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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, 2004.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________________ to __________________.
Commission file number 001-32265
AMERICAN CAMPUS COMMUNITIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 76-0753089
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
805 LAS CIMAS PARKWAY, SUITE 400 78746
AUSTIN, TX (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(512) 732-1000
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
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 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 an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The common equity of American Campus Communities, Inc. was not publicly traded
as of the end of our most recently completed second fiscal quarter, and
accordingly American Campus Communities, Inc. does not meet the definition of an
accelerated filer under Rule 12b-2 of the Securities Exchange Act of 1934.
There were 12,669,782 shares of American Campus Communities, Inc.'s common stock
with a par value of $0.01 per share outstanding as of the close of business on
March 18, 2005.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this report incorporates information by reference from the
definitive Proxy Statement for the 2005 Annual Meeting of Stockholders.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2004
TABLE OF CONTENTS
PAGE NO.
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PART I.
Item 1. Business 1
Item 2. Properties 8
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 12
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations 15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 35
Item 8. Financial Statements and Supplementary Data 35
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 35
Item 9A. Controls and Procedures 35
PART III.
Item 10. Directors and Executive Officers of the Registrant 36
Item 11. Executive Compensation 36
Item 12. Security Ownership of Certain Beneficial Owners and Management 36
Item 13. Certain Relationships and Related Transactions 36
Item 14. Principal Accountant Fees and Services 36
PART IV.
Item 15. Exhibits and Financial Statement Schedules 37
SIGNATURES 39
PART I
ITEM 1. BUSINESS
OVERVIEW / INITIAL PUBLIC OFFERING
As used herein, the terms "the Company," "us," "we" and "our" as used in this
report refer to American Campus Communities, Inc. Through our controlling
interest in American Campus Communities Operating Partnership, L.P. (the
"Operating Partnership"), of which we (through a wholly owned subsidiary) are
the sole general partner, and the subsidiaries of the Operating Partnership,
including American Campus Communities Services, Inc., which serves as our
taxable REIT subsidiary ("TRS"), the Company is one of the largest private
owners, managers and developers of high quality student housing properties in
the United States in terms of beds owned and under management. We are a fully
integrated, self-managed and self-administered equity REIT with expertise in the
acquisition, design, financing, development, construction management, leasing
and management of student housing properties. As of December 31, 2004, we owned,
through our Operating Partnership, 18 student housing properties containing
approximately 13,000 beds and 4,300 apartment units. Our owned portfolio
included 13 owned off-campus properties that are in close proximities to public
colleges and universities and five on-campus properties operated under
ground/facility leases with the related university systems. These communities
contain modern housing units, offer resort-style amenities and are supported by
a classic resident assistant system and other student-oriented programming.
Additionally, as of December 31, 2004, through our TRS, we also provided third
party property management and leasing services for 19 student housing properties
(13 of which we served as the third party developer and construction manager)
that represented approximately 11,300 beds in approximately 4,500 units. Third
party management and leasing services are typically provided pursuant to
multi-year management contracts that have an initial term that ranges from two
to five years. As of December 31, 2004, our total owned and managed portfolio
included 37 properties that represented more than 24,300 beds in more than 8,800
units.
The Company was formed to succeed certain businesses of the American Campus
Communities Predecessor (the "Predecessor"), which was not a legal entity but
rather a combination of real estate entities under common ownership and voting
control collectively doing business as American Campus Communities, L.L.C. and
Affiliated Student Housing Properties. Our Predecessor entities were engaged in
the student housing business since 1993. Our initial public offering ("IPO") was
consummated on August 17, 2004, concurrent with the consummation of various
formation transactions, and consisted of the sale of 12,100,000 shares of the
Company's common stock at a price per share of $17.50, generating gross proceeds
of approximately $211.8 million. The aggregate proceeds to the Company, net of
the underwriters' discount and offering costs, were approximately $189.4
million. In connection with the exercise of the underwriters' over-allotment
option on September 15, 2004, the Company issued an additional 515,000 shares of
common stock at the IPO price per share, generating an additional $9.0 million
of gross proceeds and $8.4 million in net proceeds after the underwriters'
discount and offering costs. In connection with the IPO, we completed the
following formation transactions:
o Redeemed 100% of the ownership interests of the Predecessor owner in
RAP Student Housing Properties L.L.C. ("RAP SHP") for approximately
$80.2 million.
o Acquired the minority ownership interest of Titan Investments II
("Titan") in certain owned off-campus properties in exchange for
approximately $5.7 million.
o Repaid certain construction and permanent indebtedness totaling
approximately $105.5 million.
o Distributed The Village at Riverside and certain other non-core assets
to our Predecessor owner (by RAP SHP).
o Entered into a senior secured revolving credit facility with a maximum
limit of $75 million subject to certain ratios and covenants.
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 also 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, as described below.
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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, that provide an opportunity 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.
ACQUISITIONS: From May 1999 to December 2001, we acquired nine properties, eight
of which we still owned at December 31, 2004. Also, at December 31, 2004, we had
five properties under contract to purchase, which closed in February 2005. These
properties contain approximately 2,200 units and 7,700 beds. 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 eight of our owned properties,
consisting of four owned off-campus properties and four on-campus participating
properties, including three off-campus developments that were completed and
opened in Fall 2004. In addition, in August 2004, we commenced construction of
an approximate $36.1 million owned off-campus development located in close
proximity to the campus of State University of New York - Buffalo. This project
sits on a 19.5 acre site and consists of nine buildings containing 269 units
featuring 828 private bedroom and bathroom accommodations. This community also
contains a clubhouse featuring resort style amenities. In December 2004, we also
commenced construction on Cullen Oaks Phase II, an approximate $17.0 million
on-campus participating property consisting of approximately 180 units and 354
beds located on the University of Houston campus. These projects are scheduled
to open in August of 2005 in conjunction with the commencement of the 2005/2006
academic year.
Our experienced development staff will 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 16 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 for 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 are 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, these dates coincide with the commencement
of the universities' Fall academic term and typically terminate at the
completion 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;
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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.
OWNED OFF-CAMPUS PROPERTIES: As of December 31, 2004, our Owned Off-Campus
Properties segment consisted of 13 owned off-campus properties that are in close
proximity to 16 public colleges and universities in nine 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 are 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.
Due to the unique structure of our leases, as discussed above, we may experience
reduced cash flows during the summer months. Additionally, changes in university
admission policies could adversely affect this segment. For example, if a
university reduces the number of student admissions or requires that a certain
class of students (e.g., 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 changes
in admission policies, we may not be able to affect such marketing efforts prior
to the commencement of the annual lease-up period or our additional marketing
efforts may not be successful.
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 leaseholds 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 five 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.
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 mortgage
financing, which generally has a 25-year amortization; (ii) ground/facility
lease rent of a nominal amount (e.g., $100 per annum over the
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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
properties is therefore limited to our interest in the net cash flow and
management 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 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 discussed above, 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 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 recognized as deliverables are provided or, in the case of
long-term full-scale development and construction projects, 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 or 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 (i) initial feasibility analysis, (ii)
review of conceptual design, and (iii) 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 (i) coordination with
the architect and other members of the design team, (ii) review of construction
plans and (iii) 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
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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's performance is dependent upon a number of risk factors which
include, but are not limited to: (i) successfully obtaining construction and/or
permanent financing on favorable terms, (ii) experiencing potential delays
beyond the originally scheduled construction commencement date, (iii) completing
projects on schedule, within budgeted amounts or in conformity with building
plans and specifications, (iv) obtaining necessary zoning, land use, building,
occupancy, and other required governmental permits and authorizations, (v)
market and economic conditions that could affect occupancy and rental rates,
(vi) injuries and accidents occurring during the construction process for which
we may be liable, and (vii) potential environmental liabilities including
off-site disposal of construction materials. 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,
2004, we provided third party management and leasing services for 19 student
housing properties that represented approximately 11,300 beds in approximately
4,500 units, 13 of which we developed. We provide these services pursuant to
multi-year management agreements (generally ranging between two to five years).
There are inherent risks associated with managing third party properties,
including changes in university operating standards or philosophies, which may
impact the profitability of our management contracts and may result in the
termination of such third party contracts. 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 will
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
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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.
EMPLOYEES
As of December 31, 2004, we had approximately 739 employees, consisting of:
o approximately 194 on-site employees in our owned off-campus properties
segment, including 74 Resident Assistants;
o approximately 89 on-site employees in our on-campus participating
properties segment, including 44 Resident Assistants;
o approximately 401 employees in our third party property management
services segment, including 381 on-site employees and 20 corporate
office employees;
o approximately 19 corporate office employees in our third party
development services segment; and
o approximately 36 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
also have a regional office located at 4199 Campus Drive, Suite 550, Irvine,
California 92612 and have management offices in each of our properties.
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 such 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 Securities and Exchange Commission. 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.
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FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the
federal securities laws. We caution investors that any forward-looking
statements presented in this report, or which management may make orally or in
writing from time to time, are based on management's beliefs and assumptions
made by, and information currently available to, management. When used, the
words "anticipate," "believe," "expect," "intend," "may," "might," "plan,"
"estimate," "project," "should," "will," "result" and similar expressions, which
do not relate solely to historical matters, are intended to identify
forward-looking statements. Such statements are subject to risks, uncertainties
and assumptions and may be affected by known and unknown risks, trends,
uncertainties and factors that are beyond our control. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated, estimated
or projected. We caution you that while forward-looking statements reflect our
good faith beliefs when we make them, they are not guarantees of future
performance and are impacted by actual events when they occur after we make such
statements. We expressly disclaim any responsibility to update forward-looking
statements, whether as a result of new information, future events or otherwise.
Accordingly, investors should use caution in relying on past forward-looking
statements, which are based on results and trends at the time they were made, to
anticipate future results or trends.
Some of the risks and uncertainties that may cause our actual results,
performance or achievements to differ materially from those expressed or implied
by forward-looking statements include, among others, the following: general
risks affecting the real estate industry (including, without limitation, the
inability to enter into or renew leases, dependence on tenants' financial
condition, and competition from other developers, owners and operators of real
estate); risks associated with the availability and terms of financing and the
use of debt to fund acquisitions and developments; failure to manage effectively
our growth and expansion into new markets or to integrate acquisitions
successfully; risks and uncertainties affecting property development and
construction (including, without limitation, construction delays, cost overruns,
inability to obtain necessary permits and public opposition to such activities);
risks associated with downturns in the national and local economies, increases
in interest rates, and volatility in the securities markets; costs of compliance
with the Americans with Disabilities Act and other similar laws; potential
liability for uninsured losses and environmental contamination; risks associated
with our Company's potential failure to qualify as a REIT under the Internal
Revenue Code of 1986 (the "Code"), as amended, and possible adverse changes in
tax and environmental laws; and risks associated with our dependence on key
personnel whose continued service is not guaranteed.
The risks included here are not exhaustive, and additional factors could
adversely affect our business and financial performance, including factors and
risks included in other sections of this report. Moreover, we operate in a very
competitive and rapidly changing environment. New risk factors emerge from time
to time and it is not possible for management to predict all such risk factors,
nor can it assess the impact of all such risk factors on our Company's business
or the extent to which any factor, or combination of factors, may cause actual
results to differ materially from those contained in any forward-looking
statements. Given these risks and uncertainties, investors should not place
undue reliance on forward-looking statements as a prediction of actual results.
7
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. Three of our off-campus
properties completed development and opened in Fall 2004, one owned off-campus
property is currently under construction with a scheduled completion date of
August 2005, and one on-campus participating property is currently under
construction with a scheduled completion date of August 2005. Lease terms are
generally 12 months at our off-campus properties and 9 months at our on-campus
properties. 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. 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 The Callaway House, in which we own an 80% partnership interest and
are entitled to significant preferred distributions;
o University Village at TU, which is subject to a 75-year ground lease
from Temple University (with four additional six-year extensions); and
o Five on-campus participating properties held under ground/facility
leases with two university systems.
8
TYPICAL YEAR ENDED AVERAGE
DATE PRIMARY LEASE DECEMBER MONTHLY
YEAR ACQUIRED/ UNIVERSITY TERM 31, 2004 REVENUE/
PROPERTY BUILT DEVELOPE SERVED (MOS) REVENUE BED (1)
- ------------------------ ----- -------- ------------- ------- ------------ --------
OWNED OFF-CAMPUS PROPERTIES
Commons On Apache (2) 1987 May-99 Arizona 12 $ 1,629 $ 328
State
University
Main Campus
Virginia
Polytechnic
Institute
The Village at 1990/ and State
Blacksburg 1998 Dec-00 University 12 3,690 331
Arizona
State
The Village on University 10 or
University 1998 Dec-99 Main Campus 12 4,593 456
The
University
of Georgia-
River Club Apartments 1996 Aug-99 Athens 12 3,342 354
The
University
of Georgia-
River Walk Townhomes 1998 Aug-99 Athens 12 1,392 344
Texas A&M
The Callaway House (3) 1999 Mar-01 University 9 5,184 (4) n/a (4)
The
University
The Village at Alafaya of Central
Club 1999 Jul-00 Florida 12 5,119 491
The
University
The Village at of Central
Science Drive 2000 Nov-01 Florida 12 4,696 510
The
University Village at University
Boulder Creek (5) of Colorado
2002 Aug-02 at Boulder 12 2,617 673
----------- -------
SUBTOTAL - SAME STORE OWNED OFF-CAMPUS PROPERTIES 32,262 424
California
State
University Village at Aug-04 University,
Fresno (6) 2004 (6) Fresno 12 1,013 501
California
State
University Village University,
at San Sep-04 San
Bernardino (6) (7) 2004 (6) Bernardino 9 1,181 578
University Village at Aug-04 Temple
TU (6) (8) 2004 (6) University 12 2,210 606
State
University Village at University
Sweet Home (9) of New York
2005 Aug-05 - Buffalo 12 12 n/a
----------- -------
SUBTOTAL - NEW OWNED OFF-CAMPUS PROPERTIES 4,416 572
----------- -------
TOTAL - OWNED OFF-CAMPUS PROPERTIES $ 36,678 $ 459
----------- -------
2004
AVERAGE OCCUPANCY
OCCUPANCY AS OF # OF # OF # OF
PROPERTY (1) 12/31/04 BLDGS UNITS BEDS
- ------------------------ --------- ---------- ------- ------- ------
OWNED OFF-CAMPUS PROPERTIES
Commons On Apache (2) 86.3% 100.0% 6 111 444
The Village at
Blacksburg 85.7% 98.6% 26 288 1,056
The Village on
University 84.7% 95.1% 20 288 918
River Club Apartments 96.1% 93.3% 18 266 794
River Walk Townhomes 95.7% 98.2% 20 100 340
The Callaway House (3) 71.7% 101.9% 1 173 538
The Village at Alafaya
Club 97.4% 96.5% 20 228 840
The Village at
Science Drive 97.9% 99.5% 17 192 732
University Village at
Boulder Creek (5)
93.4% 87.1% 4 82 309
--------- --------- ------ ------ ------
SUBTOTAL - SAME STORE OWNED OFF-CAMPUS PROPERTIES 89.7% 97.0% 132 1,728 5,971
University Village at
Fresno (6) 99.7% 99.5% 9 105 406
University Village
at San
Bernardino (6) (7) 96.2% 95.6% 6 132 480
University Village at
TU (6) (8) 96.4% 99.7% 3 220 749
University Village at
Sweet Home (9)
n/a n/a 9 269 828
--------- --------- ------ ------ ------
SUBTOTAL - NEW OWNED OFF-CAMPUS PROPERTIES 96.3% 98.5% 27 726 2,463
--------- --------- ------ ------ ------
TOTAL - OWNED OFF-CAMPUS PROPERTIES 91.2% 97.3% 159 2,454 8,434
--------- --------- ------ ------ ------
9
TYPICAL YEAR ENDED AVERAGE
DATE PRIMARY LEASE DECEMBER MONTHLY
YEAR ACQUIRED/ UNIVERSITY TERM 31, 2004 REVENUE/
PROPERTY BUILT DEVELOPED SERVED (MOS) REVENUE BED (1)
- ----------------------- ----- --------- -------------- ------ ------------ --------
ON-CAMPUS PARTICIPATING PROPERTIES (10) (11)
Prairie View
University Village - 1996/ Aug-96- A&M
PVAMU 97/98 Aug-98 University 9 $ 7,480 $ 381
Texas A&M
University Village - International
TAMIU 1997 Aug-97 University 9 952 406
Prairie View
University College - 2000/ Aug-00 A&M
PVAMU 2003 Aug-03 University 9 5,812 417
The
University 9 and
Cullen Oaks Phase I 2001 Aug-01 of Houston 12 3,174 642
The
Cullen Oaks Phase II (9) University 9 and
2005 Aug-05 of Houston 12 - n/a
------------ --------
TOTAL - ON-CAMPUS PARTICIPATING PROPERTIES
17,418 428
------------ --------
GRAND TOTAL- ALL PROPERTIES $ 54,096 (12) $ 447 (13)
============ ========
2004
AVERAGE OCCUPANCY
OCCUPANCY AS OF # OF # OF # OF
PROPERTY (1) 12/31/04 BLDGS UNITS BEDS
- ----------------------- --------- ----------- ------ ------ -------
ON-CAMPUS PARTICIPATING PROPERTIES (10) (11)
University Village -
PVAMU 97.1% 99.2% 30 612 1,920
University Village -
TAMIU 81.1% 66.3% 4 84 252
University College -
PVAMU 89.3% 98.6% 14 756 1,470
Cullen Oaks Phase I 92.1% 98.3% 3 231 525
Cullen Oaks Phase II (9)
n/a n/a 1 180 354
--------- --------- ------- ------- ------
TOTAL - ON-CAMPUS PARTICIPATING PROPERTIES 92.8% 96.9% 52 1,863 4,521
--------- --------- ------- ------- ------
GRAND TOTAL- ALL PROPERTIES 91.8% 97.1% 211 4,317 12,955
========= ========= ======= ======= ======
10
(1) Average monthly revenue per bed is calculated based upon our base rental
revenue for the year ended December 31, 2004 divided by average occupied
beds over the typical lease term. Average occupancy is calculated based
on the average number of occupied beds (including beds occupied by
staff) during the year ended December 31, 2004 divided by total beds.
