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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 2005.
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period From _______________ to _______________.
Commission file number 001-32265
AMERICAN CAMPUS COMMUNITIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 76-0753089
(STATE OR OTHER JURISDICTION (IRS EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
805 LAS CIMAS PARKWAY, SUITE 400 AUSTIN, TX 78746
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(512) 732-1000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
(TITLE OF EACH CLASS) (NAME OF EACH EXCHANGE ON WHICH REGISTERED)
- --------------------------------- -------------------------------------------
Common Stock, $.01 par value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes / / No /X/
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes / / No /X/
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the
Exchange Act). Large accelerated filer Accelerated filer X Non-accelerated filer
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes / / No /X/
The aggregate market value of voting and non-voting common equity held by
non-affiliates of the registrant was $152,852,078 based on the last sale price
of the common equity on June 30, 2005, which is the last business day of the
Company's most recently completed second quarter.
There were 17,190,000 shares of the Company's common stock with a par value of
$0.01 per share outstanding as of the close of business on March 6, 2006.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this report incorporates information by reference from the
definitive Proxy Statement for the 2006 Annual Meeting of Stockholders.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2005
TABLE OF CONTENTS
PAGE NO.
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PART I.
Item 1. Business 1
Item 1A. Risk Factors 7
Item 1B. Unresolved Staff Comments 16
Item 2. Properties 16
Item 3. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Security Holders 19
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 20
Item 6. Selected Financial Data 22
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations 23
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 43
Item 8. Financial Statements and Supplementary Data 43
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 43
Item 9A. Controls and Procedures 43
PART III.
Item 10. Directors and Executive Officers of the Registrant 45
Item 11. Executive Compensation 45
Item 12. Security Ownership of Certain Beneficial Owners and Management 45
Item 13. Certain Relationships and Related Transactions 45
Item 14. Principal Accounting Fees and Services 45
PART IV.
Item 15. Exhibits and Financial Statement Schedules 46
SIGNATURES 51
PART I
ITEM 1. BUSINESS
OVERVIEW
American Campus Communities, Inc. (referred to herein as "the Company," "us,"
"we," and "our") is a real estate investment trust ("REIT") that was
incorporated on March 9, 2004 and commenced operations effective with the
completion of our initial public offering ("IPO") on August 17, 2004. Through
our controlling interest in American Campus Communities Operating Partnership LP
(the "Operating Partnership") and American Campus Communities Services, Inc.,
(our taxable REIT subsidiary or "TRS"), we are one of the largest owners,
managers and developers of high quality student housing properties in the United
States in terms of beds owned and under management. We are a fully integrated,
self-managed and self-administered equity REIT with expertise in the
acquisition, design, financing, development, construction management, leasing
and management of student housing properties.
Concurrent with the consummation of various formation transactions, our IPO
consisted of the sale of 12,615,000 shares of the Company's common stock at a
price per share of $17.50, including the exercise of the underwriters'
over-allotment option. Gross proceeds to the Company were approximately $220.8
million (approximately $197.8 million net of the underwriters' discount and
offering costs). As part of the various formation transactions, we redeemed the
ownership interests of our Predecessor owners, acquired a minority ownership
interest in four owned off-campus properties, repaid certain construction and
permanent indebtedness, distributed an owned off-campus property and other
non-core assets to our Predecessor owners, and entered into a revolving credit
facility. In addition, on July 5, 2005, we completed an 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 the exercise of the underwriters'
over-allotment option. The offering generated gross proceeds of approximately
$102.9 million (approximately $96.6 million net of the underwriters' discount
and offering costs).
As of December 31, 2005, our 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 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 resident assistant system and other student-oriented programming.
Through the TRS, we also provide construction management and development
services for student housing properties owned by colleges and universities,
charitable foundations, and others. As of December 31, 2005, the Company
provided third party management and leasing services for 17 student housing
properties (12 of which the Company served as the third party developer and
construction manager) that represented approximately 10,000 beds in
approximately 4,100 units. Third party management and leasing services are
typically provided pursuant to multi-year management contracts that have initial
terms that range from one to five years. As of December 31, 2005, our total
owned and managed portfolio included 42 properties that represented
approximately 27,100 beds in approximately 9,700 units.
BUSINESS OBJECTIVES, INVESTMENT STRATEGIES, AND OPERATING SEGMENTS
BUSINESS OBJECTIVES
Our primary business objectives are to create long-term stockholder value by
deploying capital to develop, redevelop, acquire and operate student housing
communities, and to sell communities when they no longer meet our long-term
investment strategy or when market conditions are favorable. We believe we can
achieve these objectives by continuing to implement our investment strategies
and successfully manage our operating segments, which are described in more
detail below.
INVESTMENT STRATEGIES
We seek to own high quality, well designed and well located student housing
properties. We seek to acquire or develop properties in under-serviced markets
that have stable or increasing student populations, are in submarkets with high
barriers to entry and provide opportunities for substantial economic growth as a
result of their differentiated design and close proximity to campuses, or
through our superior operational capabilities. We believe that our reputation
and close relationship with universities give us an advantage in sourcing
acquisitions and developments and obtaining municipal approvals and community
support for our development projects.
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ACQUISITIONS: During 2005, we acquired seven properties containing 3,118 beds in
978 units for an aggregate contract purchase price of $120.2 million, not
including closing costs, anticipated capital expenditures, and initial
integration expenses necessary to bring the properties up to our operating
standards. Also, as of December 31, 2005, we were in the due diligence period
related to the acquisition of 13 operating properties and one development
property. The acquisition of the 13 operating properties was consummated on
March 1, 2006, with acquisition of the one development property anticipated to
be closed during the third quarter of 2006. We believe that our relationship
with university systems and individual educational institutions, our knowledge
of the student housing market and our prominence as the first publicly-traded
REIT focused exclusively on student housing in the United States will afford us
a competitive advantage in acquiring additional student housing properties.
DEVELOPMENT: Since 1996, we have developed nine of our owned properties,
consisting of five owned off-campus properties and four on-campus participating
properties. This includes one owned off-campus property and an additional phase
at one of our existing on-campus participating properties that each opened for
occupancy in August 2005. In addition, as of December 31, 2005, we had two
owned-off campus properties under development with a total combined development
budget of approximately $110.4 million. These two properties are scheduled to
open for occupancy in August 2006 and Summer 2007.
Our experienced development staff intends to continue to identify and acquire
land parcels in close proximity to colleges and universities that offer location
advantages or that allow for the development of unique products that offer a
competitive advantage. We will also continue to benefit from opportunities
derived from our extensive network with colleges and universities as well as our
relationship with certain developers with whom we have previously developed
off-campus student housing properties.
OPERATING SEGMENTS
We define business segments by their distinct customer base and service
provided. We have identified four reportable segments: Owned Off-Campus
Properties, On-Campus Participating Properties, Development Services, and
Property Management Services. For a detailed financial analysis of our segments'
results of operations and financial position, please refer to Note 17 in the
accompanying Notes to Consolidated and Combined Financial Statements contained
in Item 8.
PROPERTY OPERATIONS
UNIQUE LEASING CHARACTERISTICS: Student housing properties are typically leased
by the bed on an individual lease liability basis, unlike multifamily housing
where leasing is by the unit. Individual lease liability limits each resident's
liability to his or her own rent without liability for a roommate's rent. A
parent or guardian is required to execute each lease as a guarantor unless the
resident provides adequate proof of income. The number of lease contracts that
we administer is therefore equivalent to the number of beds occupied and not the
number of units. Unlike traditional multifamily housing, most of our leases
commence and terminate on the same dates and may have terms of 9, 10, or 12
months. (Please refer to the property table contained in Item 2 - Properties for
a listing of the typical lease terms at our properties.) As an example, in the
case of our typical 12-month leases, the commencement date coincides with the
commencement of the respective university's Fall academic term and the
termination date is the date of the last subsequent summer school session. As
such, we must re-lease each property in its entirety each year.
MANAGEMENT PHILOSOPHY: Our management philosophy is based upon meeting the
following objectives:
o Satisfying the specialized needs of residents by providing the
highest levels of customer service;
o Developing and maintaining an academically oriented environment
via a premier residence life/student development program;
o Maintaining each project's physical plant in top condition;
o Maximizing revenue through the development and implementation of
a strategic annual marketing plan and leasing administration
program; and
o Maximizing cash flow through maximizing revenue coupled with
prudent control of expenses.
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OWNED OFF-CAMPUS PROPERTIES: As of December 31, 2005, our Owned Off-Campus
Properties segment consisted of 21 owned off-campus properties within close
proximity to 25 colleges and universities in ten states. Off-campus properties
are generally located in close proximity to the school campus, generally with
pedestrian, bicycle, or University shuttle access. We tend to offer more relaxed
rules and regulations than on-campus housing that is generally more appealing to
upper-classmen. We believe that the support of colleges and universities can be
beneficial to the success of our off-campus properties. We actively seek to have
these institutions recommend our off-campus facilities to their students or to
provide us with mailing lists so that we may directly market to students and
parents. In some cases, the institutions actually promote our off-campus
facilities in their recruiting and admissions literature. In cases where the
educational institutions do not offer recommendations for off-campus housing or
mailing lists, most nonetheless provide lists of suitable properties to their
students, and we continually work to ensure that our properties are on these
lists in each of the markets that we serve.
This segment is subject to competition for tenants with on-campus housing owned
by colleges and universities. Colleges and universities can generally avoid real
estate taxes and borrow funds at lower interest rates than us (and other private
sector operators), thereby decreasing their operating costs. Residence halls
owned and operated by the primary colleges and universities in the markets of
our owned properties typically charge lower rental rates, but offer fewer
amenities than those charged by our properties. Additionally, most universities
are only able to house a small percentage of their overall enrollment, and are
therefore highly dependant upon the off-campus market to provide housing for
their students. High-quality, well run off-campus student housing can be a
critical component to an institution's ability to attract and retain students.
Therefore, developing and maintaining good relationships with educational
institutions can result in a privately owned off-campus facility becoming, in
effect, an extension of the institution's housing program, with the institution
providing highly valued references and recommendations to students and parents.
This segment also competes with national and regional owner-operators of
off-campus student housing in a number of markets as well as with smaller local
owner-operators. Therefore, the performance of this segment could be affected by
the construction of new off-campus residences in close proximity to our existing
properties, increases or decreases in the general levels of rents for housing in
competing communities, increases or decreases in the number of students enrolled
at one or more of the colleges or universities in the market of a property, and
other general economic conditions.
ON-CAMPUS PARTICIPATING PROPERTIES: Our On-Campus Participating Properties
segment includes on-campus properties owned by our TRS that are operated under
ground/facility leases with the related university systems. We participate with
two university systems in the operations and cash flows of four on-campus
participating properties under long-term ground/facility leases. The subject
universities hold title to both the land and improvements on these properties.
Under our ground/facility leases, 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 have developed each of our on-campus
participating properties. For purposes of our consolidated financial statements
contained in Item 8, the development fee earned by our TRS during the
construction period is deferred and recognized in revenue over the term of the
underlying ground leases. However, for purposes of our calculation of Funds from
Operations - Modified for Operational Performance of On-Campus Participating
Properties ("FFOM") contained in Item 7, we reflect such development fees as
earned over the construction period based on the percentage-of-completion
method.
While the terms of each specific ground/facility lease agreement tend to vary in
certain respects, the following terms are generally common to all: (i) a term of
30-40 years, subject to early termination upon repayment of the related
financing, which generally has a 25-year amortization; (ii) ground/facility
lease rent of a nominal amount (e.g., $100 per annum over the lease term) plus
50% of net cash flow; (iii) the right of first refusal by the institution to
purchase our leasehold interest in the event we propose to sell it to any third
party; (iv) an obligation by the educational institution to promote the project,
include information relative to the project in brochures and mailings and to
permit us to advertise the project; (v) the requirement to receive the
educational institution's consent to increase rental rates by a percentage
greater than the percentage increase in our property operating expenses plus the
amount of any increases in debt service, and (vi) the option of the institution
to purchase our interest in and assume management of the facility, with the
purchase price calculated at the discounted present cash value of our leasehold
interest, resulting in a significant reduction in our portfolio but not
necessarily our net income.
We do not have access to the cash flows and working capital of these on-campus
participating properties except for the annual net cash distribution.
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
3
properties is therefore limited to our interest in the net cash flow, management
fees, and development fees from these properties. 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/development fees that we receive from these properties rather than
upon their contribution to our gross revenues and expenses for financial
reporting purposes.
Our on-campus participating properties are susceptible to some of the same risks
as our owned off-campus properties, including: (i) seasonality in rents; (ii)
annual re-leasing that is highly dependent on marketing and university admission
policies; and (iii) competition for tenants from other on-campus housing
operated by educational institutions or other off-campus properties.
THIRD PARTY SERVICES
Our third party services consist of development services and management services
and are typically provided to university and college clients. The majority of
our third party management services are provided to clients for whom we also
provide development services. While management evaluates the operational
performance of our third party services based on the distinct segments
identified below, at times we also evaluate these segments on a combined basis.
DEVELOPMENT SERVICES: Our Development Services segment consists of development
and construction management services that we provide through our TRS for third
party owners. These services range from short-term consulting projects to
long-term full-scale development and construction projects. Revenues earned on
such contracts are generally recognized based on the percentage-of-completion
method. We typically provide these services to colleges and universities seeking
to modernize their on-campus student housing properties. They look to us to
bring our student housing experience and expertise to ensure they develop
marketable, functional, and financially sustainable facilities. Educational
institutions usually seek to build housing that will enhance their recruitment
and retention of students while facilitating their academic objectives. Most of
these development service contracts are awarded via a competitive request for
proposal ("RFP") process that qualifies developers based on their overall
capability to provide specialized student housing design, development,
construction management, financial structuring, and property management
services. Our development services typically include pre-development, design and
financial structuring services. Our pre-development services typically include
feasibility studies for third party owners and design services. Feasibility
studies include an initial feasibility analysis, review of conceptual design,
and assistance with master planning. Some of the documents produced in this
process include the conceptual design documents, preliminary development and
operating budgets, cash flow projections and a preliminary market assessment.
Our design services include coordination with the architect and other members of
the design team, review of construction plans and assistance with project due
diligence and project budgets.
Construction management services typically consist of coordinating and
supervising the construction, equipping and furnishing process on behalf of the
project owner, including site visits, hiring of a general contractor and project
professionals, and full coordination and administration of all activities
necessary for project completion in accordance with plans and specifications and
with verification of adequate insurance.
Our development services activities benefit our primary goal of owning and
operating student housing properties in a number of ways. By providing these
services to others, we are able to expand and refine our unit plan and community
design, the operational efficiency of our material specifications and our
ability to determine market acceptance of unit and community amenities. Our
development and construction management personnel enable us to establish
relationships with general contractors, architects and project professionals
throughout the nation. Through these services, we gain experience and expertise
in residential and commercial construction methodologies under various labor
conditions, including right-to-work labor markets, markets subject to prevailing
wage requirements and fully unionized environments. This segment is subject to
competition from other specialized student housing development companies as well
as from national real estate development companies.
PROPERTY MANAGEMENT SERVICES: Our Property Management Services segment,
conducted by our TRS, includes revenues generated from third party management
contracts in which we are typically responsible for all aspects of operations,
including marketing, leasing administration, facilities maintenance, business
administration, accounts payable, accounts receivable, financial reporting,
capital projects, and residence life student development. As of December 31,
2005, we provided third party management and leasing services for 17 student
housing properties that represented approximately 10,000 beds in approximately
4,100 units, 12 of which we developed. We provide these services pursuant to
multi-year management agreements (generally ranging between one to five years).
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There are several housing options that compete with our third party managed
properties including, but not limited to, multifamily housing, for-rent single
family dwellings, other off-campus specialized student housing and the
aforementioned on-campus participating properties.
AMERICANS WITH DISABILITIES ACT AND FEDERAL FAIR HOUSING ACT
Many laws and governmental regulations are applicable to our properties and
changes in the laws and regulations, or their interpretation by agencies and the
courts, occur frequently. Our properties must comply with Title III of the
Americans with Disabilities Act, or ADA, to the extent that such properties are
"public accommodations" as defined by the ADA. The ADA may require removal of
structural barriers to access by persons with disabilities in certain public
areas of our properties where such removal is readily achievable. We believe
that the existing properties are in substantial compliance with the ADA and that
we will not be required to make substantial capital expenditures to address the
requirements of the ADA. However, noncompliance with the ADA could result in
imposition of fines or an award of damages to private litigants. The obligation
to make readily achievable accommodations is an ongoing one, and we intend to
continue to assess our properties and to make alterations as appropriate in this
respect.
Under the Federal Fair Housing Act and state fair housing laws, discrimination
on the basis of certain protected classes is prohibited. Violation of these laws
can result in significant damage awards to victims. The Company has a strong
policy against any kind of discriminatory behavior and trains its employees to
avoid discrimination or the appearance of discrimination. There is no assurance,
however, that an employee will not violate the Company's policy against
discrimination and thus violate fair housing laws. This could subject the
Company to legal actions and the possible imposition of damage awards.
ENVIRONMENTAL MATTERS
Under various laws and regulations relating to the protection of the
environment, an owner of real estate may be held liable for the costs of removal
or remediation of certain hazardous or toxic substances located on or in its
property. These laws often impose liability without regard to whether the owner
was responsible for, or even knew of, the presence of such substances. The
presence of such substances may adversely affect the owner's ability to rent or
sell the property or use the property as collateral. Independent environmental
consultants conducted Phase I environmental site assessments (which involve
visual inspection but not soil or groundwater analysis) on all of the owned
off-campus properties and on-campus participating properties in our existing
portfolio. Phase I environmental site assessments did not reveal any
environmental liabilities that would have a material adverse effect on us. In
addition, we are not aware of any environmental liabilities that management
believes would have a material adverse effect on the Company. There is no
assurance that Phase I environmental site assessments would reveal all
environmental liabilities or that environmental conditions not known to us may
exist now or in the future which would result in liability to the Company for
remediation or fines, either under existing laws and regulations or future
changes to such requirements.
From time to time, the United States Environmental Protection Agency, or EPA,
designates certain sites affected by hazardous substances as "Superfund" sites
pursuant to CERCLA. Superfund sites can cover large areas, affecting many
different parcels of land. Although CERCLA imposes joint and several liability
for contamination on property owners and operators regardless of fault, the EPA
may choose to pursue potentially responsible parties ("PRPs") based on their
actual contribution to the contamination. PRPs are liable for the costs of
responding to the hazardous substances. Each of Commons on Apache, The Village
at University and University Village at San Bernardino (disposed of in January
2005) are located within federal Superfund sites. The EPA designated these areas
as Superfund sites because groundwater underneath these areas is contaminated.
We have not been named, and do not expect to be named, as a PRP with respect to
these sites. However, there can be no assurance regarding potential future
developments concerning such sites.
INSURANCE
We carry comprehensive liability and property insurance on our properties, which
we believe is of the type and amount customarily obtained on real property
assets. We intend to obtain similar coverage for properties we acquire in the
future. However, there are certain types of losses, generally of a catastrophic
nature, such as losses from floods or earthquakes, that may be subject to
limitations in certain areas. When not otherwise contractually stipulated, we
exercise our judgment in determining amounts, coverage limits, and deductibles,
in an effort to maintain appropriate levels of insurance on our investments. If
we suffer a substantial loss, our insurance coverage may not be sufficient due
to market conditions at the time or other unforeseen factors. Inflation, changes
in building codes and ordinances, environmental considerations and other factors
also might make it infeasible to use insurance proceeds to replace a property
after it has been damaged or destroyed.
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EMPLOYEES
As of December 31, 2005, we had approximately 828 employees, consisting of:
o approximately 268 on-site employees in our owned off-campus
properties segment, including 115 Resident Assistants;
o approximately 105 on-site employees in our on-campus
participating properties segment, including 44 Resident
Assistants;
o approximately 381 employees in our property management services
segment, including 355 on-site employees and 26 corporate office
employees;
o approximately 24 corporate office employees in our development
services segment; and
o approximately 50 executive, corporate administration and
financial personnel.
Our employees are not currently represented by a labor union.
OFFICES AND WEBSITE
Our principal executive offices are located at 805 Las Cimas Parkway, Suite 400,
Austin, Texas 78746. Our telephone number at that location is (512) 732-1000.
We file our annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and other reports required by Sections 13(a) and 15(d) of
the Securities Exchange Act of 1934. You may read and copy any materials we file
with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington,
DC 20549. You may obtain information on the operation of the Public Reference
Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site
that contains reports, proxy and information statements and other information
regarding issuers that file electronically with the SEC. The address of that
site is www.sec.gov.
Our website is located at www.americancampuscommunities.com or
www.studenthousing.com. We make available free of charge through our website our
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and amendments to these reports filed or furnished pursuant to Sections
13(a) or 15(d) of the Securities Act of 1934, as amended, as soon as reasonably
practicable after we electronically file such material with, or furnish it to,
the SEC. Our website also contains copies of our Corporate Governance Guidelines
and Code of Business Ethics as well as the charters of our Nominating and
Corporate Governance, Audit, and Compensation committees. The information on our
website is not part of this filing.
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. 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; 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; risks associated with downturns
in the
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national and local economies, increases in interest rates, and volatility in the
securities markets; costs of compliance with the Americans with Disabilities Act
and other similar laws; potential liability for uninsured losses and
environmental contamination; risks associated with our Company's potential
failure to qualify as a REIT under the Internal Revenue Code of 1986 (the
"Code"), as amended, and possible adverse changes in tax and environmental laws;
and the other factors discussed in the "Risk Factors" contained in Item 1A of
this report.
ITEM 1A. RISK FACTORS
THE FOLLOWING RISK FACTORS MAY CONTAIN DEFINED TERMS THAT ARE DIFFERENT FROM
THOSE USED IN OTHER SECTIONS OF THIS REPORT. UNLESS OTHERWISE INDICATED, WHEN
USED IN THIS SECTION, THE TERMS "WE" AND "US" REFER TO AMERICAN CAMPUS
COMMUNITIES, INC. AND ITS SUBSIDIARIES, INCLUDING AMERICAN CAMPUS COMMUNITIES
OPERATING PARTNERSHIP LP, OUR OPERATING PARTNERSHIP, AND THE TERM "SECURITIES"
REFERS TO SHARES OF COMMON STOCK OF AMERICAN CAMPUS COMMUNITIES, INC. AND UNITS
OF LIMITED PARTNERSHIP INTEREST IN OUR OPERATING PARTNERSHIP.
THE FACTORS DESCRIBED BELOW REPRESENT THE COMPANY'S PRINCIPAL RISKS. OTHER
FACTORS MAY EXIST THAT THE COMPANY DOES NOT CONSIDER TO BE SIGNIFICANT BASED ON
INFORMATION THAT IS CURRENTLY AVAILABLE OR THAT THE COMPANY IS NOT CURRENTLY
ABLE TO ANTICIPATE.
RISKS RELATED TO OUR PROPERTIES AND OUR BUSINESS
OUR RESULTS OF OPERATIONS ARE SUBJECT TO AN ANNUAL LEASING CYCLE, SHORT LEASE-UP
PERIOD, SEASONAL CASH FLOWS, CHANGING UNIVERSITY ADMISSION AND HOUSING POLICIES
AND OTHER RISKS INHERENT IN THE STUDENT HOUSING INDUSTRY.
We generally lease our owned properties under 12-month leases, and in certain
cases, under ten-month, nine-month or shorter-term semester leases. As a result,
we may experience significantly reduced cash flows during the summer months at
properties leased under leases having terms shorter than 12 months. Furthermore,
all of our properties must be entirely re-leased each year, exposing us to
increased leasing risk. In addition, we are subject to increased leasing risk on
our properties under construction and future acquired properties based on our
lack of experience leasing those properties and unfamiliarity with their leasing
cycles. Student housing properties are also typically leased during a limited
leasing season that usually begins in January and ends in August of each year.
We are therefore highly dependent on the effectiveness of our marketing and
leasing efforts and personnel during this season.
Changes in university admission policies could adversely affect us. For example,
if a university reduces the number of student admissions or requires that a
certain class of students, such as freshman, live in a university owned
facility, the demand for beds at our properties may be reduced and our occupancy
rates may decline. While we may engage in marketing efforts to compensate for
such change in admission policy, we may not be able to effect such marketing
efforts prior to the commencement of the annual lease-up period or our
additional marketing efforts may not be successful.
We rely on our relationships with colleges and universities for referrals of
prospective student-tenants or for mailing lists of prospective student-tenants
and their parents. Many of these colleges and universities own and operate their
own competing on-campus facilities. Any failure to maintain good relationships
with these colleges and universities could therefore have a material adverse
effect on us. If colleges and universities refuse to make their lists of
prospective student-tenants and their parents available to us or increase the
costs of these lists, there could be a material adverse effect on us.
Federal and state laws require colleges to publish and distribute reports of
on-campus crime statistics, which may result in negative publicity and media
coverage associated with crimes occurring on or in the vicinity of our on-campus
participating properties. Reports of crime or other negative publicity regarding
the safety of the students residing on, or near, our properties may have an
adverse effect on both our on-campus and off-campus business.
WE FACE SIGNIFICANT COMPETITION FROM UNIVERSITY-OWNED ON-CAMPUS STUDENT HOUSING,
FROM OTHER OFF-CAMPUS STUDENT HOUSING PROPERTIES AND FROM TRADITIONAL
MULTIFAMILY HOUSING LOCATED WITHIN CLOSE PROXIMITY TO UNIVERSITIES.
On-campus student housing has certain inherent advantages over off-campus
student housing in terms of physical proximity to the university campus and
integration of on-campus facilities into the academic community. Colleges and
universities can generally avoid real estate taxes and borrow funds at lower
interest rates than us and other private sector operators. We also compete with
national and regional owner-operators of off-campus student housing in a number
of markets as well as with smaller local owner-operators.
7
Currently, the industry is fragmented with no participant holding a significant
market share. There are a number of student housing complexes that are located
near or in the same general vicinity of many of our owned properties and that
compete directly with us. Such competing student housing complexes may be newer
than our properties, located closer to campus, charge less rent, possess more
attractive amenities or offer more services or shorter term or more flexible
leases.
Rental income at a particular property could also be affected by a number of
other factors, including the construction of new on-campus and off-campus
residences, increases or decreases in the general levels of rents for housing in
competing communities, increases or decreases in the number of students enrolled
at one or more of the colleges or universities in the market of the property and
other general economic conditions.
We believe that a number of other large national companies with substantial
financial and marketing resources may be potential entrants in the student
housing business. The entry of one or more of these companies could increase
competition for students and for the acquisition, development and management of
other student housing properties.
WE MAY BE UNABLE TO SUCCESSFULLY COMPLETE AND OPERATE OUR PROPERTIES OR OUR
THIRD PARTY DEVELOPED PROPERTIES.
We intend to continue to develop and construct student housing in accordance
with our growth strategies. These activities may also include any of the
following risks:
o we may be unable to obtain financing on favorable terms or at
all;
o we may not complete development projects on schedule, within
budgeted amounts or in conformity with building plans and
specifications;
o we may encounter delays or refusals in obtaining all necessary
zoning, land use, building, occupancy and other required
governmental permits and authorizations;
o occupancy and rental rates at newly developed or renovated
properties may fluctuate depending on a number of factors,
including market and economic conditions, and may reduce or
eliminate our return on investment;
o we may become liable for injuries and accidents occurring during
the construction process and for environmental liabilities,
including off-site disposal of construction materials;
o we may decide to abandon our development efforts if we determine
that continuing the project would not be in our best interests;
and
o we may encounter strikes, weather, government regulations and
other conditions beyond our control.
Our newly developed properties will be subject to risks associated with managing
new properties, including lease-up and integration risks. In addition, new
development activities, regardless of whether or not they are ultimately
successful, typically will require a substantial portion of the time and
attention of our development and management personnel. Newly developed
properties may not perform as expected.
We anticipate that we will, from time to time, elect not to proceed with ongoing
development projects. If we elect not to proceed with a development project, the
development costs associated therewith will ordinarily be charged against income
for the then-current period. Any such charge could have a material adverse
effect on our results of operations in the period in which the charge is taken.
We may in the future develop properties nationally, internationally or in
geographic regions other than those in which we currently operate. We do not
possess the same level of familiarity with development in these new markets,
which could adversely affect our ability to develop such properties successfully
or at all or to achieve expected performance. Future development opportunities
may not be available to us on terms that meet our investment criteria or we may
be unsuccessful in capitalizing on such opportunities. Our ability to capitalize
on such opportunities will be largely dependent upon external sources of capital
that may not be available to us on favorable terms or at all.
