------- ----------------
University Village-PVAMU (1) Sep 1999 24 years Sep 2023 $ 30,070
University College-PVAMU (Phase I) (2) May 2001 22 years Aug 2025 19,410
University College-PVAMU (Phase II) (2) Jul 2003 25 years Aug 2028 4,135
University Village-TAMIU (1) Sep 1999 24 years Sep 2023 4,600
----------------
Total $ 58,215
================
(1) Part of combined bond issuance. Separate loan agreements are not
cross-collateralized or cross-defaulted.
(2) Multiple financings of single facility.
Cullen Oaks Phase I is currently encumbered by a mortgage loan originated in
September 2000 in the original principal amount of approximately $17.7 million.
The loan bears interest at the Prime rate, or LIBOR plus 1.9%, at our election
with principal amortizing on a 30 year schedule. We have in place an interest
rate swap agreement which effectively caps the interest on the outstanding
balance as of September 30, 2005 of approximately $16.9 million at 5.5%. The
loan matures in November 2008. Pursuant to the Leases, in the event the
leasehold estate does not achieve Financial Break Even (defined as revenues less
operating expenses, excluding management fees, less debt service), the
applicable Lessor would be required to make a rental payment, also known as the
Contingent Payment, sufficient to achieve Financial Break Even. The Contingent
Payment provision remains in effect until such time as any financing placed on
the facilities would receive an investment grade rating without the Contingent
Payment provision. In the event that the Lessor is required to make a Contingent
Payment, future net cash flow distributions would be first applied to repay such
Contingent Payments and then to unpaid management fees prior to normal
distributions Pursuant to the leases, in the event the leasehold estates do not.
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 was 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 September 30,
2005 was approximately $15.7 million, bearing interest at a weighted average
rate of 5.8%. The total availability under this construction loan is $17.0
million and the loan requires payments of interest only through June 2006, at
which time we have the option to extend the maturity date to November 2008 and
convert the loan to a 30-year amortization basis.
The weighted average interest rate of the indebtedness encumbering our on-campus
participating properties was 6.7% at September 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
38
(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:
COMPANY PREDECESSOR COMPANY PREDECESSOR
------------------------------ --------------- ----------------------------- --------------
PERIOD FROM PERIOD FROM PERIOD FROM PERIOD FROM
THREE MONTHS AUGUST 17, JULY 1, NINE MONTHS AUGUST 17, JANUARY 1,
ENDED 2004 TO 2004 TO ENDED 2004 TO 2004 TO
SEPTEMBER 30, SEPTEMBER 30, AUGUST 16, SEPTEMBER 30, SEPTEMBER 30, AUGUST 16,
2005 2004 2004 2005 2004 2004
- ----------------------------------------------- -------------- --------------- -------------- -------------- --------------
Net (loss) income $ (596) $ (1,538) $ (3,670) $ 5,804 $ (1,538) $ (3,141)
Minority interests 10 (1) (85) 85 (1) (129)
(Gain) loss from disposition
of real estate - - - (5,883) - 39
Real estate related
depreciation and amortization:
Real estate related
depreciation and
amortization 4,269 1,401 1,218 12,143 1,401 5,749
Discontinued operations
depreciation and
amortization - - 110 - - 285
Furniture, fixtures, and
equipment depreciation (116) (36) (40) (320) (36) (181)
-------------- -------------- --------------- -------------- -------------- ---------------
FUNDS FROM OPERATIONS ("FFO") $ 3,567 $ (174) $ (2,467) $ 11,829 $ (174) $ 2,622
============== ============== =============== ============== ============== ===============
FFO PER SHARE - BASIC $ 0.21 $ (0.01) $ 0.84 $ (0.01)
============== ============== ============== ==============
FFO PER SHARE - DILUTED $ 0.21 $ (0.01) $ 0.83 $ (0.01)
============== ============== ============== ==============
Weighted average common shares
outstanding:
Basic 17,005,462 12,290,256 14,100,631 12,290,256
============== ============== ============== ==============
Diluted 17,174,663 12,411,256 14,263,981 12,411,256
============== ============== ============== ==============
While our on-campus participating properties contributed $3.6 million and $3.3
million to our revenues for the three months ended September 30, 2005 and 2004,
and $12.3 million and $11.8 million to our revenues for the nine months ended
September 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.
39
Funds From Operations--Modified for Operational Performance of On-Campus
Participating Properties:
COMPANY PREDECESSOR COMPANY PREDECESSOR
------------------------------ --------------- ----------------------------- --------------
PERIOD FROM PERIOD FROM PERIOD FROM PERIOD FROM
THREE MONTHS AUGUST 17, JULY 1, NINE MONTHS AUGUST 17, JANUARY 1,
ENDED 2004 TO 2004 TO ENDED 2004 TO 2004 TO
SEPTEMBER 30, SEPTEMBER 30, AUGUST 16, SEPTEMBER 30, SEPTEMBER 30, AUGUST 16,
2005 2004 2004 2005 2004 2004
- ----------------------------------------------- -------------- --------------- -------------- -------------- --------------
Funds from operations $ 3,567 $ (174) $ (2,467) $ 11,829 $ (174) $ 2,622
Elimination of operations of
on-campus participating
properties:
Net loss from on-campus
participating properties (1) 966 156 812 897 156 753
Amortization of investment in
on-campus participating
properties (913) (438) (512) (2,675) (438) (2,222)
--------------- -------------- --------------- -------------- -------------- --------------
3,620 (456) (2,167) 10,051 (456) 1,153
Modifications to reflect
operational performance of
on-campus participating
properties:
Our share of net cash flow (2) 245 100 202 697 100 598
Management fees 167 97 61 588 97 489
On-campus participating
properties development
fees (3) 253 - - 1,068 - -
--------------- -------------- --------------- -------------- -------------- --------------
Impact of on-campus
participating properties 665 197 263 2,353 197 1,087
--------------- -------------- --------------- -------------- -------------- --------------
FUNDS FROM OPERATIONS - MODIFIED
FOR OPERATIONAL PERFORMANCE OF
ON-CAMPUS PARTICIPATING
PROPERTIES ("FFOM") $ 4,285 $ (259) $ (1,904) $ 12,404 $ (259) $ 2,240
=============== ============== =============== ============== ============== ==============
FFOM per share - basic $ 0.25 $ (0.02) $ 0.88 $ (0.02)
=============== ============== ============== ==============
FFOM per share - diluted $ 0.25 $ (0.02) $ 0.87 $ (0.02)
=============== ============== ============== ==============
Weighted average common shares
outstanding:
Basic 17,005,462 12,290,256 14,100,631 12,290,256
=============== ============== ============== ==============
Diluted 17,174,663 12,411,256 14,263,981 12,411,256
=============== ============== ============== ==============
(1) Excludes the loss on the sale of an on-campus participating property of
$39,000 during the period from January 1, 2004 to August 16, 2004, 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 was completed in August
2005.
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.
40
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.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS
EXHIBIT NO. DESCRIPTION
- ------------ ----------------------------------------------------------------
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
41
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: November 11, 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
42