Average occupancy for our owned off-campus properties includes the
decrease in occupancy occurring during the summer months.
(2) Commons on Apache is 100% leased for the 2004-2005 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) We developed for a third party a competing 994-bed on-campus residence
hall for the University of Colorado that opened 495 beds in the Fall
2003 semester. The second phase of 499 beds opened in the Fall 2004
semester.
(6) These properties completed construction and opened in the Fall 2004
semester. Average occupancy is calculated based on the period these
properties were operating in 2004.
(7) In November 2004, California State University exercised its option to
purchase this property for $28.3 million. The disposition was
consummated in January 2005. This property is 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.
(8) Subject to a 75-year ground lease from Temple University.
(9) Currently under development with a scheduled completion date of August
2005.
(10) Although our on-campus participating properties accounted for 43.2% of
our units, 34.9% of our beds and 28.6% of our revenues for the year
ended December 31, 2004, 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,
2004. 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.
(11) Subject to ground/facility leases with their primary university systems.
Average occupancy is calculated based on the 9-month academic year
(excluding the summer months).
(12) Excludes revenue from Coyote Village, which was transferred to
Weatherford College in 2004, and revenue from The Village at Riverside,
which following the IPO is owned by an entity affiliated with our
Predecessor owners. Includes 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.
(13) 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.
PROPERTY ACTIVITY SUBSEQUENT TO YEAR END
ACQUISITIONS
In February 2005, we acquired a five-property portfolio (the "Proctor
Portfolio") for a purchase price of $53.5 million, including the assumption of
$35.4 million of debt (excluding the impact of purchase accounting adjustments)
with a weighted average interest rate of 7.4% and an average term to maturity of
6 years. We also incurred transaction costs of approximately $0.9 million and
anticipate spending approximately $0.8 million of capital expenditures and
approximately $0.1 of initial integration expenses to bring the properties up to
our 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.
In March 2005, we acquired a 136-unit, 418-bed off-campus student housing
property ("CityParc") located near the University of North Texas in Denton,
Texas, for a purchase price of $19.2 million, including the assumption of
approximately $11.8 million of fixed-rate mortgage debt (excluding the impact of
purchase accounting adjustments) with an interest rate of 5.96% that matures in
2014. We also incurred transaction costs of approximately $0.2 million and
anticipate spending approximately $0.1 million of capital expenditures and
approximately $35,000 of initial integration expenses to bring the property up
to our operating standards.
In February 2005, we entered into a purchase and sale agreement to acquire a
396-unit, 1,044-bed off-campus student housing property ("Exchange at
Gainesville") located near the University of Florida campus in Gainesville,
Florida. The purchase and sale agreement contemplates a purchase price of
approximately $47.5 million. We expect to incur transaction costs of
approximately $0.7 million and anticipate spending approximately $0.4 million of
capital expenditures and approximately $45,000 of initial integration expenses
to bring the property up to our operating standards. We expect to close this
acquisition at the end of the first quarter 2005 or early second quarter 2005.
DISPOSITION
In November 2004, California State University - San Bernardino exercised its
option to purchase the University Village at San Bernardino off-campus student
housing property for an aggregate purchase price of approximately $28.3 million.
This transaction was finalized in January 2005 resulting in net sales proceeds
of approximately $28.1 million and a gain on
11
disposition of approximately $5.9 million. This property is included in
discontinued operations in the accompanying financial statements contained
herein in Item 8.
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, 2004, 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, 2004.
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
HOLDERS
As of March 18, 2005, there were four holders of record of the Company's common
stock and 12,615,000 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 does 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 $75 million
revolving credit facility described in Note 8 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.
INITIAL PUBLIC OFFERING
On August 17, 2004, we consummated our IPO. The shares of common stock sold in
our IPO were registered under the Securities Act of 1933, as amended, on a
Registration Statement (Registration No. 333-114813) on Form S-11 that was
declared effective by the Securities and Exchange Commission on August 11, 2004.
All 12,100,000 shares of common stock registered under such Registration
Statement were sold at a price to the public of $17.50 per share, generating
gross proceeds of approximately $211.8 million. The aggregate proceeds to the
Company, net of the underwriters' discount and offering costs, were
approximately $189.4 million. All of the shares of common stock were sold by us
and there were no selling stockholders in our IPO. In connection with the
exercise of the underwriters' over-allotment option on September 15, 2004, the
Company issued an additional 515,000 shares of common stock at the IPO price per
share, generating an additional $9.0 million of gross proceeds and $8.4 million
in net proceeds after the underwriters' discount and offering costs.
12
See Item 1 - Business for a discussion of the use of the IPO proceeds and
related formation transactions.
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, profits interest units ("PIUs") in the
Operating Partnership, restricted stock units ("RSUs"), restricted stock, and
other stock-based incentive awards. The Company has reserved a total of
1,210,000 shares of the Company's common stock for issuance pursuant to the
Plan, subject to certain adjustments for changes in the Company's capital
structure, as defined in the Plan. Refer to Note 9 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, 2004, 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) 7,145 (1) $-0- 1,202,855
Equity Compensation Plans Not
Approved by Security Holders n/a n/a n/a
(1) Consists of RSUs granted to independent Board of Directors
members in connection with our IPO.
(2) Table does not include 121,000 PIUs and 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, these awards 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 714,173
shares available for future issuance under the Plan.
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 consolidated results for
our Company reflect our post-IPO structure as a REIT, including the operations
of the TRS, which was not present in our Predecessor operations. The combined
historical financial information for the Predecessor includes:
o the development and management service operations and real estate
operations of American Campus Communities, L.L.C. (the Predecessor);
o the real estate operations of RAP SHP and its subsidiaries (including
The Village at Riverside, which we do not own after the completion of
the IPO, and Coyote Village, which was transferred to Weatherford
College in April 2004); and
o the joint venture properties and operations of American Campus-Titan,
LLC and American Campus-Titan II, LLC.
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.
13
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------ ------------ ------------ ------------ ------------
STATEMENTS OF OPERATIONS INFORMATION:
Revenues $ 60,823 $ 57,136 $ 52,131 $ 40,752 $ 25,126
Loss from continuing operations (1,572) (967) (2,753) (3,300) (1,869)
Discontinued operations:
Income (loss) attributable to
discontinued operations 272 7 319 361 (3)
(Loss) gain from disposition of real estate (39) 16 295 - -
Net loss (1,339) (944) (2,139) (2,939) (1,872)
PER SHARE AND DISTRIBUTION DATA: (1)
Income per diluted share:
Income from continuing operations $ 0.10
Discontinued operations 0.05
Net income 0.15
Cash distributions declared per share / unit 0.1651
Cash distributions declared 2,104
BALANCE SHEET DATA:
Total assets $ 367,628 $ 330,566 $ 307,658 $ 295,637 $ 217,151
Mortgage loans, bonds payable and
lines of credit 201,014 267,518 249,706 234,449 178,442
Stockholders' and Predecessor owners'
equity (2) 138,229 27,658 35,526 40,572 25,609
SELECTED OWNED PROPERTY INFORMATION:
Owned properties 18 14 14 13 10
Units 4,317 3,567 3,459 3,377 2,781
Beds 12,955 10,546 10,336 10,027 8,232
Occupancy 97.1% 91.5% 91.0% 93.5% 93.3%
CASH FLOW INFORMATION:
Net cash provided by operating activities $ 17,293 $ 6,862 $ 7,647 $ 5,338 $ 3,577
Net cash used in investing activities (63,621) (33,738) (21,678) (68,540) (87,652)
Net cash provided by financing activities 45,151 21,537 11,646 72,832 84,215
FUNDS FROM OPERATIONS ("FFO"):
Net loss $ (1,339) $ (944) $ (2,139) $ (2,939) $ (1,872)
Minority interests (100) (16) (30) (110) (20)
Loss (gain) from disposition of real estate 39 (16) (295) - -
Real estate related depreciation and
amortization 10,009 8,937 8,233 6,807 4,188
------------ ------------ ------------ ------------ ------------
Funds from operations (3)(4) $ 8,609 $ 7,961 $ 5,769 $ 3,758 $ 2,296
============ ============ ============ ============ ============
(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 year ended December 31, 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
14
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
We are one of the largest owners, managers and developers of high quality
student housing properties in the United States in terms of beds owned and under
management. We are a fully integrated, self-managed and self-administered equity
REIT with expertise in the acquisition, design, financing, development,
construction management, leasing and management of student housing properties.
As of December 31, 2004, we owned 18 high-quality student housing properties,
which included approximately 4,300 apartment units and 13,000 beds. Our owned
portfolio includes primarily off-campus properties that are in close proximity
to public universities, contain modern housing units, offer resort-style
amenities and are supported by a classic resident assistant system and other
student-oriented programming.
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.
We own and operate 13 off-campus student housing properties within close
proximity to 16 primary colleges and universities in nine states. Additionally,
we participate with two university systems in the ownership of five on-campus
properties under long-term ground/facility leases; we refer to these properties
as our "on-campus participating properties." We manage all 18 of our owned
properties.
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 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 and the University of Colorado 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 25 third
party student housing properties, including two properties that are scheduled to
open in August 2005 and August 2006. As of December 31, 2004, development fees
of approximately $3.9 million remained to be earned by us with respect to third
party properties that began construction in 2004. All properties are
15
scheduled to open in 2005 except for Vista del Campo Phase II, which is
scheduled to open in 2006. The following table provides certain information with
respect to third party properties under construction as of December 31, 2004:
FEES PREVIOUSLY BALANCE TO BE EARNED
TOTAL CONTRACTUAL EARNED AND AND RECOGNIZED IN
PROPERTY FEE AMOUNT RECOGNIZED 2005 AND 2006
- --------------------------------- -------------------- -------------------- -----------------------
Saint Leo University Phase II $ 375 $ 83 $ 292
Vista del Campo Phase II 3,501 43 3,458
West Virginia University -
pre-development services 400 250 150
-------------------- -------------------- -----------------------
Total $ 4,276 $ 376 $ 3,900
==================== ==================== =======================
In addition, as of December 31, 2004, we had one awarded project, Cleveland
State University. This awarded project has fees of approximately $1.5 million
and commenced construction in March 2005.
We also provide third party management and leasing services for 19 student
housing properties that represent approximately 11,300 beds in approximately
4,500 units, 13 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 two to five years. As of December 31,
2004, our total owned and managed portfolio included 37 properties that
represented approximately 24,300 beds in approximately 8,800 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.
OUR RECENT FORMATION AS A REIT
We were formed to succeed the business of the American Campus Communities
Predecessor (the "Predecessor"), which was not a legal entity but rather a
combination of real estate entities under common ownership and voting control
collectively doing business as American Campus Communities, L.L.C. and
Affiliated Student Housing Properties, entities engaged in the student housing
business since 1993. Our Company was incorporated in Maryland on March 9, 2004.
Additionally, the Operating Partnership was formed and our taxable REIT
subsidiary ("TRS") was incorporated in Maryland on July 14, 2004 and August 17,
2004, respectively, each in anticipation of our initial public offering of
common stock (the "IPO"). The IPO was consummated on August 17, 2004, concurrent
with the consummation of various formation transactions, and consisted of the
sale of 12,100,000 shares of our common stock at a price per share of $17.50,
generating gross proceeds of approximately $211.8 million. The aggregate
proceeds to our Company, net of the underwriters' discount and offering costs,
were approximately $189.4 million. In connection with the exercise of the
underwriters' over-allotment option on September 15, 2004, we issued an
additional 515,000 shares of common stock at the IPO price per share, generating
an additional $9.0 million of gross proceeds and $8.4 million in net proceeds
after the underwriters' discount. Our operations commenced on August 17, 2004
after completion of the IPO and the formation transactions, and are conducted
substantially through the Operating Partnership and its wholly owned
subsidiaries, including the TRS.
In connection with the IPO we completed the following formation transactions:
|X| Redeemed 100% of the ownership interests of the Predecessor owner in
RAP Student Housing Properties L.L.C. ("RAP SHP") for approximately
$80.2 million.
|X| Acquired the minority ownership interest of Titan Investments II
("Titan") in certain owned off-campus properties in exchange for
approximately $5.7 million.
16
|X| Repaid certain construction and permanent indebtedness totaling
approximately $105.5 million.
|X| Distributed The Village at Riverside and certain other non-core assets
to our Predecessor owner (by RAP SHP).
|X| Entered into a senior secured revolving credit facility with a maximum
limit of $75 million, subject to certain ratios and covenants.
As our Predecessor was not a REIT and provided certain services to residents
which are impermissible under IRS REIT regulations, in conjunction with the
formation of our Company we restructured our operations relative to the
provision of these services. Subsequent to the commencement of our operations as
a REIT, these resident services have been provided by our TRS, resulting in
lower rental revenue and higher resident services revenue.
CRITICAL ACCOUNTING POLICIES
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. Revenues
recognized in excess of amounts received are included in other assets. 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 have been 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 specific 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.
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.
17
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:
o Management, having the authority to approve the action, commits to a
plan to sell the asset
o 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
o An active program to locate a buyer and other actions required to
complete the plan to sell the asset have been initiated
o 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
o The asset is being actively marketed for sale at a price that is
reasonable in relation to its current fair value
o 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.
DISCONTINUED OPERATIONS
When material, the results of operations of a property that has either been
disposed of, distributed, or is classified as held for sale is reported in
discontinued operations if both of the following conditions are met: (a) the
operations and cash flows of the component have been (or will be) eliminated
from the ongoing operations of the Company as a result of the disposal
transaction and (b) the Company will not have any significant continuing
involvement in the operations of the component after the disposal transaction.
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. Additionally, upon completion of
construction at University Village at TU, which occurred during Fall 2004, our
Predecessor owners received a construction guarantee fee, which was paid from
the remaining construction budget. In November 2004, our Predecessor owners also
received insurance proceeds received by the Company in connection with the fire
that occurred at the University Village at Fresno. These payments were accounted
for as equity distributions.
18
RESULTS OF OPERATIONS
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:
12/31/2004 12/31/2003 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 12 370 3,083.3%
-------------- ------------- ------------- ------------
TOTAL REVENUES 60,823 57,136 3,687 6.5%
OPERATING EXPENSES:
Owned off-campus properties 16,861 15,272 1,589 10.4%
On-campus participating properties 7,900 7,925 (25) (0.3%)
Third party development and management services 5,543 5,389 154 2.9%
General and administrative 5,234 2,749 2,485 90.4%
Depreciation and amortization 9,973 8,868 1,105 12.5%
Ground/facility lease 812 489 323 66.1%
-------------- ------------- ------------- ------------
TOTAL OPERATING EXPENSES 46,323 40,692 5,631 13.8%
-------------- ------------- ------------- ------------
OPERATING INCOME 14,500 16,444 (1,944) (11.8%)
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 tax benefit, minority interests,
and discontinued operations (2,400) (983) (1,417) 144.2%
Income tax benefit 728 - 728 100.0%
Minority interests 100 16 84 525.0%
-------------- ------------- ------------- ------------
LOSS FROM CONTINUING OPERATIONS (1,572) (967) (605) 62.6%
Discontinued operations:
Income attributable to discontinued operations 272 7 265 3,785.7%
(Loss) gain from disposition of real estate (39) 16 (55) (343.8%)
-------------- ------------- ------------- ------------
Total discontinued operations 233 23 210 913.0%
-------------- ------------- ------------- ------------
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.
19
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.
Revenues in 2005 will be dependent on our ability to maintain our current leases
in effect for the 2004/2005 academic year and our ability to obtain appropriate
rental rates and desired occupancy for the 2005/2006 academic year at our
various properties during our leasing period, which typically begins in January
and ends in August.
At these existing properties, operating expenses 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.
We anticipate that operating expenses in 2005 will increase slightly as compared
with 2004 as a result of expected increases in utility costs, property taxes and
general inflation.
ON-CAMPUS PARTICIPATING PROPERTIES ("OCPP") OPERATIONS
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 $0.3 million increase in operating expenses from $0.1 million in
2003 to $0.4 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. We
anticipate that operating expenses in 2005 will increase slightly as compared
with 2004 as a result of expected increases in utility costs and general
inflation.
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 13 projects in progress during 2004 with an average contractual fee of $1.0
million, as compared to 2003 in which we had ten projects in progress with an
average contractual fee
20
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, 36.0% was recognized (on a
percentage of completion basis) during 2004 compared to 60.4% in 2003.
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. 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 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.
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.
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. We expect third party property management revenues to increase in
2005 from 2004, primarily as a result of the timing of the new contracts that
commenced in Fall 2004.
RESIDENT SERVICES
Concurrent with our commencement of operations and our designation as a REIT,
certain services previously provided to residents by our properties are now
provided by our TRS. These services generally consist of food service and
housekeeping (at Callaway House), and certain resident programming activities.