We typically provide guarantees of timely completion of projects that we develop
for third parties. In certain cases, our contingent liability under these
guarantees may exceed our development fee from the project. Although we seek to
mitigate this risk by, among other things, obtaining similar guarantees from the
project contractor, we could sustain significant losses
8
if development of a project were to be delayed or stopped and we were unable to
cover our guarantee exposure with the guarantee received from the project
contractor.
WE MAY BE UNABLE TO SUCCESSFULLY ACQUIRE PROPERTIES ON FAVORABLE TERMS.
Our future growth will be dependent upon our ability to successfully acquire new
properties on favorable terms. As we acquire additional properties, we will be
subject to risks associated with managing new properties, including lease-up and
integration risks. Newly developed and recently acquired properties may not
perform as expected and may have characteristics or deficiencies unknown to us
at the time of acquisition. Future acquisition opportunities may not be
available to us on terms that meet our investment criteria or we may be
unsuccessful in capitalizing on such opportunities. Our ability to capitalize on
such opportunities will be largely dependent upon external sources of capital
that may not be available to us on favorable terms or at all.
Our ability to acquire properties on favorable terms and successfully operate
them involves the following significant risks:
o our potential inability to acquire a desired property may be
caused by competition from other real estate investors;
o competition from other potential acquirers may significantly
increase the purchase price and decrease expected yields;
o we may be unable to finance an acquisition on favorable terms or
at all;
o we may have to incur significant capital expenditures to improve
or renovate acquired properties;
o we may be unable to quickly and efficiently integrate new
acquisitions, particularly acquisitions of portfolios of
properties, into our existing operations;
o market conditions may result in higher than expected costs and
vacancy rates and lower than expected rental rates; and
o we may acquire properties subject to liabilities but without any
recourse, or with only limited recourse, to the sellers, or with
liabilities that are unknown to us, such as liabilities for
clean-up of undisclosed environmental contamination, claims by
tenants, vendors or other persons dealing with the former owners
of our properties and claims for indemnification by members,
directors, officers and others indemnified by the former owners
of our properties.
Our failure to finance property acquisitions on favorable terms, or operate
acquired properties to meet our financial expectations, could adversely affect
us.
OUR DEBT LEVEL REDUCES CASH AVAILABLE FOR DISTRIBUTION AND MAY EXPOSE US TO THE
RISK OF DEFAULT UNDER OUR DEBT OBLIGATIONS.
As of December 31, 2005, our total consolidated indebtedness was approximately
$287.3 million (excluding unamortized debt premiums). Our debt service
obligations expose us to the risk of default and reduce or eliminate cash
resources that are available to operate our business or pay distributions that
are necessary to maintain our qualification as a REIT. There is no limit on the
amount of indebtedness that we may incur except as provided by the covenants in
our revolving credit facility. We expect to incur additional indebtedness under
our revolving credit facility to fund future property development and
acquisitions and other working capital needs, which may include the payment of
distributions to our security holders. The amount available to us and our
ability to borrow from time to time under our revolving credit facility is
subject to certain conditions and the satisfaction of specified financial
covenants. Our level of debt and the limitations imposed on us by our debt
agreements could have significant adverse consequences, including the following:
o We may be unable to borrow additional funds as needed or on
favorable terms.
o We may be unable to refinance our indebtedness at maturity or
the refinancing terms may be less favorable than the terms of
our original indebtedness.
o We may be forced to dispose of one or more of our properties,
possibly on disadvantageous terms.
9
o We may default on our payment or other obligations as a result
of insufficient cash flow or otherwise, and the lenders or
mortgagees may foreclose on our properties that secure their
loans and receive an assignment of rents and leases.
o Foreclosures could create taxable income without accompanying
cash proceeds, a circumstance that could hinder our ability to
meet the REIT distribution requirements imposed by the Internal
Revenue Code.
WE MAY NOT BE ABLE TO RECOVER PRE-DEVELOPMENT COSTS FOR UNIVERSITY DEVELOPMENTS.
University systems and educational institutions typically award us development
services contracts on the basis of a competitive award process, but such
contracts are typically executed following the formal approval of the
transaction by the institution's governing body. In the intervening period, we
may incur significant pre-development and other costs in the expectation that
the development services contract will be executed. If an institution's
governing body does not ultimately approve our selection and the terms of the
pending development contract, we may not be able to recoup these costs from the
institution and the resulting losses could be material.
OUR AWARDED PROJECTS MAY NOT BE SUCCESSFULLY STRUCTURED OR FINANCED AND MAY
DELAY OUR RECOGNITION OF REVENUES.
The recognition and timing of revenues from our awarded development services
projects will, among other things, be contingent upon successfully structuring
and closing project financing as well as the timing of construction. The
development projects that we have been awarded have at times been delayed beyond
the originally scheduled construction commencement date. If such delays were to
occur with our current awarded projects, our recognition of expected revenues
and receipt of expected fees from these projects would be delayed.
WE MAY ENCOUNTER DELAYS IN COMPLETION OR EXPERIENCE COST OVERRUNS WITH RESPECT
TO OUR PROPERTIES THAT ARE UNDER CONSTRUCTION.
As of December 31, 2005, we were in the process of constructing two owned
off-campus properties. These properties are subject to the various risks
relating to properties that are under construction referred to elsewhere in
these risk factors, including the risks that we may encounter delays in
completion and that these projects may experience cost overruns. These
properties may not be completed on time. Additionally, if we do not complete the
construction of certain of our properties on schedule, we may be required to
provide alternative housing to the students with whom we have signed leases. We
generally do not make any arrangements for such alternative housing for these
properties and we would likely incur significant expenses in the event we
provide such housing. If construction is not completed on schedule, students may
attempt to break their leases and our occupancy at such properties for that
academic year may suffer.
OUR GUARANTEES COULD RESULT IN LIABILITIES IN EXCESS OF OUR DEVELOPMENT FEES.
In third party developments, we typically provide guarantees of the obligations
of the developer, including development budgets and timely project completion.
These guarantees include, among other things, the cost of providing alternate
housing for students in the event we do not timely complete a development
project. These guarantees typically exclude delays resulting from force majeure
and also, in third party transactions, are typically limited in amount to the
amount of our development fees from the project. In certain cases, however, our
contingent liability under these guarantees has exceeded our development fee
from the project and we may agree to such arrangements in the future. Our
obligations under alternative housing guarantees typically expire five days
after construction is complete. Project cost guarantees are normally satisfied
within one year after completion of the project.
UNIVERSITIES HAVE THE RIGHT TO TERMINATE OUR PARTICIPATING GROUND LEASES.
The ground leases through which we own our on-campus participating properties
provide that the university lessor may purchase our interest in and assume the
management of the facility, with the purchase price calculated at the discounted
present cash value of our leasehold interest. The exercise of any such buyout
would result in a significant reduction in our portfolio.
CHANGES IN LAWS AND LITIGATION RISKS COULD AFFECT OUR BUSINESS.
We are generally not able to pass through to our residents under existing leases
real estate taxes, income taxes or other taxes. Consequently, any such tax
increases may adversely affect our financial
10
condition and limit our ability to satisfy our financial obligations and make
distributions to security holders. Changes that increase our potential liability
under environmental laws or our expenditures on environmental compliance could
have the same impact.
As a publicly traded owner of properties, we may become involved in legal
proceedings, including consumer, employment, tort or commercial litigation, that
if decided adversely to or settled by us could result in liability that is
material to our financial condition or results of operations.
RISKS RELATED TO THE REAL ESTATE INDUSTRY
OUR PERFORMANCE AND VALUE ARE SUBJECT TO RISKS ASSOCIATED WITH REAL ESTATE
ASSETS AND WITH THE REAL ESTATE INDUSTRY.
Our ability to satisfy our financial obligations and make expected distributions
to our security holders depends on our ability to generate cash revenues in
excess of expenses and capital expenditure requirements. Events and conditions
generally applicable to owners and operators of real property that are beyond
our control may decrease cash available for distribution and the value of our
properties. These events include:
o general economic conditions;
o rising level of interest rates;
o local oversupply, increased competition or reduction in demand
for student housing;
o inability to collect rent from tenants;
o vacancies or our inability to rent space on favorable terms;
o inability to finance property development and acquisitions on
favorable terms;
o increased operating costs, including insurance premiums,
utilities, and real estate taxes;
o costs of complying with changes in governmental regulations;
o the relative illiquidity of real estate investments;
o decreases in student enrollment at particular colleges and
universities;
o changes in university policies related to admissions; and
o changing student demographics.
In addition, periods of economic slowdown or recession, rising interest rates or
declining demand for real estate, or the public perception that any of these
events may occur, could result in a general decline in rents or an increased
incidence of defaults under existing leases, which would adversely affect us.
POTENTIAL LOSSES MAY NOT BE COVERED BY INSURANCE.
We carry fire, earthquake, terrorism, business interruption, vandalism,
malicious mischief, boiler and machinery, commercial general liability and
workers' compensation insurance covering all of the properties in our portfolio
under various policies. We believe the policy specifications and insured limits
are appropriate and adequate given the relative risk of loss, the cost of the
coverage and industry practice. There are, however, certain types of losses,
such as property damage from generally unsecured losses such as riots, wars,
punitive damage awards or acts of God, that may be either uninsurable or not
economically insurable. Some of our properties are insured subject to
limitations involving large deductibles and policy limits that may not be
sufficient to cover losses. In addition, we may discontinue earthquake,
terrorism or other insurance on some or all of our properties in the future if
the cost of premiums fro any of these policies exceeds, in our judgment, the
value of the coverage discounted for the risk of loss.
If we experience a loss that is uninsured or that exceeds policy limits, we
could lose the capital invested in the damaged properties as well as the
anticipated future cash flows from those properties. In addition, if the damaged
properties are
11
subject to recourse indebtedness, we would continue to be liable for the
indebtedness, even if these properties were irreparably damaged and require
substantial expenditures to rebuild or repair. In the event of a significant
loss at one or more of our properties, the remaining insurance under our
policies, if any, could be insufficient to adequately insure our other
properties. In such event, securing additional insurance, if possible, could be
significantly more expensive than our current policies.
UNIONIZATION OR WORK STOPPAGES COULD HAVE AN ADVERSE EFFECT ON US.
We are at times required to use unionized construction workers or to pay the
prevailing wage in a jurisdiction to such workers. Due to the highly labor
intensive and price competitive nature of the construction business, the cost of
unionization and/or prevailing wage requirements for new developments could be
substantial. Unionization and prevailing wage requirements could adversely
affect a new development's profitability. Union activity or a union workforce
could increase the risk of a strike, which would adversely affect our ability to
meet our construction timetables.
WE COULD INCUR SIGNIFICANT COSTS RELATED TO GOVERNMENT REGULATION AND PRIVATE
LITIGATION OVER ENVIRONMENTAL MATTERS.
Under various environmental laws, including the Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA"), a current or previous owner
or operator of real property may be liable for contamination resulting from the
release or threatened release of hazardous or toxic substances or petroleum at
that property, and an entity that arranges for the disposal or treatment of a
hazardous or toxic substance or petroleum at another property may be held
jointly and severally liable for the cost to investigate and clean up such
property or other affected property. Such parties are known as potentially
responsible parties ("PRPs"). Such environmental laws often impose liability
without regard to whether the owner or operator knew of, or was responsible for,
the presence of the contaminants, and the costs of any required investigation or
cleanup of these substances can be substantial. PRPs are liable to the
government as well as to other PRPs who may have claims for contribution. The
liability is generally not limited under such laws and could exceed the
property's value and the aggregate assets of the liable party. The presence of
contamination or the failure to remediate contamination at our properties may
expose us to third party liability for personal injury or property damage, or
adversely affect our ability to sell, lease or develop the real property or to
borrow using the real property as collateral.
Environmental laws also impose ongoing compliance requirements on owners and
operators of real property. Environmental laws potentially affecting us address
a wide variety of matters, including, but not limited to, asbestos-containing
building materials ("ACBM"), storage tanks, storm water and wastewater
discharges, lead-based paint, wetlands, and hazardous wastes. Failure to comply
with these laws could result in fines and penalties or expose us to third party
liability. Some of our properties may have conditions that are subject to these
requirements and we could be liable for such fines or penalties or liable to
third parties.
EXISTING CONDITIONS AT SOME OF OUR PROPERTIES MAY EXPOSE US TO LIABILITY RELATED
TO ENVIRONMENTAL MATTERS.
Some of the properties in our portfolio may contain asbestos-containing building
materials, or ACBMs. Environmental laws require that ACBMs be properly managed
and maintained, and may impose fines and penalties on building owners or
operators for failure to comply with these requirements. Also, some of the
properties in our portfolio contain, or may have contained, or are adjacent to
or near other properties that have contained or currently contain storage tanks
for the storage of petroleum products or other hazardous or toxic substances.
These operations create a potential for the release of petroleum products or
other hazardous or toxic substances. Third parties may be permitted by law to
seek recovery from owners or operators for personal injury associated with
exposure to contaminants, including, but not limited to, petroleum products,
hazardous or toxic substances, and asbestos fibers. Also, some of the properties
may contain regulated wetlands that can delay or impede development or require
costs to be incurred to mitigate the impact of any disturbance. Absent
appropriate permits, we can be held responsible for restoring wetlands and be
required to pay fines and penalties.
Over the past several years, there have been an increasing number of lawsuits
against owners and managers of residential properties, although not against us,
alleging personal injury and property damage caused by the presence of mold in
residential real estate. Some of these lawsuits have resulted in substantial
monetary judgments or settlements. Insurance carriers have reacted to these
liability awards by excluding mold related programs designed to minimize the
existence of mold in any of our properties as well as guidelines for promptly
addressing and resolving reports of mold to minimize any impact mold might have
on residents or the property.
We do not carry environmental insurance on our properties. Environmental
liability at any of our properties may have a material adverse effect on our
financial condition, results of operations, cash flow, the trading price of our
stock or our ability to satisfy our debt service obligations and pay dividends
or distributions to our security holders.
12
WE MAY INCUR SIGNIFICANT COSTS COMPLYING WITH THE AMERICANS WITH DISABILITIES
ACT AND SIMILAR LAWS.
Under the Americans with Disabilities Act of 1990, or the ADA, all public
accommodations must meet federal requirements related to access and use by
disabled persons. Additional federal, state and local laws also may require
modifications to our properties, or restrict our ability to renovate our
properties. For example, the Fair Housing Amendments Act of 1988, or FHAA,
requires apartment properties first occupied after March 13, 1990 to be
accessible to the handicapped. We have not conducted an audit or investigation
of all of our properties to determine our compliance with present requirements.
Noncompliance with the ADA or FHAA could result in the imposition of fines or an
award or damages to private litigants and also could result in an order to
correct any non-complying feature. We cannot predict the ultimate amount of the
cost of compliance with the ADA, FHAA or other legislation. If we incur
substantial costs to comply with the ADA, FHAA or any other legislation, we
could be materially and adversely affected.
WE MAY INCUR SIGNIFICANT COSTS COMPLYING WITH OTHER REGULATIONS.
The properties in our portfolio are subject to various federal, state and local
regulatory requirements, such as state and local fire and life safety
requirements. If we fail to comply with these various requirements, we might
incur governmental fines or private damage awards. Furthermore, existing
requirements could change and require us to make significant unanticipated
expenditures that would materially and adversely affect us.
JOINT VENTURE INVESTMENTS COULD BE ADVERSELY AFFECTED BY OUR LACK OF SOLE
DECISION-MAKING AUTHORITY, OUR RELIANCE ON CO-VENTURERS' FINANCIAL CONDITION AND
DISPUTES BETWEEN OUR CO-VENTURERS AND US.
We have co-invested, and anticipate that we will continue in the future to
co-invest, with third parties through partnerships, joint ventures or other
entities, acquiring non-controlling interests in or sharing responsibility for
managing the affairs of a property, partnership, joint venture or other entity.
In connection with joint venture investments, we do not have sole
decision-making control regarding the property, partnership, joint venture or
other entity. Investments in partnerships, joint ventures or other entities may,
under certain circumstances, involve risks not present were a third party not
involved, including the possibility that our partners or co-venturers might
become bankrupt or fail to fund their share of required capital contributions.
Our partners or co-venturers also may have economic or other business interests
or goals that are inconsistent with our business interests or goals, and may be
in a position to take actions contrary to our preferences, policies or
objectives. Such investments also will have the potential risk of impasses on
decisions, such as a sale, because neither we nor our partners or co-venturers
would have full control over the partnership or joint venture. Disputes between
us and our partners or co-venturers may result in litigation or arbitration that
would increase our expenses and prevent our officers and/or directors from
focusing their time and effort exclusively on our business. Consequently,
actions by or disputes with our partners or co-venturers might result in
subjecting properties owned by the partnership, joint venture or other entity to
additional risk. In addition, we may in certain circumstances be liable for the
actions of our partners or co-venturers.
RISKS RELATED TO OUR ORGANIZATION AND STRUCTURE
WE ARE RECENTLY ORGANIZED AND HAVE A LIMITED OPERATING HISTORY.
We were organized in March 2004 and have a limited operating history. In
addition, all of our properties have been acquired or developed by us or our
predecessors within the past nine years and have limited operating histories
under current management. Consequently, our historical operating results may not
be useful in assessing our likely future performance. The operating performance
of the properties may decline under our management. We may not be able to
generate sufficient cash from operations to satisfy our financial obligations
and make distributions to our security holders.
We will also be subject to the risks generally associated with the operation of
a relatively new business.
TO QUALIFY AS A REIT, WE MAY BE FORCED TO LIMIT THE ACTIVITIES OF OUR TRS.
To qualify as a REIT, no more than 20% of the value of our total assets may
consist of the securities of one or more taxable REIT subsidiaries, such as
American Campus Communities Services, Inc., our TRS. Certain of our activities,
such as our third party development, management and leasing services, must be
conducted through our TRS for us to qualify as a REIT. In addition, certain
non-customary services must be provided by a TRS or an independent contractor.
If the revenues from such activities create a risk that the value of our TRS,
based on revenues or otherwise, approaches the 20% threshold, we will be forced
to curtail such activities or take other steps to remain under the 20%
threshold. Since the 20% threshold is based on value, it is possible that the
IRS could successfully contend that the value of our TRS exceeds the 20%
threshold even if
13
our TRS accounts for less than 20% of our consolidated revenues, income or cash
flow. Our on-campus participating properties and our third party services are
held by our TRS. Consequently, income earned from our on-campus participating
properties and our third party services will be subject to regular federal
income taxation and state and local income taxation where applicable, thus
reducing the amount of cash available for distribution to our security holders.
Our TRS is not permitted to directly or indirectly operate or manage a "hotel,
motel or other establishment more than one-half of the dwelling units in which
are used on a transient basis." We believe that our method of operating our TRS
will not be considered to constitute such an activity. Future Treasury
Regulations or other guidance interpreting the applicable provisions might adopt
a different approach, or the IRS might disagree with our conclusion. In such
event we might be forced to change our method of operating our TRS, which could
adversely affect us, or our TRS could fail to qualify as a taxable REIT
subsidiary, which would likely cause us to fail to qualify as a REIT.
FAILURE TO QUALIFY AS A REIT WOULD HAVE SIGNIFICANT ADVERSE CONSEQUENCES TO US
AND THE VALUE OF OUR SECURITIES.
We intend to operate in a manner that will allow us to qualify as a REIT for
federal income tax purposes under the Internal Revenue Code. If we lose our REIT
status, we will face serious tax consequences that would substantially reduce or
eliminate the funds available for investment and for distribution to security
holders for each of the years involved, because:
o we would not be allowed a deduction for dividends to security
holders in computing our taxable income and such amounts would
be subject to federal income tax at regular corporate rates;
o we also could be subject to the federal alternative minimum tax
and possibly increased state and local taxes; and
o unless we are entitled to relief under applicable statutory
provisions, we could not elect to be taxed as a REIT for four
taxable years following the year during which we were
disqualified.
In addition, if we fail to qualify as a REIT, we will not be required to pay
dividends to stockholders, and all dividends to stockholders will be subject to
tax as ordinary income to the extent of our current and accumulated earnings and
profits. As a result of all these factors, our failure to qualify as a REIT also
could impair our ability to expand our business and raise capital, and would
adversely affect the value of our common stock.
Qualification as a REIT involves the application of highly technical and complex
Internal Revenue Code provisions for which there are only limited judicial and
administrative interpretations. The complexity of these provisions and of the
applicable Treasury Regulations that have been promulgated under the Internal
Revenue Code is greater in the case of a REIT that, like us, holds its assets
through a partnership or a limited liability company. The determination of
various factual matters and circumstances not entirely within our control may
affect our ability to qualify as a REIT. In order to qualify as a REIT, we must
satisfy a number of requirements, including requirements regarding the
composition of our assets and "two gross income tests": (a) at least 75% of our
gross income in any year must be derived from qualified sources, such as "rents
from real property," mortgage interest, dividends from other REITs and gains
from sale of such assets, and (b) at least 95% of our gross income must be
derived from sources meeting the 75% income test above, and other passive
investment sources, such as other interest and dividends and gains from sale of
securities. Also, we must pay dividends to stockholders aggregating annually at
least 90% of our REIT taxable income, excluding any net capital gains. In
addition, legislation, new regulations, administrative interpretations or court
decisions may adversely affect our investors, our ability to qualify as a REIT
for federal income tax purposes or the desirability of an investment in a REIT
relative to other investments.
Even if we qualify as a REIT for federal income tax purposes, we may be subject
to some federal, state and local taxes on our income or property and, in certain
cases, a 100% penalty tax, in the event we sell property as a dealer or if our
TRS enters into agreements with us or our tenants on a basis that is determined
to be other than an arm's length basis.
TO QUALIFY AS A REIT, WE MAY BE FORCED TO BORROW FUNDS ON A SHORT-TERM BASIS
DURING UNFAVORABLE MARKET CONDITIONS.
In order to qualify as a REIT, we are required under the Internal Revenue Code
to distribute annually at least 90% of our REIT taxable income, determined
without regard to the dividends paid deduction and excluding any net capital
gain. Our TRS may, in its discretion, retain any income it generates net of any
tax liability it incurs on that income without affecting the 90% distribution
requirements to which we are subject as a REIT. Net income of our TRS is
included in REIT taxable income and increases the amount required to be
distributed, only if such amounts are paid out as a dividend by our TRS. If our
TRS distributes any of its after-tax income to us, that distribution will be
included in our REIT taxable income. In addition, we will be subject to income
tax at regular corporate rates to the extent that we distribute less than 100%
of our net taxable income, including any net capital gains. Because of these
distribution requirements, we may not be able to fund
14
future capital needs, including any necessary acquisition financing, from
operating cash flow. Consequently, we will be compelled to rely on third party
sources to fund our capital needs. We may not be able to obtain this financing
on favorable terms or at all. Any additional indebtedness that we incur will
increase our leverage. Our access to third party sources of capital depends, in
part, on:
o general market conditions;
o our current debt levels and the number of properties subject to
encumbrances;
o our current performance and the market's perception of our
growth potential;
o our cash flow and cash dividends; and
o the market price per share of our stock.
If we cannot obtain capital from third party sources, we may not be able to
acquire or develop properties when strategic opportunities exist, satisfy our
debt service obligations or make the cash distributions to our security holders,
including those necessary to qualify as a REIT.
OUR CHARTER CONTAINS RESTRICTIONS ON THE OWNERSHIP AND TRANSFER OF OUR STOCK.
Our charter provides that, subject to certain exceptions, no person or entity
may beneficially own, or be deemed to own by virtue of the applicable
constructive ownership provisions of the Internal Revenue Code, more than 9.8%
(by value or by number of shares, whichever is more restrictive) of the
outstanding shares of our common stock or more than 9.8% by value of all our
outstanding shares, including both common and preferred stock. We refer to this
restriction as the "ownership limit." A person or entity that becomes subject to
the ownership limit by virtue of a violative transfer that results in a transfer
to a trust is referred to as a "purported beneficial transferee" if, had the
violative transfer been effective, the person or entity would have been a record
owner and beneficial owner or solely a beneficial owner of our stock, or is
referred to as a "purported record transferee" if, had the violative transfer
been effective, the person or entity would have been solely a record owner of
our stock.
The constructive ownership rules under the Internal Revenue Code are complex and
may cause stock owned actually or constructively by a group of related
individuals and/or entities to be owned constructively by one individual or
entity. As a result, the acquisition of less than 9.8% of our stock (or the
acquisition of an interest in an entity that owns, actually or constructively,
our stock) by an individual or entity, could, nevertheless cause that individual
or entity, or another individual or entity, to own constructively in excess of
9.8% of our outstanding stock and thereby subject the stock to the ownership
limit. Our charter, however, requires exceptions to be made to this limitation
if our board of directors determines that such exceptions will not jeopardize
our tax status as a REIT. This ownership limit could delay, defer or prevent a
change of control or other transaction that might involve a premium price for
our common stock or otherwise be in the best interest of our security holders.
CERTAIN TAX AND ANTI-TAKEOVER PROVISIONS OF OUR CHARTER AND BYLAWS MAY INHIBIT A
CHANGE OF OUR CONTROL.
Certain provisions contained in our charter and bylaws and the Maryland General
Corporation Law may discourage a third party from making a tender offer or
acquisition proposal to us. If this were to happen, it could delay, deter or
prevent a change in control or the removal of existing management. These
provisions also may delay or prevent the security holders from receiving a
premium for their securities over then-prevailing market prices. These
provisions include:
o the REIT ownership limit described above;
o authorization of the issuance of our preferred shares with
powers, preferences or rights to be determined by our board of
directors;
o the right of our board of directors, without a stockholder vote,
to increase our authorized shares and classify or reclassify
unissued shares;
o advance-notice requirements for stockholder nomination of
directors and for other proposals to be presented to stockholder
meetings; and
o the requirement that a majority vote of the holders of common
stock is needed to remove a member of our board of directors for
"cause."
15
THE MARYLAND BUSINESS STATUTES ALSO IMPOSE POTENTIAL RESTRICTIONS ON A CHANGE OF
CONTROL OF OUR COMPANY.
Various Maryland laws may have the effect of discouraging offers to acquire us,
even if the acquisition would be advantageous to security holders. Our bylaws
exempt us from some of those laws, such as the control share acquisition
provisions, but our board of directors can change our bylaws at any time to make
these provisions applicable to us.
OUR RIGHTS AND THE RIGHTS OF OUR SECURITY HOLDERS TO TAKE ACTION AGAINST OUR
DIRECTORS AND OFFICERS ARE LIMITED.
Maryland law provides that a director or officer has no liability in that
capacity if he or she performs his or her duties in good faith, in a manner he
or she reasonably believe to be in our best interests and with the care that an
ordinary prudent person in a like position would use under similar
circumstances. In addition, our charter eliminates our directors' and officers'
liability to us and our stockholders for money damages except for liability
resulting from actual receipt of an improper benefit in money, property or
services or active and deliberate dishonesty established by a final judgment and
which is material to the cause of action. Our bylaws require us to indemnify
directors and officers for liability resulting from actions taken by them in
those capacitates to the maximum extent permitted by Maryland law. As a result,
we and our security holders may have more limited rights against our directors
and officers than might otherwise exist under common law. In addition, we may be
obligated to fund the defense costs incurred by our directors and officers.
ITEM 1B. UNRESOLVED STAFF COMMENTS
There were no unresolved comments from the staff of the SEC at December 31,
2005.
ITEM 2. PROPERTIES
The following table presents certain summary information about our properties.
Our properties generally are modern facilities, and amenities at most of our
properties include a swimming pool, basketball courts and a large community
center featuring a fitness center, computer center, tanning beds, study areas,
and a recreation room with billiards and other games. Some properties also have
a jacuzzi/hot tub, volleyball courts, tennis courts and in-unit washers and
dryers. Callaway House also has a food service facility. One owned off-campus
property and an additional phase at an on-campus participating property
completed construction and opened in Fall 2005. Two owned off-campus properties
are currently under construction with scheduled completion dates of Fall 2006
and Summer 2007. Lease terms are generally 12 months at our off-campus
properties and nine months at our on-campus properties. These properties are
included in the Owned Off-Campus Properties and On-Campus Participating
Properties segments discussed in Item 1 and the accompanying Notes to
Consolidated and Combined Financial Statements contained in Item 8. All dollar
amounts in this table and others herein, except share and per share amounts, are
stated in thousands unless otherwise indicated.
We own fee title to all of these properties except for:
o University Village at TU, which is subject to a 75-year ground
lease from Temple University (with four additional six-year
extensions);
o Village at Newark, which is subject to a 95-year ground lease;
and
o Four on-campus participating properties held under
ground/facility leases with two university systems.
