Form 10-Q


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended March 31, 2007.   

o
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
Incorporation or Organization)
 
(IRS Employer Identification No.)
     
805 Las Cimas Parkway, Suite 400
Austin, TX
(Address of Principal Executive Offices)
 
78746
(Zip Code)

(512) 732-1000
Registrant’s telephone number, including area code
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  o      Accelerated Filer  x     Non-accelerated filer  o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
Yes  o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

There were 23,169,059 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 May 7, 2007.
 


 

 
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2007

TABLE OF CONTENTS

 
 
 
PAGE
 NO.
   
PART I.    
 
     
Item 1.
Consolidated Financial Statements
 
     
 
1
 
 
 
 
2
 
 
 
 
3
 
 
 
 
4
 
 
 
 
5
 
 
 
17
     
32
     
32
 
 
PART II.    
 
 
 
 
32
 
 
33
 
 
 
 

AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)

   
March 31, 2007
 
December 31, 2006
 
   
(Unaudited)
     
Assets
         
           
Investments in real estate:
         
Owned properties, net
 
$
836,470
 
$
694,197
 
On-campus participating properties, net
   
75,693
   
76,688
 
Investments in real estate, net
   
912,163
   
770,885
 
               
Cash and cash equivalents
   
25,037
   
79,107
 
Restricted cash
   
10,219
   
11,260
 
Student contracts receivable, net
   
6,499
   
3,129
 
Other assets
   
22,247
   
20,000
 
               
Total assets
 
$
976,165
 
$
884,381
 
               
Liabilities and stockholders’ equity
             
               
Liabilities:
             
Secured debt
 
$
528,133
 
$
432,294
 
Accounts payable and accrued expenses
   
18,710
   
13,616
 
Other liabilities
   
31,869
   
29,436
 
Total liabilities
   
578,712
   
475,346
 
               
Minority interests
   
37,710
   
39,561
 
               
Commitments and contingencies (Note 11)
             
               
Stockholders’ equity:
             
Common shares, $.01 par value, 800,000,000 shares authorized, 23,141,059 and 22,903,073 shares issued and outstanding at March 31, 2007 and December 31, 2006, respectively
   
231
   
229
 
Additional paid in capital
   
385,942
   
382,367
 
Accumulated earnings and distributions
   
(26,009
)
 
(13,533
)
Accumulated other comprehensive (loss) income
   
(421
)
 
411
 
Total stockholders’ equity
   
359,743
   
369,474
 
               
Total liabilities and stockholders’ equity
 
$
976,165
 
$
884,381
 
 
See accompanying notes to consolidated financial statements. 
 
1


AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except share and per share data)

   
Three Months Ended March 31,
 
   
2007
 
2006
 
Revenues:
         
Owned off-campus properties
 
$
27,145
 
$
18,125
 
On-campus participating properties
   
6,337
   
5,982
 
Third party development services
   
369
   
1,602
 
Third party development services - on-campus participating properties
   
36
   
36
 
Third party management services
   
722
   
662
 
Resident services
   
341
   
320
 
Total revenues
   
34,950
   
26,727
 
               
Operating expenses:
             
Owned off-campus properties
   
11,862
   
7,766
 
On-campus participating properties
   
2,026
   
1,950
 
Third party development and management services
   
1,294
   
1,638
 
General and administrative
   
11,328
   
1,587
 
Depreciation and amortization
   
6,970
   
5,018
 
Ground/facility lease
   
295
   
192
 
Total operating expenses
   
33,775
   
18,151
 
               
Operating income
   
1,175
   
8,576
 
               
Nonoperating income and (expenses):
             
Interest income
   
707
   
185
 
Interest expense
   
(6,460
)
 
(5,336
)
Amortization of deferred financing costs
   
(298
)
 
(355
)
Total nonoperating expenses
   
(6,051
)
 
(5,506
)
               
(Loss) income before income taxes, minority interests, and discontinued operations
   
(4,876
)
 
3,070
 
Income tax provision
   
(60
)
 
 
Minority interests
   
258
   
(128
)
(Loss) income from continuing operations
   
(4,678
)
 
2,942
 
               
Discontinued operations:
             
Income attributable to discontinued operations
   
   
722
 
Net (loss) income
 
$
(4,678
)
$
3,664
 
               
(Loss) income per share - basic:
             