These services are provided to the residents at market rates and, under an
agreement between the TRS and the Operating Partnership, payments from residents
are collected by the properties on behalf of the TRS in conjunction with their
collection of rents. Revenue from resident services for the year ended December
31, 2004 approximated $0.4 million. As a business strategy, our level of
services provided to residents by the TRS is only incidental to that which is
necessary to maintain or increase occupancy. As a result of the timing of the
formation of the TRS in 2004, we expect revenue from resident services in 2005
to be significantly higher than in 2004.
GENERAL AND ADMINISTRATIVE
General and administrative expenses (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.
As a result of being a public company, we anticipate our future general and
administrative expenses will exceed those of our Predecessor.
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. We expect depreciation and amortization in 2005 to increase
significantly from 2004 primarily due to a full year's depreciation on the two
owned off-campus properties opened in August 2004 and the $120.2 million of
announced 2005 acquisitions already closed or pending closure. 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.
21
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. We anticipate that interest
expense in 2005 will increase from 2004 levels due to interest expense on debt
assumed or incurred in connection with potential property acquisitions or any
increase in borrowing rates that may impact our floating rate on our credit
facility, which would be slightly offset by a reduction in interest expense due
to the repayment of $46.0 million in mortgage loans in connection with the IPO.
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.
Unlike our Predecessor, we will be subject to federal, state and local income
taxes in the future as a result of the services provided by our TRS, which
include our third party services revenues, resident services revenues and the
operations of our on-campus participating properties. As a result, the income
earned by our TRS will, unlike our Predecessor and our results from our owned
off-campus properties, be subject to a new level of taxation. The amount of
income taxes to be recognized in the future will be dependent on the operating
results of the TRS.
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 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 15 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.
22
COMPARISON OF YEARS ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2002
The following table presents our results of operations for the years ended
December 31, 2003 and 2002, including the amount and percentage change in these
results between the two periods:
12/31/2003 12/31/2002 CHANGE($) CHANGE(%)
-------------- ------------- ------------- -------------
REVENUES:
Owned off-campus properties $ 31,514 $ 29,997 $ 1,517 5.1%
On-campus participating properties 16,482 16,055 427 2.7%
Third party development and management services 9,128 6,019 3,109 51.7%
Other income 12 60 (48) (80.0%)
-------------- ------------- ------------- -------------
TOTAL REVENUES 57,136 52,131 5,005 9.6%
OPERATING EXPENSES:
Owned off-campus properties 15,272 14,856 416 2.8%
On-campus participating properties 7,925 8,101 (176) (2.2%)
Third party development and management services 5,389 4,441 948 21.3%
General and administrative 2,749 1,995 754 37.8%
Depreciation and amortization 8,868 8,077 791 9.8%
Ground/facility lease 489 643 (154) (24.0%)
-------------- ------------- ------------- -------------
TOTAL OPERATING EXPENSES 40,692 38,113 2,579 6.8%
-------------- ------------- ------------- -------------
OPERATING INCOME 16,444 14,018 2,426 17.3%
NONOPERATING INCOME AND (EXPENSES):
Interest income 71 166 (95) (57.2%)
Interest expense (16,940) (16,421) (519) 3.2%
Amortization of deferred financing costs (558) (546) (12) 2.2%
-------------- ------------- ------------- -------------
TOTAL NONOPERATING EXPENSES (17,427) (16,801) (626) 3.7%
-------------- ------------- ------------- -------------
Loss before minority interests and discontinued operations (983) (2,783) 1,800 (64.7%)
Minority interests 16 30 (14) (46.7%)
-------------- ------------- ------------- -------------
LOSS FROM CONTINUING OPERATIONS (967) (2,753) 1,786 (64.9%)
Discontinued operations:
Income attributable to discontinued operations 7 319 (312) (97.8%)
Gain from disposition of real estate 16 295 (279) (94.6%)
-------------- ------------- ------------- -------------
Total discontinued operations 23 614 (591) (96.3%)
-------------- ------------- ------------- -------------
NET LOSS $ (944) $ (2,139) $ 1,195 (55.9%)
============== ============= ============= =============
OWNED OFF-CAMPUS PROPERTIES OPERATIONS
Revenues from our owned off-campus properties increased in 2003 by $1.5 million
as compared to 2002, primarily from a full year of operations at a property we
developed and opened in 2002, as discussed below.
NEW PROPERTY OPERATIONS. In August 2002, we completed construction of a 309-bed
property (University Village at Boulder Creek) and opened the property at 100%
occupancy for the 2002/2003 academic year. This property contributed revenues of
$2.6 million and operating expenses of $0.8 million in 2003, its first full
calendar year of operations, an increase of approximately $1.6 million and $0.5
million, respectively, from its partial first year of operation in 2002.
SAME STORE PROPERTY OPERATIONS (EXCLUDING NEW PROPERTY ACTIVITY). We had eight
properties containing 5,662 beds in 2003 and 2002 which produced revenues of
$28.9 million and $29.0 million in those years, respectively. Our weighted
average occupancy of 86.4% for 2003 decreased slightly from 86.7% in 2002. The
decrease in both revenue and occupancy from 2002 to 2003 was primarily due to a
softening of the overall multifamily submarket primarily impacting two
properties.
At these existing properties, operating expenses remained relatively constant
and decreased by $0.1 million in 2003 as compared to 2002.
ON-CAMPUS PARTICIPATING PROPERTIES ("OCPP") OPERATIONS
Revenues from our on-campus participating properties increased $0.4 million in
2003 compared to 2002 primarily due to the opening of 210 additional beds at the
University College - PVAMU property in August 2003, as discussed below. Coyote
Village, an on-campus participating property that commenced operations in August
2003, had its ground leases transferred to
23
Weatherford College in April 2004; therefore, it is not reflected in operating
revenues and expenses but is included in discontinued operations. In addition,
Lamar, an on-campus participating property that commenced operations in August
2002, had its ground lease transferred to Lamar University in December 2002;
therefore, it is not reflected in operating revenues and expenses but is
included in discontinued operations.
NEW PROPERTY OPERATIONS. 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 $0.4 million of revenue and $0.1 million of operating expenses in
2003.
SAME STORE OCPP OPERATIONS (EXCLUDING NEW PROPERTY ACTIVITY). We had four
properties containing 3,957 beds which were operating during both 2003 and 2002,
and which had average occupancy rates during these periods of 78.9% and 78.7%,
respectively. These properties produced revenues of $16.1 million in both 2003
and 2002.
Operating expenses for our same store OCPP properties were $7.8 million and $8.1
million in 2003 and 2002, respectively, a decrease of $0.3 million. This decline
was the result of a reduction in insurance premiums and reductions in expenses
related to corporate management and oversight.
Ground/facility lease expense decreased by $0.2 million in 2003 compared with
2002. Ground/facility lease payments reflect the Universities' 50% share of the
related facilities' cash flows, which decreased in 2003 as compared to 2002.
THIRD PARTY DEVELOPMENT AND MANAGEMENT SERVICES
Third party development and management services revenues increased from $6.0
million in 2002 to $9.1 million in 2003, an increase of $3.1 million.
DEVELOPMENT SERVICES. Third party development services revenues of $7.9 million
in 2003 represented an increase of $2.8 million from $5.1 million in 2002. This
increase resulted primarily from an increase in the number of development
projects in progress (twelve in 2003 compared to nine in 2002, a 33% increase).
Incentive fees based on cost savings were $0.2 million for 2002 and 2003.
MANAGEMENT SERVICES. Third party property management revenues of $1.2 million in
2003 represented an increase of $0.2 million from $1.0 million in 2002. The
increase consisted of $0.2 million from a full year of fees from contracts
beginning in 2002 and an increase of $0.2 million from five contracts that
commenced in Fall 2003, offset, in part, by the final amortization in 2002 of a
deferred cancellation fee in the amount of $0.2 million.
The increase in the volume of our third party service business required us to
correspondingly increase the resources and related costs dedicated to the
pursuit and delivery of third party services. Consequently, our compensation and
benefits, insurance and pursuit costs increased by $1.0 million from $4.4
million in 2002 to $5.4 million in 2003. In part, these increased expenses
reflect our increased staffing needs in this area.
GENERAL AND ADMINISTRATIVE
General and administrative expenses (consisting primarily of corporate expenses)
of $2.8 million in 2003 represented an increase of $0.8 million from $2.0
million in 2002. The increase was primarily a result of a severance accrual for
the Predecessor's former chief executive officer.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization of $8.9 million for 2003 represented an increase
of $0.8 million due to a full year's depreciation of one owned off-campus
property placed in service during 2002 and depreciation of an on-campus
participating property placed in service in August 2003. Amortization of
deferred financing costs remained relatively constant at $0.6 million for both
2003 and 2002.
INTEREST EXPENSE
Interest expense of $16.9 million in 2003 represented an increase of $0.5
million from $16.4 million in 2002. The increase consisted primarily of a full
year's interest expense in 2003 relating to a developed property that opened in
Fall 2002 and a
24
partial year's interest expense on a developed on-campus participating property
that opened in Fall 2003, partially offset by a decrease in interest expense
resulting from principal payments.
DISCONTINUED OPERATIONS
SFAS No. 144 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, 2003 and/or December 31, 2002 include (i) the Village at
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) an
on-campus participating property whose ground lease was transferred to Lamar
University in December 2002.
Please refer to Note 15 in the footnotes to the accompanying Notes to
Consolidated and Combined Financial Statements contained in Item 8 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, 2003 and 2002.
CASH FLOWS
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 $11.9 million,
as compared to $8.9 million for the year ended December 31, 2003, an increase of
$3.0 million. Despite a $0.4 million increase in net loss from 2003 to 2004,
operations for 2004 were impacted by $3.4 million of non-cash expenses which
primarily consisted of compensation related to the issuance of PIUs and RSUs in
connection with our IPO and increased depreciation and amortization primarily
due to the timing of various student housing property additions.
Changes in working capital accounts provided approximately $5.4 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 $7.4 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), both of which are scheduled to be completed
in August 2005. For the years ended December 31, 2004, 2003, and 2002, our cash
used in investing activities was comprised of the following:
25
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
2004 2003 2002
------------------ ------------------ ------------------
Capital expenditures for on-campus participating properties $ 1,045 $ 3,788 $ 396
Capital expenditures for owned off-campus properties 7,674 3,775 20,901
On-campus participating property transferred to University - 7,976 -
Investments in development properties completed in August 2004 44,359 18,002 -
Investments in University Village at Sweet Home 9,087 - -
Investments in Cullen Oaks Phase II 836 - -
Purchase of corporate furniture, fixtures, and equipment 620 197 381
------------------ ------------------ ------------------
Total $ 63,621 $ 33,738 $ 21,678
================== ================== ==================
FINANCING ACTIVITIES
Cash provided by financing activities totaled $45.2 million and $21.5 million
for the years ended December 31, 2004 and 2003, respectively. In connection with
our IPO and our subsequent issuance of additional shares under the exercise of
the underwriters' over-allotment option, we generated gross proceeds of
approximately $220.8 million. Approximately $23.0 million of the gross proceeds
were used for the underwriters' discount, offering costs and financing costs,
leaving us with net proceeds of approximately $197.8 million. Approximately
$85.9 million of our gross proceeds were 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. In
connection with our IPO, we paid off the then-outstanding loan balance
(including approximately $18.3 million of outstanding loan draws from 2003)
using approximately $59.5 million from our IPO proceeds. We also used our IPO
proceeds to pay off $46.0 million of mortgage debt and 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.
COMPARISON OF YEARS ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2002
OPERATING ACTIVITIES
Net cash provided by operating activities before changes in working capital
accounts totaled $8.9 million and $6.8 million for 2003 and 2002, respectively,
an increase of $2.1 million. This increase resulted from a corresponding
decrease in net loss of $1.2 million and an increase in depreciation and
amortization of $0.8 million. Changes in working capital accounts used $2.0
million in 2003 while $0.8 million was provided by changes in working capital
accounts in 2002, a decrease of $2.8 million. The change is primarily due to an
increase in restricted cash in 2003 related to the receipt of insurance proceeds
from a fire that occurred at one of our owned off-campus properties under
development in Fresno, California, as well as certain restricted funds that were
set aside as required under construction loan agreements.
INVESTING ACTIVITIES
Net cash used in investing activities totaled $33.7 million and $21.7 million
for 2003 and 2002, respectively, an increase of $12.0 million. The increase
related to the construction of two on-campus participating properties that
opened in 2003 and three owned off-campus owned properties under construction
during 2003 that opened in Fall 2004.
FINANCING ACTIVITIES
Net cash provided by financing activities totaled $21.5 million and $11.6
million for 2003 and 2002, respectively, an increase of $9.9 million. This
increase was due primarily to borrowings and contributions to fund the
construction of two on-campus participating properties and three owned
off-campus owned properties under construction during 2003, offset by an
increase in distributions to our Predecessor owners of $2.1 million.
26
STRUCTURE OF ON-CAMPUS PARTICIPATING PROPERTIES
At our on-campus participating properties, the subject universities own both the
land and improvements. We then have a leasehold interest under a ground/facility
lease. Under the lease, we receive an annual distribution representing 50% of
these properties' net cash available for distribution after payment of operating
expenses (which includes our management fees), debt service (which includes
repayment of principal) and capital expenditures. We also manage these
properties under multi-year management agreements and are paid a management fee
representing 5% of receipts.
We do not have access to the cash flows and working capital of these
participating properties except for the annual net cash distribution as
described above. Additionally, a substantial portion of these properties' cash
flow is dedicated to capital reserves required under the applicable property
indebtedness and to the amortization of such indebtedness. These amounts do not
increase our economic interest in these properties since our interest, including
our right to share in the net cash available for distribution from the
properties, terminates upon the amortization of their indebtedness. Our economic
interest in these properties is therefore limited to our interest in the net
cash flow and management 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 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 actual contribution to our
consolidated/combined income and expense of our on-campus participating
properties for the years ended December 31, 2004, 2003, and 2002. These results
include the contribution of certain on-campus participating properties that were
developed by us and by pre-arrangement transferred to the university after the
necessary financing had been secured:
YEAR ENDED DECEMBER 31,
------------------------------------------------
2004 2003 2002
-------------- -------------- --------------
Revenues $ 17,730 $ 17,002 $ 16,670
Direct operating expenses (1) 7,621 7,517 7,273
Amortization 3,532 3,271 3,152
Amortization of deferred financing costs 240 180 160
Ground/facility lease expense 846 584 664
-------------- -------------- --------------
Net operating income 5,491 5,450 5,421
Interest income 53 30 67
Interest expense (5,547) (5,293) (5,291)
Other non-operating income 234 - -
-------------- -------------- --------------
NET INCOME (2) $ 231 $ 187 $ 197
============== ============== ==============
(1) Excludes the property management fees described below. This expense and the
corresponding fee revenue recognized by us have been eliminated in
consolidation/combination. Also excludes allocation of expenses related to
corporate management and oversight.
(2) 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.
We earned $0.9 million, $0.8 million, and $0.8 million in management fees under
these arrangements for the years ended December 31, 2004, 2003, and 2002,
respectively. Additionally, our share of the net cash flows of these properties
for the years ended December 31, 2004, 2003, and 2002 was $0.8 million, $0.5
million, and $0.7 million, respectively.
LIQUIDITY AND CAPITAL RESOURCES
CASH BALANCES AND LIQUIDITY
As of December 31, 2004, excluding our on-campus participating properties, we
had $7.0 million in cash and cash equivalents, restricted cash, and short-term
investments, as compared to $7.8 million in cash and cash equivalents,
restricted cash, and short-term investments as of as of December 31, 2003.
Restricted cash primarily consists of escrow accounts held by lenders and
resident security deposits, as required by law in certain states. Additionally,
restricted cash as of December 31, 2004 also included $0.8 million of funds held
in escrow that were paid to our Predecessor owners in February 2005 in
accordance with the terms of the Contribution Agreement executed in conjunction
with the IPO.
27
As of December 31, 2004, our short-term liquidity needs included, but were not
limited to, the following: (i) anticipated distribution payments to our
stockholders and unitholders totaling approximately $17.2 million based on an
anticipated annual distribution of $1.35 per share or unit, including those
required to maintain our REIT status and satisfy our current distribution
policy, (ii) remaining development costs on our Sweet Home development project,
estimated to be approximately $25.0 million, (iii) funds used for the
acquisition of the Proctor Portfolio, as previously discussed, estimated to be
approximately $19.7 million, and (iv) funds for potential future acquisitions
and development projects. We expect to meet our short-term liquidity
requirements generally through net cash provided by operations, proceeds from
the sale of our University Village at San Bernardino property of approximately
$28.1 million (received in January 2005), borrowings under our revolving credit
facility, and permanent property level debt.
We may seek additional funds to undertake initiatives not contemplated by our
business plan or obtain additional cushion against possible shortfalls. We also
may pursue additional financing as opportunities arise. Future financings may
include a range of different sizes or types of financing, including the sale of
additional debt or equity securities. While we believe we will be able to obtain
such funds, these funds may not be available on favorable terms or at all. Our
ability to obtain additional financing depends on several factors, including
future market conditions, our success or lack of success in penetrating our
markets, our future creditworthiness, and restrictions contained in agreements
with our investors or lenders, including the restrictions contained in the
agreements governing our revolving credit facility. These financings could
increase our level of indebtedness or result in dilution to our equity holders.