16
YEAR
TYPICAL ENDED AVERAGE 2005
DATE LEASE DECEMBER MONTHLY AVERAGE
YEAR ACQUIRED/ PRIMARY TERM 31, 2005 REVENUE/ OCCUPANCY
PROPERTY BUILT DEVELOPED UNIVERSITY SERVED (MOS) REVENUE BED (1) (1)
- --------------------------- ------- --------- ------------------ ------- ---------- -------- ---------
OWNED OFF-CAMPUS PROPERTIES
Arizona State
University Main
Commons on Apache (2) 1987 May-99 Campus 12 $ 1,792 $ 322 100.0%
Virginia Polytechnic
The Village at Blacksburg 1990/ Dec-00 Institute and
1998 State University 12 4,186 322 98.7%
Arizona State
University Main
The Village on University 1998 Dec-99 Campus 10/12 4,952 473 91.6%
The University
of Georgia -
River Club Apartments 1996 Aug-99 Athens 12 3,367 357 96.6%
The University
of Georgia -
River Walk Townhomes 1998 Aug-99 Athens 12 1,451 353 96.9%
Texas A&M
The Callaway House (3) 1999 Mar-01 University 9 5,799 (4) n/a (4) 102.7%
The University
The Village at Alafaya of Central
Club 1999 Jul-00 Florida 12 5,398 506 98.0%
The University
The Village at Science of Central
Drive 2000 Nov-01 Florida 12 4,881 523 98.7%
The University
University Village at of Colorado at
Boulder Creek 2002 Aug-02 Boulder 12 2,401 660 89.6%
---------- -------- ---------
SUBTOTAL - SAME STORE OWNED OFF-CAMPUS PROPERTIES (5) 34,227 430 97.1%
---------- -------- ---------
California State
University Village at University,
Fresno 2004 Aug-04 Fresno 12 2,654 510 97.4%
University Village at TU (6) 2004 Aug-04 Temple University 12 6,052 613 98.6%
State University
University Village at of New York -
Sweet Home (7) 2005 Aug-05 Buffalo 12 2,216 557 99.9%
University Club University of
Tallahassee (8) 2000 Feb-05 Florida 12 3,085 376 95.8%
The Grove at University Florida State
Club (8) 2002 Feb-05 University 12 750 450 98.1%
College Club Tallahassee Florida A&M
(8) 2001 Feb-05 University 12 1,882 352 94.6%
The Greens at College Florida A&M
Club (8) 2004 Feb-05 University 12 823 357 97.7%
University Club University of
Gainesville (8) 1999 Feb-05 Florida 12 1,751 362 97.5%
City Parc at Fry Street University of
(8) 2004 Mar-05 North Texas 12 1,993 508 96.9%
University of
The Estates (8) 2002 Mar-05 Florida 12 4,931 510 96.9%
Texas A&M
Callaway Villas (9) 2006 Aug-06 (9) University 12 - n/a n/a
Summer Rutgers
2007 University,
Village at Newark (10) 2007 (10) NJIT, Essex CCC 12 - n/a n/a
--------- -------- ---------
SUBTOTAL - NEW OWNED OFF-CAMPUS PROPERTIES 26,137 488 97.5%
--------- ------- ---------
TOTAL - OWNED OFF-CAMPUS PROPERTIES
$ 60,364 $ 458 97.3%
--------- ------ --------
(CONTINUED)
OCCUPANCY
AS OF # OF # OF # OF
PROPERTY 12/31/05 BUILDINGS UNITS BEDS
- --------------------------- --------- --------- ------- --------
OWNED OFF-CAMPUS PROPERTIES
Commons on Apache (2) 100.0% 6 111 444
The Village at Blacksburg 98.8% 26 288 1,056
The Village on University 96.4% 20 288 918
River Club Apartments 97.0% 18 266 794
River Walk Townhomes 97.9% 20 100 340
The Callaway House (3) 103.7% 1 173 538
The Village at Alafaya
Club 98.9% 20 228 840
The Village at Science
Drive 99.5% 17 192 732
University Village at
Boulder Creek 93.2% 4 82 309
------ --------- ------- --------
SUBTOTAL - SAME STORE OWNED OFF-CAMPUS PROPERTIES (5) 98.5% 132 1,728 5,971
--------- --------- ------- --------
University Village at 97.3% 9 105 406
Fresno
University Village at TU (6) 98.8% 3 220 749
University Village at 99.6% 9 269 828
Sweet Home (7)
University Club 99.0% 17 152 608
Tallahassee (8)
The Grove at University 98.4% 8 64 128
Club (8)
College Club Tallahassee 97.4% 11 96 384
(8)
The Greens at College 98.8% 5 40 160
Club (8)
University Club 94.9% 8 94 376
Gainesville (8)
City Parc at Fry Street 98.6% 7 136 418
(8)
98.9% 18 396 1,044
The Estates (8)
n/a 18 236 704
Callaway Villas (9)
n/a 2 221 812
Village at Newark (10) -------- --------- ------- --------
SUBTOTAL - NEW OWNED OFF-CAMPUS PROPERTIES 98.5% 115 2,029 6,617
--------- --------- ------- --------
TOTAL - OWNED OFF-CAMPUS PROPERTIES
98.5% 247 3,757 12,588
------- -------- ------ -------
17
TYPICAL YEAR ENDED AVERAGE 2005
DATE PRIMARY LEASE DECEMBER MONTHLY AVERAGE
YEAR ACQUIRED/ UNIVERSITY TERM 31, 2005 REVENUE/ OCCUPANCY
PROPERTY BUILT DEVELOPED SERVED (MOS) REVENUE BED (1) (1)
- ----------------------- ----- --------- ------------------- -------- ------------ -------- ---------
ON-CAMPUS PARTICIPATING PROPERTIES (11) (12)
University Village - 1996/ Aug-96- Prairie View A&M
PVAMU 97/98 Aug-98 University 9 $ 7,764 $ 426 96.5%
University College - 2000/ Aug-00 Prairie View A&M
PVAMU 2003 Aug-03 University 9 5,592 426 89.8%
Texas A&M
University Village - International
TAMIU 1997 Aug-97 University 9 924 415 72.8%
2001/ Aug-01 The University
Cullen Oaks 2005 Aug-05 of Houston 9 4,190 575 98.5%
------------ -------- ---------
TOTAL - ON-CAMPUS PARTICIPATING PROPERTIES 18,470 455 93.4%
------------ -------- ---------
GRAND TOTAL- ALL PROPERTIES $ 78,834 (13) $ 457 (14) 96.1%
============ ======== =========
(CONTINUED)
OCCUPANCY
AS OF # OF # OF # OF
12/31/05 BLDGS UNITS BEDS
----------- ------ ------ -------
ON-CAMPUS PARTICIPATING PROPERTIES (11) (12)
University Village -
PVAMU 99.2% 30 612 1,920
University College -
PVAMU 85.8% 14 756 1,470
University Village -
TAMIU 75.4% 4 84 252
Cullen Oaks 99.4% 4 411 879
--------- ------- ------- ------
TOTAL - ON-CAMPUS PARTICIPATING PROPERTIES 93.5% 52 1,863 4,521
--------- ------- ------- ------
97.0% 299 5,620 17,109
========= ======= ======= ======
(1) Average monthly revenue per bed is calculated based upon our base rental
revenue earned during typical lease terms for the year ended December
31, 2005 divided by average occupied beds over the typical lease term.
Average occupancy is calculated based on the average number of occupied
beds during typical lease terms for the year ended December 31, 2005
divided by total beds.
(2) Commons on Apache is 100% leased for the 2005-2006 academic year by
Arizona State University for a minimum rental of approximately $1.7
million.
(3) Although we hold an 80% interest in the property, because of our
preferred distribution rights, we currently receive substantially all of
the property's net cash flow.
(4) As rent at this property includes food services, revenue is not
comparable to the other properties in this chart. Subsequent to our IPO,
this property's food services revenue is now recognized by our TRS.
(5) Our same store portfolio represents properties that were owned by us for
both of the full years ended December 31, 2005 and 2004.
(6) Subject to a 75-year ground lease from Temple University.
(7) This property completed construction and opened in the Fall 2005
semester. Average occupancy is calculated based on the period this
property was operating in 2005.
(8) These properties were acquired during 2005. Average occupancy is
calculated based on the period this property was owned and operated by
us in 2005.
(9) Currently under development with a scheduled completion date of August
2006.
(10) Currently under development with a scheduled completion date of Summer
2007. Subject to a 95-year ground lease.
(11) Although our on-campus participating properties accounted for 33.1% of
our units, 26.4% of our beds and 23.4% of our revenues for the year
ended December 31, 2005, because of the structure of their ownership and
financing we have only received approximately $0.8 million in
distributions of excess cash flow during the year ended December 31,
2005. The ground/facility leases through which we own our on-campus
participating properties provide that the university lessor may purchase
our interest in and assume the management of the facility.
(12) Subject to ground/facility leases with their primary university systems.
Average occupancy is calculated based on the nine month academic year
(excluding the summer months).
(13) Excludes revenue from San Bernardino, which was sold in January 2005.
These revenues are included in discontinued operations discussed in Item
7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations and Item 8 - Consolidated and Combined Financial
Statements.
(14) Does not include revenues from The Callaway House because of its food
service component, which is now recognized by our TRS subsequent to our
IPO.
18
PROPERTY ACTIVITY SUBSEQUENT TO YEAR END
ACQUISITIONS
On March 1, 2006, we acquired a 13 property portfolio (the "Royal Portfolio")
for a purchase price of $244.3 million, which excludes $9.8 million of
anticipated transaction costs, initial integration expenses and capital
expenditures necessary to bring the properties up to our operating standards. As
part of the transaction, we assumed $123.6 million of fixed-rate mortgage debt
(excluding the impact of purchase accounting adjustments) with a weighted
average interest rate of 5.95% and an average term to maturity of 6.3 years. In
addition, we issued certain partners of the contributors approximately 2.1
million common units of limited partnership interest in the Operating
Partnership valued at $23.50 per unit and approximately 0.1 million preferred
units of limited partnership interest in the Operating Partnership valued at
$26.75 per unit with a cumulative preferential per annum cash distribution rate
of 5.99%. These units are exchangeable after one year into an equal number of
shares of the Company's common stock.
The Royal Portfolio consists of five properties in Florida, four properties in
Texas, two properties in Tennessee, and one property each in Arizona and
Kentucky. The 13 operating properties total approximately 1,800 units and 5,700
beds. Subsequent to this transaction, our total owned and managed portfolio is
comprised of 53 properties that represent approximately 31,800 beds in
approximately 11,100 units.
We are also under contract to acquire a $24.8 million development property in
Waco, Texas. The closing of this transaction is anticipated to occur during the
third quarter of 2006, upon completion of construction and lease-up, and is
dependent upon this property achieving certain occupancy levels and rental
rates.
ARIZONA STATE UNIVERSITY
Arizona State University recently notified us that they will not exercise their
option to renew the master lease arrangement at Commons on Apache for the
2006-2007 academic year.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are subject to various lawsuits, claims and proceedings
arising in the ordinary course of business. As of December 31, 2005, none of
these were expected to have a material adverse effect on our cash flows,
financial condition, or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our stockholders during the quarter ended
December 31, 2005.
19
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
The Company's common stock has been listed and is traded on the New York Stock
Exchange ("NYSE") under the symbol "ACC" since our IPO in August 2004. The
following table sets forth, for the periods indicated, the high and low sale
prices in dollars on the NYSE for our common stock and the distributions we
declared with respect to the periods indicated.
DISTRIBUTIONS
HIGH LOW DECLARED
----------- ----------- ---------------
Period from August 17, 2004 to September 30, 2004 $ 19.05 $ 17.00 $ --
Quarter ended December 31, 2004 $ 23.06 $ 18.50 $ 0.1651
Quarter ended March 31, 2005 $ 22.75 $ 19.09 $ 0.3375
Quarter ended June 30, 2005 $ 23.36 $ 19.04 $ 0.3375
Quarter ended September 30, 2005 $ 25.25 $ 21.75 $ 0.3375
Quarter ended December 31, 2005 $ 26.49 $ 22.60 $ 0.3375
HOLDERS
As of March 7, 2006, there were approximately seven holders of record of the
Company's common stock and 17,190,000 shares of common stock outstanding. The
holders of record do not include persons whose shares are held of record by a
bank, brokerage house or clearing agency, but do include any such bank,
brokerage house or clearing agency that is a holder of record.
DISTRIBUTIONS
We intend to continue to declare quarterly distributions on our common stock.
The actual amount and timing of distributions, however, will be at the
discretion of our Board of Directors and will depend upon our financial
condition in addition to the requirements of the Code, and no assurance can be
given as to the amounts or timing of future distributions. The payment of
distributions is subject to restrictions under the Company's $100 million
revolving credit facility described in Note 10 to the Consolidated and Combined
Financial Statements in Item 8 and discussed in Management's Discussion and
Analysis of Financial Condition and Results of Operations in Item 7 under
Liquidity and Capital Resources.
EQUITY COMPENSATION PLANS
We have 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, common units of limited partnership
interest in the Operating Partnership (formerly profits interest units or
"PIUs"), restricted stock units ("RSUs"), restricted stock awards ("RSAs"), and
other stock-based incentive awards. The Company has reserved a total of
1,210,000 shares of the Company's common stock for issuance pursuant to the
Plan, subject to certain adjustments for changes in the Company's capital
structure, as defined in the Plan. Refer to Note 11 in the accompanying Notes to
Consolidated and Combined Financial Statements in Item 8 for a more detailed
description of the Plan. As of December 31, 2005, the total units and shares
issued under the Plan were as follows:
# OF SECURITIES TO BE WEIGHTED-AVERAGE # OF SECURITIES REMAINING
ISSUED UPON EXERCISE OF EXERCISE PRICE OF AVAILABLE FOR FUTURE
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, ISSUANCE UNDER EQUITY
WARRANTS, AND RIGHTS WARRANTS, AND RIGHTS COMPENSATION PLANS
----------------------- ---------------------- -------------------------
Equity Compensation Plans
Approved by Security
Holders (2) 181,243 (1) $-0- 1,028,757
Equity Compensation Plans Not
Approved by Security Holders n/a n/a n/a
20
(1) Consists of RSUs granted to non-employee Board of Director members in
connection with our IPO and in May 2005, RSAs granted to its executive
officers and certain employees in February 2005 and common units of
limited partnership interest in the Operating Partnership. In connection
with the Company's 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) Table does not include 367,682 common stock awards in the form of an
outperformance bonus plan. Upon the occurrence of certain events or the
achievement of certain performance measures, the common stock awards
under the outperformance bonus plan will be paid to the recipients in
either stock or cash, at the discretion of the Compensation Committee of
the Board of Directors. If these awards were included in the above
table, we would have 661,075 shares available for future issuance under
the Plan.
21
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial and operating data on a
consolidated historical basis for the Company and on a combined historical basis
for the Predecessor. Results for the year ended December 31, 2004 represent the
combined historical data for our Predecessor for the period from January 1, 2004
to August 16, 2004 as well as the consolidated results for our Company for the
period from August 17, 2004 to December 31, 2004.
The following data should be read in conjunction with the Notes to Consolidated
and Combined Financial Statements in Item 8 and Management's Discussion and
Analysis of Financial Condition and Results of Operations included in Item 7.
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
2005 2004 2003 2002 2001
------------ ------------ ------------ ------------ ------------
STATEMENTS OF OPERATIONS INFORMATION:
Revenues $ 87,474 $ 60,823 $ 57,124 $ 52,131 $ 40,752
Income (loss) from continuing operations 3,781 (1,667) (967) (2,753) (3,300)
Discontinued operations:
(Loss) income attributable to
discontinued operations (2) 367 7 319 361
Gain (loss) from disposition of real estate 5,883 (39) 16 295 --
Net Income (loss) 9,662 (1,339) (944) (2,139) (2,939)
PER SHARE AND DISTRIBUTION DATA:
Income per diluted share:
Income from continuing operations $ 0.26 $ 0.10 (1)
Discontinued operations 0.39 0.05 (1)
Net income 0.65 0.15 (1)
Cash distributions declared per share / unit 1.35 0.1651 (1)
Cash distributions declared 20,180 2,084 (1)
BALANCE SHEET DATA:
Total assets $ 550,862 $ 367,628 $ 330,566 $ 307,658 $ 295,637
Secured debt 291,646 201,014 267,518 249,706 234,449
Capital lease obligations 1,679 598 410 402 165
Stockholders' and Predecessor owners' equity (2) 223,227 138,229 27,658 35,526 40,572
SELECTED OWNED PROPERTY INFORMATION:
Owned properties 25 18 14 14 13
Units 5,620 4,317 3,567 3,459 3,377
Beds 17,109 12,955 10,546 10,336 10,027
Occupancy as of December 31, 97.0% 97.1% 91.5% 91.0% 93.5%
Net cash provided by operating activities $ 20,429 $ 17,778 $ 6,846 $ 7,647 $ 5,338
Net cash used in investing activities (111,755) (63,621) (33,738) (21,678) (68,540)
Net cash provided by financing activities 111,332 45,251 21,553 11,646 72,832
FUNDS FROM OPERATIONS ("FFO"):
Net income (loss) $ 9,662 $ (1,339) $ (944) $ (2,139) $ (2,939)
Minority interests 164 (100) (16) (30) (110)
(Gain) loss from disposition of estate (5,883) 39 (16) (295) --
Real estate related depreciation and
amortization 16,032 10,009 8,937 8,233 6,807
---------- ---------- ---------- ---------- ----------
Funds from operations (3)(4) $ 19,975 $ 8,609 $ 7,961 $ 5,769 $ 3,758
========== ========== ========== ========== ==========
22
(1) Represents per share information and cash distributions declared during
the period from August 17, 2004 (our IPO date) through December 31,
2004.
(2) Information for the years ended December 31, 2005 and 2004 reflects our
stockholders' equity as a result of the IPO while previous years reflect
our Predecessor owners' equity.
(3) As defined by the National Association of Real Estate Investment Trusts
or NAREIT, funds from operations or FFO represents income (loss) before
allocation to minority interests (computed in accordance with GAAP),
excluding gains (or losses) from sales of property, plus real estate
related depreciation and amortization (excluding amortization of loan
origination costs) and after adjustments for unconsolidated partnerships
and joint ventures. We present FFO because we consider it an important
supplemental measure of our operating performance and believe it is
frequently used by securities analysts, investors and other interested
parties in the evaluation of REITs, many of which present FFO when
reporting their results. FFO is intended to exclude GAAP historical cost
depreciation and amortization of real estate and related assets, which
assumes that the value of real estate diminishes ratably over time.
Historically, however, real estate values have risen or fallen with
market conditions. Because FFO excludes depreciation and amortization
unique to real estate, gains and losses from property dispositions and
extraordinary items, it provides a performance measure that, when
compared year over year, reflects the impact to operations from trends
in occupancy rates, rental rates, operating costs, development
activities and interest costs, providing perspective not immediately
apparent from net income.
We compute FFO in accordance with standards established by the Board of
Governors of NAREIT in its March 1995 White Paper (as amended in
November 1999 and April 2002), which may differ from the methodology for
calculating FFO utilized by other equity REITs and, accordingly, may not
be comparable to such other REITs. Further, FFO does not represent
amounts available for management's discretionary use because of needed
capital replacement or expansion, debt service obligations or other
commitments and uncertainties. FFO should not be considered as an
alternative to net income (loss) (computed in accordance with GAAP) as
an indicator of our financial performance or to cash flow from operating
activities (computed in accordance with GAAP) as an indicator of our
liquidity, nor is it indicative of funds available to fund our cash
needs, including our ability to pay distributions.
(4) When considering our FFO, we believe it is also a meaningful measure of
our performance to make certain adjustments related to our on-campus
participating properties. See Management's Discussion and Analysis of
Financial Condition and Results of Operations--Funds from Operations in
Item 7 contained herein.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OUR COMPANY AND OUR BUSINESS
OVERVIEW
We are one of the largest owners, managers and developers of high quality
student housing properties in the United States in terms of beds owned and under
management. We are a fully integrated, self-managed and self-administered equity
REIT with expertise in the acquisition, design, financing, development,
construction management, leasing and management of student housing properties.
PROPERTY PORTFOLIO
As of December 31, 2005, our total property portfolio contained 25 student
housing properties with approximately 17,100 beds and 5,600 apartment units, all
of which we manage. These communities contain modern housing units, offer
resort-style amenities and are supported by a resident assistant system and
other student-oriented programming.
Our property portfolio includes 21 owned off-campus properties that are in close
proximities to 25 colleges and universities in ten states, two of which are
currently under construction. 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.
23
Additionally, we participate with two university systems in the ownership of
four on-campus properties under long-term ground/facility leases; we refer to
these properties as our "on-campus participating properties."
THIRD PARTY DEVELOPMENT AND MANAGEMENT SERVICES
We also provide development and construction management services for student
housing properties owned by universities, 501(c) 3 foundations and others. Our
clients have included some of the nation's most prominent systems of higher
education, including the State University of New York System, the University of
California System, the University of Houston System, the Texas A&M University
System, the Texas State University System, the University of Georgia System, the
University of North Carolina System, the Purdue University System, the
University of Colorado System, and the West Virginia University System. 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.
Since 1996, we have developed and assisted in securing financing for 26 third
party student housing properties, including five projects with scheduled
completion dates ranging between August 2006 and August 2008. As of December 31,
2005, we were under contract on six projects that are currently in process and
whose fees range from $0.3 million to $3.5 million. As of December 31, 2005,
fees of approximately $3.0 million remained to be earned by us with respect to
these projects, which have scheduled completion dates of August 2006 through
August 2008. In addition, as of December 31, 2005, we have been awarded five
projects which have not yet commenced construction.
We also provide third party management and leasing services for 17 student
housing properties that represent approximately 10,000 beds in approximately
4,100 units, 12 of which we developed. Our third party management and leasing
services are typically provided pursuant to multi-year management contracts that
have an initial term that ranges from one to five years. As of December 31,
2005, our total owned and managed portfolio included 42 properties that
represented approximately 27,100 beds in approximately 9,700 units.
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 with high barriers to entry which 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, close, and successfully operate student
housing properties.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States ("GAAP") requires management to make
estimates and assumptions in certain circumstances that affect amounts reported
in our consolidated and combined financial statements and related notes. In
preparing these financial statements, management has utilized all available
information, including its past history, industry standards and the current
economic environment, among other factors, in forming its estimates and
judgments of certain amounts included in the consolidated and combined financial
statements, giving due consideration to materiality. It is possible that the
ultimate outcome anticipated by management in formulating its estimates may not
be realized. Application of the critical accounting policies below involves the
exercise of judgment and use of assumptions as to future uncertainties and, as a
result, actual results could differ from these estimates. In addition, other
companies in similar businesses may utilize different estimation policies and
methodologies, which may impact the comparability of our results of operations
and financial condition to those companies.
REVENUE AND COST RECOGNITION OF THIRD PARTY DEVELOPMENT AND MANAGEMENT
SERVICES
Costs associated with the pursuit of third party development and management
service contracts are expensed as incurred until such time as we have been
notified of a contract award or otherwise believe that it is probable a contract
will be awarded. At such time, the reimbursable portion of such costs are
recorded as receivables with the remaining portion deferred and expensed in
relation to the revenues earned on such contracts. Development revenues are
recognized and related costs (including the costs of our development personnel
involved in the project) deferred and expensed using the percentage of
completion method as determined by construction costs incurred relative to the
total estimated construction costs. Fees received in excess of those recognized
are reflected as deferred development and construction revenue, which is
included in other liabilities in the accompanying consolidated balance sheets.
Revenues recognized in excess of amounts received are
24
included in other assets on the accompanying consolidated balance sheets.
Incentive fees are recognized when the project is complete and the incentive
amount has been confirmed by an independent third party.
Third party management fees are generally received and recognized on a monthly
basis and are computed as a percentage of property receipts, revenues or a fixed
monthly amount, in accordance with the applicable management contract. Incentive
management fees are recognized when the contractual criteria are anticipated to
be met.
STUDENT HOUSING RENTAL REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE
Student housing rental revenue is recognized on a straight-line basis over the
term of the contract. Ancillary and other property related income is recognized
in the period earned. In estimating the collectibility of our accounts
receivable, we analyze the aging of resident receivables, historical bad debts,
and current economic trends. These estimates have a direct impact on our net
income, as an increase in our allowance for doubtful accounts reduces our net
income.
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 8 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).
LONG-LIVED ASSETS-IMPAIRMENT
On a periodic basis, management is required to assess whether there are any
indicators that the value of our real estate properties may be impaired. A
property's value is considered impaired if management's estimate of the
aggregate future cash flows (undiscounted and without interest charges) to be
generated by the property are less than the carrying value of the property.
These estimates of cash flows consider factors such as expected future operating
income, trends and prospects, as well as the effects of demand, competition and
other factors. To the extent impairment has occurred, the loss will be measured
as the excess of the carrying amount of the property over the fair value of the
property, thereby reducing our net income.
CONSTRUCTION PROPERTY SAVINGS AND FIRE PROCEEDS
An entity formed by our Predecessor owners was entitled to any savings in the
budgeted completion cost of three of our owned off-campus construction
properties that were completed in Fall 2004. In February 2005, our Predecessor
owners received such funds. Additionally, in April 2005, our Predecessor owners
received insurance proceeds originally received by the Company in connection
with the fire that occurred at the University Village at Fresno in 2003. These
payments were accounted for as equity distributions.
CAPITAL EXPENDITURES
We distinguish between capital expenditures necessary for the ongoing operations
of our properties and acquisition-related improvements incurred within one to
two years of acquisition of the related property. (Acquisition-related
improvements are expenditures that have been identified at the time the property
is acquired, and which we intended to incur in order to position the property to
be consistent with our physical standards). We capitalize non-recurring
expenditures for additions and betterments to buildings and land improvements.
In addition, we generally capitalize expenditures for exterior painting,
roofing, and other major maintenance projects that substantially extend the
useful life of the existing assets. The cost of ordinary repairs and maintenance
that do not improve the value of an asset or extend its useful life are charged
to expense when incurred. Planned major repair, maintenance and improvement
projects are capitalized when performed. In some circumstances, lenders require
us to maintain a reserve account for future repairs and capital expenditures.
These amounts are
25
classified as restricted cash on the accompanying consolidated balance sheets,
as the funds are not available to us for current use.
RESULTS OF OPERATIONS
COMPARISON OF THE YEARS ENDED DECEMBER 31, 2005 AND DECEMBER 31, 2004
The following table presents our results of operations for the years ended
December 31, 2005 and 2004, including the amount and percentage change in these
results between the two periods. The results for the year ended December 31,
2004 as presented below represent the consolidated financial results of our
Company for the period from August 17, 2004 to December 31, 2004 and the
combined financial results of our Predecessor for the period from January 1,
2004 to August 16, 2004. The presentation of results for the year ended December
31, 2004 below is not in accordance with GAAP and is presented only for
comparison purposes.
YEAR ENDED DECEMBER 31,
--------------------------
2005 2004 CHANGE($) CHANGE(%)
------------ ------------ ------------ ------------
REVENUES:
Owned off-campus properties $ 59,239 $ 35,115 $ 24,124 68.7%
On-campus participating properties 18,470 17,418 1,052 6.0%
Third party development and management services 8,640 7,908 732 9.3%
Resident services 1,125 382 743 194.5%
------------ ------------ ------------ ------------
TOTAL REVENUES 87,474 60,823 26,651 43.8%
OPERATING EXPENSES:
Owned off-campus properties 27,551 16,861 10,690 63.4%
On-campus participating properties 8,325 7,995 330 4.1%
Third party development and management services 6,969 5,543 1,426 25.7%
General and administrative 6,714 5,234 1,480 28.3%
Depreciation and amortization 16,471 9,973 6,498 65.2%
Ground/facility lease 873 812 61 7.5%
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 66,903 46,418 20,485 44.1%
------------ ------------ ------------ ------------
OPERATING INCOME 20,571 14,405 6,166 42.8%
NONOPERATING INCOME AND (EXPENSES):
Interest income 825 82 743 906.1%
Interest expense (17,368) (16,698) (670) 4.0%
Amortization of deferred financing costs (1,176) (1,211) 35 (2.9%)
Other nonoperating income 1,279 927 352 38.0%
------------ ------------ ------------ ------------
TOTAL NONOPERATING EXPENSES (16,440) (16,900) 460 (2.7%)
------------ ------------ ------------ ------------
Income (loss) before income taxes, minority interests,
and discontinued operations 4,131 (2,495) 6,626 (265.6%)
Income tax (provision) benefit (186) 728 (914) (125.5%)
Minority interests (164) 100 (264) (264.0%)
------------ ------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 3,781 (1,667) 5,448 (326.8%)
Discontinued operations:
(Loss) income attributable to discontinued operations (2) 367 (369) (100.5%)
Gain (loss) from disposition of real estate 5,883 (39) 5,922 (15,184.6%)
------------ ------------ ------------ ------------
Total discontinued operations 5,881 328 5,553 1,693.0%
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 9,662 $ (1,339) $ 11,001 (821.6%)
============ ============ ============ ============
26
OWNED OFF-CAMPUS PROPERTIES OPERATIONS
Revenues and operating expenses from our owned off-campus properties increased
by $24.1 million and $10.7 million, respectively, in 2005 as compared to 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. We also completed construction of and opened
an 828-bed property serving the State University of New York - Buffalo in August
2005. 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. These new properties contributed $22.9
million of additional revenues and $10.7 million of additional operating
expenses in 2005 as compared to 2004.