(Loss) income from continuing operations per share
 
$
(0.20
)
$
0.17
 
Net (loss) income per share
 
$
(0.20
)
$
0.21
 
(Loss) income per share - diluted:
             
(Loss) income from continuing operations per share
 
$
(0.20
)
$
0.17
 
Net (loss) income per share
 
$
(0.20
)
$
0.21
 
Weighted-average common shares outstanding:
             
Basic
   
22,942,737
   
17,209,779
 
Diluted
   
25,241,190
   
18,176,189
 
               
Distributions declared per common share
 
$
0.3375
 
$
0.3375
 

See accompanying notes to consolidated financial statements.
 
2

 
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited, in thousands)
 
   
Three Months Ended March 31,
 
     
2007
 
 
2006
 
Net (loss) income
 
$
(4,678
)
$
3,664
 
 
             
Other comprehensive (loss) income:
             
Change in fair value of interest rate swaps
   
(802
)
 
118
 
Net comprehensive (loss) income
 
$
(5,480
)
$
3,782
 
 
See accompanying notes to consolidated financial statements.
 
3

AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
 
   
Three Months Ended March 31,
 
     
2007
 
 
2006
 
Operating activities
             
Net (loss) income
 
$
(4,678
)
$
3,664
 
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
             
Minority interests share of (loss) income
   
(258
)
 
128
 
Depreciation and amortization
 
 
6,970
 
 
5,275
 
Amortization of deferred financing costs and debt premiums/discounts
 
 
(70
)
 
106
 
Share-based compensation
 
 
229
 
 
121
 
Amortization of gain on interest rate swap termination
 
 
(30
)
 
 
Income tax provision
 
 
60
 
 
 
Changes in operating assets and liabilities:
             
Restricted cash
   
1,690
   
(1,211
)
Student contracts receivable, net
   
(3,320
)
 
706
 
Other assets
   
285
   
(605
)
Accounts payable and accrued expenses
   
4,390
   
367
 
Other liabilities
   
(2,048
)
 
(2,471
)
Net cash provided by operating activities
   
3,220
   
6,080
 
Investing activities
             
Cash paid for property acquisitions
   
(38,330
)
 
(69,241
)
Investments in owned properties
   
(17,113
)
 
(14,684
)
Investments in on-campus participating properties
   
(65
)
 
(49
)
Purchase of corporate furniture, fixtures and equipment
   
(235
)
 
(139
)
Net cash used in investing activities
   
(55,743
)
 
(84,113
)
Financing activities
             
Proceeds from revolving credit facility, net of paydowns
   
   
67,000
 
Proceeds from construction loans
   
9,646
   
5,708
 
Principal payments on debt
   
(1,569
)
 
(1,098
)
Change in construction accounts payable
   
108
   
(5
)
Debt issuance and assumption costs
   
(1,153
)
 
(1,204
)
Distributions to common and restricted stockholders
   
(7,791
)
 
(5,841
)
Distributions to minority partners
   
(788
)
 
(143
)
Net cash (used) provided by financing activities
   
(1,547
)
 
64,417
 
Net change in cash and cash equivalents
   
(54,070
)
 
(13,616
)
Cash and cash equivalents at beginning of period
   
79,107
   
24,641
 
Cash and cash equivalents at end of period
 
$
25,037
 
$
11,025
 
Supplemental disclosure of non-cash investing and financing activities
             
Loans assumed in connection with property acquisitions
 
$
(88,307
)
$
(123,649
)
Contribution of land from minority partner in development joint venture
 
$
2,756
 
$
 
Issuance of Common Units in connection with property acquisitions
 
$
 
$
(49,096
)
Issuance of Preferred Units in connection with property acquisitions
 
$
 
$
(3,075
)
Change in fair value of derivative instruments, net
 
$
(802
)
$
118
 
Supplemental disclosure of cash flow information
             
Interest paid
 
$
7,772
 
$
6,251
 

See accompanying notes to consolidated financial statements.
 