CULLEN OAKS PHASE II FINANCING
In December 2004, we obtained a new construction loan in the amount of $17.0
million ($0.5 million of which was outstanding at December 31, 2004) to fund the
development and construction of Cullen Oaks - Phase II, an on-campus
participating property scheduled to open in August 2005. The loan has an initial
term of 18 months and bears interest, at the Company's option, at either Prime
(5.25% at December 31, 2004) or LIBOR plus 2.0% (4.4% at December 31, 2004).
Upon completion, the University has a continuing obligation to us to lease beds
at this property for an amount sufficient to pay all property expenditures,
including debt service. We have provided limited guarantees to the project's
construction lender. The loan requires payments of interest only through June
2006 and can be extended through November 2008, at which time the loan will
require monthly principal and interest payments based on a 30-year amortization
period.
REVOLVING CREDIT FACILITY
The Operating Partnership has a senior secured revolving credit facility with a
term of 36 months that provides a maximum capacity of $75 million, subject to
certain conditions as contained in the Credit Agreement (the "Agreement"). The
maximum capacity may be increased by up to an additional $25 million, subject to
certain borrowing base requirements, as outlined in the Agreement. The facility
bears interest at a variable rate, at the Company's option, based upon a base
rate or one-, two-, three-, or six-month LIBOR plus, in each case, a spread
based upon the Company's total leverage. The credit facility is secured by the
Company's ownership interests in a minimum of four unlevered owned off-campus
student housing properties. The Company guarantees the Operating Partnership's
obligations under the credit facility. As of December 31, 2004, the facility had
a maximum borrowing limit (subject to certain financial covenants) of
approximately $65.1 million, $11.8 million of which had been drawn as of
December 31, 2004, leaving a remaining availability of approximately $53.3
million.
The terms of our credit facility include certain restrictions and covenants,
which limit, among other things, the payment of distributions (as discussed
below), the incurrence of additional indebtedness, liens, and the disposition of
assets. The terms also require compliance with financial ratios relating to
consolidated net worth and leverage requirements. Commencing with the earlier of
the day the outstanding balance exceeds $25 million or December 31, 2005, we
will also be subject to compliance with additional fixed charge and debt
coverage ratios. The distribution restriction previously mentioned provides
that, except to enable us to continue to qualify as a REIT for federal income
tax purposes, before December 31, 2005, we may not pay distributions greater
than $5 million in any given quarter. Subsequent to December 31, 2005, we will
be prohibited from making distributions which exceed 95% of our funds from
operations, as defined, over any four consecutive fiscal quarters. As of
December 31, 2004, the Company was in compliance with all such covenants.
28
DISTRIBUTIONS
We are required to distribute 90% of our REIT taxable income (excluding capital
gains) on an annual basis in order to qualify as a REIT for federal income tax
purposes. Accordingly, we intend to make, but are not contractually bound to
make, regular quarterly distributions to common stockholders and PIU holders.
All such distributions are at the discretion of the Board of Directors. We may
be required to use borrowings under the credit facility, if necessary, to meet
REIT distribution requirements and maintain our REIT status. The Board of
Directors considers market factors and our Company's performance in addition to
REIT requirements in determining distribution levels.
On November 10, 2004, the Company declared a distribution per share of $0.1651
which was paid on November 29, 2004 to all common stockholders of record as of
November 22, 2004. At the same time, the Company paid or set aside an equivalent
amount per unit to holders of PIUs in the Operating Partnership and holders of
RSUs (see Note 9 to the accompanying Notes to Consolidated and Combined
Financial Statements contained in Item 8). This distribution was prorated to
reflect third quarter operations subsequent to the IPO and therefore reflects
the period from August 17, 2004 through September 30, 2004.
Additionally, on February 17, 2005, the Company declared a distribution per
share of $0.3375, which was paid on March 8, 2005 to all common stockholders of
record as of February 25, 2005. At the same time, the Company paid or set aside
an equivalent amount per unit to holders of PIUs in the Operating Partnership
and holders of RSUs.
DISTRIBUTIONS TO PREDECESSOR OWNERS
An entity newly formed by our Predecessor owners was entitled to any savings in
the budgeted completion cost of three of our owned off-campus construction
properties that were completed in Fall 2004. Accordingly, in February 2005, we
distributed approximately $0.4 million of designated unspent funds to an entity
affiliated with our Predecessor owners and accounted for the payment as an
equity distribution. The $0.8 million in escrowed funds described above were
also released to an entity affiliated with our Predecessor owners. We do not
have any ownership interest in such entity and the entity does not have any
ownership interest in the Company.
Additionally, upon completion of construction at University Village at TU, which
occurred Fall 2004, our Predecessor owners received $0.5 million relating to a
construction guarantee fee, which was paid from the remaining construction
budget. In November 2004, our Predecessor owners also received $0.9 million
relating to insurance proceeds received by the Company in connection with the
fire that occurred at the University Village at Fresno. These payments were also
accounted for as equity distributions. Subsequent to December 31, 2004, other
than the completion funds described above, the only payments that our
Predecessor owners are entitled to relate to potential additional insurance
proceeds received in connection with the fire at the University Village at
Fresno.
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.
29
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,
------------------------------------------------
2004 2003 2002
-------------- -------------- --------------
Average beds 6,548 (1) 5,971 5,778
Total recurring capital expenditures $ 1,262 $ 1,104 $ 1,055
Average per bed $ 193 $ 185 $ 183
(1) Does not include University Village at Sweet Home, which is currently
under construction with a scheduled completion date of August 2005.
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 predevelopment expenditures before a
financing commitment has been obtained and, accordingly, bear the risk of the
loss of these predevelopment expenditures if financing cannot ultimately be
arranged on acceptable terms. Historically, the development projects that we
have been awarded have been successfully structured and financed; however, their
development has at times been delayed beyond the period initially scheduled,
causing revenue to be recognized in later periods.
INDEBTEDNESS
As of December 31, 2004, we had approximately $201.0 million of outstanding
consolidated indebtedness, comprised of an $11.8 million balance on our
revolving credit facility secured by four of our owned off-campus properties,
$112.0 million in mortgage debt secured by seven of our owned off-campus
properties, $17.6 million in mortgage and construction loans secured by two
on-campus participating properties, and $59.7 million in bond issuances secured
by three of our on-campus participating properties. The weighted average
interest rate on our consolidated indebtedness as of December 31, 2004 was
7.04%. All of our outstanding indebtedness is fixed rate except for our
revolving credit facility and the Cullen Oaks Phase II construction loan
discussed below. As of December 31, 2004, approximately 6.1% of our total
consolidated indebtedness was variable rate debt.
OWNED OFF-CAMPUS PROPERTIES
The following table contains certain summary information concerning the mortgage
indebtedness that encumbers our owned off-campus properties as of December 31,
2004:
BALANCE AS OF
ORIGINAL INTEREST MATURITY DECEMBER 31,
ASSET DATE RATE DATE 2004
- -------------------------------------- ----------------- --------------- -------------------- -------------------
University Village at Boulder Creek 12/01/2002 5.71% November 2012 $ 16,540
River Club Apartments 07/28/2000 8.18% August 2010 18,533
River Walk Townhomes 08/31/1999 8.00% September 2009 7,683
Village at Alafaya Club 07/11/2000 8.16% August 2010 (1) 20,474
Village at Blacksburg 12/15/2000 7.50% January 2011 21,352
Commons on Apache 05/14/1999 7.66% June 2009 7,668
Callaway House 03/30/2001 7.10% April 2011 19,724
-------------------
Total $ 111,974
===================
(1) Represents the Anticipated Repayment Date, as defined in the loan
agreement. If the loan is not repaid on the Anticipated Repayment
Date, then certain monthly payments including excess cash flow, as
defined, become due through the maturity date of August 2030.
30
The weighted average interest rate of such indebtedness was 7.44% as of December
31, 2004. Each of these mortgages is a non-recourse obligation subject to
customary exceptions. Each of these mortgages has a 30 year amortization, and
none are cross-defaulted or cross-collateralized to any other indebtedness. The
loans generally may not be prepaid prior to maturity; in certain cases,
prepayment is allowed, subject to prepayment penalties.
ON-CAMPUS PARTICIPATING PROPERTIES
Three of our on-campus participating properties are 100% financed with
project-based taxable bonds, as listed below. Under the terms of these
financings, one of our special purpose subsidiaries publicly issued three series
of taxable bonds and loaned the proceeds to three special purpose subsidiaries
that each hold a separate leasehold interest. Although a default in payment by
these special purpose subsidiaries could result in a default under one or more
series of bonds, the indebtedness of any of these special purpose subsidiaries
is not cross-defaulted or cross-collateralized with indebtedness of the REIT,
the Operating Partnership or other special purpose subsidiaries. Repayment of
principal and interest on these bonds is insured by MBIA, Inc. The loans
encumbering the leasehold interests are non-recourse, subject to customary
exceptions.
The following table sets forth certain information concerning these bond
financings:
ORIGINAL ORIGINAL BALANCE AS OF
ASSET DATE TERM DECEMBER 31, 2004
---------------------------------------- ------------------ -------------------- ----------------------
University Village-PVAMU (1) September 1999 24 years $ 30,851
University College-PVAMU
(Phase I) (2) May 2001 22 years 19,855
University College-PVAMU
(Phase II) (2) July 2003 25 years 4,230
University Village-TAMIU (1) September 1999 24 years 4,719
----------------------
Total $ 59,655
======================
(1) Part of combined bond issuance. Separate loan agreements are not
cross-collateralized or cross-defaulted.
(2) Multiple financings of single facility.
Cullen Oaks Phase I is currently encumbered by a mortgage loan originated in
September 2000 in the original principal amount of approximately $17.7 million.
The loan bears interest at the Prime rate, or LIBOR plus 1.9%, at our election
with principal amortizing on a 30 year schedule. We have in place an interest
rate swap agreement which effectively caps the interest on the outstanding
balance as of December 31, 2004 of approximately $17.0 million at 5.5%. The loan
matures in November 2008. The University has a continuing obligation to us to
lease beds at this property for an amount sufficient to pay all property
expenditures, including debt service. In turn, we have guaranteed payment of
this property's indebtedness. In addition, in December 2004, we obtained a
construction loan to finance the Cullen Oaks Phase II on-campus participating
property, which is scheduled to be completed in August 2005. For each borrowing,
we have the option of choosing either the Prime rate or LIBOR plus 2.0%, and we
also have the option to extend the maturity of this loan through November 2008.
The balance on this construction loan as of December 31, 2004 was approximately
$0.6 million, bearing interest at 4.4%. 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 6.93% at December 31, 2004.
OFF BALANCE SHEET ITEMS
We do not have any off-balance sheet arrangements.
31
CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual obligations as of December 31,
2004:
TOTAL 2005 2006 2007 2008 2009 THEREAFTER
---------- --------- --------- --------- --------- --------- -----------
Long-term debt (1) $ 345,771 $ 30,368 $ 17,795 $ 28,867 $ 32,626 $ 29,362 $ 206,753
Operating leases (2) 9,810 527 509 482 478 480 7,334
Capital leases 715 275 182 135 95 28 -
Owned off-campus
development project (3) 24,977 24,977 - - - - -
Severance agreement 625 455 170 - - - -
---------- --------- --------- --------- --------- --------- -----------
$ 381,898 $ 56,602 $ 18,656 $ 29,484 $ 33,199 $ 29,870 $ 214,087
========== ========= ========= ========= ========= ========= ===========
(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, 2004 was assumed to remain constant
over all periods presented.
(2) Includes minimum annual lease payments of $0.1 million required
through 2079 under the ground lease for University Village at TU.
(3) Consists of the completion costs related to University Village at
Sweet Home, which is scheduled to be completed in August 2005. 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. This amount does not include completion costs
related to Cullen Oaks Phase II, which is funded through the
construction loan described above.
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 distributions.
32
The following table presents a reconciliation of our FFO to our net loss:
PERIOD FROM PERIOD FROM YEAR ENDED DECEMBER 31,
AUGUST 17, 2004 TO JANUARY 1, 2004 TO ---------------------------------
DECEMBER 31, 2004 AUGUST 16, 2004 2003 2002
---------------------- --------------------- -------------- ---------------
Net income (loss) $ 1,802 $ (3,141) $ (944) $ (2,139)
Minority interests 29 (129) (16) (30)
Loss (gain) from disposition of real estate - 39 (16) (295)
Real estate related depreciation and
amortization:
Total depreciation and
amortization 4,158 5,815 8,868 8,077
Discontinued operations
depreciation and amortization 152 219 346 334
Furniture, fixtures, and equipment
depreciation (154) (181) (277) (178)
---------------------- --------------------- -------------- ---------------
FUNDS FROM OPERATIONS ("FFO") $ 5,987 $ 2,622 $ 7,961 $ 5,769
====================== ===================== ============== ===============
FFO per share - basic $ 0.48
======================
FFO per share - diluted $ 0.47
======================
Weighted average common shares
outstanding:
Basic 12,513,130
======================
Diluted 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 recent 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 a deferred tax asset associated with a
step up in the tax basis of the on-campus participating properties owned by our
TRS, resulting in an income tax benefit of $0.8 million.
While our on-campus participating properties contributed $17.4 million, $16.5
million, and $16.1 million to our revenues for the years ended December 31,
2004, 2003, and 2002, respectively, under our ground/facility 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.
33
Funds From Operations--Modified for Operational Performance of On-Campus
Participating Properties ("FFOM"):
PERIOD FROM PERIOD FROM YEAR ENDED DECEMBER 31,
AUGUST 17, 2004 TO JANUARY 1, 2004 TO ---------------------------------
DECEMBER 31, 2004 AUGUST 16, 2004 2003 2002
---------------------- --------------------- -------------- ---------------
Funds from operations $ 5,987 $ 2,622 $ 7,961 $ 5,769
Elimination of operations of on-campus
participating properties:
Net (income) loss from on-campus
participating properties (1,023) 753 (187) (197)
Amortization of investment in on-campus
participating properties (1,309) (2,222) (3,270) (3,158)
---------------------- --------------------- -------------- ---------------
3,655 1,153 4,504 2,414
Modifications to reflect operational
performance of on-campus participating
properties:
Our share of net cash flow (1) 214 583 471 651
Management fees 371 489 809 796
On-campus participating properties
development fees (2) 15 - - -
---------------------- --------------------- -------------- ---------------
Impact of on-campus participating
properties 600 1,072 1,280 1,447
---------------------- --------------------- -------------- ---------------
FUNDS FROM OPERATIONS - MODIFIED FOR $ $ 2,225 $ 5,784 $
OPERATIONAL PERFORMANCE OF ON-CAMPUS
PARTICIPATING PROPERTIES ("FFOM") 4,255 3,861
====================== ===================== ============== ===============
FFOM per share - basic $ 0.34
======================
FFOM per share - diluted $ 0.34
======================
Weighted-average common shares
outstanding:
Basic 12,513,130
======================
Diluted 12,634,130
======================
(1) 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.
(2) Development and construction management fees related to the Cullen
Oaks Phase II on-campus participating property.
This narrower measure of performance measures our profitability for these
properties in a manner that is similar to the measure of our profitability from
our services business where we similarly incur no initial or ongoing capital
investment in a property and derive only consequential benefits from capital
expenditures and debt amortization. We believe, however, that this narrower
measure of performance is inappropriate in traditional real estate ownership
structures where debt amortization and capital expenditures enhance the property
owner's long-term profitability from its investment.
Our FFOM may have limitations as an analytical tool because it reflects the
unique contractual calculation of net cash flow from our on-campus participating
properties, which is different from that of our off-campus owned properties.
Additionally, FFOM reflects features of our ownership interests in our on-campus
participating properties that are unique to us. Companies that are considered to
be in our industry may not have similar ownership structures; therefore, those
companies may not calculate 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 FFOM
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
34
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
Our future income, cash flows and fair values relevant to financial instruments
are dependent upon prevailing market interest rates. Market risk refers to the
risk of loss from adverse changes in market prices and interest rates. The fair
value of our fixed rate debt is impacted by changes in interest rates, as an
example, a 1% increase in interest rates (100 basis points) would cause a $13.7
million and $16.3 million decline in the fair value of our fixed rate debt as of
December 31, 2004 and 2003, respectively. Conversely, a 1% decrease in interest
rates would cause a $15.9 million and $18.9 million increase in the fair value
of our fixed rate debt as of December 31, 2004 and 2003, respectively. Due to
the structure of our floating rate debt and interest rate protection
instruments, the impact of a 1% increase or decrease in interest rates on our
cash flows would not be significant at December 31, 2004 or 2003.
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 an outstanding balance of $11.8 million at December 31, 2004
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 $0.6 million at December 31, 2004 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 $75 million senior secured 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.
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.
35
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.
PART III
The information required by Part III is incorporated by reference from our
definitive proxy statement for our 2005 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 ACCOUNTANT FEES AND SERVICES
The information contained in the section captioned "Independent Auditor Fees" of
the definitive proxy statement is incorporated herein by reference.