SAME STORE PROPERTY OPERATIONS (EXCLUDING NEW PROPERTY ACTIVITY). We had nine
properties containing 5,971 beds which were operating during both 2005 and 2004.
These properties produced revenues of $34.2 million and $32.3 million during
2005 and 2004, respectively, an increase of $1.9 million. Excluding resident
services revenues, which are provided through our TRS subsequent to our IPO,
these properties produced revenues of $33.1 million during 2005, as compared to
$31.9 million in 2004, an increase of $1.2 million. These increases were due
primarily to the improved lease up for the 2005/2006 academic year, which
resulted in average occupancy rates increasing to 95.1% in 2005 from 89.7% in
2004. Revenues in 2006 will be dependent on 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 these existing properties, operating expenses remained relatively constant at
$15.4 million for both 2005 and 2004. We anticipate that operating expenses in
2006 will increase slightly as compared with 2005 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 of our Cullen Oaks property, consisting of 180 units and 354
beds. This additional phase contributed approximately $0.6 million of additional
revenues and approximately $0.2 million of additional operating expenses during
2005.
SAME STORE OCPP OPERATIONS. We had four participating properties containing
4,167 beds which were operating during both 2005 and 2004. Revenues from our
same store on-campus participating properties increased to $17.8 million in 2005
from $17.4 million in 2004, an increase of $0.4 million. This increase was due
to increased rental rates, which were offset by a decrease in average occupancy
from 76.1% in 2004 to 73.3% in 2005, as well as an increase in other
miscellaneous income items.
At these existing properties, operating expenses increased by approximately $0.1
million, from $8.0 million in 2004 to $8.1 million in 2005. This increase was
primarily due to increased utility costs, most of which was collected from
tenants in the form of utility income. We anticipate that operating expenses in
2006 will increase slightly as compared with 2005 as a result of expected
increases in utility costs, insurance, taxes and general inflation.
THIRD PARTY DEVELOPMENT AND MANAGEMENT SERVICES
Third party development and management services revenue increased by $0.7
million from $7.9 million in 2004 as compared to $8.6 million in 2005. Total
third party development services revenue remained relatively constant at $5.9
million in 2005 as compared to $5.8 million in 2004, an increase of $0.1
million. Third party management services revenue increased by $0.7 million, from
$2.1 million in 2004 to $2.8 million in 2005. The reasons for these variances
are more fully described below.
Third party development and management services operating expenses increased
approximately $1.4 million, from $5.5 million in 2004, to $6.9 million in 2005.
This increase was primarily due to expenses incurred during 2005 in relation to
three West Virginia University fixed price projects that were in progress during
2005 which contributed $1.1 million to the
27
increase and a reserve of approximately $0.3 million of development costs
associated with our Blinn College development project which was not awarded as
anticipated. 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. Any such charge could have a
material effect on our results of operations in the period in which the charge
is taken.
THIRD PARTY DEVELOPMENT SERVICES REVENUE. 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. The increase in our third party development revenue
was primarily due to a slightly higher average contractual fee per project and a
higher percentage of the contractual fees recognized during 2005 as compared to
2004. These factors were offset by fewer projects in progress and a decrease in
construction savings revenue earned during 2005. We had eight projects in
progress during 2005 with an average contractual fee of approximately $1.2
million compared to 2004 in which we had 12 projects in progress with an average
contractual fee of $1.1 million. Also, due to 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 57.3% of the
total contractual fees were recognized during 2005 compared to approximately
34.6% for 2004. In addition, our third party development revenue decreased as a
result of approximately $0.6 million of construction savings revenue that was
recognized during 2004. No construction savings revenue was earned on our third
party development projects during 2005.
We continue to see a very active market for third party development and
construction management services with active RFPs consistent with prior years.
The market has begun to expand, with colleges and universities seeking new
levels of service ranging from long-range planning, predevelopment consulting,
and campus planning, to the more traditional historic full development and
construction management services. We pursue these projects based on relative
profitability, long-term relationship opportunities and geographical asset
growth synergies.
THIRD PARTY DEVELOPMENT SERVICES REVENUE - ON-CAMPUS PARTICIPATING PROPERTIES:
Development services revenue earned in relation to our on-campus participating
properties is recognized over the term of the underlying ground leases. The
decrease in development revenue earned on our on-campus participating properties
is primarily due to approximately $0.4 million of deferred development and
construction revenue recognized in 2004 upon the transfer of one of our
on-campus participating properties (Coyote Village) to Weatherford College in
April 2004.
MANAGEMENT SERVICES REVENUE. Third party management services revenue increased
$0.7 million from $2.1 million in 2004 as compared to $2.8 million in 2005. The
increase was due to a full academic year of revenues earned related to seven new
management contracts that commenced in Fall 2004. We expect third party
management services revenues to remain relatively constant in 2006 as compared
to 2005 as the loss in any current contracts or the reduction in any current
contract fees is anticipated to be offset by new contracts obtained during 2006.
RESIDENT SERVICES
Concurrent with our commencement of operations and our designation as a REIT in
2004, 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 $0.7 million in
2005 as compared to 2004. This increase is due to 2004 reflecting only
approximately 4.5 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 2005 reflects a full year 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.
GENERAL AND ADMINISTRATIVE
General and administrative expenses (relating primarily to corporate operations)
increased $1.5 million in 2005 compared to 2004. This increase was primarily due
to the following items: (i) additional expenses of $0.5 million incurred in 2005
related to Sarbanes-Oxley Section 404 compliance costs, (ii) a compensation
charge of approximately $0.4 million to reflect a separation agreement entered
into with an executive officer in April 2005, (iii) a full year of expenses
incurred as a public company during 2005, (iv) general increases in corporate
staffing as a result of the growth experienced by the Company in 2005, and (v)
normal inflationary increases in such items as payroll costs, benefits, and
other related corporate items. These
28
increases were offset by a compensation charge of approximately $2.1 million
recorded during 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 $6.5 million in 2005 compared to 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 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 was 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
in 2005. We expect depreciation and amortization in 2006 to increase
significantly from 2005 primarily due to a full year's depreciation on
properties acquired and placed in service during 2005 and the $244.3 million of
recently completed 2006 acquisitions.
Amortization of deferred financing costs remained relatively constant at $1.2
million for both 2005 and 2004. Amortization of deferred financing costs was
reduced in 2005 due to two mortgage loans paid off in connection with our IPO,
which was offset by additional finance cost amortization incurred in 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. We expect amortization of deferred financing
costs in 2006 to increase from 2005 primarily due to a full year's amortization
of debt assumed or incurred in connection with acquisitions made during 2005 and
the debt anticipated to be assumed or incurred in connection with the $244.3
million of recently completed 2006 acquisitions.
INTEREST INCOME
Interest income increased by $0.7 million, from $0.1 million in 2004 to $0.8
million in 2005. This increase is primarily due to additional interest earned in
2005 on the remaining proceeds from our July 2005 equity offering that were
invested in commercial paper and money market investments during the year.
INTEREST EXPENSE
Interest expense increased $0.7 million in 2005 compared to 2004. This increase
was primarily due to additional interest of $3.8 million related to debt assumed
or incurred in relation to the acquisition of the seven previously mentioned
properties in the first quarter 2005 as well as additional interest expense of
$0.5 million incurred in 2005 under our revolving credit facility. Approximately
six months of interest was recognized under our revolving credit facility in
2005 as a result of the facility being fully paid down in July 2005 in
connection with our equity offering. This is in comparison to only approximately
4.5 months of interest recognized under our revolving credit facility in 2004
due to the facility being obtained in connection with the IPO in August 2004.
These increases were offset by the retirement of $46.0 million in mortgage loans
in connection with our IPO, which resulted in a decrease in interest expense of
approximately $2.5 million. An additional $1.3 million of interest was also
capitalized in 2005 as compared to 2004 as a result of increased activity
related to the construction of our owned off-campus properties. We anticipate
that interest expense in 2006 will increase from 2005 levels due to interest
expense assumed or incurred in connection with property acquisitions and
increases in potential borrowing rates that may impact our floating rate on our
credit facility.
OTHER NONOPERATING INCOME
Other non-operating income for 2005 includes a gain of approximately $0.8
million related to the sale of our option to acquire a 23.33% interest in Dobie
Center, an off-campus student housing property held by an affiliate of our
Predecessor owners. In addition, we also recognized a gain of approximately $0.4
and $0.7 million in 2005 and 2004, respectively, related to insurance proceeds
received for a fire that occurred at one of our owned off-campus properties in
2003. A gain of approximately $0.2 million was also recognized in 2004 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, an initial income tax benefit of $0.7 million was
recorded in connection with our IPO during 2004. An income tax provision of
approximately
29
$0.2 million was recorded by our TRS during 2005 to better reflect our estimate
of the realization of our deferred tax asset based on management's estimate of
future taxable income of our TRS.
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 in 2005 represent the 0.7% interest in the net income of our
Operating Partnership held by holders of common units in our Operating
Partnership as well as a minority partner's interest in the net income of our
University Village at Sweet Home property, which commenced operations in August
2005. Minority interests in 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 9 in the accompanying Notes to
Consolidated and Combined Financial Statements contained in Item 8 herein 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. University Village at San Bernardino, which was sold to
Cal State University - San Bernardino in January 2005, is included in
discontinued operations for the year ended December 31, 2005 and 2004. The
properties included in discontinued operations for the year ended December 31,
2004 also include the Village at Riverside and other non-core assets that were
distributed to our Predecessor owners as part of the IPO as well as an on-campus
participating property (Coyote Village) whose ground lease was transferred to
the Weatherford College in April 2004.
Please refer to Note 6 in the accompanying Notes to Consolidated and Combined
Financial Statements contained in Item 8 herein for a table summarizing the
results of operations of the properties sold, distributed, or classified as held
for sale during the years ended December 31, 2005 and 2004.
30
COMPARISON OF THE YEARS ENDED DECEMBER 31, 2004 AND DECEMBER 31, 2003
The results for the year ended December 31, 2004, as presented below represent
the combined financial results of our Predecessor for the period from January 1,
2004 to August 16, 2004, and the consolidated financial results of our Company
for the period from August 17, 2004 to December 31, 2004. The presentation of
results for the year ended December 31, 2004 below is not in accordance with
GAAP and is presented only for comparison purposes. The following table presents
our results of operations for the years ended December 31, 2004 and 2003,
including the amount and percentage change in these results between the two
periods:
YEAR ENDED DECEMBER 31,
--------------------------
2004 2003 CHANGE($) CHANGE(%)
------------ ------------ ------------ ------------
REVENUES:
Owned off-campus properties $ 35,115 $ 31,514 $ 3,601 11.4%
On-campus participating properties 17,418 16,482 936 5.7%
Third party development and management services 7,908 9,128 (1,220) (13.4%)
Resident services and other income 382 -- 382 100.0%
------------ ------------ ------------ ------------
TOTAL REVENUES 60,823 57,124 3,699 6.5%
OPERATING EXPENSES:
Owned off-campus properties 16,861 15,272 1,589 10.4%
On-campus participating properties 7,995 7,925 70 0.9%
Third party development and management services 5,543 5,389 154 2.9%
General and administrative 5,234 2,737 2,497 91.2%
Depreciation and amortization 9,973 8,868 1,105 12.5%
Ground/facility lease 812 489 323 66.1%
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 46,418 40,680 5,738 14.1%
------------ ------------ ------------ ------------
OPERATING INCOME 14,405 16,444 (2,039) (12.4%)
NONOPERATING INCOME AND (EXPENSES):
Interest income 82 71 11 15.5%
Interest expense (16,698) (16,940) 242 (1.4%)
Amortization of deferred financing costs (1,211) (558) (653) 117.0%
Other nonoperating income 927 -- 927 100.0%
------------ ------------ ------------ ------------
TOTAL NONOPERATING EXPENSES (16,900) (17,427) 527 (3.0%)
------------ ------------ ------------ ------------
Loss before income taxes, minority interests, and
discontinued operations (2,495) (983) (1,512) 153.8%
Income tax benefit 728 -- 728 100.0%
Minority interests 100 16 84 525.0%
------------ ------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS (1,667) (967) (700) 72.4%
Discontinued operations:
Income attributable to discontinued operations 367 7 360 5,142.9%
(Loss) gain from disposition of real estate (39) 16 (55) (343.8%)
------------ ------------ ------------ ------------
Total discontinued operations 328 23 305 1,326.1%
------------ ------------ ------------ ------------
NET LOSS $ (1,339) $ (944) $ (395) 41.8%
============ ============ ============ ============
OWNED OFF-CAMPUS PROPERTIES OPERATIONS
Revenues from our owned off-campus properties increased by $3.6 million in 2004
as compared to 2003 primarily due to the completion of construction and opening
of two properties in August 2004 and higher fourth quarter occupancy at a
majority of the same store properties operated during both years, as described
below. Operating expenses increased $1.6 million in 2004 as compared to 2003.
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.
31
NEW PROPERTY OPERATIONS. In August of 2004 we completed construction of and
opened a 406-bed property serving California State University, Fresno and a
749-bed property serving Temple University. These new properties contributed
$3.2 million of additional revenues and $1.3 million of additional operating
expenses during 2004 as compared with 2003.
SAME STORE PROPERTY OPERATIONS (EXCLUDING NEW PROPERTY ACTIVITY). We had nine
properties containing 5,971 beds which were operating during both 2004 and 2003,
and which had weighted average occupancy rates during these periods of 89.7% and
86.9%, respectively. These properties produced revenues of $31.9 million and
$31.5 million during 2004 and 2003, respectively. This increase of approximately
$0.4 million or 1.3% was the result of the improved Fall 2004 lease up and was
offset by certain non-rental revenues reflected as property revenues by the
Predecessor which are now reflected as resident services revenues in our TRS.
At these existing properties, operating expenses increased $0.3 million or 2.0%
in 2004 compared with 2003. This increase was the result of increases in
operating expenses such as bad debt, maintenance, employee benefits, and taxes.
These increases were due to a combination of increases in inflation, overall
higher occupancy rates and decreased collection prospects at certain properties.
ON-CAMPUS PARTICIPATING PROPERTIES ("OCPP") OPERATIONS
Revenues from our on-campus participating properties increased $0.9 million in
2004 compared to 2003 primarily due to the opening of 210 additional beds at the
University College-Prairie View A&M University property in August 2003, and an
increase in both average occupancy and rental rates for properties which were
operating during both 2004 and 2003. Operating expenses for our on-campus
participating properties remained relatively constant in 2004 as compared to
2003. Coyote Village, an on-campus participating property that commenced
operations in August 2003, had its ground lease transferred to Weatherford
College in April 2004; therefore, it is not reflected in operating revenues and
expenses but is included in discontinued operations.
NEW PROPERTY OPERATIONS. As discussed above, in August 2003 we opened a 210-bed
phase of University College-Prairie View A&M University. The opening of this
on-campus property contributed $0.8 million and $0.4 million of revenues for
2004 and 2003, respectively, an increase of $0.4 million. This property also
contributed a $0.4 million increase in operating expenses from $0.1 million in
2003 to $0.5 million in 2004.
SAME STORE OCPP OPERATIONS (EXCLUDING NEW PROPERTY ACTIVITY). We had four
properties containing 3,957 beds which were operating during both 2004 and 2003,
and which had average occupancy rates during these periods of 82.9% and 78.9%
respectively. These properties produced revenues of $16.6 million and $16.1
million during 2004 and 2003, respectively.
Operating expenses for our same store OCPPs decreased to $7.5 million in 2004
from $7.8 million in 2003, a decrease of $0.3 million. This decrease is
primarily due to reduced utility rates and improved collection prospects.
Ground/facility lease expense increased by $0.3 million in 2004 compared with
2003. Ground/facility lease payments reflect the Universities' 50% share of the
related facilities' cash flows, which have increased in 2004 as compared to
2003. The increased cash flows primarily relate to improvements in operations
resulting from increased occupancy and rates as well as reductions in turn costs
and bad debt expense.
THIRD PARTY DEVELOPMENT AND MANAGEMENT SERVICES
Third party development and management services revenue decreased $1.2 million
from $9.1 million in 2003 to $7.9 million in 2004.
DEVELOPMENT SERVICES. Third party development services revenue for 2004
represented a decrease of $2.1 million compared to 2003. This decrease was due
to a combination of a lower average contractual fee per project and the
percentage of the contractual fee recognized during the respective periods. We
had 12 projects in progress during 2004 with an average contractual fee of $1.1
million, as compared to 2003 in which we had ten projects in progress with an
average contractual fee of $1.2 million. In addition, due to differences in the
percentage of construction completed during the periods, of the total
contractual fees of the projects in progress during the respective periods,
34.6% was recognized (on a percentage of completion basis) during 2004 compared
to 60.4% in 2003.
Third party development services revenue from on-campus participating properties
increased primarily due to the recognition of $0.4 million of deferred
development fees on an on-campus participating property that was transferred to
Weatherford College in April 2004.
32
MANAGEMENT SERVICES. Third party management revenues increased by $0.9 million
in 2004 compared with 2003. The increase was due to five new contracts that
commenced in Fall 2004 as well as a full year of fees from contracts that began
in Fall 2003.
RESIDENT SERVICES
Concurrent with our commencement of operations and our designation as a REIT,
certain services previously provided to residents by our properties are now
provided by our TRS. These services generally consist of food service and
housekeeping (at Callaway House), and certain resident programming activities.
These services are provided to the residents at market rates and, under an
agreement between the TRS and the Operating Partnership, payments from residents
are collected by the properties on behalf of the TRS in conjunction with their
collection of rents. Revenue from resident services for the year ended December
31, 2004 approximated $0.4 million.
GENERAL AND ADMINISTRATIVE
General and administrative expenses (consisting primarily of corporate expenses)
of $5.2 million for 2004 included $2.2 million of expenses related to the IPO
and formation transactions. Excluding these expenses, general and administrative
expenses increased $0.3 million in 2004 compared to 2003. The IPO and formation
transactions consisted of the recognition of compensation expense of $2.1
million and $0.1 million in connection with the issuance of profits interest
units ("PIUs") and restricted stock units ("RSUs"), respectively. The remaining
increase was primarily a result of expenses incurred as a public company which
were not present in the Predecessor's operations such as directors'
compensation, investor relations and director and officer liability insurance.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased $1.1 million in 2004 compared to 2003.
The increase was primarily due to $0.8 million of additional depreciation and
amortization from the opening of the two owned off-campus properties in August
2004 and the opening of the on-campus participating property in August 2003, as
described above. Amortization of deferred financing costs increased $0.7 million
in 2004 compared to 2003 primarily due to the write-off of $0.6 million of
unamortized deferred financing costs associated with the repayment of debt in
connection with the IPO.
INTEREST EXPENSE
Interest expense of $16.7 million for 2004 represented a decrease of $0.2
million from $16.9 million in 2003. Interest expense decreased due to the
retirement of certain debt in connection with the IPO, which was partially
offset by loan prepayment penalties incurred in connection with such debt
repayment and an increase in interest expense recognized on the opening of the
on-campus participating property in August 2003.
OTHER INCOME
Other income increased $0.9 million in 2004 as compared with 2003 primarily due
to gains related to two property insurance settlements.
INCOME TAX BENEFIT
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. Based on projected future earnings of the TRS, we recorded a
deferred tax asset, net of allowance, and related income tax benefit of $0.7
million in connection with the formation transactions and $0.2 million in
connection with the change in the valuation allowance which offset the
recognition of income tax expense of $0.2 million from the date of the IPO to
December 31, 2004.
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 years ended December 31, 2004 and/or December 31, 2003 include (i) the
Village at
33
Riverside and other non-core assets that were distributed to our Predecessor
owners as part of the IPO, (ii) an on-campus participating property whose ground
lease was transferred to the Weatherford College in April 2004, and (iii)
University Village at San Bernardino, which was sold to California State
University - San Bernardino in January 2005 and is classified as Owned
Off-Campus Property - Held for Sale as of December 31, 2004.
Please refer to Note 6 in the accompanying Notes to Consolidated and Combined
Financial Statements contained in Item 8 herein for a table summarizing the
results of operations of the properties sold, distributed, or classified as held
for sale during the years ended December 31, 2004 and 2003.
CASH FLOWS
COMPARISON OF YEARS ENDED DECEMBER 31, 2005 AND DECEMBER 31, 2004
OPERATING ACTIVITIES
For the year ended December 31, 2005, net cash provided by operating activities
before changes in working capital accounts provided approximately $20.6 million,
as compared to $11.8 million for the year ended December 31, 2004, an increase
of $8.8 million. Changes in working capital accounts utilized $0.2 million for
the year ended December 31, 2005 while $6.0 million was provided by working
capital accounts for the year ended December 31, 2004, a decrease of $6.2
million. This change was primarily the result of a $2.9 million increase in
accounts receivable from our third party development and management services
operations due to the increased activities in these operations in 2005 as
compared to 2004. Additionally, various working capital accounts experienced an
increase in 2005 over 2004 such as student contracts receivable and prepaid
expenses due to the properties acquired or placed in service during 2005.
INVESTING ACTIVITIES
Investing activities utilized $111.8 million and $63.6 million for the years
ended December 31, 2005 and 2004, respectively. The increase in cash utilized in
investing activities during the year ended December 31, 2005 related primarily
to the use of cash to acquire seven properties in the first quarter of 2005 and
to fund the development of an additional phase of an on-campus participating
property, which was completed in Fall 2005. This increase in cash utilized 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 year ended December 31, 2005,
three owned off-campus properties were under development, of which one was
completed in Fall 2005, while four properties were under development during the
year ended December 31, 2004, of which three were completed in Fall 2004. For
the years ended December 31, 2005, 2004, and 2003, our cash utilized in
investing activities was comprised of the following:
YEAR ENDED DECEMBER 31,
----------------------------------------
2005 2004 2003
------------ ------------ ------------
Property disposition $ 28,023 $ -- $ --
Property acquisitions (72,763) -- --
Capital expenditures for on-campus participating properties (489) (1,045) (691)
Capital expenditures for owned off-campus properties (3,639) (7,674) (3,775)
On-campus participating property transferred to University -- -- (7,976)
Investments in on-campus participating properties under
development (15,398) (836) (3,097)
Investments in owned off-campus properties under
development (47,398) (53,446) (18,002)
Purchase of non-real estate furniture, fixtures, and equipment (742) (620) (197)
Sale of option to acquire interest in student housing
property 651 -- --
------------ ------------ ------------
TOTAL $ (111,755) $ (63,621) $ (33,738)
============ ============ ============
FINANCING ACTIVITIES
Cash provided by financing activities totaled $111.3 million and $45.3 million
for the years ended December 31, 2005 and 2004, respectively. Cash flows
provided by financing activities for the year ended December 31, 2005 consisted
primarily of proceeds received from our equity offering, net of offering costs,
of approximately $96.6 million in July 2005. Other significant financing
activities occurring during the year ended December 31, 2005 included the
receipt of proceeds from a
34
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
additional phase of an on-campus participating property in the amount of
approximately $15.9 million. These items were offset by the use of cash to fund
distributions to our common and restricted stockholders in the amount of
approximately $20.2 million as well as the use of cash to pay down our revolving
credit (net of draws on the facility during the period) in the amount of
approximately $11.8 million.
Cash flows provided by financing activities for the year ended December 31, 2004
consisted primarily of proceeds received from our initial public offering, net
of offering costs, of approximately $197.8 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 connection with the IPO, we also entered
into a revolving credit facility, of which $11.8 million was outstanding at
December 31, 2004. In addition, during the year ended December 31, 2004, we
received approximately $41.7 million in proceeds from construction loans used to
fund the development of three owned off-campus properties. Also, a $2.1 million
partial-quarter distribution for the third quarter 2004 was paid in November
2004.
COMPARISON OF YEARS ENDED DECEMBER 31, 2004 AND DECEMBER 31, 2003
OPERATING ACTIVITIES
For the year ended December 31, 2004, net cash provided by operating activities
before changes in working capital accounts provided approximately $11.8 million,
as compared to $8.8 million for the year ended December 31, 2003, an increase of
$3.0 million. Changes in working capital accounts provided approximately $6.0
million for the year ended December 31, 2004 while $2.0 million was utilized by
working capital for the year ended December 31, 2003, an increase of $8.0
million. This change was primarily the result of a receivable for insurance
proceeds in 2003 related to a fire that occurred at one of our owned off-campus
properties under development in Fresno, California, and the subsequent receipt
and use of those proceeds in 2004 to fund the related rebuild costs, as well as
higher payables associated with three development projects under construction as
of December 31, 2003. Additionally, in connection with the pay down of three
construction loans as part of our IPO formation transactions, certain restricted
funds were released by the lender in the third quarter 2004.
INVESTING ACTIVITIES
Investing activities used $63.6 million and $33.7 million for the years ended
December 31, 2004 and 2003, respectively. The increase in the cash used in
investing activities during the year ended December 31, 2004 related primarily
to the use of cash to fund the development costs at University Village at
Fresno, University Village at San Bernardino, and University Village at TU owned
off-campus construction projects, which were completed in Fall 2004.
Additionally, in 2004, we purchased land and funded development costs for
University Village at Sweet Home and commenced construction of a new on-campus
facility (Cullen Oaks - Phase II).
FINANCING ACTIVITIES
Cash provided by financing activities totaled $45.3 million and $21.6 million
for the years ended December 31, 2004 and 2003, respectively. In connection with
our IPO, we generated net proceeds of approximately $197.8 million in August
2004. Approximately $105.5 million of our IPO proceeds were used to pay down
mortgage and construction loan indebtedness and $85.9 million was used to
purchase the equity interests of our Predecessor owners. In addition, during
2004, we borrowed approximately $41.2 million to fund the three development
projects described above. We also used our IPO proceeds to pay off the $1.7
million balance on our Predecessor's line of credit. In connection with the IPO,
we also entered into a $75 million revolving credit facility, of which $11.8
million was outstanding at December 31, 2004. Also, a $2.1 million
partial-quarter distribution for the third quarter 2004 was paid in November
2004.
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
35
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
years ended December 31, 2005, 2004, and 2003:
YEAR ENDED DECEMBER 31,
----------------------------------------
2005 2004 2003
------------ ------------ ------------
Revenues $ 18,470 $ 17,730 $ 17,002
Direct operating expenses (1) 7,738 7,621 7,517
Amortization 3,661 3,532 3,271
Amortization of deferred financing costs 234 240 180
Ground/facility lease (2) 873 846 584
------------ ------------ ------------
Net operating income 5,964 5,491 5,450
Interest income 178 53 30
Interest expense (3) (4) (5,718) (5,547) (5,293)
Other non-operating income -- 234 --
------------ ------------ ------------
NET INCOME (5) $ 424 $ 231 $ 187
============ ============ ============
(1) Excludes property management fees of $0.9 million, $0.9 million, and
$0.8 for the years ended December 31, 2005, 2004, and 2003,
respectively. 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 $0.2 million of capitalized
interest for the year ended December 31, 2005, related to Cullen Oaks
Phase II, a recently completed project that was an additional phase of
the Cullen Oaks on-campus participating property.
(4) Debt service expenditures for these properties totaled $7.8 million,
$7.2 million and $6.6 million for the years ended December 31, 2005,
2004, and 2003, respectively.
(5) 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 8. Excludes income taxes
associated with these properties, which are owned by our TRS subsequent
to the IPO.
LIQUIDITY AND CAPITAL RESOURCES
CASH BALANCES AND LIQUIDITY
As of December 31, 2005, excluding our on-campus participating properties, we
had $27.2 million in cash and cash equivalents and restricted cash as compared
to $7.0 million in cash and cash equivalents and restricted cash as of December
31, 2004. This increase was primarily due to the completion of our equity
offering in July 2005, which generated net proceeds of approximately $96.6
million, of which approximately $14.4 million is remaining at December 31, 2005.
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, 2005 included $1.2 million of
funds held in escrow in connection with potential property acquisitions.
