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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 exp