36
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 F-1
Consolidated and Combined Balance Sheets as of December 31, 2004
and December 31, 2003 F-2
Consolidated and Combined Statements of Operations for the Company
for the period from August 17, 2004 through December 31, 2004 F-3
and for the Predecessor for the period from January 1, 2004
through August 16, 2004, and for the years ended December 31,
2003 and 2002
Consolidated and Combined Statements of Changes in Stockholders'
and Predecessor Owners' Equity for the Company for the period F-4
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 years ended December 31, 2003 and 2002
Consolidated and Combined Statements of Cash Flows for the Company
for the period from August 17, 2004 through December 31, 2004 F-5
and for the Predecessor for the period from January 1, 2004
through August 16, 2004, and for the years ended December 31, 2003
and 2002
Notes to Consolidated and Combined Financial Statements F-6
(B) EXHIBITS
Exhibit
Number Description of Document
- ------ --------------------------------------------------------------------
3.1* Form of Articles of Amendment and Restatement of American Campus
Communities, Inc.
3.2* Form of Bylaws of American Campus Communities, Inc.
4.1* Form of Certificate for Common Stock.
10.1* Form of Amended and Restated Partnership Agreement of American
Campus Communities Operating Partnership LP
10.2*^ American Campus Communities, Inc. 2004 Incentive Award Plan.
10.3*^ American Campus Communities, Inc. 2004 Outperformance Bonus Plan.
10.4*^ Form of PIU Grant Notice (including Registration Rights).
10.5* Form of Indemnification Agreement between American Campus
Communities, Inc. and certain of its directors and officers.
10.6* Form of Employment Agreement by and between American Campus
Communities, Inc. and William C. Bayless, Jr.
10.7* Form of Employment Agreement by and between American Campus
Communities, Inc. and Brian B. Nickel.
10.8* Form of Employment Agreement by and between American Campus
Communities, Inc. and Mark J. Hager.
10.9* Form of Confidentiality and Noncompetition Agreement.
10.10* First Amended and Restated Management Agreement between Dobie Center
Properties, Ltd. and Texas Campus Lifestyles
Management (Dobie Center), L.C., dated as of August 1, 1998.
10.11* Amendment to First Amended and Restated Management Agreement and
Exclusive Leasing Agreement between Dobie Center Properties, Ltd.
and Texas Campus Lifestyles Management (Dobie Center), L.C., dated
as of February 1, 2004.
10.12* Property Management Agreement between SHP-The Village at Riverside
LP and American Campus Management (Texas), Ltd., dated as of
December 2000.
37
Exhibit
Number Description of Document
- ------ --------------------------------------------------------------------
10.13 Credit Agreement, dated as of August 17, 2004, by and 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 ("DBTCA"), as the initial issuer of Letters of
Credit, the Swing Line Bank, DBTCA, as administrative agent, DBTCA,
as collateral agent, Citigroup Global Markets Inc. ("CGMI"), as
syndication agent, and Deutsche Bank Securities Inc. and CGMI, as
co-lead arrangers and joint book running managers (incorporated by
reference to Exhibit 10.1 to the Company's Current Report on Form
8-K filed on August 19, 2004).
10.14* Contribution Agreement 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., dated as of July 27, 2004.
10.15* Purchase and Sale Agreement among Titan Investments I, LLC, Anthony
J. Patinella, Jr. and RAP Student Housing Properties, LLC, dated as
of July 27, 2004.
10.16* Form of Option Agreement for the Dobie Center, by and between
American Campus Communities, Inc. and RSVP Student Housing, LLC.
10.17* Form of Option Agreement for The Village at Riverside, by and among
American Campus Communities, Inc., RSVP Student Housing, LLC and
RAP-ACP, LLC.
10.18* Letter of Intent between American Campus Communities, Inc. and Titan
Investments I, LLC, dated as of July 27, 2004.
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 the Company's Current Report on Form
8-K filed on August 19, 2004).
21 List of Subsidiaries of the Registrant
23 Consent of Independent Registered Public Accounting Firm
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.
* Incorporated by reference to the same numbered exhibit previously
filed with the Company's registration statement on Form S-11 (SEC
File No. 333-114813).
^ Indicates Management Compensation Plan.
38
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 29, 2005 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 29, 2005
- --------------------------------- (Principal Executive Officer)
William C. Bayless, Jr.
/s/ Brian B. Nickel Executive Vice President, Chief Investment March 29, 2005
- --------------------------------- Officer, Secretary and Director
Brian B. Nickel
/s/ Mark J. Hager Executive Vice President, Chief Financial and March 29, 2005
- --------------------------------- Accounting Officer and Treasurer (Principal
Mark J. Hager Financial and Accounting Officer)
/s/ R.D. Burck Chairman of the Board of Directors March 29, 2005
- ---------------------------------
R.D. Burck March 29, 2005
/s/ G. Steven Dawson Director March 29, 2005
- ---------------------------------
G. Steven Dawson March 29, 2005
/s/ Cydney Donnell Director March 29, 2005
- ---------------------------------
Cydney Donnell
/s/ Edward Lowenthal Director March 29, 2005
- ---------------------------------
Edward Lowenthal
/s/ Scott H. Rechler Director March 29, 2005
- ---------------------------------
Scott H. Rechler
/s/ Winston W. Walker Director March 29, 2005
- ---------------------------------
Winston W. Walker
39
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 sheet of American Campus
Communities, Inc. and Subsidiaries as of December 31, 2004, and the combined
balance sheet of the American Campus Predecessor (American Campus Communities,
L.L.C. and Affiliated Student Housing Properties) as of December 31, 2003, and
the related consolidated and combined statements of operations, changes in
stockholders' and Predecessor owners' equity and cash flows for the period from
January 1, 2004 through August 16, 2004 (representing the Predecessor), the
period from August 17, 2004 through December 31, 2004 (representing American
Campus Communities Inc. as the "Company"), and for the years ended December 31,
2003 and 2002. These consolidated and combined financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated and combined 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. We were not engaged to perform an
audit of the Company's internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated and combined financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of American Campus Communities, Inc. and Subsidiaries ("Company") at
December 31, 2004 and the combined financial position of American Campus
Communities, L.L.C. and Affiliated Student Housing Properties ("Predecessor") at
December 31, 2003, and the related consolidated and combined statements of
operations, changes in stockholders' and Predecessor owners' equity and cash
flows for the period from January 1, 2004 through August 16, 2004 (representing
the Predecessor), the period from August 17, 2004 through December 31, 2004
(representing the Company), and for the years ended December 31, 2003 and 2002,
in conformity with accounting principles generally accepted in the United
States.
March 14, 2005
ERNST & YOUNG LLP
AUSTIN, TX
F-1
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
CONSOLIDATED AND COMBINED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
COMPANY PREDECESSOR
------------------------ ------------------------
DECEMBER 31, 2004 DECEMBER 31, 2003
------------------------ ------------------------
ASSETS
Investments in real estate:
On-campus participating properties, net $ 68,064 $ 69,713
On-campus participating property - held for sale - 7,976
Owned off-campus properties, net 250,100 222,907
Owned off-campus property - held for sale 22,350 -
------------------------ ------------------------
Investments in real estate, net 340,514 300,596
Cash and cash equivalents 4,050 5,227
Restricted cash and short-term investments 9,816 9,503
Student contracts receivable, net 2,164 2,355
Other assets 11,084 12,885
------------------------ ------------------------
$ 367,628 $ 330,566
======================== ========================
LIABILITIES AND STOCKHOLDERS' AND PREDECESSOR OWNERS' EQUITY
Liabilities:
Mortgage loans, bonds payable, and lines of credit $ 201,014 $ 267,518
Note payable secured by leasehold held for sale - 8,080
Accounts payable and accrued expenses 5,443 3,966
Other liabilities 20,294 23,092
------------------------ ------------------------
Total liabilities 226,751 302,656
Minority interests 2,648 252
Commitments and contingencies (Note 14)
Stockholders' and Predecessor owners' equity:
Common stock, $.01 par value, 800,000,000 shares authorized,
12,615,000 shares issued and outstanding 126 -
Additional paid in capital 136,259 -
Accumulated earnings and distributions 1,802 -
Accumulated other comprehensive income (loss) 42 (197)
Predecessor owners' equity - 27,855
------------------------ ------------------------
Total stockholders' and Predecessor owners' equity 138,229 27,658
------------------------ ------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' AND PREDECESSOR OWNERS' EQUITY $ 367,628 $ 330,566
======================== ========================
See accompanying notes to consolidated and combined financial statements.
F-2
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
COMPANY PREDECESSOR
------------------- ---------------------------------------------------------------
PERIOD FROM PERIOD FROM
AUGUST 17, 2004 TO JANUARY 1, 2004 TO YEAR ENDED YEAR ENDED
DECEMBER 31, 2004 AUGUST 16, 2004 DECEMBER 31, 2003 DECEMBER 31, 2002
------------------- -------------------- -------------------- -------------------
REVENUES:
Owned off-campus properties $ 15,254 $ 19,861 $ 31,514 $ 29,997
On-campus participating properties 8,078 9,340 16,482 16,055
Third party development services 1,367 3,896 7,830 3,998
Third party development services -
on-campus participating properties 43 497 109 1,076
Third party management services -
affiliates - 178 335 507
Third party management services 1,138 789 854 438
Resident services 382 - - -
Other income - - 12 60
------------------- -------------------- -------------------- -------------------
TOTAL REVENUES 26,262 34,561 57,136 52,131
OPERATING EXPENSES:
Owned off-campus properties 6,741 10,120 15,272 14,856
On-campus participating properties 2,604 5,296 7,925 8,101
Third party development and management
services 2,140 3,403 5,389 4,441
General and administrative 4,202 1,032 2,749 1,995
Depreciation and amortization 4,158 5,815 8,868 8,077
Ground/facility lease 214 598 489 643
------------------- -------------------- -------------------- -------------------
TOTAL OPERATING EXPENSES 20,059 26,264 40,692 38,113
------------------- -------------------- -------------------- -------------------
OPERATING INCOME 6,203 8,297 16,444 14,018
NONOPERATING INCOME AND (EXPENSES):
Interest income 39 43 71 166
Interest expense (5,556) (11,142) (16,940) (16,421)
Amortization of deferred financing costs (842) (369) (558) (546)
Other nonoperating income 653 274 - -
------------------- -------------------- -------------------- -------------------
TOTAL NONOPERATING EXPENSES (5,706) (11,194) (17,427) (16,801)
------------------- -------------------- -------------------- -------------------
Income (loss) before income tax benefit,
minority interests, and discontinued
operations 497 (2,897) (983) (2,783)
Income tax benefit 728 - - -
Minority interests (29) 129 16 30
------------------- -------------------- -------------------- -------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 1,196 (2,768) (967) (2,753)
Discontinued operations:
Income (loss) attributable to discontinued
operations 606 (334) 7 319
(Loss) gain from disposition of real estate - (39) 16 295
------------------- -------------------- -------------------- -------------------
Total discontinued operations 606 (373) 23 614
------------------- -------------------- -------------------- -------------------
NET INCOME (LOSS) $ 1,802 $ (3,141) $ (944) $ (2,139)
=================== ==================== ==================== ===================
Income per share - basic:
Income from continuing operations per share $ 0.10
===================
Net income per share $ 0.14
===================
Income per share - diluted:
Income from continuing operations per share $ 0.10
===================
Net income per share $ 0.15
===================
Weighted-average common shares outstanding:
Basic 12,513,130
===================
Diluted 12,634,130
===================
Distributions declared per common share $ 0.1651
===================
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 CHANGES IN
STOCKHOLDERS' AND PREDECESSOR OWNERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
FOR THE PERIODS FROM JANUARY 1, 2004 TO AUGUST 16, 2004 AND FROM AUGUST 17, 2004 TO DECEMBER 31, 2004, AND
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
ACCUMULATED ACCUMULATED
ADDITIONAL EARNINGS OTHER PREDECESSOR
NUMBER OF COMMON PAID IN AND COMPREHENSIVE OWNERS'
SHARES STOCK CAPITAL DISTRIBUTIONS INCOME (LOSS) EQUITY TOTAL
----------- ---------- ----------- ------------- -------------- ----------- ----------
PREDECESSOR
Predecessor owners' equity,
December 31, 2001 - $ - $ - $ - $ 29 $ 40,542 $ 40,571
Contributions - - - - - 5,363 5,363
Distributions - - - - - (8,194) (8,194)
Comprehensive loss:
Expiration of interest
rate swap - - - - 29 - 29
Change in fair value
of interest rate cap - - - - (104) - (104)
Net loss - - - - - (2,139) (2,139)
----------
Total comprehensive loss - - - - - - (2,214)
----------- ---------- ----------- ------------- -------------- ----------- ----------
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
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 $ 136,259 $ 1,802 $ 42 $ - $ 138,229
=========== ========== =========== ============= ============== =========== ==========
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 CASH FLOWS
(IN THOUSANDS)
PERIOD FROM PERIOD FROM
AUGUST 17, JANUARY 1,
2004 TO 2004 TO YEAR ENDED YEAR ENDED
DECEMBER 31, AUGUST 16, DECEMBER 31, DECEMBER 31,
2004 2004 2003 2002
-------------- -------------- -------------- --------------
OPERATING ACTIVITIES
Net income (loss) $ 1,802 $ (3,141) $ (944) $ (2,139)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 4,395 5,949 9,214 8,411
Amortization of deferred financing costs 933 421 587 564
Compensation expense recognized for award of profits
interest units and restricted stock units 2,242 - - -
Income tax benefit (728) - - -
Changes in operating assets and liabilities:
Restricted cash and short-term investments 4,385 (5,016) (2,036) (140)
Student contracts receivable, net (727) 860 (378) 355
Other assets 786 2,320 (265) (1,269)
Accounts payable and accrued expenses (910) 2,591 (421) 1,335
Other liabilities 199 932 1,105 530
-------------- -------------- -------------- --------------
Net cash provided by operating activities 12,377 4,916 6,862 7,647
-------------- -------------- -------------- --------------
INVESTING ACTIVITIES
Investments in on-campus participating properties (1,316) (565) (3,788) (396)
Student housing facility subject to lease-held for sale - - (7,976) -
Investments in owned off-campus properties (13,220) (47,900) (21,777) (20,901)
Purchase of furniture, fixtures and equipment (401) (219) (197) (381)
-------------- -------------- -------------- --------------
Net cash used in investing activities (14,937) (48,684) (33,738) (21,678)
-------------- -------------- -------------- --------------
FINANCING ACTIVITIES
Proceeds from short-term loans, net of paydowns (1,870) 1,796 (716) 790
Proceeds from revolving credit facility, net of paydowns 11,800 - - -
Repayment of long-term debt (107,149) (1,403) (2,997) (33,502)
Repayment of notes payable - related parties - - (1,000) (1,096)
Proceeds from long-term debt 540 41,170 29,605 47,969
Proceeds from notes payable - related parties - - 1,020 607
Change in construction accounts payable (6,860) 2,044 3,943 3
Issuance of common stock 220,763 - - -
Debt issuance and offering costs (21,855) (3,001) (1,513) (447)
Distributions to common stockholders and holders of (2,104) - - -
profits interest units
Contributions from Predecessor owners - 860 3,538 5,363
Distributions to Predecessor owners (1,399) (2,212) (10,311) (8,194)
Redemption of ownership interests of Predecessor owners (85,853) - - -
Minority interests (11) (105) (32) 153
-------------- -------------- -------------- --------------
Net cash provided by financing activities 6,002 39,149 21,537 11,646
-------------- -------------- -------------- --------------
Net change in cash and cash equivalents 3,442 (4,619) (5,339) (2,385)
Cash and cash equivalents at beginning of period 608 5,227 10,566 12,951
-------------- -------------- -------------- --------------
Cash and cash equivalents at end of period $ 4,050 $ 608 $ 5,227 $ 10,566
============== ============== ============== ==============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES
Reduction of investment in student housing due to fire $ - $ - $ (3,750) $ -
============== ============== ============== ==============
Financing of equipment through capital lease obligations $ 69 $ 302 $ 117 $ 278
============== ============== ============== ==============
Change in fair value of derivative instruments, net $ (134) $ 373 $ (151) $ (76)
============== ============== ============== ==============
$ - $ 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 $ 7,657 $ 9,960 $ 17,665 $ 17,237
============== ============== ============== ==============
Income taxes paid $ 67 $ - $ - $ -
============== ============== ============== ==============
See accompanying notes to consolidated and combined financial statements.
F-5
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
American Campus Communities, Inc. (the "Company") commenced operations as a
fully integrated real estate investment trust ("REIT") effective with the
completion of its initial public offering (the "IPO") on August 17, 2004.
Through the Company's controlling interest in American Campus Communities
Operating Partnership, L.P. (the "Operating Partnership"), of which the Company
is the sole general partner, and the subsidiaries of the Operating Partnership,
including its Taxable REIT Subsidiary, American Campus Communities Services,
Inc. (the "TRS"), the Company is one of the largest private owners, managers and
developers of high quality student housing properties in the United States in
terms of beds owned and under management. The Company is a fully integrated,
self-managed and self-administered equity REIT with expertise in the
acquisition, design, financing, development, construction management, leasing
and management of student housing properties.