As of December 31, 2005, our short-term liquidity needs included, but were not
limited to, the following: (i) anticipated distribution payments to our
stockholders and unitholders totaling approximately $23.4 million based on an
anticipated
36
annual distribution of $1.35 per share or unit based on our current shares and
units outstanding, including those required to maintain our REIT status and
satisfy our current distribution policy, (ii) remaining development costs on our
Callaway Villas owned off-campus development project funded outside of the
construction loan, estimated to be approximately $0.6 million, (iii) remaining
development costs on our Village at Newark owned off-campus development project
funded outside of the construction loan, estimated to be approximately $20.9
million, and (iv) funds for other potential future acquisitions or development
projects. We expect to meet our short-term liquidity requirements by using
remaining proceeds from our recent equity offering, net cash provided by
operations, borrowings under our revolving credit facility, and permanent
property level debt. In addition, we have a shelf registration available in
which we may offer up to $500 million of an indeterminate amount of debt
securities, preferred stock, common stock and securities warrants.
We may seek additional funds to undertake initiatives not contemplated by our
business plan or obtain additional cushion against possible shortfalls. We also
may pursue additional financing as opportunities arise. Future financings may
include a range of different sizes or types of financing, including the sale of
additional debt or equity securities. While we believe we will be able to obtain
such funds, these funds may not be available on favorable terms or at all. Our
ability to obtain additional financing depends on several factors, including
future market conditions, our success or lack of success in penetrating our
markets, our future creditworthiness, and restrictions contained in agreements
with our investors or lenders, including the restrictions contained in the
agreements governing our revolving credit facility. These financings could
increase our level of indebtedness or result in dilution to our equity holders.
2005 EQUITY OFFERING
On July 5, 2005, we consummated an 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.
CALLAWAY VILLAS FINANCING
In July 2005, we obtained a new construction loan in the amount of $25.0
million, of which $3.2 million is subject to holdback provisions, to fund a
portion of the development and construction of Callaway Villas, an owned
off-campus property scheduled to open in August 2006. We began making draws
under the loan in January 2006. The loan has an initial term of 36 months and
bears interest, at the Company's option, at either Prime (7.25% at December 31,
2005) or one-, two-, three-, or six-month LIBOR plus 1.35% (5.7% at December 31,
2005). The loan requires payments of interest only during the term of the loan
and any accrued interest or outstanding borrowings become due on the maturity
date of July 8, 2008.
VILLAGE AT NEWARK FINANCING
In September 2005, we obtained a new construction loan in the amount of $45.5
million to fund a portion of the development and construction of Village at
Newark, an owned off-campus property scheduled to open in Summer 2007. We expect
to begin making draws under the loan in the second quarter of 2006. The loan has
an initial term of 36 months and bears interest, at the Company's option, at
either Prime (7.25% at December 31, 2005) or one-, two-, or three-month LIBOR
plus 1.50% (6.4% at December 31, 2005). The term of the loan can be extended
through September 2010 through the exercise of two 12-month extension periods.
The loan requires payments of interest only through the original maturity date
and the first extension period. The loan requires monthly principal and interest
payments during the second extension period based on a 30-year amortization.
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
37
leverage. Additionally, the Company is required to pay an unused commitment fee
ranging from 0.15% to 0.20% per annum, depending on the aggregate unused
balance. As of December 31, 2004, the balance outstanding on the revolving
credit facility totaled $11.8 million, bearing interest at 3.9%. In July 2005,
the Company paid off the entire balance on the revolving credit facility using
proceeds from its 2005 equity offering. As of December 31, 2005, the total
availability under the facility (subject to certain financial covenants) was
approximately $90.9 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
December 31, 2005, the Company was in compliance with all such covenants.
DISTRIBUTIONS
We are required to distribute 90% of our REIT taxable income (excluding capital
gains) on an annual basis in order to qualify as a REIT for federal income tax
purposes. Accordingly, we intend to make, but are not contractually bound to
make, regular quarterly distributions to common stockholders and unit holders.
Distributions to common stockholders are at the discretion of the Board of
Directors. We may be required to use borrowings under the credit facility, if
necessary, to meet REIT distribution requirements and maintain our REIT status.
The Board of Directors considers market factors and our Company's performance in
addition to REIT requirements in determining distribution levels.
On March 9, 2006, the Company declared a fourth quarter 2005 distribution per
share of $0.3375 which will be paid on March 30, 2006 to all common stockholders
of record as of March 20, 2006. At the same time, the Operating Partnership will
pay an equivalent amount per unit to holders of common units.
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.
Our historical recurring capital expenditures at our owned off-campus
properties, excluding the Village at Riverside, which was distributed to our
Predecessor owners in connection with the IPO, are set forth below:
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------
2005 2004 2003
-------------- -------------- --------------
Average beds 9,941 6,548 5,971
Total recurring capital expenditures $ 1,828 $ 1,262 $ 1,104
Average per bed $ 184 $ 193 $ 185
PRE-DEVELOPMENT EXPENDITURES
Our third party development activities have historically required us to fund
pre-development expenditures such as architectural fees, permits and deposits.
Because the closing of a development project's financing is often subject to
third party delay, we cannot always predict accurately the liquidity needs of
these activities. We frequently incur these pre-development expenditures before
a financing commitment has been obtained and, accordingly, bear the risk of the
loss of
38
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. As of December 31, 2005 we
have capitalized approximately $1.5 million in pre-development costs related to
awarded projects that have not yet commenced construction.
INDEBTEDNESS
As of December 31, 2005, we had approximately $287.3 million of outstanding
consolidated indebtedness (excluding unamortized debt premiums of approximately
$4.3 million), comprised of $195.9 million in mortgage debt secured by 13 of our
owned off-campus properties, $33.2 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
December 31, 2005 was 6.89%. All of our outstanding indebtedness is fixed rate
except for our revolving credit facility, which had no outstanding balance as of
December 31, 2005, and the Cullen Oaks Phase II construction loan discussed
below. As of December 31, 2005, approximately 5.7% of our total consolidated
indebtedness was variable rate debt.
OWNED OFF-CAMPUS PROPERTIES
The weighted average interest rate of the $195.9 million of owned off-campus
mortgage debt was 6.90% as of December 31, 2005. Each of the 13 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 $58.2
million of outstanding project-based taxable bonds. Under the terms of these
financings, one of our special purpose subsidiaries publicly issued three series
of taxable bonds and loaned the proceeds to three special purpose subsidiaries
that each hold a separate leasehold interest. Although a default in payment by
these special purpose subsidiaries could result in a default under one or more
series of bonds, the indebtedness of any of these special purpose subsidiaries
is not cross-defaulted or cross-collateralized with indebtedness of the 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.
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 December 31, 2005 of approximately $16.8 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 December 31,
2005 was approximately $16.4 million, bearing interest at a weighted average
rate of 6.3%. The total availability under this construction loan is $17.0
million and the loan requires payments of interest only through June 2006, at
which time we have the option to extend the maturity date to November 2008 and
convert the loan to a 30-year amortization basis.
The weighted average interest rate of the indebtedness encumbering our on-campus
participating properties was 6.88% at December 31, 2005.
39
OFF BALANCE SHEET ITEMS
We do not have any off-balance sheet arrangements.
CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual obligations as of December 31,
2005:
TOTAL 2006 2007 2008 2009 2010 THEREAFTER
------------ ------------ ------------ ------------ ------------ ------------ ------------
Long-term debt (1) $ 424,399 $ 38,295 $ 21,919 $ 37,634 $ 42,354 $ 50,519 $ 233,678
Operating leases (2) 42,447 512 596 657 672 698 39,312
Capital leases 1,903 824 462 393 224 -- --
Owned off-campus
development projects (3) 21,536 21,536 -- -- -- -- --
Severance agreement 195 195 -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------ ------------
$ 490,480 $ 61,362 $ 22,977 $ 38,684 $ 43,250 $ 51,217 $ 272,990
============ ============ ============ ============ ============ ============ ============
(1) Long-term debt obligations reflect the payment of both principal and
interest. For long-term obligations with a variable interest rate, the
rate in effect at December 31, 2005 was assumed to remain constant over
all periods presented.
(2) Includes minimum annual lease payments under the ground leases for
University Village at TU and Village at Newark.
(3) Consists of the completion costs related to Callaway Villas and Village
at Newark, which are scheduled to be completed in August 2006 and Summer
2007, respectively. The amounts do not include completion costs which
are funded through the construction loans. We have entered into a
contract with a general contractor for certain phases of the
construction of this project. However, this contract does not generally
cover all of the costs that are necessary to place the property into
service, including the cost of furniture and marketing and leasing
costs. The unfunded commitments presented include all such costs, not
only those costs that we are obligated to fund under the construction
contract.
FUNDS FROM OPERATIONS
As defined by NAREIT, FFO represents income (loss) before allocation to minority
interests (computed in accordance with GAAP), excluding gains (or losses) from
sales of property, plus real estate related depreciation and amortization
(excluding amortization of loan origination costs) and after adjustments for
unconsolidated partnerships and joint ventures. We present FFO because we
consider it an important supplemental measure of our operating performance and
believe it is frequently used by securities analysts, investors and other
interested parties in the evaluation of REITs, many of which present FFO when
reporting their results. FFO is intended to exclude GAAP historical cost
depreciation and amortization of real estate and related assets, which assumes
that the value of real estate diminishes ratably over time. Historically,
however, real estate values have risen or fallen with market conditions. Because
FFO excludes depreciation and amortization unique to real estate, gains and
losses from property dispositions and extraordinary items, it provides a
performance measure that, when compared year over year, reflects the impact to
operations from trends in occupancy rates, rental rates, operating costs,
development activities and interest costs, providing perspective not immediately
apparent from net income.
We compute FFO in accordance with standards established by the Board of
Governors of NAREIT in its March 1995 White Paper (as amended in November 1999
and April 2002), which may differ from the methodology for calculating FFO
utilized by other equity REITs and, accordingly, may not be comparable to such
other REITs. Further, FFO does not represent amounts available for management's
discretionary use because of needed capital replacement or expansion, debt
service obligations or other commitments and uncertainties. FFO should not be
considered as an alternative to net income (loss) (computed in accordance with
GAAP) as an indicator of our financial performance or to cash flow from
operating activities (computed in accordance with GAAP) as an indicator of our
liquidity, nor is it indicative of funds available to fund our cash needs,
including our ability to pay dividends or make distributions.
40
The following table presents a reconciliation of our FFO to our net income
(loss):
COMPANY PREDECESSOR
----------------------------------- -----------------------------------
PERIOD FROM PERIOD FROM
YEAR ENDED AUGUST 17, 2004 JANUARY 1, 2004 YEAR ENDED
DECEMBER 31, TO DECEMBER 31, TO AUGUST 16, DECEMBER 31,
2005 2004 2004 2003
---------------- ---------------- ---------------- ----------------
Net income (loss) $ 9,662 $ 1,802 $ (3,141) $ (944)
Minority interests 164 29 (129) (16)
(Gain) loss from disposition of real estate (5,883) -- 39 (16)
Real estate related depreciation
and amortization:
Total depreciation and
amortization 16,471 4,158 5,815 8,868
Discontinued operations
depreciation and amortization -- 152 219 346
Furniture, fixtures, and equipment
depreciation
(439) (154) (181) (277)
---------------- ---------------- ---------------- ----------------
FUNDS FROM OPERATIONS ("FFO") $ 19,975 $ 5,987 $ 2,622 $ 7,961
================ ================ ================ ================
FFO per share - basic $ 1.34 $ 0.48
================ ================
FFO per share - diluted $ 1.33 $ 0.47
================ ================
Weighted average common shares outstanding:
Basic 14,882,944 12,513,130
================ ================
Diluted 15,047,202 12,634,130
================ ================
Our FFO for the year ended December 31, 2004 was impacted by a series of charges
totaling approximately $2.6 million related to our IPO and related formation
transactions. The primary components of the charges include: (i) PIU grants of
approximately $2.1 million, (ii) RSU grants of $0.1 million, and (iii) the
write-off of loan origination costs and exit fees associated with the repayment
of indebtedness of approximately $1.2 million. These items were partially offset
by the recognition of an initial deferred tax asset associated with the
formation of our TRS, resulting in an income tax benefit of $0.8 million.
While our on-campus participating properties contributed $18.5 million, $17.4
million and $16.5 million to our revenues for the years ended December 31, 2005,
2004, and 2003, respectively, under our participating ground leases, we and the
participating university systems each receive 50% of the properties' net cash
available for distribution after payment of operating expenses, debt service
(which includes significant amounts towards repayment of principal) and capital
expenditures. A substantial portion of our revenues attributable to these
properties is reflective of cash that is required to be used for capital
expenditures and for the amortization of applicable property indebtedness. These
amounts do not increase our economic interest in these properties or otherwise
benefit us since our interest in the properties terminates upon the repayment of
the applicable property indebtedness.
As noted above, FFO excludes GAAP historical cost depreciation and amortization
of real estate and related assets because these GAAP items assume that the value
of real estate diminishes over time. However, unlike the ownership of our owned
off-campus properties, the unique features of our ownership interest in our
on-campus participating properties cause the value of these properties to
diminish over time. For example, since the ground/facility leases under which we
operate the participating properties require the reinvestment from operations of
specified amounts for capital expenditures and for the repayment of debt while
our interest in these properties terminates upon the repayment of the debt, such
capital expenditures do not increase the value of the property to us and
mortgage debt amortization only increases the equity of the ground lessor.
Accordingly, when considering our FFO, we believe it is also a meaningful
measure of our performance to modify FFO to exclude the operations of our
on-campus participating properties and to consider their impact on performance
by including only that portion of our revenues from those properties that are
reflective of our share of net cash flow and the management fees that we
receive, both of which increase and decrease with the operating measure of the
properties, a measure referred to herein as FFOM.
41
Funds From Operations--Modified for Operational Performance of On-Campus
Participating Properties ("FFOM"):
COMPANY PREDECESSOR
----------------------------------- -----------------------------------
PERIOD FROM PERIOD FROM
YEAR ENDED AUGUST 17, 2004 JANUARY 1, 2004 YEAR ENDED
DECEMBER 31, TO DECEMBER 31, TO AUGUST 16, DECEMBER 31,
2005 2004 2004 2003
---------------- ---------------- ---------------- ----------------
Funds from operations $ 19,975 $ 5,987 $ 2,622 $ 7,961
Elimination of operations of on-campus
participating properties:
Net (income) loss from on-campus
participating properties (1) (424) (1,023) 753 (187)
Amortization of investment in on-campus
participating properties (3,661) (1,309) (2,222) (3,270)
---------------- ---------------- ---------------- ----------------
15,890 3,655 1,153 4,504
Modifications to reflect operational
performance of on-campus participating
properties:
Our share of net cash flow (2) 842 214 583 471
Management fees 878 371 489 809
On-campus participating properties
development fees (3) 1,275 15 -- --
---------------- ---------------- ---------------- ----------------
Impact of on-campus participating
properties 2,995 600 1,072 1,280
---------------- ---------------- ---------------- ----------------
FUNDS FROM OPERATIONS - MODIFIED FOR
OPERATIONAL PERFORMANCE OF ON-
CAMPUS PARTICIPATING PROPERTIES ("FFOM") $ 18,885 $ 4,255 $ 2,225 $ 5,784
================ ================ ================ ================
FFOM per share - basic $ 1.27 $ 0.34
================ ================
FFOM per share - diluted $ 1.26 $ 0.34
================ ================
Weighted-average common shares outstanding:
Basic 14,882,944 12,513,130
================ ================
Diluted 15,047,202 12,634,130
================ ================
(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 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. Amounts represent actual cash received for the
year-to-date periods and amounts accrued for the interim periods. As a
result of using accrual-based results in interim periods and cash-based
results for year-to-date periods, the sum of reported interim results
may not agree to annual cash received.
(3) Development and construction management fees, including construction
savings earned under the general construction contract, 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
42
that are considered to be in our industry may not have similar ownership
structures; and therefore those companies may not calculate a FFOM in the same
manner that we do, or at all, limiting its usefulness as a comparative measure.
We compensate for these limitations by relying primarily on our GAAP and FFO
results and using our modified FFO only supplementally.
INFLATION
Our leases do not typically provide for rent escalations. However, they
typically do not have terms that extend beyond 12 months. Accordingly, although
on a short term basis we would be required to bear the impact of rising costs
resulting from inflation, we have the opportunity to raise rental rates at least
annually to offset such rising costs. However, a weak economic environment or
declining student enrollment at our principal universities may limit our ability
to raise rental rates.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We use fixed and floating rate debt to finance acquisitions, developments and
maturing debt. These borrowings expose us to market risk related to changes in
interest rates. For fixed rate debt, interest rate changes affect the fair
market value but do not impact net income to common stockholders or cash flows.
Conversely, for floating rate debt, interest rate changes generally do not
affect the fair market value but do impact net income to common stockholders and
cash flows, assuming other factors are held constant.
At December 31, 2005 and 2004 we had fixed rate debt of $212.7 million and
$129.0 million, respectively. Holding other variables constant (such as debt
levels), a one percentage point increase in interest rates (100 basis points)
would cause a $10.0 million and $13.7 million decline in the fair value of our
fixed rate debt as of December 31, 2005 and 2004, respectively. Conversely, a
one percentage point decrease in interest rates would cause a $10.6 million and
$15.9 million increase in the fair value of our fixed rate debt as of December
31, 2005 and 2004, respectively. Due to the structure of our floating rate debt
and interest rate protection instruments, the impact of a one percentage point
increase or decrease in interest rates on our net income to common stockholders
and cash flows would not be significant at December 31, 2005 or 2004.
All of our outstanding indebtedness is fixed rate except for our revolving
credit facility and the Cullen Oaks Phase II construction loan. Our revolving
credit facility had no outstanding balance at December 31, 2005 and bears
interest at the lender's Prime rate or LIBOR plus, in each case, a spread based
on our total leverage. The Cullen Oaks Phase II construction loan had an
outstanding balance of $16.4 million at December 31, 2005 and bears interest at
the lender's Prime rate or LIBOR plus 2.0%, at our election. We have in place an
interest rate swap agreement, designated as a cash flow hedge, which effectively
fixes the interest rate on the outstanding balance of the Cullen Oaks Phase I
mortgage loan at 5.5% through maturity in 2008. We anticipate incurring
additional variable rate indebtedness in the future, including draws under our
$100 million revolving credit facility. We may in the future use derivative
financial instruments to manage, or hedge, interest rate risks related to such
variable rate borrowings. We do not, and do not expect to, use derivatives for
trading or speculative purposes, and we expect to enter into contracts only with
major financial institutions.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required herein is included as set forth in Item 15 (a) -
Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. 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.
43
As required by SEC Rule 13a-15(b), we have carried out an evaluation, under the
supervision of 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 period 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 period covered by this report were effective.
There has been no change in our internal control over financial reporting during
our most recent fiscal quarter that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of American Campus Communities, Inc. is responsible for
establishing and maintaining adequate internal control over financial reporting.
We have designed our internal control over financial reporting to provide
reasonable assurance that our published financial statements are fairly
presented, in all material respects, in conformity with generally accepted
accounting principles.
Our management is required by paragraph (c) of Rule 13a-15 of the Securities
Exchange Act of 1934, as amended, to assess the effectiveness of our internal
control over financial reporting as of the end of each fiscal year. In making
this assessment, our management used the INTERNAL CONTROL -- INTEGRATED
FRAMEWORK issued in July 1994 by the Committee of Sponsoring Organizations of
the Treadway Commission ("COSO").
Our management conducted the required assessment of the effectiveness of our
internal control over financial reporting as of December 31, 2005. Based upon
this assessment, our management believes that our internal control over
financial reporting is effective as of December 31, 2005.
Ernst & Young LLP, our independent registered public accounting firm, issued an
attestation report on our assessment of our internal control over financial
reporting. This report appears on page F-1.
44
PART III
The information required by Part III is incorporated by reference from our
definitive proxy statement for our 2006 Annual Meeting of Stockholders.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained in the sections captioned "Board of Directors - Board
Size and Composition, Board Committees, and Guidelines on Governance and Codes
of Ethics", "Executive Officers" and "Section 16(a) Beneficial Ownership
Reporting Compliance" of the definitive proxy statement is incorporated herein
by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information contained in the section captioned "Board of Directors -
Compensation of Directors", "Compensation - Executive Officer Compensation" and
"Compensation - Employment Contracts, Termination of Employment and
Change-In-Control Arrangements" of the definitive proxy statement is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in the section captioned "Security Ownership" of the
definitive proxy statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained in the section captioned "Certain Relationships and
Related Transactions" of the definitive proxy statement is incorporated herein
by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information contained in the section captioned "Independent Auditor Fees" of
the definitive proxy statement is incorporated herein by reference.
45
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) FINANCIAL STATEMENTS
The following consolidated and combined financial information is
included as a separate section of this Annual Report on Form 10-K:
PAGE NO.
---------
Report of Independent Registered Public Accounting Firm - Internal Control over Financial Reporting F-1
Report of Independent Registered Public Accounting Firm - Audit F-2
Consolidated Balance Sheets as of December 31, 2005 and December 31, 2004 F-3
Consolidated and Combined Statements of Operations for the Company for the year ended December 31, 2005 and F-4
for the period from August 17, 2004 through December 31, 2004 and for the
Predecessor for the period from January 1, 2004 through August 16, 2004, and
for the year ended December 31, 2003
Consolidated and Combined Statements of Changes in Stockholders' and Predecessor Owners' Equity for the F-5
Company for the year ended December 31, 2005 and
for the period from August 17, 2004 through December 31, 2004 and for the
Predecessor for the period from January 1, 2004 through August 16, 2004, and
for the year ended December 31, 2003
Consolidated and Combined Statements of Cash Flows for the Company for the year ended December 31, 2005 and F-6
for the period from August 17, 2004 through
December 31, 2004 and for the Predecessor for the period from January 1, 2004
through August 16, 2004, and for the year ended December 31, 2003
Notes to Consolidated and Combined Financial Statements F-7
(B) EXHIBITS
Exhibit
Number Description of Document
- ------ -----------------------
3.1 Articles of Amendment and Restatement of American Campus Communities,
Inc. Incorporated by reference to Exhibit 3.1 to the Registration
Statement on Form S-11 (Registration No. 333-114813) of American
Campus Communities, Inc.
3.2 Bylaws of American Campus Communities, Inc. Incorporated by reference
to Exhibit 3.2 to the Registration Statement on Form S-11
(Registration No. 333-114813) of American Campus Communities, Inc.
4.1 Form of Certificate for Common Stock of American Campus Communities,
Inc. Incorporated by reference to Exhibit 4.1 to the Registration
Statement on Form S-11 (Registration No. 333-114813) of American
Campus Communities, Inc.
10.1 Form of Amended and Restated Partnership Agreement of American Campus
Communities Operating Partnership LP. Incorporated by reference to
Exhibit 10.1 to the Registration Statement on Form S-11 (Registration
No. 333-114813) of American Campus Communities, Inc.
10.2* American Campus Communities, Inc. 2004 Incentive Award Plan.
Incorporated by reference to Exhibit 10.2 to the Registration
Statement on Form S-11 (Registration No. 333-114813) of American
Campus Communities, Inc.
10.3 American Campus Communities, Inc. 2004 Outperformance Bonus Plan.
Incorporated by reference to Exhibit 10.3 to the Registration
Statement on Form S-11 (Registration No. 333-114813) of American
Campus Communities, Inc.
10.4 Form of PIU Grant Notice (including Registration Rights). Incorporated
by reference to Exhibit 10.4 to the Registration Statement on Form
S-11 (Registration No. 333-114813) of American Campus Communities,
Inc.
10.5 Form of Indemnification Agreement between American Campus Communities,
Inc. and certain of its directors and officers. Incorporated by
reference to Exhibit 10.5 to the Registration Statement on Form S-11
(Registration No. 333-114813) of American Campus Communities, Inc.
46
10.6 Form of Employment Agreement between American Campus Communities, Inc.
and William C. Bayless, Jr. Incorporated by reference to Exhibit 10.6
to the Registration Statement on Form S-11 (Registration No.
333-114813) of American Campus Communities, Inc.
10.7 Amendment No. 1 to Employment Agreement, dated as of April 28, 2005,
between American Campus Communities, Inc. and William C. Bayless, Jr.
Incorporated by reference to Exhibit 99.6 to Current Report on Form
8-K of American Campus Communities, Inc. (File No. 001-32265) filed on
May 3, 2005.
10.8 Form of Employment Agreement between American Campus Communities, Inc.
and Brian B. Nickel. Incorporated by reference to Exhibit 10.7 to the
Registration Statement on Form S-11 (Registration No. 333-114813) of
American Campus Communities, Inc.
10.9 Amendment No. 1 to Employment Agreement, dated as of April 28, 2005,
between American Campus Communities, Inc. and Brian B. Nickel.
Incorporated by reference to Exhibit 99.7 to Current Report on Form
8-K of American Campus Communities, Inc. (File No. 001-32265) filed on
May 3, 2005.
10.10 Employment Agreement, dated as of April 18, 2005, between American
Campus Communities, Inc. and James C. Hopke. Incorporated by reference
to Exhibit 99.1 to Current Report on Form 8-K of American Campus
Communities, Inc. (File No. 001-32265) filed on May 3, 2005.
10.11 Employment Agreement, dated as of April 28, 2005, between American
Campus Communities, Inc. and Greg A. Dowell. Incorporated by reference
to Exhibit 99.2 to Current Report on Form 8-K of American Campus
Communities, Inc. (File No. 001-32265) filed on May 3, 2005.
10.12 Separation Agreement, dated as of April 28, 2005, between American
Campus Communities, Inc. and Mark J. Hager. Incorporated by reference
to Exhibit 99.4 to Current Report on Form 8-K of American Campus
Communities, Inc. (File No. 001-32265) filed on May 3, 2005.
10.13 Form of Confidentiality and Noncompetition Agreement. Incorporated by
reference to Exhibit 10.9 to the Registration Statement on Form S-11
(Registration No. 333-114813) of American Campus Communities, Inc.
10.14 First Amended and Restated Management Agreement, dated as of August 1,
1998, between Dobie Center Properties, Ltd. and Texas Campus
Lifestyles Management (Dobie Center), L.C. Incorporated by reference
to Exhibit 10.10 to the Registration Statement on Form S-11
(Registration No. 333-114813) of American Campus Communities, Inc.
10.15 Amendment to First Amended and Restated Management Agreement and
Exclusive Leasing Agreement, dated as of February 1, 2004, between
Dobie Center Properties, Ltd. and Texas Campus Lifestyles Management
(Dobie Center), L.C. Incorporated by reference to Exhibit 10.11 to the
Registration Statement on Form S-11 (Registration No. 333-114813) of
American Campus Communities, Inc.
10.16 Property Management Agreement, dated as of December 2000, between
SHP-The Village at Riverside LP and American Campus Management
(Texas), Ltd. Incorporated by reference to Exhibit 10.12 to the
Registration Statement on Form S-11 (Registration No. 333-114813) of
American Campus Communities, Inc.
10.17 Credit Agreement, dated as of August 17, 2004, among American Campus
Communities Operating Partnership LP, as borrower, American Campus
Communities, Inc., as parent guarantor, the other entities listed on
the signature pages thereto as guarantors, the banks, financial
institutions and other institutional lenders listed on the signature
pages thereto as the initial lenders, Deutsche Bank Trust Company
Americas, as the initial issuer of Letters of Credit, the Swing Line
Bank, Deutsche Bank Trust Company Americas, as administrative agent,
Deutsche Bank Trust Company Americas, as collateral agent, Citigroup
Global Markets Inc., as syndication agent, and Deutsche Bank
Securities Inc. and Citigroup Global Markets Inc., as co-lead
arrangers and joint book running managers. Incorporated by reference
to Exhibit 10.1 to Current Report on Form 8-K of American Campus
Communities, Inc. (File No. 001-32265) filed on August 19, 2004.
47
10.18 Contribution Agreement, dated as of July 27, 2004, among American
Campus Communities, Inc., American Campus Communities Operating
Partnership LP, RAP-ACP, LLC and Reckson Strategic Venture Partners,
LLC and, with respect to certain sections, Citigroup Global Markets
Inc. and Deutsche Bank Securities Inc. Incorporated by reference to
Exhibit 10.14 to the Registration Statement on Form S-11 (Registration
No. 333-114813) of American Campus Communities, Inc.
10.19 Composite Contribution Agreement, dated as of July 27, 2004, by and
among American Campus Communities, Inc., American Campus Communities
Operating Partnership LP, RAP-ACP, LLC and Reckson Strategic Venture
Partners, LLC and, with respect to certain sections, Citigroup Global
Markets Inc. and Deutsche Bank Securities Inc., incorporating the
following amendments: (i) First Amendment to Contribution Agreement,
dated August 11, 2004 and (ii) Second Amendment to Contribution
Agreement, dated August 17, 2004. Incorporated by reference to Exhibit
10.2 to Current Report on Form 8-K of American Campus Communities,
Inc. (File No. 001-32265) filed on August 19, 2004.
10.20 Purchase and Sale Agreement, dated as of July 27, 2004, among Titan
Investments I, LLC, Anthony J. Patinella, Jr. and RAP Student Housing
Properties, LLC. Incorporated by reference to Exhibit 10.15 to the
Registration Statement on Form S-11 (Registration No. 333-114813) of
American Campus Communities, Inc.
10.21 Form of Option Agreement for the Dobie Center, by and between American
Campus Communities, Inc. and RSVP Student Housing, LLC. Incorporated
by reference to Exhibit 10.16 to the Registration Statement on Form
S-11 (Registration No. 333-114813) of American Campus Communities,
Inc.
10.22 Form of Option Agreement for The Village at Riverside, by and among
American Campus Communities, Inc., RSVP Student Housing, LLC and
RAP-ACP, LLC. Incorporated by reference to Exhibit 10.17 to the
Registration Statement on Form S-11 (Registration No. 333-114813) of
American Campus Communities, Inc.
10.23 Letter of Intent, dated as of July 27, 2004, between American Campus
Communities, Inc. and Titan Investments I, LLC, dated as of July 27,
2004. Incorporated by reference to Exhibit 10.18 to the Registration
Statement on Form S-11 (Registration No. 333-114813) of American
Campus Communities, Inc.
10.24 Agreement of Sale and Purchase, dated September 22, 2004, by and
between ACC OP Acquisitions, LLC and College Club Apartments at
Tallahassee, LLC. Incorporated by reference to Exhibit 10.1 to
Quarterly Report on Form 10-Q for the Quarter Ended March 31, 2005 of
American Campus Communities, Inc. (File No. 001-32265).
10.25 Agreement of Sale and Purchase, dated September 22, 2004, by and
between ACC OP Acquisitions, LLC and The Grove at University Club,
LLC. Incorporated by reference to Exhibit 10.2 to Quarterly Report on
Form 10-Q for the Quarter Ended March 31, 2005 of American Campus
Communities, Inc. (File No. 001-32265).
10.26 Agreement of Sale and Purchase, dated September 22, 2004, by and
between ACC OP Acquisitions, LLC and University Club Apartments of
Gainesville, LLC. Incorporated by reference to Exhibit 10.3 to
Quarterly Report on Form 10-Q for the Quarter Ended March 31, 2005 of
American Campus Communities, Inc. (File No. 001-32265).
10.27 Agreement of Sale and Purchase, dated September 22, 2004, by and
between ACC OP Acquisitions, LLC and University Club Apartments of
Tallahassee, LLC. Incorporated by reference to Exhibit 10.4 to
Quarterly Report on Form 10-Q for the Quarter Ended March 31, 2005 of
American Campus Communities, Inc. (File No. 001-32265).
10.28 Agreement of Sale and Purchase, dated September 22, 2004, by and
between ACC OP Acquisitions, LLC and The Greens at College Club, LLC.
Incorporated by reference to Exhibit 10.5 to Quarterly Report on Form
10-Q for the Quarter Ended March 31, 2005 of American Campus
Communities, Inc. (File No. 001-32265).
10.29 Purchase and Sale Agreement, dated February 28, 2005, by and between
ACC OP Acquisitions, LLC and Fairfield Pinehurst Park, Ltd.
Incorporated by reference to Exhibit 10.6 to Quarterly Report on Form
10-Q for the Quarter Ended March 31, 2005 of American Campus
Communities, Inc. (File No. 001-32265).
48
10.30 Third Amendment to Credit Agreement, dated as of June 17, 2005, among
American Campus Communities, Inc., as Parent Guarantor, American
Campus Communities Operating Partnership LP, the Subsidiary Guarantors
listed on the signature pages thereto, KeyBank National Association,
Deutsche Bank Trust Company Americas, as the resigning Administrative
Agent and resigning Collateral Agent, the other lenders that are
signatories thereto, and KeyBank National Association, as successor
Administrative Agent. Incorporated by reference to Exhibit 99.1 to
Current Report on Form 8-K of American Campus Communities, Inc. (File
No. 001-32265) filed on June 20, 2005.
10.31 Form of Contribution and Sale Agreement, dated as of December 2, 2005,
among Royal Tallahassee Partnership, Royal Tallahassee Partnership II
Limited Partnership, Royal Tallahassee III Partnership, Royal
Gainesville Limited Partnership, Royal Orlando Limited Partnership,
Royal Lexington Limited Partnership, Royal Tucson Entrada Real Limited
Partnership, Royal Texas-Tennessee Limited Partnership, Royal
Texas-Tennessee II Limited Partnership, Raiders Pass Phase II Limited
Partnership, Royal San Marcos Limited Partnership and Royal San
Antonio Limited Partnership, on the one hand, and American Campus
Communities, Inc. and American Campus Communities Operating
Partnership LP, on the other hand. Incorporated by reference to
Exhibit 99.1 to Current Report on Form 8-K of American Campus
Communities, Inc. (File No. 001-32265) filed on February 13, 2006.
10.32 Form of First Amendment to Contribution and Sale Agreement, dated as
of December 16, 2005, among Royal Tallahassee Partnership, Royal
Tallahassee Partnership II Limited Partnership, Royal Tallahassee III
Partnership, Royal Gainesville Limited Partnership, Royal Orlando
Limited Partnership, Royal Lexington Limited Partnership, Royal Tucson
Entrada Real Limited Partnership, Royal Texas-Tennessee Limited
Partnership, Royal Texas-Tennessee II Limited Partnership, Raiders
Pass Phase II Limited Partnership, Royal San Marcos Limited
Partnership and Royal San Antonio Limited Partnership, on the one
hand, and American Campus Communities, Inc. and American Campus
Communities Operating Partnership LP, on the other hand. Incorporated
by reference to Exhibit 99.2 to Current Report on Form 8-K of American
Campus Communities, Inc. (File No. 001-32265) filed on February 13,
2006.
10.33 Form of Second Amendment to Contribution and Sale Agreement, dated as
of January 30, 2006, among Royal Tallahassee Partnership, Royal
Tallahassee Partnership II Limited Partnership, Royal Tallahassee III
Partnership, Royal Gainesville Limited Partnership, Royal Orlando
Limited Partnership, Royal Lexington Limited Partnership, Royal Tucson
Entrada Real Limited Partnership, Royal Texas-Tennessee Limited
Partnership, Royal Texas-Tennessee II Limited Partnership, Raiders
Pass Phase II Limited Partnership, Royal San Marcos Limited
Partnership and Royal San Antonio Limited Partnership, on the one
hand, and American Campus Communities, Inc. and American Campus
Communities Operating Partnership LP, on the other hand. Incorporated
by reference to Exhibit 99.3 to Current Report on Form 8-K of American
Campus Communities, Inc. (File No. 001-32265) filed on February 13,
2006.
10.34 Form of Third Amendment to Contribution and Sale Agreement, dated as
of February 7, 2006, among Royal Tallahassee Partnership, Royal
Tallahassee Partnership II Limited Partnership, Royal Tallahassee III
Partnership, Royal Gainesville Limited Partnership, Royal Orlando
Limited Partnership, Royal Lexington Limited Partnership, Royal Tucson
Entrada Real Limited Partnership, Royal Texas-Tennessee Limited
Partnership, Royal Texas-Tennessee II Limited Partnership, Raiders
Pass Phase II Limited Partnership, Royal San Marcos Limited
Partnership and Royal San Antonio Limited Partnership, on the one
hand, and American Campus Communities, Inc. and American Campus
Communities Operating Partnership LP, on the other hand. Incorporated
by reference to Exhibit 99.4 to Current Report on Form 8-K of American
Campus Communities, Inc. (File No. 001-32265) filed on February 13,
2006.
10.35 Form of Fourth Amendment to Contribution and Sale Agreement, dated as
of February 8, 2006, among Royal Tallahassee Partnership, Royal
Tallahassee Partnership II Limited Partnership, Royal Tallahassee III
Partnership, Royal Gainesville Limited Partnership, Royal Orlando
Limited Partnership, Royal Lexington Limited Partnership, Royal Tucson
Entrada Real Limited Partnership, Royal Texas-Tennessee Limited
Partnership, Royal Texas-Tennessee II Limited Partnership, Raiders
Pass Phase II Limited Partnership, Royal San Marcos Limited
Partnership and Royal San Antonio Limited Partnership, on the one
hand, and American Campus Communities, Inc. and American Campus
Communities Operating Partnership LP, on the other hand. Incorporated
by reference to Exhibit 99.5 to Current Report on Form 8-K of American
Campus Communities, Inc. (File No. 001-32265) filed on February 13,
2006.
21.1 List of Subsidiaries of the Registrant.
49
23.2 Consent of Ernst & Young LLP.
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 0f 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.
* Indicates management compensation plan.
50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
March 13, 2006 AMERICAN CAMPUS COMMUNITIES, INC.
By: /s/ William C. Bayless, Jr.
----------------------------------
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
NAME TITLE DATE
---- ----- ----
/s/ William C. Bayless, Jr. President, Chief Executive Officer and Director March 13, 2006
- ---------------------------------------- (Principal Executive Officer)
William C. Bayless, Jr
/s/ Brian B. Nickel Executive Vice President, Chief Financial
- ---------------------------------------- Officer, Secretary and Director
Brian B. Nickel (Principal Financial Officer) March 13, 2006
/s/ Jonathan A. Graf Senior Vice President, Chief Accounting Officer
- ---------------------------------------- and Treasurer
Jonathan A. Graf (Principal Accounting Officer) March 13, 2006
/s/ R.D. Burck Chairman of the Board of Directors
- ----------------------------------------
R.D. Burck March 13, 2006
/s/ G. Steven Dawson Director
- ----------------------------------------
G. Steven Dawson March 13, 2006
/s/ Cydney Donnell Director
- ----------------------------------------
Cydney Donnell March 13, 2006
/s/ Edward Lowenthal Director
- ----------------------------------------
Edward Lowenthal March 13, 2006
/s/ Scott H. Rechler Director
---------------------------------------
Scott H. Rechler March 13, 2006
/s/ Winston W. Walker Director
----------------------------------------
Winston W. Walker March 13, 2006
51
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
THE BOARD OF DIRECTORS AND STOCKHOLDERS OF AMERICAN CAMPUS COMMUNITIES INC.
We have audited management's assessment, included in the accompanying Management
Report on Internal Control over Financial Reporting, that American Campus
Communities Inc. maintained effective internal control over financial reporting
as of December 31, 2005, based on criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). American Campus
Communities Inc.'s management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express an
opinion on management's assessment and an opinion on the effectiveness of the
company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that American Campus Communities Inc.
maintained effective internal control over financial reporting as of December
31, 2005, is fairly stated, in all material respects, based on the COSO
criteria. Also, in our opinion, American Campus Communities Inc. maintained, in
all material respects, effective internal control over financial reporting as of
December 31, 2005, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
American Campus Communities Inc. and Subsidiaries as of December 31, 2005 and
December 31, 2004, and the related consolidated statements of operations,
changes in stockholders' equity, and cash flows for the year ended December 31,
2005, and the period from August 17, 2004 to December 31, 2004, and the related
combined statements of operations, changes in owners' equity, and cash flows of
the American Campus Predecessor (American Campus Communities, L.L.C. and
Affiliated Student Housing Properties) for the period from January 1, 2004
through August 16, 2004, and for the year ended December 31, 2003 and our report
dated March 10, 2006 expressed an unqualified opinion thereon.
Ernst & Young LLP
Austin, Texas
March 10, 2006
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
THE BOARD OF DIRECTORS AND STOCKHOLDERS OF AMERICAN CAMPUS COMMUNITIES INC.
We have audited the accompanying consolidated balance sheets of American Campus
Communities Inc. and Subsidiaries as of December 31, 2005 and December 31, 2004,
and the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for the year ended December 31, 2005, and the period from
August 17, 2004 to December 31, 2004, and the related combined statements of
operations, changes in owners' equity, and cash flows of the American Campus
Predecessor (American Campus Communities, L.L.C. and Affiliated Student Housing
Properties) for the period from January 1, 2004 through August 16, 2004, and for
the year ended December 31, 2003. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of American Campus
Communities Inc. at December 31, 2005 and December 31, 2004, and the
consolidated statements of operations, changes in stockholders' equity, and cash
flows for the year ended December 31, 2005, and the period from August 17, 2004
to December 31, 2004, and the related combined statements of operations, changes
in owners' equity, and cash flows of the American Campus Predecessor for the
period from January 1, 2004 through August 16, 2004, and for the year ended
December 31, 2003, in conformity with U.S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of American Campus
Communities Inc.'s internal control over financial reporting as of December 31,
2005, based on criteria established in Internal Control--Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated March 10, 2006 expressed an unqualified opinion thereon.
Ernst & Young LLP
Austin, Texas
March 10, 2006
F-2
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31,
----------------------------------------
2005 2004
------------------- -------------------
ASSETS
Investments in real estate:
Owned off-campus properties, net $ 417,098 $ 250,100
Owned off-campus property - held for sale -- 22,350
On-campus participating properties, net 80,370 68,064
------------------- -------------------
Investments in real estate, net 497,468 340,514
Cash and cash equivalents 24,641 4,635
Restricted cash 9,502 9,231
Student contracts receivable, net 2,610 2,164
Other assets 16,641 11,084
------------------- -------------------
TOTAL ASSETS $ 550,862 $ 367,628
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Secured debt $ 291,646 $ 201,014
Accounts payable and accrued expenses 7,983 5,443
Other liabilities 25,155 20,294
------------------- -------------------
TOTAL LIABILITIES 324,784 226,751
Minority interests 2,851 2,648
Commitments and contingencies (Note 16)
Stockholders' equity:
Common shares, $.01 par value, 800,000,000 shares
authorized, 17,190,000 and 12,615,000 shares issued
and outstanding at December 31, 2005 and 2004,
respectively 172 126
Additional paid in capital 233,388 138,343
Accumulated earnings and distributions (10,817) (282)
Accumulated other comprehensive income 484 42
------------------- -------------------
TOTAL STOCKHOLDERS' EQUITY 223,227 138,229
------------------- -------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 550,862 $ 367,628
=================== ===================
See accompanying notes to consolidated and combined financial statements.
F-3
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
COMPANY PREDECESSOR
----------------------------------- -----------------------------------
PERIOD FROM PERIOD FROM
YEAR ENDED AUGUST 17, 2004 JANUARY 1, 2004 YEAR ENDED
DECEMBER 31, TO DECEMBER 31, TO AUGUST 16, DECEMBER 31,
2005 2004 2004 2003
---------------- ---------------- ---------------- ----------------
REVENUES:
Owned off-campus properties $ 59,239 $ 15,254 $ 19,861 $ 31,514
On-campus participating properties 18,470 8,078 9,340 16,482
Third party development services 5,717 1,367 3,896 7,830
Third party development services - on-campus
participating properties 137 43 497 109
Third party management services - affiliates -- -- 178 335
Third party management services 2,786 1,138 789 854
Resident services 1,125 382 -- --
---------------- ---------------- ---------------- ----------------
TOTAL REVENUES 87,474 26,262 34,561 57,124
OPERATING EXPENSES:
Owned off-campus properties 27,551 6,741 10,120 15,272
On-campus participating properties 8,325 2,604 5,391 7,925
Third party development and management services 6,969 2,140 3,403 5,389
General and administrative 6,714 4,202 1,032 2,737
Depreciation and amortization 16,471 4,158 5,815 8,868
Ground/facility lease 873 214 598 489
---------------- ---------------- ---------------- ----------------
TOTAL OPERATING EXPENSES 66,903 20,059 26,359 40,680
---------------- ---------------- ---------------- ----------------
OPERATING INCOME 20,571 6,203 8,202 16,444
NONOPERATING INCOME AND (EXPENSES):
Interest income 825 39 43 71
Interest expense (17,368) (5,556) (11,142) (16,940)
Amortization of deferred financing costs (1,176) (842) (369) (558)
Other nonoperating income 1,279 653 274 --
---------------- ---------------- ---------------- ----------------
TOTAL NONOPERATING EXPENSES (16,440) (5,706) (11,194) (17,427)
---------------- ---------------- ---------------- ----------------
Income (loss) before income taxes, minority
interests, and discontinued operations 4,131 497 (2,992) (983)
Income tax (provision) benefit (186) 728 -- --
Minority interests (164) (29) 129 16
---------------- ---------------- ---------------- ----------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 3,781 1,196 (2,863) (967)
Discontinued operations:
(Loss) income attributable to discontinued
operations (2) 606 (239) 7
Gain (loss) from disposition of real estate 5,883 -- (39) 16
---------------- ---------------- ---------------- ----------------
Total discontinued operations 5,881 606 (278) 23
---------------- ---------------- ---------------- ----------------
NET INCOME (LOSS) $ 9,662 $ 1,802 $ (3,141) $ (944)
================ ================ ================ ================
Income per share - basic:
Income from continuing operations per share $ 0.25 $ 0.10
================ ================
Net income per share $ 0.65 $ 0.14
================ ================
Income per share - diluted:
Income from continuing operations per share $ 0.26 $ 0.10
================ ================
Net income per share $ 0.65 $ 0.15
================ ================
Weighted-average common shares outstanding:
Basic 14,882,944 12,513,130
================ ================
Diluted 15,047,202 12,634,130
================ ================
Distributions declared per common share $ 1.35 $ 0.1651
================ ================
See accompanying notes to consolidated and combined financial statements.
F-4
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
CONSOLIDATED AND COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' AND PREDECESSOR OWNERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
ACCUMULATED
PAR VALUE OF ADDITIONAL ACCUMULATED OTHER PREDECESSOR
COMMON COMMON PAID IN EARNINGS AND COMPREHENSIVE OWNERS'
SHARES SHARES CAPITAL DISTRIBUTIONS (LOSS) INCOME EQUITY TOTAL
PREDECESSOR ------------ ------------ ------------ ------------- ---------------- ------------- -----------
Predecessor owners' equity,
December 31, 2002 -- $ -- $ -- $ -- $ (46) $ 35,572 $ 35,526
Contributions -- -- -- -- -- 3,538 3,538
Distributions -- -- -- -- -- (10,311) (10,311)
Comprehensive loss:
Change in fair value of
interest rate swap -- -- -- -- (153) -- (153)
Change in fair value of
interest rate cap -- -- -- -- 2 -- 2
Net loss -- -- -- -- -- (944) (944)
-----------
Total comprehensive loss -- -- -- -- -- -- (1,095)
------------ ------------ ------------ ------------- ---------------- ------------- -----------
Predecessor owners' equity,
December 31, 2003 -- -- -- -- (197) 27,855 27,658
Contributions -- -- -- -- -- 860 860
Distributions -- -- -- -- -- (2,212) (2,212)
Distribution of the Village at
Riverside and other non-core
assets to Predecessor owners -- -- -- -- -- (2,005) (2,005)
Comprehensive loss:
Change in fair value of
interest rate swap -- -- -- -- 3 -- 3
Net loss -- -- -- -- -- (3,141) (3,141)
-----------
Total comprehensive loss -- -- -- -- -- -- (3,138)
------------ ------------ ------------ ------------- ---------------- ------------- -----------
Predecessor owners' equity,
August 16, 2004 -- $ -- $ -- $ -- $ (194) $ 21,357 $ 21,163
====================================================================================================================================
COMPANY
Reclassify Predecessor
owners' equity -- $ -- $ 21,357 $ -- $ -- $ (21,357) $ --
Net proceeds from sale of
common stock 12,615,000 126 197,694 -- -- -- 197,820
Issuance of fully vested
restricted stock units -- -- 125 -- -- -- 125
Fair value of profits
interest units granted -- -- 2,117 -- -- -- 2,117
Record minority interests for
profits interest units -- -- (1,424) -- -- -- (1,424)
Redemption of ownership interest
of Predecessor owners -- -- (80,127) -- -- -- (80,127)
Distributions to Predecessor
owners -- -- (1,399) -- -- -- (1,399)
Distributions to common and
restricted stockholders -- -- -- (2,084) -- -- (2,084)
Comprehensive income:
Change in fair value of
interest rate swap -- -- -- -- 191 -- 191
Expiration of interest rate cap -- -- -- -- 45 -- 45
Net income -- -- -- 1,802 -- -- 1,802
-----------
Total comprehensive income -- -- -- -- -- -- 2,038
------------ ------------ ------------ ------------- ---------------- ------------- -----------
Stockholders' equity,
December 31, 2004 12,615,000 126 138,343 (282) 42 -- 138,229
Net proceeds from sale of
common stock 4,575,000 46 96,549 -- -- -- 96,595
Issuance of fully vested
restricted stock units -- -- 150 -- -- -- 150
Record minority interests for
common units -- -- (202) -- -- -- (202)
Amortization of restricted
stock awards -- -- 219 -- -- -- 219
Distributions to Predecessor
owners -- -- (1,671) -- -- -- (1,671)
Distributions to common and
restricted stockholders -- -- -- (20,197) -- -- (20,197)
Comprehensive income:
Change in fair value of
interest rate swap -- -- -- -- 442 -- 442
Net income -- -- -- 9,662 -- -- 9,662
-----------
Total comprehensive income -- -- -- -- -- -- 10,104
------------ ------------ ------------ ------------- ---------------- ------------- -----------
STOCKHOLDERS' EQUITY,
DECEMBER 31, 2005 17,190,000 $ 172 $ 233,388 $ (10,817) $ 484 $ -- $ 223,227
============ ============ ============ ============= ================ ============= ===========
See accompanying notes to consolidated and combined financial statements.
F-5
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
COMPANY PREDECESSOR
-------------------------------- --------------------------------
PERIOD FROM PERIOD FROM
YEAR ENDED AUGUST 17, 2004 JANUARY 1, 2004 YEAR ENDED
DECEMBER 31, TO DECEMBER 31, TO AUGUST 16, DECEMBER 31,
2005 2004 2004 2003
-------------- --------------- --------------- ---------------
OPERATING ACTIVITIES
Net income (loss) $ 9,662 $ 1,802 $ (3,141) $ (944)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
(Gain) loss from disposition of real estate (5,883) -- 39 --
Gain on sale of option to acquire interest in student
housing property (849) -- -- --
Minority interests share of income (loss) 164 29 (129) (16)
Depreciation and amortization 16,471 4,395 5,949 9,214
Amortization of deferred financing costs and debt
premiums 463 933 421 587
Share-based compensation 369 2,242 -- --
Income tax provision (benefit) 186 (728) -- --
Changes in operating assets and liabilities:
Restricted cash 308 4,970 (5,016) (2,036)
Student contracts receivable, net (446) (727) 860 (378)
Other assets (4,082) 746 2,321 (265)
Accounts payable and accrued expenses 2,254 (910) 2,591 (421)
Other liabilities 1,812 199 932 1,105
-------------- --------------- --------------- ---------------
Net cash provided by operating activities 20,429 12,951 4,827 6,846
-------------- --------------- --------------- ---------------
INVESTING ACTIVITIES
Net proceeds from disposition of real estate 28,023 -- -- --
Cash paid for property acquisitions (72,763) -- -- --
Investments in owned off-campus properties (51,037) (13,220) (47,900) (21,777)
Investments in on-campus participating properties (15,887) (1,316) (565) (3,788)
Purchase of furniture, fixtures and equipment (742) (401) (219) (197)
Student housing facility subject to lease-held for sale -- -- -- (7,976)
Net proceeds from sale of option to acquire interest
in student housing property 651 -- -- --
-------------- --------------- --------------- ---------------
Net cash used in investing activities (111,755) (14,937) (48,684) (33,738)
-------------- --------------- --------------- ---------------
FINANCING ACTIVITIES
Net (paydown of) proceeds from revolving credit facility
and line of credit (11,800) 9,930 1,796 (716)
Proceeds from construction loans 15,871 540 41,170 29,605
Proceeds from bridge/mortgage loan 38,800 -- -- --
Repayment of debt in connection with IPO -- (105,499) -- --
Principal payments on debt (3,772) (1,650) (1,403) (2,997)
Net proceeds from notes payable - related parties -- -- -- 20
Change in construction accounts payable (404) (6,860) 2,044 3,943
Debt issuance costs (1,689) (259) (1,653) (1,513)
Proceeds from sale of common stock 102,938 220,763 -- --
Offering costs (6,598) (21,596) (1,348) --
Distributions to common and restricted stockholders (20,180) (2,084) -- --
Contributions from Predecessor owners -- -- 860 3,538
Distributions to Predecessor owners (1,671) (1,399) (2,212) (10,311)
Redemption of ownership interests of Predecessor owners -- (85,853) -- --
Distributions to minority partners (163) (20) (16) (16)
-------------- --------------- --------------- ---------------
Net cash provided by financing activities 111,332 6,013 39,238 21,553
-------------- --------------- --------------- ---------------
Net change in cash and cash equivalents 20,006 4,027 (4,619) (5,339)
Cash and cash equivalents at beginning of period 4,635 608 5,227 10,566
-------------- --------------- --------------- ---------------
Cash and cash equivalents at end of period $ 24,641 $ 4,635 $ 608 $ 5,227
============== =============== =============== ===============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES
Loans assumed in connection with property acquisitions $ (47,170) $ -- $ -- $ --
============== =============== =============== ===============
Reduction of investment in student housing due to fire $ -- $ -- $ -- $ (3,750)
============== =============== =============== ===============
Financing of equipment through capital lease obligations $ 388 $ 69 $ 302 $ 117
============== =============== =============== ===============
Change in fair value of derivative instruments, net $ 442 $ (134) $ 373 $ (151)
============== =============== =============== ===============
Transfer of leasehold asset $ -- $ -- $ 7,976 $ --
============== =============== =============== ===============
Repayment by transferee of note payable on leasehold
asset held for sale $ -- $ -- $ (8,080) $ --
============== =============== =============== ===============
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 $ -- $ (13,845) $ -- $ --
============== =============== =============== ===============
Distribution of liabilities of The Village at
Riverside and other non-core assets to
Predecessor owners $ -- $ 11,840 $ -- $ --
============== =============== =============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 18,030 $ 7,657 $ 9,960 $ 17,665
============== =============== =============== ===============
Income taxes paid $ 6 $ 67 $ -- $ --
============== =============== =============== ===============
See accompanying notes to consolidated and combined financial statements.
F-6
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") is a real estate investment
trust ("REIT") that was incorporated on March 9, 2004 and commenced operations
effective with the completion of an initial public offering ("IPO") on August
17, 2004. Through the Company's controlling interest in American Campus
Communities Operating Partnership LP (the "Operating Partnership") and American
Campus Communities Services, Inc., (the Company's taxable REIT subsidiary or
"TRS"), the Company is one of the largest owners, managers and developers of
high quality student housing properties in the United States in terms of beds
owned and under management. The Company is a fully integrated, self-managed and
self-administered equity REIT with expertise in the acquisition, design,
financing, development, construction management, leasing and management of
student housing properties.
Concurrent with the consummation of various formation transactions, the IPO
consisted of the sale of 12,615,000 shares of the Company's common stock at a
price per share of $17.50, including the exercise of the underwriters'
over-allotment option. Gross proceeds to the Company were approximately $220.8
million (approximately $197.8 million net of the underwriters' discount and
offering costs). As part of the various formation transactions, the Company
redeemed the ownership interests of its Predecessor owners, acquired a minority
ownership interest in four owned off-campus properties, repaid certain
construction and permanent indebtedness, distributed an owned off-campus
property and other non-core assets to its Predecessor owners, and entered into a
revolving credit facility. In addition, on July 5, 2005, the Company completed
an 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 the exercise of the
underwriters' over-allotment option. The offering generated gross proceeds of
approximately $102.9 million (approximately $96.6 million net of the
underwriters' discount and offering costs).
As of December 31, 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
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 also provides construction management and
development services for student housing properties owned by colleges and
universities, charitable foundations, and others. As of December 31, 2005, the
Company provided third party management and leasing services for 17 student
housing properties (12 of which the Company served as the third party developer
and construction manager) that represented approximately 10,000 beds in
approximately 4,100 units. Third party management and leasing services are
typically provided pursuant to multi-year management contracts that have initial
terms that range from one to five years. As of December 31, 2005, the Company's
total owned and managed portfolio included 42 properties that represented
approximately 27,100 beds in approximately 9,700 units.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND COMBINATION
The accompanying consolidated financial statements include all of the accounts
of the Company, the Operating Partnership and the subsidiaries of the Operating
Partnership. Ownership interests contributed to the Operating Partnership by the
Predecessor entities have been accounted for as a reorganization of entities
under common control in a manner similar to a pooling-of-interests. Accordingly,
the contributed assets and assumed liabilities were recorded at the
Predecessor's historical cost basis. This method of accounting also requires the
reporting of results of operations for the period in which the reorganization
occurred as though the entities had been combined at either the beginning of the
period or inception. The reorganization did not require any material adjustments
to conform 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.