The Company was formed to succeed certain businesses of the American Campus
Communities Predecessor (the "Predecessor"), which was not a legal entity but
rather a combination of real estate entities under common ownership and voting
control collectively doing business as American Campus Communities, L.L.C. and
Affiliated Student Housing Properties. The Company's Predecessor entities were
engaged in the student housing business since 1993. The Company was incorporated
in Maryland on March 9, 2004. Additionally, the Operating Partnership was formed
and the TRS was incorporated in Maryland on July 14, 2004 and August 17, 2004,
respectively, each in anticipation of the IPO. The IPO was consummated on August
17, 2004, concurrent with the consummation of various formation transactions,
and consisted of the sale of 12,100,000 shares of the Company's common stock at
a price per share of $17.50, generating gross proceeds of approximately $211.8
million. The aggregate proceeds to the Company, net of the underwriters'
discount and offering costs, were approximately $189.4 million. In connection
with the exercise of the underwriters' over-allotment option on September 15,
2004, the Company issued an additional 515,000 shares of common stock at the IPO
price per share, generating an additional $9.0 million of gross proceeds and
$8.4 million in net proceeds after the underwriters' discount and offering
costs. Also in connection with the IPO formation transactions, the Company used
approximately $85.9 million of IPO proceeds to redeem the ownership interests of
the Predecessor owners. These payments were accounted for as an equity
distribution within the accompanying consolidated and combined statements of
changes in stockholders' and Predecessor owners' equity. The Company's
operations commenced on August 17, 2004 after completion of the IPO and the
formation transactions, and are carried on primarily through the Operating
Partnership and its wholly owned subsidiaries, including the TRS.
As of December 31, 2004, the Company owned, through its Operating Partnership,
18 student housing properties containing approximately 4,300 apartment units and
13,000 beds. The Company's owned portfolio included 13 owned off-campus
properties that are in close proximities to public colleges and universities and
five on-campus properties operated under ground/facility leases with the related
university systems. These communities contain modern housing units, offer
resort-style amenities and are supported by a classic resident assistant system
and other student-oriented programming.
Through the TRS, the Company provides construction management and development
services for student housing properties owned by colleges and universities,
charitable foundations, and others. As of December 31, 2004, the Company also
provided third party property management and leasing services for 19 student
housing properties (13 of which the Company served as the third party developer
and construction manager) that represented approximately 11,300 beds in
approximately 4,500 units. Third party management and leasing services are
typically provided pursuant to multi-year management contracts that have an
initial term that ranges from two to five years. As of December 31, 2004, the
Company's total owned and managed portfolio included 37 properties that
represented approximately 24,300 beds in approximately 8,800 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
F-6
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
reorganization did not require any material adjustments to conform to the
accounting policies of the separate entities.
The historical financial data prior to August 17, 2004 presented in this report
is the historical data for the Predecessor and reflects the combined historical
results of operations and financial position of the Predecessor including the
operations of The Village at Riverside and certain other non-core assets which
were distributed to the Predecessor owners as a part of the formation
transactions. As a result, the historical results of operations and financial
position prior to the IPO are not indicative of, or in some instances directly
comparable to, the Company's results of operations and financial position after
the IPO.
The Company consolidates entities over which it exercises significant control
over major operating decisions, such as approval of budgets, development
management, and changes in financing. The entities included in the consolidated
and combined financial statements have been consolidated or combined only for
the periods that such entities were under the control of 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued a
revision to Statement of Financial Accounting Standard ("SFAS") No. 123,
"Share-Based Payment." This statement establishes standards for the accounting
for transactions in which an entity exchanges its equity instruments for goods
or services. It also addresses transactions in which an entity incurs
liabilities in exchange for goods or services that are based on the fair value
of the entity's equity instruments or that may be settled by the issuance of
those equity instruments. The adoption of this statement did not have a material
impact on the Company's consolidated or combined financial position or results
of operations.
In December 2004, the Emerging Issues Task Force ("EITF") issued EITF No. 04-5,
"Investor's Accounting for an Investment in a Limited Partnership When the
Investor is the Sole General Partner and the Limited Partners Have Certain
Rights." This statement provides guidance in assessing when a sole general
partner, as defined, should consolidate its investment in a limited partnership.
This statement applies to the Company's investment in the 1772 Sweet Home Road
joint venture discussed in Note 7. The adoption of this statement is not
expected to have a material impact on the Company's consolidated or combined
financial position or results of operations.
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.
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.
RESTRICTED CASH AND SHORT-TERM INVESTMENTS
Restricted cash and short-term investments consist 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. Realized
and unrealized gains and losses are not material for the periods presented.
F-7
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
INTERNAL-USE SOFTWARE
The Company capitalizes direct costs incurred during the application,
development, and implementation stages for developing, purchasing or otherwise
acquiring software for internal use. These costs are included in other assets in
the accompanying consolidated and combined balance sheets and are amortized over
the estimated useful lives of the software, generally three to five years. All
costs incurred during the preliminary project stage, including project scoping,
identification and testing of alternatives, are expensed as incurred.
FIXED ASSETS AND DEPRECIATION
Land, buildings and improvements, on-campus participating properties, and
furniture, fixtures and equipment, are recorded at historical cost. The cost of
buildings and improvements includes the purchase price of the property,
including legal fees and acquisition costs. Buildings and improvements are
depreciated over 40 years. On-campus participating properties are amortized over
useful lives ranging from 25 to 34 years, representing the respective lease
terms. Furniture, fixtures, equipment, and software for internal use are
depreciated over estimated useful lives ranging from 3 to 7 years.
Depreciation and amortization are computed using the straight-line method for
financial reporting purposes. Accumulated depreciation on furniture, fixtures
and equipment and software for internal use at December 31, 2004 and 2003
approximated $1.2 million and $0.9 million, respectively.
STUDENT HOUSING CONSTRUCTION AND DEVELOPMENT IN PROGRESS
Costs, including construction period interest and amortization of deferred
financing costs, associated with projects either under construction or those
that are under development and are expected to be constructed are capitalized
and included in on-campus participating properties, net or owned off-campus
properties, net in the accompanying consolidated and combined balance sheets, as
applicable. Upon completion of the project, costs are transferred into the
applicable asset category and depreciation commences. Costs associated with
projects that are terminated are expensed at the time of termination. Interest
capitalized during the year approximated $1.8 million, $0.4 million and $0.4
million for the years ended December 31, 2004, 2003, and 2002, respectively.
Amortization of deferred financing costs totaling approximately $0.2 million,
$0.1 million, and $0.2 million was capitalized during the years ended December
31, 2004, 2003, and 2002, respectively.
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.
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
F-8
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
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.
LONG-LIVED ASSETS - IMPAIRMENT
SFAS No. 144, "Accounting for the Impairment and Disposal of Long-Lived Assets"
requires that long-lived assets to be held and used be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. If an event or change in circumstance indicates
that a potential impairment in the value of a property has occurred, the
Company's policy is to assess any potential impairment by making a comparison of
the current and projected cash flows for such property over its remaining
holding period, on an undiscounted basis, to the carrying amount of the
property. If such carrying amounts are in excess of the estimated projected cash
flows of the property, the Company would recognize an impairment loss equivalent
to an amount required to adjust the carrying amount to its estimated fair market
value. As of December 31, 2004, management determined that no indicators of
impairment existed.
REPAIRS, MAINTENANCE, AND MAJOR IMPROVEMENTS
The costs of ordinary repairs and maintenance are charged to operations when
incurred. Major improvements that extend the life of an asset are capitalized
and depreciated over the remaining useful life of the asset. Planned major
repair, maintenance and improvement projects are capitalized when performed.
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.
Amortization expense, net of amounts capitalized, approximated $1.4 million,
$0.6 million, and $0.6 million for the years ended December 31, 2004, 2003, and
2002, respectively. Accumulated amortization at December 31, 2004 and 2003
approximated $1.6 million and $1.8 million, respectively.
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 specific receivables are doubtful. When management has determined
a receivable to be uncollectible, the receivable is removed as an asset with a
corresponding reduction in the allowance for doubtful accounts.
F-9
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 OF CHARGED TO BALANCE, END OF
PERIOD EXPENSE WRITE-OFFS PERIOD
----------------------- ---------------- ------------- -----------------
Year ended December 31, 2002 $ 894 $ 738 $ (56) $ 1,576
Year ended December 31, 2003 $ 1,576 $ 584 $ (103) $ 2,057
Year ended December 31, 2004 $ 2,057 $ 646 $ (1,851) (1) $ 852
(1) In 2004, the Company wrote off essentially all receivables that were 100%
reserved.
DEVELOPMENT SERVICES REVENUE AND COST RECOGNITION - THIRD-PARTY PROJECTS
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. Incentive fees are
recognized when performance has been verified by an independent third party.
FACILITY MANAGEMENT REVENUES
Management fees are recognized when earned in accordance with each management
contract. Incentive management fees are recognized when the incentive criteria
have been met and the incentive amount has been confirmed by a third party.
ADVERTISING COSTS
Advertising costs are expensed during the period incurred. The Company uses no
direct response advertising. Advertising expense approximated $0.4 million, $0.9
million, and $0.6 million in 2004, 2003, and 2002, 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 and caps 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.
COMMON STOCK ISSUANCE COSTS
In accordance with the Securities and Exchange Commission's Staff Accounting
Bulleting No. 5, specific incremental costs directly attributable to the IPO
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.
F-10
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
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.
INCOME TAXES
The Company intends to elect to be taxed as a REIT under the Internal Revenue
Code of 1986, as amended (the "Code"), commencing with the taxable year ended
December 31, 2004. 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. The Company believes that it has been organized and has operated
in a manner that will allow it to qualify for taxation as a REIT under the Code
commencing with the taxable year ended December 31, 2004, and it is management's
intention to adhere to these requirements and maintain the Company's REIT
status.
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.
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:
CASH AND CASH EQUIVALENTS, RESTRICTED CASH AND SHORT-TERM INVESTMENTS, 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, 2004,
the Company estimated the fair value of its mortgage loans to be approximately
$130.8 million.
BONDS PAYABLE: the fair value of bonds payable is based on market quotes for
bonds outstanding. As of December 31, 2004, the Company estimated the fair value
of its bonds payable to be approximately $72.4 million.
LINE OF CREDIT (REVOLVING CREDIT FACILITY): the fair value of the Company's
revolving credit facility approximates carrying value due to the variable
interest rate feature of this instrument.
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, which includes balance sheets presented in an unclassified
format and discontinued operations.
F-11
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
3. EARNINGS PER SHARE
Earnings per share is calculated based on the weighted average number of shares
of the Company's common stock outstanding during the period. Restricted stock
units ("RSUs") are included in both basic and diluted weighted average common
shares outstanding because they were fully vested on the date of grant and all
conditions required in order for the recipients to earn the RSUs have been
satisfied. Profits interest units ("PIUs") in the Operating Partnership are
excluded from basic weighted average common shares outstanding because the
conditions required in order for those units to be converted into common shares
have not yet been satisfied. See Note 9 for a discussion of PIUs and RSUs.
The following is a summary of the elements used in calculating basic and diluted
income per share for the period subsequent to the IPO (August 17, 2004 through
December 31, 2004):
PERIOD FROM
AUGUST 17, 2004 THROUGH
DECEMBER 31, 2004
----------------------------
Basic net income per share calculation:
Income from continuing operations $ 1,196
Discontinued operations 606
----------------------------
Net income $ 1,802
============================
Income from continuing operations - per share $ 0.10
============================
Income from discontinued operations - per share $ 0.04
============================
Net income - per share $ 0.14
============================
Basic weighted average common shares outstanding 12,513,130
============================
Diluted net income per share calculation:
Income from continuing operations $ 1,196
Add back income allocated to PIU holders 30
----------------------------
Income from continuing operations, as adjusted 1,226
Discontinued operations 606
----------------------------
Net income, as adjusted $ 1,832
============================
Income from continuing operations - per share $ 0.10
============================
Income from discontinued operations - per share $ 0.05
============================
Net income - per share $ 0.15
============================
Basic weighted average common shares outstanding 12,513,130
PIUs 121,000
----------------------------
Diluted weighted average common shares outstanding 12,634,130
============================
F-12
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, 2004
-------------------------
Deferred tax assets:
Fixed and intangible assets $ 11,742
Net operating loss carryforward 343
Prepaid and deferred rent 175
Bad debt reserves 46
Accrued expenses 21
-------------------------
Total deferred tax assets 12,327
Valuation allowance for deferred tax assets (10,696)
-------------------------
Deferred tax assets, net of valuation allowance 1,631
Deferred tax liability:
Deferred financing costs 903
-------------------------
Net deferred tax assets $ 728
=========================
Significant components of the income tax benefit are as follows:
PERIOD FROM AUGUST 17,
2004 THROUGH
DECEMBER 31, 2004
-------------------------
Deferred:
Federal $ 660
State 68
-------------------------
Total (total income tax benefit from continuing operations) $ 728
=========================
TRS income subject to tax is $0.4 million for the period from August 17, 2004
(IPO and TRS formation date) to December 31, 2004. The reconciliation of income
tax attributable to continuing operations computed at the U.S. statutory rate to
income tax benefit is as follows, including the percentage of consolidated
income subject to tax:
PERIOD FROM AUGUST 17,
2004 TO
DECEMBER 31, 2004
-------------------------
Tax at U.S. statutory rates on TRS income subject to tax $ (132)
State income tax, net of federal income tax benefit (14)
Effect of permanent differences (8)
Decrease in valuation allowance 217
Initial adoption of SFAS No. 109 665
-------------------------
Income tax benefit $ 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 $0.7 million, the tax benefit for which is
reflected as income tax benefit in the accompanying consolidated and combined
statements of operations. The valuation allowance decreased by $0.2 million
during the period from August 17, 2004 to December 31, 2004 due to management's
determination that an additional amount of gross deferred tax assets became more
likely than not to be recognized.
At December 31, 2004, the Company had net operating loss carryforwards ("NOLs")
of approximately $0.9 million for income tax purposes that expire in 2024. These
NOLs may be used to offset future taxable income generated by the TRS.
F-13
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
5. INVESTMENTS IN OWNED OFF-CAMPUS PROPERTIES
Owned off-campus properties consist of the following:
DECEMBER 31,
------------------------------------------------
2004 2003
----------------------- ----------------------
Owned off-campus properties:
Land $ 33,778 $ 35,434
Buildings and improvements 219,841 175,436
Furniture, fixtures and equipment 10,104 6,673
Construction in progress 9,087 22,961
----------------------- ----------------------
272,810 240,504
Less accumulated depreciation (22,710) (17,597)
----------------------- ----------------------
Owned off-campus properties, net $ 250,100 $ 222,907
======================= ======================
In May 2003, an arson fire destroyed a student housing facility under
construction. Reconstruction commenced in June 2003 and the Company has received
advances totaling approximately $8.8 million as of December 31, 2004.
Accordingly, the Company has recognized a total gain of $0.7 million during the
year ended December 31, 2004 related to the settlement of this claim. This
amount is included in other nonoperating income in the accompanying consolidated
and combined statements of operations.
OWNED OFF-CAMPUS PROPERTY - HELD FOR SALE
In November 2004, California State University - San Bernardino exercised its
option to purchase the University Village at San Bernardino off-campus student
housing property for an aggregate purchase price of approximately $28.3 million.
This transaction was consummated in January 2005, and this property is reflected
as Owned Off-Campus Property - Held for Sale as of December 31, 2004 in the
accompanying consolidated balance sheet. This property is included in the Owned
Off-Campus Properties segment discussed in Note 16.
6. ON-CAMPUS PARTICIPATING PROPERTIES
The Company is a party to ground/facility lease agreements ("Leases") with
certain state university systems and colleges (the "Lessor") for the purpose of
developing, constructing, and operating student housing facilities on university
campuses. Under the terms of the leases, title to the constructed facilities is
held by the Lessor and the Lessor receives a de minimus base rent paid at
inception and 50% of defined net cash flows on an annual basis through the term
of the lease. The leases terminate upon final repayment of the related debt, the
amortization period of which is contractually stipulated.
Pursuant to the Leases, in the event the leasehold estates do not achieve
Financial Break Even, (defined as revenues less operating expenses, excluding
management fees, less debt service) the Lessor would be required to make a
rental payment, also known as the Contingent Payment, sufficient to achieve
Financial Break Even until the facilities received investment grade ratings.
Future net cash flow distributions would be first applied to repay such
Contingent Payments. As a result of obtaining permanent financing (non recourse
to the Company), beginning November 1999 and December 2002, the Texas A&M
University System is no longer required to make Contingent Payments under the
Prairie View A&M University Phase I, II, III (University Village) and Phase IV
(University College) leases, respectively, as the facilities received investment
grade ratings.
In the event the Company seeks to sell its leasehold interest, the Leases
provide the Lessors the right of first refusal of a bona fide purchase offer and
an option to purchase the lessee's rights under the lease.
In conjunction with the execution of each Lease, the Company has entered into a
separate five-year agreement to manage the facilities for 5% of defined gross
receipts. The five-year term of the management agreement is not contingent upon
the continuation of the facility lease. Upon expiration of the respective five
year management agreements, the agreements continue on a month-to-month basis.
F-14
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
On-campus participating properties are as follows:
HISTORICAL COST
---------------------------------
DECEMBER 31,
COMMENCEMENT/ REQUIRED DEBT ---------------------------------
LESSOR/UNIVERSITY EXPIRATION REPAYMENT 2004 2003
--------------------------------------------- ------------------- --------------------- ---------------- ---------------
Texas A&M University System/Prairie View
A&M University (1) 2/1/96 / 8/31/38 9/1/23 $ 37,840 $ 37,368
Texas A&M University System/Texas A&M
International 2/1/96 / 8/31/38 9/1/23 5,909 5,889
Texas A&M University System/Prairie View
A&M University (2) 10/1/99 / 8/31/39 8/31/25 / 8/31/28 23,663 23,366
University of Houston System/University of
Houston - Phase I 9/27/00 / 8/31/41 8/31/35 18,123 17,864
University of Houston System/University of
Houston - Phase II (3) 9/27/00 / 8/31/41 8/31/35 835 -
---------------- ---------------
86,370 84,487
---------------- ---------------
Less accumulated amortization (18,306) (14,774)
---------------- ---------------
On-campus participating properties, net $ 68,064 $ 69,713
================ ===============
- --------------------------------
(1) Consists of three phases placed in service between 1996 and 1998
(2) Consists of two phases placed in service between 2000 and 2003.