F-7
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
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. All dollar
amounts in the tables herein, except share and per share amounts, are stated in
thousands unless otherwise indicated.
In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51, Consolidated Financial Statements" (FIN 46"),
which was revised in December 2003. This interpretation requires certain
variable interest entities ("VIEs") to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. This interpretation was
effective for periods ending after March 15, 2004. As none of the Company's
joint ventures meet the definition of a VIE as defined in FIN 46, the issuance
of this interpretation had no effect on the Company's consolidated financial
statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States ("GAAP") requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosures of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
INVESTMENTS IN REAL ESTATE
Investments in real estate are recorded at historical cost. Major improvements
that extend the life of an asset are capitalized and depreciated over the
remaining useful life of the asset. The cost of ordinary repairs and maintenance
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
participating properties 25-34 years (shorter of useful
life or respective lease term)
Furniture, fixtures and equipment 3-7 years
The cost of buildings and improvements includes the purchase price of the
property, including legal fees and acquisition costs. Project costs directly
associated with the development and construction of an owned real estate
project, which include interest, property taxes, and amortization of deferred
finance costs, are capitalized as construction in progress. Upon completion of
the project, costs are transferred into the applicable asset category and
depreciation commences. Interest totaling approximately $1.7 million, $1.8
million and $0.4 million was capitalized during the years ended December 31,
2005, 2004, and 2003, respectively. Amortization of deferred financing costs
totaling approximately $0.1 million, $0.2 million, and $0.1 million was
capitalized during the years ended December 31, 2005, 2004, and 2003,
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 December 31, 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
F-8
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
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.
LONG-LIVED ASSETS-HELD FOR SALE
Long-lived assets to be disposed of are classified as held for sale in the
period in which all of the following criteria are met:
a. Management, having the authority to approve the action, commits
to a plan to sell the asset
b. The asset is available for immediate sale in its present
condition subject only to terms that are usual and customary for
sales of such assets
c. An active program to locate a buyer and other actions required
to complete the plan to sell the asset have been initiated
d. The sale of the asset is probable, and transfer of the asset is
expected to qualify for recognition as a completed sale, within
one year
e. The asset is being actively marketed for sale at a price that is
reasonable in relation to its current fair value
f. Actions required to complete the plan indicate that it is
unlikely that significant changes to the plan will be made or
that the plan will be withdrawn.
Concurrent with this classification, the asset is recorded at the lower of cost
or fair value, and depreciation ceases.
ON-CAMPUS PARTICIPATING PROPERTIES
The Company enters into ground and facility leases ("Leases") with university
systems and colleges ("Lessor") to finance, construct, and manage student
housing facilities. Under the terms of the leases, the Lessor has title to the
land and any improvements placed thereon. The Lease terminates upon final
repayment of the construction related financing, the amortization period of
which is contractually stipulated. Pursuant to EITF No. 97-10: THE EFFECT OF
LESSEE INVOLVEMENT IN ASSET CONSTRUCTION, the Company's involvement in
construction requires the Lessor's post construction ownership of the
improvements to be treated as a sale with a subsequent leaseback by the Company.
The sale-leaseback transaction has been accounted for as a financing, and as a
result, any fee earned during construction is deferred and recognized over the
term of the lease. The resulting financing obligation is reflected at the terms
of the underlying financing, i.e., interest is accrued at the contractual rates
and principal reduces in accordance with the contractual principal repayment
schedules.
The Company reflects these assets subject to ground/facility leases at
historical cost, less amortization. Costs are amortized, and deferred fee
revenue in excess of the cost of providing the service are recognized, over the
lease term.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. The Company maintains cash
balances in various banks. At times the Company's balances may exceed the $0.1
million amount insured by the FDIC. As the Company only uses money-centered
financial institutions, the Company does not believe it is exposed to any
significant credit risk related to its cash and cash equivalents. Cash and cash
equivalents as of December 31, 2005 includes approximately $14.4 million of
proceeds remaining from the Company's July 2005 equity offering.
F-9
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
RESTRICTED CASH
Restricted cash consists of funds held in trust and invested in low risk
investments, generally consisting of government backed securities, as permitted
by the indentures of trusts, which were established in connection with three
bond issues. Additionally, restricted cash includes escrow accounts held by
lenders and resident security deposits, as required by law in certain states.
Certain funds held by a trustee in a required escrow account are being invested
under a forward delivery agreement in government backed securities that have a
remaining maturity when purchased of six months. Restricted cash also consists
of escrow deposits made in connection with potential property acquisitions.
These escrow deposits are invested in an interest-bearing account at a
federally-insured bank. Realized and unrealized gains and losses are not
material for the periods presented.
INTANGIBLE ASSETS
In connection with the property acquisitions discussed in Note 5, the Company
capitalized approximately $1.1 million related to management's estimate of the
fair value of the in-place leases assumed. This intangible asset was amortized
on a straight-line basis over a term of approximately six months, which
represented the average remaining term of such leases. This asset was fully
amortized as of December 31, 2005 and the amortization is included in
depreciation expense in the accompanying consolidated statement of operations
for the year ended December 31, 2005.
DEFERRED FINANCING COSTS
The Company defers financing costs and amortizes the costs over the terms of the
related debt using the effective interest method. Upon repayment of or in
conjunction with a material change in the terms of the underlying debt
agreement, any unamortized costs are charged to earnings. Accordingly,
concurrent with the pay off of two mortgage loans and three construction loans
in connection with the IPO, unamortized finance costs totaling approximately
$0.6 million were charged to earnings for the year ended December 31, 2004.
Amortization expense, net of amounts capitalized, approximated $1.2 million,
$1.4 million, and $0.6 million for the years ended December 31, 2005, 2004, and
2003, respectively. Accumulated amortization at December 31, 2005 and 2004
approximated $2.9 million and $1.6 million, respectively. Deferred financing
costs, net of amortization, are included in other assets on the accompanying
consolidated balance sheets.
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 December 31, 2005 and December 31, 2004, net unamortized debt premiums
were $4.4 million and $-0-, respectively, and are included in secured debt on
the accompanying consolidated balance sheets.
RENTAL REVENUES AND RELATED RECEIVABLES
Students are required to execute lease contracts with payment schedules that
vary from single to monthly payments. Receivables are recorded when billed,
revenues and related lease incentives are recognized on a straight-line basis
over the term of the contracts, and balances are considered past due when
payment is not received on the contractual due date. Generally, the Company
requires each executed contract to be accompanied by a refundable security
deposit and a signed parental guaranty. Security deposits are refundable, net of
any outstanding charges, upon expiration of the underlying contract.
Allowances for doubtful accounts are established when management determines that
collection of receivables are doubtful. When management has determined
receivables to be uncollectible, they are removed as an asset with a
corresponding reduction in the allowance for doubtful accounts.
F-10
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
The allowance for doubtful accounts is summarized as follows:
BALANCE, BEGINNING CHARGED TO BALANCE, END OF
OF PERIOD EXPENSE WRITE-OFFS PERIOD
------------------ ---------- ---------- ---------------
Year ended December 31, 2003 $ 1,576 $ 584 $ (103) $ 2,057
Year ended December 31, 2004 (1) $ 2,057 $ 646 $(1,851) $ 852
Year ended December 31, 2005 $ 852 $ 808 $ (501) $ 1,159
(1) In 2004, the Company wrote off essentially all receivables that were
100% reserved.
THIRD PARTY DEVELOPMENT SERVICES REVENUE AND COSTS
Costs associated with the pursuit of development and construction management
contracts are expensed as incurred, until such time that management believes it
is probable the contract will be executed. Costs are then deferred and
recognized in relation to the revenues earned on executed contracts. Development
and construction revenues and related costs are recognized by the Company using
the percentage of completion method, as determined by construction costs
incurred relative to total estimated construction costs. For projects where the
Company's fee is based on a fixed price, any cost overruns incurred during
construction, as compared to the original budget, will reduce the net fee
generated on those projects. Incentive fees are recognized when performance has
been verified by an independent third party.
The Company also evaluates the collectibility of fee income and expense
reimbursements generated through the provision of development and construction
management services based upon the individual facts and circumstances, including
the contractual right to receive such amounts in accordance with the terms of
the various projects, and reserves any amounts that are deemed to be
uncollectible. Management also evaluates the status of awarded projects on a
periodic basis and expenses any deferred costs related to projects whose current
status indicates the costs may not provide future value to the Company in the
form of revenues. Such write-offs are included in third party development and
management services expenses on the accompanying consolidated and combined
statements of operations. As of December 31, 2005, the Company has capitalized
approximately $1.5 million in pre-development costs related to awarded projects
that have not yet commenced construction. Such costs are included in other
assets in the accompanying consolidated balance sheets.
THIRD PARTY MANAGEMENT SERVICES REVENUES
Management fees are recognized when earned in accordance with each management
contract. Incentive management fees are recognized when the incentive criteria
are anticipated to be met.
ADVERTISING COSTS
Advertising costs are expensed during the period incurred. The Company uses no
direct response advertising. Advertising expense approximated $1.6 million, $0.4
million, and $0.9 million in 2005, 2004, and 2003, respectively.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Derivative financial instruments are reported on the balance sheet at fair
value. Changes in fair value are recognized either in earnings or as other
comprehensive income, depending on whether the derivative has been designated as
a fair value or cash flow hedge and whether it qualifies as part of a hedging
relationship, the nature of the exposure being hedged, and how effective the
derivative is at offsetting movements in underlying exposure. The Company
discontinues hedge accounting when: (i) it determines that the derivative is no
longer effective in offsetting changes in the fair value or cash flows of a
hedged item; (ii) the derivative expires or is sold, terminated, or exercised;
(iii) it is no longer probable that the forecasted transaction will occur; or
(iv) management determines that designating the derivative as a hedging
instrument is no longer appropriate. In all situations in which hedge accounting
is discontinued and the derivative remains outstanding, the Company will carry
the derivative at its fair value on the balance sheet, recognizing changes in
the fair value in current-period earnings. The Company uses interest rate swaps
to effectively convert a portion of its floating rate debt to fixed rate, thus
reducing the impact of rising interest rates on interest payments. These
instruments are designated as cash flow hedges and qualify for the short cut
method under SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES, as amended. The interest differential to be paid or received is
accrued as interest expense. The Company's counter-parties are major financial
institutions.
F-11
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
COMMON STOCK ISSUANCE COSTS
In accordance with the Securities and Exchange Commission's Staff Accounting
Bulletin No. 5, specific incremental costs directly attributable to the
Company's equity offerings were deferred and charged against the gross proceeds
of the offering. As such, underwriting commissions and other common stock
issuance costs are reflected as a reduction of additional paid in capital.
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes net income (loss) and other comprehensive
income (loss), consisting of unrealized gains (losses) on derivative
instruments. Comprehensive income (loss) is presented in the accompanying
consolidated and combined statements of changes in stockholders' and Predecessor
owners' equity, and accumulated other comprehensive income (loss) is displayed
as a separate component of stockholders' and Predecessor owners' equity.
STOCK-BASED COMPENSATION
The Company accounts for equity based awards in accordance with SFAS No. 123
(R), SHARE-BASED PAYMENT, which the Company adopted in the first quarter of
2005. Accordingly, the Company has recognized compensation expense related to
certain restricted stock awards (see Note 11) 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 $1.3 million and $0.9 million was recognized for
the years ended December 31, 2005 and 2004, respectively. In December 2005, the
Company recognized a gain of approximately $0.8 million related to the sale of
the Company's option to acquire a 23.33% interest held by an affiliate of its
Predecessor owners in Dobie Center, an off-campus student housing property. The
Company received approximately $0.6 million in cash proceeds in conjunction with
sale of the option. The hold-back portion of approximately $0.2 million will be
collected by the Company upon expiration of the six-month survival period
related to representations and warranties. In addition, the Company also
recognized a gain of approximately $0.4 million and $0.7 million in 2005 and
2004, respectively, related to insurance proceeds received for a fire that
occurred at one of the Company's owned off-campus properties in 2003. A gain of
approximately $0.2 million was also recognized in 2004 related to insurance
proceeds received for hail damage that occurred at one of the Company's
on-campus participating properties in 2003.
FINANCIAL INSTRUMENTS
The Company does not hold or issue financial instruments for trading purposes.
The fair value of financial instruments was estimated based on the following
methods and assumptions:
F-12
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
CASH AND CASH EQUIVALENTS, RESTRICTED CASH, STUDENT CONTRACTS RECEIVABLE, OTHER
ASSETS, ACCOUNTS PAYABLE AND ACCRUED EXPENSES, and OTHER LIABILITIES: the
carrying amount approximates fair value, due to the short maturity of these
instruments.
MORTGAGE LOANS: the fair value of mortgage loans is based on the present value
of the cash flows at current rates through maturity. As of December 31, 2005,
the Company estimated the fair value of its fixed-rate mortgage loans to be
approximately $223.9 million.
CONSTRUCTION LOAN: the fair value of the Company's construction loan
approximates carrying value due to the variable interest rate feature of this
instrument.
BONDS PAYABLE: the fair value of bonds payable is based on market quotes for
bonds outstanding. As of December 31, 2005, the Company estimated the fair value
of its bonds payable to be approximately $68.9 million.
DERIVATIVE INSTRUMENTS: these instruments are reported on the balance sheet at
fair value, which is based on calculations provided by independent, third-party
financial institutions and represent the discounted future cash flows expected,
based on the projected future interest rate curves over the life of the
instrument.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the current
period presentation.
F-13
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
3. EARNINGS PER SHARE
Basic income per share is computed using net income and the weighted average
number of shares of the Company's common stock outstanding during the period,
including restricted stock units ("RSUs") issued to outside directors. Diluted
income 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 Profits
Interest Units ("PIUs"). See Note 11 for a discussion of RSUs, common units, and
RSAs.
The following is a summary of the elements used in calculating basic and diluted
income per share for the year ended December 31, 2005 and for the period
subsequent to the IPO (August 17, 2004 through December 31, 2004):
PERIOD FROM
YEAR ENDED AUGUST 17, 2004 THROUGH
DECEMBER 31, 2005 DECEMBER 31, 2004
--------------------- -------------------------
BASIC NET INCOME PER SHARE CALCULATION:
Income from continuing operations $ 3,781 $ 1,196
Discontinued operations 5,881 606
--------------------- -------------------------
Net income $ 9,662 $ 1,802
===================== =========================
Income from continuing operations - per share $ 0.25 $ 0.10
===================== =========================
Income from discontinued operations - per share $ 0.40 $ 0.04
===================== =========================
Net income - per share $ 0.65 $ 0.14
===================== =========================
Basic weighted average common shares outstanding 14,882,944 12,513,130
===================== =========================
DILUTED NET INCOME PER SHARE CALCULATION:
Income from continuing operations $ 3,781 $ 1,196
Income allocated to common unit/PIU holders (1) 105 30
--------------------- -------------------------
Income from continuing operations, as adjusted 3,886 1,226
Discontinued operations 5,881 606
--------------------- -------------------------
Net income, as adjusted $ 9,767 $ 1,832
===================== =========================
Income from continuing operations - per share $ 0.26 $ 0.10
===================== =========================
Income from discontinued operations - per share $ 0.39 $ 0.05
===================== =========================
Net income - per share $ 0.65 $ 0.15
===================== =========================
Basic weighted average common shares outstanding 14,882,944 12,513,130
Common units/PIUs (1) 121,000 121,000
Restricted stock awards 43,258 --
--------------------- -------------------------
Diluted weighted average common shares outstanding 15,047,202 12,634,130
===================== =========================
(1) In connection with the Company's 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").
F-14
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
4. INCOME TAXES
Deferred income taxes result from temporary differences between the carrying
amounts of assets and liabilities of the TRS for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
deferred tax assets and liabilities are as follows:
DECEMBER 31,
-----------------------
2005 2004
---------- ----------
DEFERRED TAX ASSETS:
Fixed and intangible assets $ 10,537 $ 11,742
Net operating loss carryforwards 584 343
Prepaid and deferred rent 1,010 175
Bad debt reserves 152 46
Accrued expenses and other 128 21
---------- ----------
Total deferred tax assets 12,411 12,327
Valuation allowance for deferred tax assets (11,107) (10,696)
---------- ----------
Deferred tax assets, net of valuation allowance 1,304 1,631
DEFERRED TAX LIABILITY:
Deferred financing costs 762 903
---------- ----------
NET DEFERRED TAX ASSETS $ 542 $ 728
========== ==========
Significant components of the income tax (provision) benefit are as follows:
PERIOD FROM AUGUST 17,
YEAR ENDED 2004 THROUGH
DECEMBER 31, 2005 DECEMBER 31, 2004
----------------- ------------------------
DEFERRED:
Federal $ (163) $ 660
State (23) 68
----------------- ------------------------
TOTAL (PROVISION) BENEFIT -- CONTINUING OPERATIONS $ (186) $ 728
================= ========================
TRS earnings subject to tax consisted of an approximate $1.9 million loss and
$0.4 million income for the year ended December 31, 2005 and for the period from
August 17, 2004 (IPO and TRS formation date) to December 31, 2004, respectively.
The reconciliation of income tax attributable to continuing operations computed
at the U.S. statutory rate to income tax (provision) benefit is as follows:
PERIOD FROM AUGUST 17,
YEAR ENDED 2004 TO
DECEMBER 31, 2005 DECEMBER 31, 2004
----------------- ------------------------
Tax (provision) benefit at U.S. statutory rates on TRS $ 655 $ (132)
income subject to tax
State income tax, net of federal income tax benefit 65 (14)
Effect of permanent differences (29) (8)
(Decrease) increase in valuation allowance (877) 217
Initial adoption of SFAS No. 109 -- 665
----------------- ------------------------
INCOME TAX (PROVISION) BENEFIT $ (186) $ 728
================= ========================
Upon formation, the TRS became subject to federal and state income taxation and,
accordingly, established deferred tax assets and liabilities. The net deferred
tax asset recorded upon formation was approximately $0.7 million. The valuation
allowance increased by approximately $0.4 million during the year ended December
31, 2005.
F-15
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
At December 31, 2005, the Company had net operating loss carryforwards ("NOLs")
of approximately $1.6 million for income tax purposes that begin to expire in
2024. These NOLs may be used to offset future taxable income generated by the
TRS.
5. 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 10, the Company entered into a bridge loan in the amount of
$37.4 million in connection with this acquisition. The bridge loan was
subsequently converted into a mortgage loan with a total principal amount of
$38.8 million.
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 10, the Company assumed fixed rate mortgage debt with an
outstanding principal balance of approximately $11.8 million in connection with
this acquisition.
In February 2005, the Company acquired a five-property portfolio (the "Proctor
Portfolio") for a contract purchase price of approximately $53.5 million, not
including anticipated capital expenditures and initial integration expenses
necessary to bring the properties up to the Company's operating standards. Four
of the properties are located in Tallahassee, Florida and one property is
located in Gainesville, Florida. These five communities total 53 buildings, 446
units, and 1,656 beds. The Company also incurred an additional $0.3 million in
closing costs and other external acquisition costs related to this acquisition.
In addition, as discussed in Note 10, 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 unaudited pro forma information for the
years ended December 31, 2005, 2004 and 2003, present consolidated and combined
information for the Company and the Predecessor as if the property acquisitions
and IPO discussed above had occurred at the beginning of the earliest period
presented. The unaudited pro forma information is provided for informational
purposes only and is not indicative of results that would have occurred or which
may occur in the future:
YEAR ENDED DECEMBER 31,
--------------------------------------
2005 2004 2003
---------- ---------- ----------
Total revenues $ 90,258 $ 76,623 $ 71,193
Net income (loss) $ 10,875 $ (1,800) $ (2,558)
Net income (loss) per share - basic $ 0.73 $ (0.14) $ (0.20)
Net income (loss) per share - diluted $ 0.73 $ (0.14) $ (0.20)
6. 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 year ended December 31, 2005.
Discontinued operations for the years ended December 31, 2004 and 2003, include
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
F-16
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
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:
YEAR ENDED DECEMBER 31,
--------------------------------------
2005 2004 2003
---------- ---------- ----------
Total revenues $ 29 $ 2,767 $ 2,769
Total operating expenses 31 1,643 1,776
---------- ---------- ----------
Operating (loss) income (2) 1,124 993
Total nonoperating expenses -- 757 986
---------- ---------- ----------
NET (LOSS) INCOME $ (2) $ 367 $ 7
========== ========== ==========
As of December 31, 2005 and 2004, assets and liabilities attributable to the
properties held for sale consisted of the following:
DECEMBER 31,
------------------------
2005 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
========== ==========
7. INVESTMENTS IN OWNED OFF-CAMPUS PROPERTIES
Owned off-campus properties consisted of the following:
DECEMBER 31,
------------------------
2005 2004
---------- ----------
Land $ 52,018 $ 33,778
Buildings and improvements 361,938 219,841
Furniture, fixtures and equipment 18,115 10,104
Construction in progress 18,962 9,087
---------- ----------
451,033 272,810
Less accumulated depreciation (33,935) (22,710)
---------- ----------
OWNED OFF-CAMPUS PROPERTIES, NET $ 417,098 $ 250,100
========== ==========
8. 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
F-17
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
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.
On-campus participating properties are as follows:
HISTORICAL COST - DECEMBER 31,
------------------------------
LEASE REQUIRED DEBT
LESSOR/UNIVERSITY COMMENCEMENT REPAYMENT (1) 2005 2004
- ------------------------------------ ------------ ------------- ------------ ------------
Texas A&M University System /
Prairie View A&M University (2) 2/1/96 9/1/23 $ 38,037 $ 37,840
Texas A&M University System /
Texas A&M International 2/1/96 9/1/23 5,920 5,909
Texas A&M University System / 8/31/25 /
Prairie View A&M University (3) 10/1/99 8/31/28 23,777 23,663
University of Houston System /
University of Houston - (4) 9/27/00 8/31/35 34,603 18,958
------------ ------------
102,377 86,370
Less accumulated amortization (21,967) (18,306)
------------ ------------
ON-CAMPUS PARTICIPATING PROPERTIES, NET $ 80,370 $ 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.
9. 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
an owned 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
F-18
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Sweet Home LLC is reflected as a minority interest in the accompanying
consolidated financial statements.
In August 2005, a wholly-owned subsidiary 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 Summer 2007. A wholly-owned subsidiary 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 December 31, 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.
Minority interests in 2005 and 2004 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 11). In connection with the Company's July 5,
2005 equity offering, 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 December 31, 2005.)
In March 2001, certain subsidiaries of the Operating Partnership entered into an
Agreement of Limited Partnership to form SHP - The Callaway House, LP (the
"Partnership"), an entity that owns and operates The Callaway House, one of the
Company's owned off-campus student housing properties. A subsidiary of the
Operating Partnership serves as General Partner, while other subsidiaries of the
Operating Partnership and an individual unaffiliated with the Company (the
"Unaffiliated LP") serve as Limited Partners. Based on management's analysis of
the operations of the property, management has determined that the Unaffiliated
LP has a zero economic interest in the Partnership as of December 31, 2005. To
the extent management determines that the Unaffiliated LP has an economic
interest in the Partnership, the individual's interest will be reflected as a
minority interest in the accompanying consolidated financial statements.
Minority interests in 2004 and 2003 also include a minority partner's ownership
in four owned off-campus properties. As part of the IPO formation transactions,
the Company redeemed the minority partner's interest.
10. DEBT
A summary of the Company's outstanding consolidated indebtedness, including
unamortized debt premiums, is as follows:
DECEMBER 31,
-----------------------
2005 2004
---------- ----------
DEBT SECURED BY OWNED OFF-CAMPUS PROPERTIES:
Mortgage loans payable $ 195,871 $ 111,974
DEBT SECURED BY ON-CAMPUS PARTICIPATING PROPERTIES:
Mortgage loan payable 16,786 17,045
Construction loan payable 16,411 540
Bonds payable 58,215 59,655
---------- ----------
287,283 189,214
Revolving credit facility -- 11,800
Unamortized debt premiums 4,363 --
---------- ----------
TOTAL DEBT $ 291,646 $ 201,014
========== ==========
F-19
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
During the twelve months ended December 31, 2005, the following transactions
occurred:
YEAR ENDED
DECEMBER 31, 2005
-----------------
Balance, beginning of period $ 201,014
Additions:
Draws on revolving credit facility 54,625
Draws under advancing construction loan 15,871
Assumption of debt upon acquisition of properties
(including debt premiums of approximately $5.1 million) 52,246
Proceeds from bridge/mortgage loan 38,800
Deductions:
Pay down of revolving credit facility (66,425)
Scheduled repayments of principal (3,772)
Amortization of debt premiums (713)
-----------------
$ 291,646
=================
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 six 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.
Availability under the revolving credit facility is limited to an "aggregate
borrowing base amount" equal to the lesser of (i) 65% of the value of certain
properties, calculated as set forth in the credit facility, and (ii) the
adjusted net operating income from these properties divided by a formula amount.
The facility bears interest at a variable rate, at the Company's option, based
upon a base rate or one-, two-, three-, or six-month LIBOR plus, in each case, a
spread based upon the Company's total leverage. Additionally, the Company is
required to pay an unused commitment fee ranging from 0.15% to 0.20% per annum,
depending on the aggregate unused balance. As of December 31, 2004, the balance
outstanding on the revolving credit facility totaled $11.8 million, bearing
interest at 3.9%. In July 2005, the Company paid off the entire balance on the
revolving credit facility using proceeds from its equity offering. As of
December 31, 2005, the total availability under the facility (subject to certain
financial covenants) was approximately $90.9 million.
The terms of the facility include certain restrictions and covenants, which
limit, among other items, the incurrence of
F-20
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
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 December 31, 2005, the Company was in
compliance with all such covenants.
CONSTRUCTION LOANS AND MORTGAGE NOTES PAYABLE
Construction loans and mortgage notes payable at December 31, 2005, excluding
debt premiums, consisted of 15 loans secured by owned off-campus and on-campus
participating properties consisting of:
INTEREST RATE AT
PRINCIPAL DECEMBER 31,
PROPERTY OUTSTANDING (1) 2005 MATURITY DATE AMORTIZATION
- ---------------------------- ----------------- ---------------- ----------------- ----------------
Cullen Oaks $ 16,786 5.54% (2) November 2008 30 years
Cullen Oaks - Phase II 16,411 6.32% (3) June 2006 n/a
University Village at
Boulder Creek 16,306 5.71% November 2012 30 years
River Club Apartments 18,343 8.18% August 2010 30 years
River Walk Townhomes 7,594 8.00% September 2009 30 years
Village at Alafaya Club 20,265 8.16% August 2010 (4) 30 years
University Club
Tallahassee 13,450 (5) 7.99% October 2010 30 years
Grove - University Club
Tallahassee 4,345 (5) 5.75% March 2013 30 years
College Club Tallahassee 8,809 (5) 6.74% December 2011 30 years
University Club
Gainesville 8,434 (5) 7.88% November 2009 30 years
The Estates 38,504 (5) 5.20% June 2015 30 years
Village at Blacksburg 21,107 7.50% January 2011 30 years
Commons on Apache 7,564 7.66% June 2009 30 years
Cityparc at Fry Street 11,665 (5) 5.96% September 2014 30 years
Callaway House 19,485 7.10% April 2011 30 years
----------------- ----------------
Wtd Avg
TOTAL $ 229,068 Rate 6.76%
================= ================
(1) For federal income tax purposes, the aggregate cost of the loans
is equal to the carrying amount.
(2) Floating rate on this mortgage loan was swapped to a fixed rate
of 5.54%. This swap terminates in November 2008, at which time
the interest rate will revert back to a variable rate. The TRS
has guaranteed payment of this indebtedness.
(3) For each borrowing, the Company has the option of choosing Prime
rate or LIBOR plus 2.0%. The Company has an option to extend the
maturity of this loan through November 2008. The TRS has
guaranteed this indebtedness, up to a limit of $4.0 million of
construction loan principal plus interest and litigation fees
potentially incurred by the lender. This guaranty will remain in
effect until the balance on the construction loan is paid in
full.
(4) 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.
(5) These mortgage loans were assumed or obtained in conjunction
with property acquisitions in the first quarter of 2005.