(3) Phase II is covered under the original Cullen Oaks ground lease.
This facility is under development and is scheduled to be placed
in service in August 2005.
ON-CAMPUS PARTICIPATING PROPERTY - HELD FOR SALE
During 2003, the Predecessor entered into a ground lease with Weatherford
College, obtained construction financing and constructed a student housing
facility which opened in the Fall of 2003. This property's ground lease was
transferred to Weatherford College and the related debt was repaid in April
2004. The leasehold is reflected as Student Housing Facility Subject to Ground
Lease - Held for Sale and the related construction loan is reflected as Note
Payable Secured by Leasehold Held for Sale as of December 31, 2003 in the
accompanying combined balance sheet. This property is included in the On-Campus
Participating Properties segment discussed in Note 16.
7. JOINT VENTURE AND MINORITY INTERESTS
In August 2004, the Operating Partnership formed a limited liability company,
1772 Sweet Home Road, L.L.C. ("Sweet Home"), with a local landowner to develop
and own an off-campus student housing property located in Buffalo, New York. The
community will consist of nine residential buildings containing 269 units and
828 beds and is scheduled to be completed in the Fall of 2005. Upon the
formation of Sweet Home, an affiliate of the Operating Partnership (the
"Managing Member") caused Sweet Home to admit the local landowner (which was a
partner in the selling partnership) as a non-managing member of Sweet Home as
partial consideration for the land. In addition, the Managing Member will fund
all remaining development and construction costs of the project. A subsidiary of
the TRS will serve as the developer and construction manager of the project.
Each member receives a return on its investment and participates in additional
returns, as defined in the Operating Agreement. This entity is consolidated and
the non-managing member's interest in Sweet Home is reflected as a minority
interest in the accompanying financial statements.
In connection with the IPO, a wholly-owned affiliate of the Company acquired
Titan Investments II ("Titan"), which held a minority ownership in three
development properties and one operating property in exchange for approximately
$5.7 million in cash. Subsequent to this transaction, the four properties are
now wholly owned by the Operating Partnership. This transaction was accounted
for using the purchase method and the purchase price was allocated to the assets
and liabilities acquired based on their respective fair values.
Minority interests also include PIUs received by certain executive and senior
officers on the IPO date (see Note 9). A PIU and a share of the Company's common
stock have essentially the same economic characteristics, as they effectively
participate equally in the net income and distributions of the Operating
Partnership. The PIU holders' minority interest in the Operating Partnership is
reported at an amount equal to the PIU holders' ownership percentage of the net
equity of the Operating Partnership at the end of each reporting period (1.0% at
December 31, 2004.)
F-15
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
8. DEBT
A summary of the Company's outstanding consolidated and combined indebtedness is
as follows:
DECEMBER 31,
--------------------------------------
2004 2003
------------------ ------------------
Debt secured by owned off-campus properties:
Revolving credit facility and short-term notes payable $ 11,800 $ 74
Mortgage loans payable 111,974 170,780
Construction loans payable - 26,447
Debt secured by on-campus participating properties:
Mortgage loan payable 17,045 17,287
Construction loan payable 540 -
Bonds payable 59,655 61,010
------------------ ------------------
Total debt $ 201,014 $ 275,598
================== ==================
During the twelve months ended December 31, 2004, the following transactions
occurred:
YEAR ENDED
DECEMBER 31, 2004
------------------------
Balance, beginning of period $ 275,598
Additions
Draws on lines of credit, net of payoffs 11,726
Draws under advancing construction loans 41,170
Closing of new construction loan for leasehold property (1) 540
Deductions:
Scheduled repayments of principal (3,053)
Repayment of note payable secured by leasehold held for sale (8,080)
Reduction in debt due to distribution of assets in connection with IPO (11,388)
Repayment of construction loans in connection with IPO (59,537)
Repayment of mortgage loans in connection with IPO (45,962)
------------------------
$ 201,014
========================
(1) In December 2004, the Company obtained a new construction loan to fund
the development and construction of Cullen Oaks - Phase II, a leasehold
facility scheduled to open in August 2005. The loan has a term of 18
months and bears interest, at the Company's option, at either Prime
(5.25% at December 31, 2004) or LIBOR plus 2.0% (4.4% at December 31,
2004).
REVOLVING CREDIT FACILITY
In connection with the IPO, the Operating Partnership obtained a senior secured
revolving credit facility. The credit facility has a term of 36 months and
provides a maximum capacity of $75 million, subject to certain conditions as
contained in the Credit Agreement (the "Agreement"). The maximum capacity may be
increased by up to an additional $25 million, subject to certain borrowing base
requirements, as outlined in the Agreement. The facility bears interest at a
variable rate, at the Company's option, based upon a base rate or one-, two-,
three-, or six-month LIBOR plus, in each case, a spread based upon the Company's
total leverage. Additionally, the Company is required to pay an unused
commitment fee ranging from 0.20% to 0.25% per annum, depending on the aggregate
unused balance. The credit facility is secured by the Company's ownership
interests in a minimum of four unlevered owned off-campus properties. The
Company guarantees the Operating Partnership's obligations under the credit
facility. As of December 31, 2004, the balance outstanding on the revolving
credit facility totaled $11.8 million, bearing interest at 3.9%, with remaining
availability (subject to certain financial covenants) totaling $53.3 million.
The terms of the Agreement include certain restrictions and covenants, which
limit, among other things, the payment of
F-16
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
distributions (as discussed below), the incurrence of additional indebtedness,
liens, and the disposition of assets. The terms also require compliance with
financial ratios relating to consolidated net worth and leverage requirements.
Commencing with the earlier of the day the outstanding balance exceeds $25
million or December 31, 2005, the Company will also be subject to compliance
with additional fixed charge and debt coverage ratios. The distribution
restriction previously mentioned provides that, except to enable the Company to
continue to qualify as a REIT for federal income tax purposes, before December
31, 2005, the Company may not pay distributions greater than $5 million in any
given quarter. Subsequent to December 31, 2005, the Company will be prohibited
from making distributions which exceed 95% of the Company's funds from
operations, as defined, over any four consecutive fiscal quarters. As of
December 31, 2004, the Company was in compliance with all such covenants.
CONSTRUCTION LOANS AND MORTGAGE NOTES PAYABLE
Construction loans and mortgage notes payable at December 31, 2004 consisted of
nine loans secured by off-campus and on-campus properties consisting of:
PRINCIPAL INTEREST RATE AT
OUTSTANDING STATED DECEMBER 31,
PROPERTY (3) INTEREST RATE 2004 MATURITY DATE AMORTIZATION
- ---------------------------- -------------- ---------------- ---------------- ------------------ --------------
Cullen Oaks (1) $ 17,045 LIBOR +1.90% 5.54% November 2008 30 years
Cullen Oaks - Phase II (2) 540 (2) 4.41% June 2006 n/a
University Village at
Boulder Creek 16,540 5.71% 5.71% November 2012 30 years
River Club Apartments 18,533 8.18% 8.18% August 2010 30 years
River Walk Townhomes 7,683 8.00% 8.00% September 2009 30 years
Village at Alafaya Club 20,474 8.16% 8.16% August 2010 (4) 30 years
Village at Blacksburg 21,352 7.50% 7.50% January 2011 30 years
Commons on Apache 7,668 7.66% 7.66% June 2009 30 years
Callaway House 19,724 7.10% 7.10% April 2011 30 years
-------------- ----------------
Total $ 129,559 Wtd Avg Rate 7.18%
============== ================
(1) 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.
(2) Construction loan was obtained in December 2004. For each borrowing,
the Company has the option of choosing either a 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 related
construction loan is paid in full.
(3) For federal income tax purposes, the aggregate cost of the loans is
equal to the carrying amount.
(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.
F-17
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, 2004 consisted of the
following:
PRINCIPAL WEIGHTED REQUIRED
MORTGAGED FACILITIES DECEMBER 31, AVERAGE MATURITY MONTHLY DEBT
SERIES SUBJECT TO LEASES ORIGINAL 2004 RATE THROUGH SERVICE
- ---------- ---------------------------- ------------ --------------- ----------- -------------- ---------------
University Village- September
1999 PVAMU/TAMIU $ 39,270 $ 35,570 7.50% 2023 $ 302
2001 University College-PVAMU 20,995 19,855 7.40% August 2025 158
2003 University College-PVAMU 4,325 4,230 5.90% August 2028 28
------------ --------------- ----------- ---------------
Total/weighted average rate $ 64,590 $ 59,655 7.35% $ 488
============ =============== =========== ===============
SHORT-TERM NOTES PAYABLE
On May 1, 2002, the Predecessor entered into a line of credit facility bearing
interest at the Prime rate plus 1.0%. The line of credit was limited to 66.7% of
forecasted annual cash flow with a maximum of $1.0 million. The facility was
secured by reimbursable development and acquisition costs and leasehold
distributions. This line of credit was paid off in connection with the IPO.
On December 16, 2002, the Predecessor executed a note payable in the amount of
$0.4 million, bearing interest at higher of LIBOR or 5.0% maturing on December
1, 2003, to finance the acquisition of land to be used for future development
with a university system. On August 19, 2003, the University acquired the land
and the loan was repaid.
SCHEDULE OF DEBT MATURITIES
Scheduled debt maturities (reflecting automatic extensions where applicable) for
each of the five years subsequent to December 31, 2004, are as follows:
SCHEDULED DUE AT
PRINCIPAL MATURITY TOTAL
------------------- --------------------- ---------------------
2005 $ 3,001 $ - $ 3,001
2006 3,216 540 3,756
2007 15,241 - 15,241
2008 3,617 15,972 19,589
2009 3,511 14,389 17,900
Thereafter 69,580 71,947 141,527
------------------- --------------------- ---------------------
$ 98,166 $ 102,848 $ 201,014
=================== ===================== =====================
Payment of principal and interest were current at December 31, 2004. Mortgage
notes and bonds payable are subject to prepayment penalties.
9. INCENTIVE AWARD PLAN
The Company has adopted the 2004 Incentive Award Plan (the "Plan"). The Plan
provides for the grant to selected employees and directors of the Company and
the Company's affiliates of stock options, profits interest units ("PIUs") in
the Operating Partnership, restricted stock units ("RSUs"), restricted stock,
and other stock-based incentive awards. The Company has reserved a total of
1,210,000 shares of the Company's common stock for issuance pursuant to the
Plan, subject to certain adjustments for changes in the Company's capital
structure, as defined in the Plan.
F-18
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
PROFITS INTEREST UNITS
Upon consummation of the IPO, 121,000 PIUs were issued to certain executive and
senior officers. PIUs are a special class of interests in the Operating
Partnership, and each PIU awarded is deemed equivalent to one share of the
Company's common stock. PIUs will receive the same quarterly per unit
distribution as the per share distributions on the Company's common stock. Under
the terms of the PIU agreements, the Operating Partnership will revalue its
assets upon the occurrence of certain "book-up events", at which time the PIUs
will achieve full parity with common units of the Operating Partnership. PIUs
will thereafter be automatically converted into an equal number of common units
of the Operating Partnership. 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 issued to certain independent
directors. 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 $0.1 million of compensation
expense on the IPO date, reflecting the fair value of the RSUs issued.
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. Such payments will be paid in cash; however, the
Compensation Committee of the Board of Directors may, in its sole discretion,
elect to pay such an award 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, 2004, nothing has been reflected in the accompanying financial statements
related to these awards.
10. INTEREST RATE HEDGES
In connection with the 2001 acquisition of a student housing facility, the
Predecessor purchased an interest rate cap effective November 16, 2001 through
December 10, 2004, for approximately $0.1 million. The rate cap paid interest
above LIBOR of 7.5% and was designated to hedge the Predecessor's exposure to
increases in cash outflows for interest payments on a variable rate loan in the
amount of $19.5 million. The debt underlying this hedge was repaid in connection
with the IPO and consequently the hedge is no longer considered an effective
cash flow hedge. This hedge has zero fair value at December 31, 2004 and 2003.
In connection with the December 2003 extension of a construction note payable,
the Predecessor entered into an interest rate swap on November 19, 2003
(effective December 15, 2003 through November 15, 2008) that was designated to
hedge its exposure to fluctuations on interest payments attributed to changes in
interest rates associated with payments on its advancing construction note
payable. Under the terms of the interest rate swap agreement, the Company pays a
fixed rate of 5.5% and receives a floating rate of LIBOR plus 1.9%. The interest
rate swap had a fair value (negative fair value) of approximately $40,000 and
($0.2 million) at December 31, 2004 and 2003, respectively, and is reflected in
other assets and other liabilities in the accompanying consolidated and combined
balance sheets, respectively.
F-19
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
The Company does not expect to reclassify a material amount of net gains on
hedge instruments from accumulated other comprehensive income to earnings in
2005. Ineffectiveness resulting from the Company's hedges is not material.
11. RELATED PARTY TRANSACTIONS
Prior to the IPO, the Predecessor borrowed funds from certain of its owners to
fund short-term working capital needs. These notes were unsecured and accrued
interest at 16%, compounded monthly. Borrowings under these arrangements totaled
$-0- and $1.0 million for 2004 and 2003, respectively. There were no balances
outstanding at December 31, 2004 and 2003. Interest expense on related party
notes payable for 2004, 2003, and 2002 totaled $-0-, $35,000, and $0.1 million,
respectively.
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 $0.2 million, $0.3 million, and $0.4
million for 2004, 2003, and 2002, respectively. 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 has paid its Predecessor owners approximately
$1.4 million related to a guarantee fee and the distribution of insurance
proceeds from a fire that occurred at an off-campus student housing property
(see Note 5).
12. 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. Concurrent with the
sublease of the new office, the Predecessor sublet its existing office space
through the expiration of the lease in October 2003.
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 based on a defined formula.
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 $0.5 million, $0.6 million, and $0.5
million in 2004, 2003, and 2002, respectively, net of sublease income of
approximately $-0-, $0.1 million, and $28,000.
On-campus participating properties, net at December 31, 2004 included
approximately $0.2 million related to a capital lease of technology equipment,
net of approximately $23,000 of accumulated amortization. Other assets at
December 31, 2004 included approximately $0.3 million related to assets under
capital leases, net of $0.2 million of accumulated amortization.
Future minimum commitments over the life of all leases subsequent to December
31, 2004, are as follows:
OPERATING CAPITAL
----------------- -----------------
2005 $ 527 $ 275
2006 509 182
2007 482 135
2008 478 95
2009 480 28
Thereafter 7,334 -
----------------- -----------------
Total minimum lease payments 9,810 715
Amount representing interest - 117
----------------- -----------------
Balance of minimum lease payments $ 9,810 $ 598
================= =================
F-20
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
The capital lease obligations are reflected in other liabilities in the
accompanying consolidated and combined balance sheets. Amortization of assets
recorded under capital leases for the years ended December 31, 2004, 2003, and
2002 is included in depreciation expense and is immaterial for the periods
presented.
13. 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 21.0%, 21.0%, and 22.0% of the Company's consolidated and combined
revenues for 2004, 2003, and 2002, 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.
14. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
EMPLOYMENT AGREEMENT: Pursuant to an employment agreement with a former key
employee of the Predecessor, the Company is required to make periodic payments
and provide certain other benefits through 2005. The present value of these
payments of approximately $1.0 million was expensed during the year ended
December 31, 2003. The remaining amount owed under this agreement is included in
accounts payable and accrued expenses and other liabilities in the accompanying
consolidated and combined balance sheets.
DEVELOPMENT-RELATED GUARANTEES: The Company commonly provides alternate housing
and project cost guarantees, subject to force majeure. These guarantees are
typically limited, on an aggregate basis, to the amount of the projects' related
development fees or a contractually agreed-upon maximum exposure amount.
Alternate housing guarantees typically expire five days after construction is
complete and generally require the Company to provide substitute living quarters
and transportation for students to and from the university if the project is not
complete by an agreed-upon completion date. Project cost guarantees hold the
Company responsible for the cost of a project in excess of budget. The budget
consists primarily of costs included in the general contractors' guaranteed
maximum price contract ("GMP"). The GMP obligates the general contractor,
subject to force majeure and approved change orders, to provide completion date
guarantees and to cover cost overruns and liquidated damages. In addition, the
GMP is secured with payment and performance bonds. Project cost guarantees
expire upon completion of certain developer obligations, which are normally
satisfied within one year after completion of the project. The Company's
estimated maximum exposure amount under the above guarantees is approximately
$3.6 million.
On one completed project, the Company has guaranteed losses up to $3.0 million
in excess of the development fee if the loss is due to any failure of the
Company to maintain, or cause its professionals to maintain, required insurance
for a period of five years beyond completion of the project (August 2009).
At December 31, 2004 all projects were on schedule and within budget. The
Company has estimated the fair value of guarantees entered into or modified
after December 31, 2002, the effective date of FASB Interpretation No. 45
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," to be immaterial.
In the normal course of business, the Company enters into various
development-related purchase commitments with parties that provide
development-related goods and services. In the event that the Company was to
terminate development services prior to the completion of projects under
construction, the Company could potentially be committed to satisfy outstanding
purchase orders with such parties. The Company's most significant and common
commitments rest with general contractors and furniture suppliers.
DEBT-RELATED GUARANTEES: RAP Student Housing Properties, L.L.C.'s ("RAP SHP", an
entity wholly owned by the Operating Partnership) limited guaranty of certain
obligations of the borrower in connection with the mortgage loan for The Village
at Riverside, a property which was retained by the Predecessor owners in
connection with the IPO, continues to be in effect. Subsequent to the IPO, the
property was foreclosed upon by the lender. Pursuant to the guaranty, RAP SHP
agreed to
F-21
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
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 Company would be
reimbursed for the amount of such liability by the Predecessor owners so long as
they are not in breach of their obligations to the Company under the indemnity.
CONTINGENCIES
LITIGATION: In the normal course of business, the Company is subject to claims,
lawsuits, and legal proceedings. While it is not possible to ascertain the
ultimate outcome of such matters, management believes that the aggregate amount
of such liabilities, if any, in excess of amounts provided or covered by
insurance, will not have a material adverse effect on the consolidated financial
position or results of operations of the Company.
ENVIRONMENTAL MATTERS: The Company is not aware of any environmental liability
with respect to the properties that would have a material adverse effect on the
Company's business, assets or results of operations. However, there can be no
assurance that such a material environmental liability does not exist. The
existence of any such material environmental liability could have an adverse
effect on the Company's results of operations and cash flows.
15. DISCONTINUED OPERATIONS
As described in Note 5, in November 2004, California State University - San
Bernardino exercised its option to purchase the University Village at San
Bernardino off-campus student housing property. As discussed in Note 6, a
leasehold interest was transferred to Weatherford College in April 2004.
Additionally, as discussed in Note 1, in connection with the IPO, the Company
distributed its interests in the entities owning The Village at Riverside to an
affiliate of the Company's Predecessor owners along with certain other non-core
assets. Discontinued operations for the year ended December 31, 2002 also
includes a leasehold interest that was transferred to Lamar University in
December 2002.
Accordingly, the related net income 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,
--------------------------------------------------
2004 2003 2002
--------------- --------------- ----------------
Total revenues $ 2,767 $ 2,769 $ 2,932
Total operating expenses 1,738 1,776 1,625
--------------- --------------- ----------------
Operating income 1,029 993 1,307
Total nonoperating expenses 757 986 988
--------------- --------------- ----------------
Net income $ 272 $ 7 $ 319
=============== =============== ================
As of December 31, 2004 and 2003, assets and liabilities attributable to the
properties classified within discontinued operations consisted of the following:
DECEMBER 31,
---------------------------------
2004 2003
--------------- ----------------
Cash and cash equivalents $ 176 $ 403
=============== ================
Other assets $ 119 $ 1,112
=============== ================
Land, buildings and improvements, and furniture,
fixtures, and equipment, net of accumulated
depreciation $ 22,350 $ 31,013
=============== ================
Accounts payable and accrued expenses $ 126 $ 490
=============== ================
Notes payable $ - $ 25,811
=============== ================
Other liabilities $ 311 $ 513
=============== ================
F-22
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
16. 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.
As a result of the Company's new structure subsequent to the IPO, management has
segregated the segment formerly titled "Student Housing Rentals" into two
distinct segments titled "Owned Off-Campus Properties" and "On-Campus
Participating Properties." This new segment reporting format better reflects how
third parties analyze the Company and its properties subsequent to the IPO and,
accordingly, how management internally evaluates the operations of such
properties.
F-23
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
2004 2003 2002
--------------- -------------- ---------------
OWNED OFF-CAMPUS PROPERTIES
Rental revenues $ 35,497 $ 31,499 $ 29,702
Interest and other income 21 - 47
--------------- -------------- ---------------
Total revenues from external customers 35,518 31,499 29,749
Operating expenses before depreciation and amortization 15,597 14,583 13,893
Interest expense 11,049 11,700 11,070
Insurance gain 654 - -
--------------- -------------- ---------------
Operating income before depreciation, amortization, minority
interests and allocation of corporate overhead $ 9,526 $ 5,216 $ 4,786
=============== ============== ===============
Depreciation and amortization $ 6,520 $ 5,667 $ 5,081
=============== ============== ===============
Capital expenditures $ 61,120 $ 21,777 $ 20,901
=============== ============== ===============
Total segment assets at December 31, $ 269,643 $ 201,676 $ 206,659
=============== ============== ===============
ON-CAMPUS PARTICIPATING PROPERTIES
Rental revenues $ 17,418 $ 16,482 $ 16,055
Interest and other income 61 27 67
--------------- -------------- ---------------
Total revenues from external customers 17,479 16,509 16,122
Operating expenses before depreciation, amortization, and
ground/facility lease 7,381 7,411 7,124
Ground/facility lease 812 489 643
Interest expense 5,469 5,181 5,191
Insurance gain 273 - -
--------------- -------------- ---------------
Operating income before depreciation, amortization, minority
interests and allocation of corporate overhead $ 4,090 $ 3,428 $ 3,164
=============== ============== ===============
Depreciation and amortization $ 3,532 $ 3,271 $ 3,152
=============== ============== ===============
Capital expenditures $ 1,881 $ 3,788 $ 396
=============== ============== ===============
Total segment assets at December 31, $ 79,686 $ 89,502 $ 79,501
=============== ============== ===============
DEVELOPMENT SERVICES
Development and construction management fees from
external customers $ 5,803 $ 8,010 $ 5,481
Intersegment revenues 234 456 222
--------------- -------------- ---------------
Total revenues 6,037 8,466 5,703
Operating expenses 3,796 3,854 3,934
--------------- -------------- ---------------
Operating income before depreciation, amortization,
minority interests and allocation of corporate overhead $ 2,241 $ 4,612 $ 1,769
=============== ============== ===============
Total segment assets at December 31, $ 12,879 $ 34,639 $ 13,807
=============== ============== ===============
PROPERTY MANAGEMENT SERVICES
Property management fees from external customers $ 2,105 $ 1,189 $ 945
Intersegment revenues 1,152 983 930
--------------- -------------- ---------------
Total revenues 3,257 2,172 1,875
Operating expenses 1,480 1,523 1,675
--------------- -------------- ---------------
Operating income before depreciation, amortization, minority
interests and allocation of corporate overhead $ 1,777 $ 649 $ 200
=============== ============== ===============
Total segment assets at December 31, $ 1,141 $ 615 $ 261
=============== ============== ===============
RECONCILIATIONS
Total segment revenues $ 62,291 $ 58,646 $ 53,449
Elimination of intersegment revenues (1,386) (1,439) (1,152)
--------------- -------------- ---------------
Total consolidated revenues $ 60,905 $ 57,207 $ 52,297
=============== ============== ===============
Segment operating income before depreciation, amortization,
minority interests and allocation of corporate overhead $ 17,634 $ 13,905 $ 9,919
Depreciation and amortization 11,184 9,426 8,623
Net unallocated expenses relating to corporate overhead 8,850 5,462 4,079
Income tax benefit 728 - -
Minority interests 100 16 30
--------------- -------------- ---------------
Loss from continuing operations $ (1,572) $ (967) $ (2,753)
=============== ============== ===============
Total segment assets $ 363,349 $ 326,432 $ 300,228
Unallocated corporate assets 4,279 4,134 7,430
--------------- -------------- ---------------
Total assets $ 367,628 $ 330,566 $ 307,658
=============== ============== ===============
F-24
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The information presented below represents the combined financial results of the
Predecessor from January 1, 2004 to August 16, 2004, and the consolidated
financial results of the Company from August 17, 2004 to December 31, 2004.
2004
---------------------------------------------------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH 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)
================= ================= ================= ================= =================
2003
---------------------------------------------------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER TOTAL
----------------- ----------------- ----------------- ----------------- -----------------
Total revenues $ 15,647 $ 14,083 $ 14,026 $ 16,167 $ 59,923 (1)
================= ================= ================= ================= =================
Net income (loss) $ 1,347 $ (370) $ (1,544) $ (377) $ (944)
================= ================= ================= ================= =================
(1) Includes revenues from discontinued operations of $2.8 million for
each of the years ended December 31, 2004 and 2003.
(2) Represents the period from August 17, 2004 (IPO date) through December
31, 2004.
18. SUBSEQUENT EVENTS
On February 17, 2005, the Company declared a distribution per share of $0.3375
which was paid on March 8, 2005 to all common stockholders of record as of
February 25, 2005. At the same time, the Company paid or set aside an equivalent
amount per unit to holders of PIUs and RSUs, respectively (see Note 9).
In February 2005, the Company acquired a five-property portfolio (the "Proctor
Portfolio") for a purchase price of $53.5 million, including the assumption of
$35.4 million in debt (excluding the impact of purchase accounting adjustments).
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 results of operations of these properties will be
included in the Company's consolidated statements of operations beginning in the
first quarter of 2005.
In March 2005, we acquired a 136-unit, 418-bed off-campus student housing
property ("CityParc") located near the University of North Texas in Denton,
Texas, for a purchase price of $19.2 million, including the assumption of
approximately $11.8 million of fixed-rate mortgage debt (excluding the impact of
purchase accounting adjustments).
In February 2005, the Company entered into a purchase and sale agreement to
acquire a 396-unit, 1,044-bed off-campus student housing property ("Exchange at
Gainesville") located near the University of Florida campus in Gainesville,
Florida. The purchase and sale agreement contemplates a purchase price of
approximately $47.5 million. The Company expects to close this acquisition in
late first quarter or early second quarter 2005.
As discussed in Note 5, in November 2004, California State University - San
Bernardino exercised its option to purchase the University Village at San
Bernardino off-campus student housing property for an aggregate purchase price
of approximately $28.3 million. This transaction was consummated in January
2005, resulting in a gain on disposition of approximately $5.9 million.
Subsequent to the transactions discussed above, the Company's total owned and
managed portfolio will include 43 properties that represent approximately 26,900
beds in approximately 9,600 units.
F-25
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES AND
AMERICAN CAMPUS PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
19. 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
Unites Beds Land Equipment Land Equipment Acquisition
------- -------- -------- ------------- -------- ------------- -------------
OWNED OFF-CAMPUS PROPERTIES
Commons on
Apache 111 444 $ 1,464 $ 8,072 $ - $ - $ 1,163
The Village at
Blacksburg 288 1,056 3,826 22,155 - - 1,353
The Village on
University 288 918 5,508 31,264 - - 1,104
River Club
Apartments 266 794 3,478 19,655 - - 660
River Walk
Townhomes 100 340 1,442 8,194 - - 292
The Callaway
House 173 538 5,081 20,499 - - 498
The Village at
Alafaya Club 228 840 3,788 21,851 - - 531
The Village at
Science Drive 192 732 4,673 19,021 - - 125
University
Village
at Boulder
Creek 82 309 939 14,887 96 1,506 443
University
Village
at Fresno 105 406 900 6,838 29 483 8,232
Univ. Village
at San
Bernardino
(5) 132 480 1,836 7,701 95 1,000 11,871
University
Village
at TU 220 749 - 8,876 - 2,380 29,863
University
Village
at Sweet
Home(2) 269 828 2,554 - - - 9,087
------- -------- -------- ------------- -------- ------------- -------------
Subtotal 2,454 8,434 $ 35,489 $ 189,013 $ 220 $ 5,369 $ 65,222
Total Costs
-------------------------------------
Buildings
and
Improvements
and
Furniture,
Fixtures Accumulated
and Depreciation Year
Land Equipment Total (4) (1) Encumbrances Built
-------- ------------- ---------- ------------ ------------ -------
OWNED OFF-CAMPUS PROPERTIES
Commons on
Apache $1,464 $ 9,235 $10,699 $ 1,826 $ 7,668 1987
The Village at 1990/
Blacksburg 3,826 23,508 27,334 2,797 21,352 1998
The Village on
University 5,508 32,368 37,876 4,698 - 1998
River Club
Apartments 3,478 20,315 23,793 3,151 18,533 1996
River Walk
Townhomes 1,442 8,486 9,928 1,312 7,683 1998
The Callaway
House 5,081 20,997 26,078 2,615 19,724 1999
The Village at
Alafaya Club 3,788 22,382 26,170 2,793 20,474 1999
The Village at
Science Drive 4,673 19,146 23,819 1,636 - 2000
University
Village
at Boulder
Creek 1,035 16,836 17,871 1,211 16,540 2002
University
Village
at Fresno 929 15,553 16,482 197 - 2004
Univ. Village
at San
Bernardino
(5) 1,931 20,572 22,503 153 - 2004
University
Village
at TU - 41,119 41,119 474 - 2004
University
Village
at Sweet
Home(2) 2,554 9,087 11,641 - - 2005
-------- ------------- ---------- ------------ ------------
Subtotal $ 35,709 $ 259,604 $ 295,313 $ 22,863 $ 111,974
F-26
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
Unites Beds Land Equipment Land Equipment Acquisition
------- -------- -------- ------------- -------- ------------- -------------
ON-CAMPUS PARTICIPATING PROPERTIES
University
Village -
PVAMU 612 1,920 $ - $ 36,506 $ - $ - $ 1,334
University
Village -
TAMIU 84 252 - 5,844 - - 65
University
College -
PVAMU 756 1,470 - 22,650 - - 1,013
Cullen Oaks
Phase I 231 525 - 17,642 - - 481
Cullen Oaks
Phase II (3) 180 354 - - - - 835
------- -------- -------- ------------- -------- ------------- -------------
Subtotal 1,863 4,521 - 82,642 - - 3,728
------- -------- -------- ------------- -------- ------------- -------------
TOTAL-ALL
PROPERTIES 4,317 12,955 $ 35,489 $ 271,655 $ 220 $ 5,369 $ 68,950
======= ======== ======== ============= ======== ============= =============
Total Costs
-------------------------------------
Buildings
and
Improvements
and
Furniture,
Fixtures Accumulated
and Depreciation Year
Land Equipment Total (4) (1) Encumbrances Built
-------- ------------- ---------- ------------ ------------ -------
ON-CAMPUS PARTICIPATING PROPERTIES
University
Village - 1996/
PVAMU $ - $ 37,840 $37,840 $ 10,639 $ 30,851 97/98
University
Village -
TAMIU - 5,909 5,909 1,682 4,719 1997
University
College - 2000/
PVAMU - 23,663 23,663 3,749 24,085 2003
Cullen Oaks
Phase I - 18,123 18,123 2,236 17,045 2001
Cullen Oaks
Phase II (3) - 835 835 - 540 2005
-------- ------------- ---------- ------------ ------------
Subtotal - 86,370 86,370 18,306 77,240
-------- ------------- ---------- ------------ ------------
TOTAL-ALL
PROPERTIES $ 35,709 $ 345,974 $ 381,683 $ 41,169 $ 189,214
======== ============= ========== ============ ============
(1) The depreciable lives for buildings and improvements and furniture,
fixtures and equipment range from three to forty years.
(2) University Village at Sweet Home is owned through a joint venture and
commenced construction in August 2004. Costs capitalized subsequent to
acquisition represent construction costs associated with the
development of this property. Year built represents the scheduled
completion date.
(3) Cullen Oaks Phase II is a leasehold property that commenced
construction in December 2004. 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 $458.4
million. (5) University Village at San Bernardino was sold in January
2005. See note 18.
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,
2004, 2003, and 2002 are as follows:
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
2004 2003
--------------------------------- ---------------------------------
OFF-CAMPUS(1) ON-CAMPUS(2) OFF-CAMPUS(1) ON-CAMPUS(2)
--------------- ---------------- --------------- ----------------
INVESTMENTS IN REAL ESTATE:
Balance, beginning of year $ 240,504 $ 92,463 $ 222,162 $ 80,699
Basis step-up 5,589 - - -
Acquisition of land for development 2,532 - - -
Acquisition of properties - - - -
Improvements and development expenditures 61,286 1,883 19,267 11,764
Disposition of properties - (7,976) (925) -
Distribution of non-core assets to Predecessor
owners (14,598) - - -
--------------- ---------------- --------------- ----------------
Balance, end of year $ 295,313 $ 86,370 $ 240,504 $ 92,463
=============== ================ =============== ================
ACCUMULATED DEPRECIATION:
Balance, beginning of year $ (17,597) $ (14,774) $ (11,930) $ (11,503)
Depreciation for the year (6,520) (3,532) (5,667) (3,271)
Disposition of properties - - - -
Distribution of non-core assets to Predecessor
owners 1,254 - - -
--------------- ---------------- --------------- ----------------
Balance, end of year $ (22,863) $ (18,306) $ (17,597) $ (14,774)
=============== ================ =============== ================
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
2002
---------------------------------
OFF-CAMPUS(1) ON-CAMPUS(2)
--------------- ----------------
INVESTMENTS IN REAL ESTATE:
Balance, beginning of year $ 200,886 $ 80,304
Basis step-up - -
Acquisition of land for development - -
Acquisition of properties - -
Improvements and development expenditures 21,276 437
Disposition of properties - (42)
Distribution of non-core assets to Predecessor
owners - -
--------------- ----------------
Balance, end of year $ 222,162 $ 80,699
=============== ================
ACCUMULATED DEPRECIATION:
Balance, beginning of year $ (6,849) $ (8,351)
Depreciation for the year (5,081) (3,152)
Disposition of properties - -
Distribution of non-core assets to Predecessor
owners - -
--------------- ----------------
Balance, end of year $ (11,930) $ (11,503)
=============== ================
(1) Owned off-campus properties
(2) On-campus participating properties
F-28