F-21
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
BONDS PAYABLE
Bonds payable consist of three issues secured by student housing ground/facility
leases, with interest and principal paid semi-annually and annually,
respectively, through maturity. Covenants include, among other items, budgeted
and actual debt service coverage ratios. The bonds are nonrecourse to the
Company. Payment of regularly scheduled principal payments is guaranteed by MBIA
Insurance Corporation. Bonds payable at December 31, 2005 consisted of the
following:
PRINCIPAL WEIGHTED REQUIRED
MORTGAGED FACILITIES DECEMBER 31, AVERAGE MATURITY MONTHLY DEBT
SERIES SUBJECT TO LEASES ORIGINAL 2005 RATE THROUGH SERVICE
- ---------- ---------------------------- ------------ --------------- ----------- -------------- --------------
University Village- September
1999 PVAMU/TAMIU $ 39,270 $ 34,670 7.66% 2023 $ 302
2001 University College-PVAMU 20,995 19,410 7.35% August 2025 158
2003 University College-PVAMU 4,325 4,135 5.80% August 2028 28
------------ --------------- ----------- --------------
TOTAL/WEIGHTED AVERAGE RATE $ 64,590 $ 58,215 7.42% $ 488
============ =============== =========== ==============
SCHEDULE OF DEBT MATURITIES
Scheduled debt maturities (reflecting automatic extensions where applicable) for
each of the five years subsequent to December 31, 2005, are as follows:
SCHEDULED DUE AT
PRINCIPAL MATURITY TOTAL
---------------- ------------ -------------
2006 $ 4,340 $ 16,411 $ 20,751
2007 4,636 - 4,636
2008 4,875 15,972 20,847
2009 4,825 22,296 27,121
2010 4,696 32,930 37,626
Thereafter 70,559 105,743 176,302
---------------- ------------ -------------
$ 93,931 $ 193,352 $ 287,283
================ ============ =============
Payment of principal and interest were current at December 31, 2005. Mortgage
notes and bonds payable are subject to prepayment penalties.
11. 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, common units of limited partnership
interest in the Operating Partnership (formerly profits interest units or
"PIUs"), restricted stock units ("RSUs"), restricted stock awards ("RSAs"), and
other stock-based incentive awards. The Company has reserved a total of
1,210,000 shares of the Company's common stock for issuance pursuant to the
Plan, subject to certain adjustments for changes in the Company's capital
structure, as defined in the Plan. A summary of the Company's stock-based
incentive awards under the Plan, as of December 31, 2005 and changes during the
year ended December 31, 2005, is presented below:
RESTRICTED RESTRICTED
COMMON STOCK UNITS STOCK AWARDS OUTPERFORMANCE
UNITS/PIUS (RSUS) (RSAS) BONUS PLAN TOTAL
-------------- --------------- ---------------- ---------------- ---------
Outstanding at December 31, 2004 121,000 7,145 -- 367,682 495,827
Granted -- 7,230 55,130 -- 62,360
Forfeited -- -- (9,262) -- (9,262)
-------------- --------------- ---------------- ---------------- ---------
Outstanding at December 31, 2005 121,000 14,375 45,868 367,682 548,925
-------------- --------------- ---------------- ---------------- ---------
Vested at December 31, 2005 121,000 14,375 -- -- 135,375
-------------- --------------- ---------------- ---------------- ---------
F-22
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
COMMON UNITS
PIUs were issued to certain executive and senior officers upon consummation of
the IPO. In connection with the Company's equity offering in July 2005, all
121,000 PIUs were converted to common units of limited partnership interest in
the Operating Partnership, as contemplated in the OP Agreement. Each common unit
is deemed equivalent to one share of the Company's common stock. Common units
receive the same quarterly per unit distribution as the per share distributions
on the Company's common stock. The Operating Partnership recognized
approximately $2.1 million of compensation expense on the IPO date, reflecting
the fair value of the PIUs issued.
RESTRICTED STOCK UNITS
In conjunction with the IPO, 7,145 RSUs were granted to certain independent
directors. An additional 7,230 RSUs were granted to outside members of the Board
of Directors in May 2005. No shares of stock were issued at the time of the RSU
awards, and the Company is not required to set aside a fund for the payment of
any such award; however, the stock is deemed to be awarded on the date of grant.
Upon the Settlement Date, which is three years from the date of grant, the
Company will deliver to the recipients a number of shares of common stock equal
to the number of RSUs held by the recipients. In addition, recipients of RSUs
are entitled to dividend equivalents equal to the cash distributions paid by the
Company on one share of common stock for each RSU issued, payable currently or
on the Settlement Date, as determined by the Compensation Committee of the Board
of Directors. The Company recognized approximately $0.2 million and $0.1 million
of compensation expense in 2005 and 2004, reflecting the fair value of the RSUs
issued.
RESTRICTED STOCK AWARDS
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 $0.2 million in 2005. 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.
The weighted-average grant-date fair value for each RSA granted or forfeited
during the year, and outstanding as of December 31, 2005, was $21.54. As of
December 31, 2005, there was approximately $0.8 million of total unrecognized
compensation cost related to RSAs and the cost is expected to be recognized over
a remaining weighted-average period of 3.2 years.
OUTPERFORMANCE BONUS PLAN
Upon consummation of the IPO, the Company granted to its executive officers and
certain key employees a special award based upon the individuals' continued
service and attaining certain performance measures. These awards consist of a
bonus pool equal to the value on the date of vesting of 367,682 shares of common
stock. No dividends or dividend equivalent payments will accrue with respect to
the shares of common stock underlying this bonus pool. Vesting of the awards
will occur on the third anniversary of the IPO, provided that the employees have
maintained continued service and that at least one performance measure, as
outlined in the Plan, has been achieved. These performance measures include (i)
a total return on the Company's stock of at least 25% per annum from the IPO
date through the vesting date, or (ii) a total return on the Company's stock of
at least 12% per annum from the IPO date through the vesting date, and such
return is at or above the 60th percentile of the total return achieved by "peer"
companies during the same period. Payments of vested awards will be made within
120 days of vesting. The Compensation Committee of the Board of Directors may,
in its sole discretion, elect to pay such an award in cash or through the
issuance of shares of common stock, PIUs or similar securities, valued at the
date of issuance. Because the achievement of the required performance measures
was considered to be remote as of December 31, 2005, nothing has been reflected
in the accompanying financial statements related to these awards.
12. 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
F-23
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
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 $0.5 million and $40,000
at December 31, 2005 and 2004, respectively, and is reflected in other assets in
the accompanying consolidated balance sheets.
The Company does not expect to reclassify a material amount of net gains on
hedge instruments from accumulated other comprehensive income to earnings in
2006. Ineffectiveness resulting from the Company's hedges is not material.
13. RELATED PARTY TRANSACTIONS
Prior to the IPO, an affiliate of the Predecessor had an ownership interest in
Dobie Center Properties, Ltd. which owns Dobie Center, a student housing
facility. Pursuant to a management agreement with the Dobie Center, the Company
received facility management fees representing 3% of gross receipts and 6% of
qualifying capital projects, and commercial leasing fees of 4% of commercial
leases. Such fees totaled approximately $-0-, $0.2 million, and $0.3 million for
the years ended December 31, 2005, 2004, and 2003, respectively, and are
reflected as third party management services - affiliates on the accompanying
consolidated statements of operations. The management agreement began operating
on a month-to-month basis upon expiration in May 2002. Upon consummation of the
Company's IPO, the Company no longer has an ownership interest in this property;
as such, the management fees earned subsequent to the IPO are reflected as third
party management services on the accompanying consolidated statements of
operations.
Subsequent to the IPO, the Company paid its Predecessor owners approximately
$1.7 million and $1.4 million for the years ended December 31, 2005 and 2004,
respectively, related to a guarantee fee and the distribution of insurance
proceeds from a fire that occurred at an off-campus student housing property.
14. LEASE COMMITMENTS
The Company is a party to a sublease for corporate office space beginning August
15, 2002, and expiring December 31, 2010. The terms of the sublease provide for
a period of free rent and scheduled rental rate increases and common area
maintenance charges upon expiration of the free rent period.
The Company entered into a ground lease agreement on October 2, 2003 for the
purpose of constructing a student housing facility near the campus of Temple
University in Philadelphia, Pennsylvania. The agreement terminates June 30, 2079
and has four six year extensions available. Under the terms of the ground lease,
the lessor receives annual minimum rents of $0.1 million and contingent rental
payments which are based upon the operating performance of the property. The
contingent rental payment was approximately $0.1 million for 2005.
The Company entered into a 95-year ground lease agreement on August 3, 2005 for
the purpose of constructing a student housing facility near the campuses of
Rutgers University and the New Jersey Institute of Technology in Newark, New
Jersey. The agreement terminates May 2102 with no extensions or renewals
available. Under the terms of the ground lease, the lessor receives escalating
annual rents ranging from $0.1 million to $0.4 million and contingent rental
payments based upon the operating performance of the property. Straight-lined
rental amounts are capitalized during the construction period and will be
expensed once the property commences operations.
The Company also has various operating and capital leases for furniture, office
and technology equipment, which expire through 2009. Rental expense under the
operating lease agreements approximated $0.6 million, $0.5 million, and $0.6
million for the years ended December 31, 2005, 2004, and 2003, respectively, net
of sublease income of approximately $-0-, $-0-, and $0.1 million, respectively.
Owned off-campus properties, net at December 31, 2005 included approximately
$0.7 million related to capital leases of furniture, net of approximately $0.2
million of accumulated amortization. On-campus participating properties, net at
December 31, 2005 included approximately $0.5 million related to capital leases
of technology equipment, net of approximately $0.2 million of accumulated
amortization. Other assets at December 31, 2005 included approximately $0.5
million related to corporate assets under capital leases, net of $0.2 million of
accumulated amortization.
F-24
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Future minimum commitments over the life of all leases subsequent to December
31, 2005, are as follows:
OPERATING CAPITAL
------------- -------------
2006 $ 512 $ 824
2007 596 462
2008 657 393
2009 672 224
2010 698 -
Thereafter 39,312 -
------------- -------------
Total minimum lease payments 42,447 1,903
Amount representing interest -- (224)
------------- -------------
BALANCE OF MINIMUM LEASE PAYMENTS $ 42,447 $ 1,679
============= =============
The capital lease obligations are reflected in other liabilities in the
accompanying consolidated balance sheets. Amortization of assets recorded under
capital leases is included in depreciation expense and was approximately $0.5
million for the year ended December 31, 2005 and immaterial for the years ended
December 31, 2004 and 2003.
15. CONCENTRATION OF RISKS
The Company has a significant presence on a single university campus, Prairie
View A&M University. These on-campus participating properties represent
approximately 15.3%, 21.0%, and 21.0% of the Company's consolidated and combined
revenues for 2005, 2004, and 2003, respectively. The percentage of consolidated
and combined net income attributable to those facilities is minimal. The
unlikely event of significantly diminished enrollment at this university could
have a negative impact on the Company's ability to achieve its forecasted
profitability.
16. 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.
On one completed project, the Company has guaranteed losses up to $3.0 million
in excess of the development fee if the loss is due to any failure of the
Company to maintain, or cause its professionals to maintain, required insurance
for a period of five years after completion of the project (August 2009).
The Company's estimated maximum exposure amount under the above guarantees is
approximately $9.2 million.
At December 31, 2005, all projects were anticipated to complete on schedule and
within budget. The Company has estimated the fair value of guarantees entered
into or modified after December 31, 2002, the effective date of FASB
Interpretation No. 45, GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR
GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS, to be
immaterial.
In the normal course of business, the Company enters into various
development-related purchase commitments with parties that provide
development-related goods and services. In the event that the Company was to
terminate development services prior to the completion of projects under
construction, the Company could potentially be committed to satisfy outstanding
F-25
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
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 year ended December 31, 2005. The remaining
amount owed of approximately $0.2 million under this agreement is included in
other liabilities in the accompanying consolidated balance sheet as of December
31, 2005.
CONTINGENCIES
LITIGATION: In the normal course of business, the Company is subject to claims,
lawsuits, and legal proceedings. While it is not possible to ascertain the
ultimate outcome of such matters, management believes that the aggregate amount
of such liabilities, if any, in excess of amounts provided or covered by
insurance, will not have a material adverse effect on the consolidated financial
position or results of operations of the Company.
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.
17. 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.
F-26
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31,
-------------------------------------------------
2005 2004 2003
------------- ------------- -------------
OWNED OFF-CAMPUS PROPERTIES
Rental revenues $ 60,364 $ 35,497 $ 31,514
Interest and other income 19 21 --
------------- ------------- -------------
Total revenues from external customers 60,383 35,518 31,514
Operating expenses before depreciation and amortization 27,079 15,597 14,583
Interest expense 12,283 11,049 11,700
Insurance gain 430 654 --
------------- ------------- -------------
Operating income before depreciation, amortization, minority
interests and allocation of corporate overhead $ 21,451 $ 9,526 $ 5,231
============= ============= =============
Depreciation and amortization $ 12,376 $ 6,520 $ 5,667
============= ============= =============
Capital expenditures $ 51,037 $ 61,120 $ 21,777
============= ============= =============
Total segment assets at December 31, $ 433,802 $ 281,276 $ 234,372
============= ============= =============
ON-CAMPUS PARTICIPATING PROPERTIES
Rental revenues $ 18,470 $ 17,418 $ 16,482
Interest and other income 182 61 27
------------- ------------- -------------
Total revenues from external customers 18,652 17,479 16,509
Operating expenses before depreciation, amortization,
ground/facility lease, and allocation of corporate overhead 7,594 7,476 7,411
Ground/facility lease 873 812 489
Interest expense 5,717 5,469 5,181
Insurance gain -- 273 --
------------- ------------- -------------
Operating income before depreciation, amortization, minority
interests and allocation of corporate overhead $ 4,468 $ 3,995 $ 3,428
============= ============= =============
Depreciation and amortization $ 3,662 $ 3,532 $ 3,271
============= ============= =============
Capital expenditures $ 15,887 $ 1,881 $ 3,788
============= ============= =============
Total segment assets at December 31, $ 92,522 $ 79,686 $ 89,502
============= ============= =============
DEVELOPMENT SERVICES
Development and construction management fees from
external customers $ 5,854 $ 5,803 $ 7,983
Intersegment revenues 2,651 234 456
------------- ------------- -------------
Total revenues 8,505 6,037 8,439
Operating expenses 4,626 3,796 3,854
------------- ------------- -------------
Operating income before depreciation, amortization,
minority interests and allocation of corporate overhead $ 3,879 $ 2,241 $ 4,585
============= ============= =============
Total segment assets at December 31, $ 3,438 $ 1,246 $ 1,943
============= ============= =============
PROPERTY MANAGEMENT SERVICES
Property management fees from external customers $ 2,786 $ 2,105 $ 1,189
Intersegment revenues 2,650 1,152 983
------------- ------------- -------------
Total revenues 5,436 3,257 2,172
Operating expenses 2,110 1,480 1,523
------------- ------------- -------------
Operating income before depreciation, amortization, minority
interests and allocation of corporate overhead $ 3,326 $ 1,777 $ 649
============= ============= =============
Total segment assets at December 31, $ 1,459 $ 1,141 $ 615
============= ============= =============
RECONCILIATIONS
Total segment revenues $ 92,976 $ 62,291 $ 58,634
Unallocated interest income earned on corporate cash 624 -- --
Elimination of intersegment revenues (5,301) (1,386) (1,439)
------------- ------------- -------------
Total consolidated revenues, including interest income $ 88,299 $ 60,905 $ 57,195
============= ============= =============
Segment operating income before depreciation, amortization,
minority interests and allocation of corporate overhead $ 33,124 $ 17,539 $ 13,893
Depreciation and amortization 17,647 11,184 9,426
Net unallocated expenses relating to corporate overhead 11,346 8,850 5,450
Income tax (provision) benefit (186) 728 --
Minority interests (164) 100 16
------------- ------------- -------------
Income (loss) from continuing operations $ 3,781 $ (1,667) $ (967)
============= ============= =============
Total segment assets $ 531,221 $ 363,349 $ 326,432
Unallocated corporate assets 19,641 4,279 4,134
------------- ------------- -------------
TOTAL ASSETS $ 550,862 $ 367,628 $ 330,566
============= ============= =============
F-27
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The information presented below represents the consolidated financial results of
the Company for the years ended December 31, 2005 and 2004.
2005
---------------------------------------------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER TOTAL
----------- ----------- ----------- ----------- -----------
Total revenues $ 19,570 $ 20,007 $ 21,877 $ 26,049 $ 87,503 (1)
=========== =========== =========== =========== ===========
Net income (loss) $ 8,192 $ (1,792) $ (596) $ 3,858 $ 9,662
=========== =========== =========== =========== ===========
Net income (loss) per share-
basic $ 0.65 $ (0.14) $ (0.04) $ 0.22 $ 0.65
=========== =========== =========== =========== ===========
Net income (loss) per share-
Diluted $ 0.65 $ (0.14) $ (0.03) $ 0.22 $ 0.65
=========== =========== =========== =========== ===========
2004
---------------------------------------------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER TOTAL
----------- ----------- ----------- ----------- -----------
Total revenues $ 16,172 $ 14,331 $ 13,971 $ 19,116 $ 63,590 (1)
=========== =========== =========== =========== ===========
Net income (loss) $ 1,529 $ (1,001) $ (5,208) $ 3,341 $ (1,339)
=========== =========== =========== =========== ===========
Net income per share-basic $ -- $ -- $ -- $ 0.26 $ 0.14 (2)
=========== =========== =========== =========== ===========
Net income per share-diluted $ - $ -- $ -- $ 0.26 $ 0.15 (2)
=========== =========== =========== =========== ===========
(1) Includes revenues from discontinued operations of $29,000 and
$2.8 million for the years ended December 31, 2005 and 2004,
respectively.
(2) Represents the period from August 17, 2004 (IPO date) through
December 31, 2004.
19. SUBSEQUENT EVENTS
ACQUISITION: On March 1, 2006, the Company acquired a 13 property portfolio (the
"Royal Portfolio") for a purchase price of $244.3 million, which excludes $9.8
million of anticipated transaction costs, initial integration expenses and
capital expenditures necessary to bring the properties up to the Company's
operating standards. As part of the transaction, the Company assumed $123.6
million of fixed-rate mortgage debt (excluding the impact of purchase accounting
adjustments) with a weighted average interest rate of 5.95% and an average term
to maturity of 6.3 years. In addition, the Company issued certain partners of
the contributors approximately 2.1 million common units of limited partnership
interest in the Operating Partnership valued at $23.50 per unit and
approximately 0.1 million preferred units of limited partnership interest in the
Operating Partnership valued at $26.75 per unit with a cumulative preferential
per annum cash distribution rate of 5.99%. These units are exchangeable after
one year into an equal number of shares of the Company's common stock. The
results of operations of these properties will be included in the Company's
consolidated statement of operations beginning in the first quarter of 2006.
The Royal Portfolio consists of five properties in Florida, four properties in
Texas, two properties in Tennessee, and one property each in Arizona and
Kentucky. The 13 operating properties total approximately 1,800 units and 5,700
beds. Subsequent to this transaction, the Company's total owned and managed
portfolio is comprised of 53 properties that represent approximately 31,800 beds
in approximately 11,100 units.
The Company is also under contract to acquire a $24.8 million development
property in Waco, Texas. The closing of this transaction is anticipated to occur
during the third quarter of 2006, upon completion of construction and lease-up,
and is dependent upon this property achieving certain occupancy levels and
rental rates.
F-28
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
DISTRIBUTIONS: On March 9, 2006, the Company declared a fourth quarter 2005
distribution per share of $0.3375 which will be paid on March 30, 2006 to all
common stockholders of record as of March 20, 2006. At the same time, the
Operating Partnership will pay an equivalent amount per unit to holders of
common units (formerly PIUs - see Note 11).
F-28
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
20. SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
INITIAL COSTS BASIS STEP-UP
----------------------- -----------------------
BUILDINGS BUILDINGS
AND AND
IMPROVEMENTS IMPROVEMENTS
AND AND COSTS
FURNITURE, FURNITURE, CAPITALIZED
FIXTURES FIXTURES SUBSEQUENT
AND AND TO
UNITS BEDS LAND EQUIPMENT LAND EQUIPMENT ACQUISITION
----- ---- ---- --------- ---- --------- -----------
OWNED OFF-CAMPUS PROPERTIES
Commons on Apache 111 444 $ 1,464 $ 8,072 $ -- $ -- $ 1,225
The Village at Blacksburg 288 1,056 3,826 22,155 -- -- 1,861
The Village on University 288 918 5,508 31,264 -- -- 1,290
River Club Apartments 266 794 3,478 19,655 -- -- 808
River Walk Townhomes 100 340 1,442 8,194 -- -- 361
The Callaway House 173 538 5,081 20,499 -- -- 700
The Village at Alafaya Club 228 840 3,788 21,851 -- -- 758
The Village at Science Drive 192 732 4,673 19,021 -- -- 285
University Village at
Boulder Creek 82 309 939 14,887 96 1,506 567
University Village at Fresno 105 406 900 6,838 29 483 8,182
University Village at TU 220 749 -- 8,876 -- 2,380 29,954
University Village at
Sweet Home 269 828 2,554 34,699 -- -- 4
University Club Tallahassee 152 608 4,065 17,369 -- -- 486
The Grove at University Club 64 128 600 5,734 -- -- 68
College Club Tallahassee 96 384 1,499 11,155 -- -- 186
TOTAL COSTS
------------------------------
BUILDINGS
AND
IMPROVEMENTS
AND
FURNITURE,
FIXTURES ACCUMULATED
AND DEPRECIATION ENCUMBRANCES YEAR
LAND EQUIPMENT TOTAL (4) (1) (5) BUILT
---- --------- --------- ------------ ------------ -------
OWNED OFF-CAMPUS PROPERTIES
Commons on Apache $ 1,464 $ 9,297 $ 10,761 $ 2,192 $ 7,564 1987
The Village at Blacksburg 3,826 24,016 27,842 3,617 21,107 1990/1998
The Village on University 5,508 32,554 38,062 5,722 -- 1998
River Club Apartments 3,478 20,463 23,941 3,807 18,343 1996
River Walk Townhomes 1,442 8,555 9,997 1,580 7,594 1998
The Callaway House 5,081 21,199 26,280 3,370 19,485 1999
The Village at Alafaya Club 3,788 22,609 26,397 3,499 20,265 1999
The Village at Science Drive 4,673 19,306 23,979 2,197 -- 2000
University Village at
Boulder Creek 1,035 16,960 17,995 1,758 16,306 2002
University Village at Fresno 929 15,503 16,432 720 -- 2004
University Village at TU -- 41,210 41,210 1,716 -- 2004
University Village at
Sweet Home 2,554 34,703 37,257 435 -- 2005
University Club Tallahassee 4,065 17,855 21,920 749 13,450 2000
The Grove at University Club 600 5,802 6,402 198 4,345 2002
College Club
Tallahassee 1,499 11,341 12,840 423 8,809 2001
F-30
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
INITIAL COSTS BASIS STEP-UP
------------------------- -----------------------
BUILDINGS BUILDINGS
AND AND
IMPROVEMENTS IMPROVEMENTS
AND AND COSTS
FURNITURE, FURNITURE, CAPITALIZED
FIXTURES FIXTURES SUBSEQUENT
AND AND TO
UNITS BEDS LAND EQUIPMENT LAND EQUIPMENT ACQUISITION
------- ------ -------- --------- ------- --------- -----------
The Greens at College Club 40 160 $ 601 $ 4,892 $ -- $ -- $ 78
University Club Gainesville 94 376 1,416 11,848 -- -- 233
City Parc at Fry Street 136 418 1,902 17,678 -- -- 149
The Estates 396 1,044 4,254 43,164 -- -- 654
Callaway Villas (2) 236 704 3,903 -- -- -- 10,677
Village at Newark (3) 221 812 -- -- -- -- 8,269
------- ------ -------- --------- ------- --------- -----------
Subtotal 3,757 12,588 $ 51,893 $ 327,851 $ 125 $ 4,369 $ 66,795
------- ------ -------- --------- ------- --------- -----------
ON-CAMPUS PARTICIPATING PROPERTIES
University Village - PVAMU 612 1,920 $ -- 36,506 -- -- $ 1,531
University College - PVAMU 756 1,470 -- 22,650 -- -- 1,127
University Village - TAMIU 84 252 -- 5,844 -- -- 76
Cullen Oaks Phase I and II 411 879 -- 33,958 -- -- 645
------- ------ -------- --------- ------- --------- -----------
Subtotal 1,863 4,521 -- 98,958 -- -- 3,379
------- ------ -------- --------- ------- --------- -----------
TOTAL-ALL PROPERTIES 5,620 17,109 $ 51,893 $ 426,809 $ 125 $ 4,369 $ 70,174
------- ------ -------- --------- ------- --------- -----------
TOTAL COSTS
---------------------------------
BUILDINGS
AND
IMPROVEMENTS
AND
FURNITURE,
FIXTURES ACCUMULATED
AND DEPRECIATION ENCUMBRANCES YEAR
LAND EQUIPMENT TOTAL (4) (1) (5) BUILT
-------- --------- --------- ------------ -------------- -------
The Greens at College Club $ 601 $ 4,970 $ 5,571 $ 151 $ -- 2004
University Club Gainesville 1,416 12,081 13,497 380 8,434 1999
City Parc at Fry Street 1,902 17,827 19,729 463 11,665 2004
The Estates 4,254 43,818 48,072 958 38,504 2002
Callaway Villas (2) 3,903 10,677 14,580 -- -- 2006
Village at Newark (3) -- 8,269 8,269 -- -- 2007
-------- --------- --------- ------------ --------------
Subtotal $ 52,018 $ 399,015 $ 451,033 $ 33,935 $ 195,871
-------- --------- --------- ------------ --------------
ON-CAMPUS PARTICIPATING PROPERTIES
University Village - PVAMU $ -- $ 38,037 38,037 12,226 30,070 1996/97/98
University College - PVAMU -- 23,777 23,777 4,792 23,545 2000/2003
University Village - TAMIU -- 5,920 5,920 1,918 4,600 1997
Cullen Oaks Phase I and II -- 34,603 34,603 3,031 33,197 2001/2005
-------- --------- --------- ------------ --------------
Subtotal -- 102,337 102,337 21,967 91,412
-------- --------- --------- ------------ --------------
TOTAL-ALL PROPERTIES $ 52,018 $ 501,352 $ 553,370 $ 55,902 $ 287,283
-------- --------- --------- ------------ --------------
(1) The depreciable lives for buildings and improvements and furniture,
fixtures and equipment range from three to forty years.
(2) Callaway Villas commenced construction in July 2005. Costs capitalized
subsequent to acquisition represent construction costs associated with
the development of this property. Year built represents the scheduled
completion date.
(3) Village at Newark commenced construction in September 2005. Costs
capitalized subsequent to acquisition represent construction costs
associated with the development of this property. Year built represents
the scheduled completion date.
(4) Total aggregate costs for Federal income tax purposes is $635.1 million.
(5) Total encumbrances exclude net unamortized debt premiums of $4.4 million
as of December 31, 2005.
F-31
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
The changes in the Company's and the Predecessor's investments in real estate
and related accumulated depreciation for each of the years ended December 31,
2005, 2004, and 2003 are as follows:
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------
2005 2004 2003
------------------------- ------------------------- -------------------------
OFF- ON- OFF- ON- OFF- ON-
CAMPUS (1) CAMPUS (2) CAMPUS (1) CAMPUS (2) CAMPUS (1) CAMPUS (2)
----------- ----------- ----------- ----------- ----------- -----------
INVESTMENTS IN REAL ESTATE:
Balance, beginning of year $ 295,313 $ 86,370 $ 240,504 $ 92,463 $ 222,162 $ 80,699
Basis step-up -- -- 5,589 -- -- --
Acquisition of land for development 3,903 -- 2,532 -- -- --
Acquisition of properties 126,176 -- -- -- -- --
Improvements and development expenditures 48,214 15,967 61,286 1,883 19,267 11,764
Disposition of properties (22,573) -- -- (7,976) (925) --
Distribution of non-core assets to
Predecessor owners -- -- (14,598) -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balance, end of year $ 451,033 $ 102,337 $ 295,313 $ 86,370 $ 240,504 $ 92,463
=========== =========== =========== =========== =========== ===========
ACCUMULATED DEPRECIATION:
Balance, beginning of year $ (22,863) $ (18,306) $ (17,597) $ (14,774) $ (11,930) $ (11,503)
Depreciation for the year (11,241) (3,661) (6,520) (3,532) (5,667) (3,271)
Disposition of properties 169 -- -- -- -- --
Distribution of non-core assets to
Predecessor owners -- -- 1,254 -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balance, end of year $ (33,935) $ (21,967) $ (22,863) $ (18,306) $ (17,597) $ (14,774)
=========== =========== =========== =========== =========== ===========
(1) Owned off-campus properties
(2) On-campus participating properties
F-32