4


AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1.     Organization and Description of Business  

American Campus Communities, Inc. (the “Company”) is a real estate investment trust (“REIT”) that was incorporated on March 9, 2004 and commenced operations effective with the completion of an initial public offering (“IPO”) on August 17, 2004. Through the Company’s controlling interest in American Campus Communities Operating Partnership LP (the “Operating Partnership”) and American Campus Communities Services, Inc., (the Company’s taxable REIT subsidiary or “TRS”), the Company is one of the largest owners, managers and developers of high quality student housing properties in the United States in terms of beds owned and under management. The Company is a fully integrated, self-managed and self-administered equity REIT with expertise in the acquisition, design, financing, development, construction management, leasing and management of student housing properties.

As of March 31, 2007, the Company’s property portfolio contained 43 student housing properties with approximately 26,800 beds and approximately 8,900 apartment units, consisting of 39 owned properties that are in close proximities to colleges and universities and four on-campus participating properties operated under ground/facility leases with the related university systems. These communities contain modern housing units, offer resort-style amenities and are supported by a classic resident assistant system and other student-oriented programming.

Through the TRS, the Company also provides construction management and development services for student housing properties owned by colleges and universities, charitable foundations, and others. As of March 31, 2007, the Company provided third party management and leasing services for 15 student housing properties (ten of which the Company served as the third party developer and construction manager) that represented approximately 9,600 beds in approximately 3,300 units. Third party management and leasing services are typically provided pursuant to multi-year management contracts that have initial terms that range from one to five years. As of March 31, 2007, the Company’s total owned and managed portfolio included 58 properties with approximately 36,400 beds in approximately 12,200 units.

2.   Summary of Significant Accounting Policies

Principles of Consolidation and Combination

The accompanying consolidated financial statements include all of the accounts of the Company, the Operating Partnership and the subsidiaries of the Operating Partnership. The Company consolidates entities in which it has an ownership interest and over which it exercises significant control over major operating decisions, such as budgeting, investment and financing decisions. The real estate entities included in the consolidated financial statements have been consolidated only for the periods that such entities were under control by the Company. All significant intercompany balances and transactions have been eliminated in consolidation. All dollar amounts in the tables herein, except share and per share amounts, are stated in thousands unless otherwise indicated.

Recent Accounting Pronouncements

In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The adoption of this statement did not have a material impact on the Company’s consolidated financial statements.

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The Company does not expect its adoption to have a material impact on the Company’s consolidated financial statements.

5

 
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”), which gives entities the option to measure eligible financial assets, financial liabilities and firm commitments at fair value on an instrument-by-instrument basis (i.e., the fair value option), which are otherwise not permitted to be accounted for at fair value under other accounting standards. The election to use the fair value option is available when an entity first recognizes a financial asset or financial liability or upon entering into a firm commitment. Subsequent changes in fair value must be recorded in earnings. Additionally, SFAS No. 159 allows for a one-time election for existing positions upon adoption, with the transition adjustment recorded to beginning retained earnings. This statement is effective for fiscal years beginning after November 15, 2007. The Company does not expect its adoption to have a material impact on the Company’s consolidated financial statements.

Interim Financial Statements

The accompanying interim financial statements are unaudited, but have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all disclosures required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting solely of normal recurring matters) necessary for a fair presentation of the financial statements for these interim periods have been included. Because of the seasonal nature of the Company’s operations, the results of operations and cash flows for any interim period are not necessarily indicative of results for other interim periods or for the full year. These financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December, 31, 2006.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Investments in Real Estate 

Investments in real estate are recorded at historical cost. Major improvements that extend the life of an asset are capitalized and depreciated over the remaining useful life of the asset. The cost of ordinary repairs and maintenance is charged to expense when incurred. Depreciation and amortization are recorded on a straight-line basis over the estimated useful lives of the assets as follows:

Buildings and improvements
 
7-40 years
Leasehold interest - on-campus
participating properties
 
25-34 years (shorter of useful life or respective lease term)
Furniture, fixtures and equipment
 
3-7 years

The cost of buildings and improvements includes the purchase price of the property, including legal fees and acquisition costs. Project costs directly associated with the development and construction of an owned real estate project, which include interest, property taxes, and amortization of deferred finance costs, are capitalized as construction in progress. Upon completion of the project, costs are transferred into the applicable asset category and depreciation commences. Interest totaling approximately $1.1 million and $0.5 million was capitalized during the three months ended March 31, 2007, and 2006, respectively. Amortization of deferred financing costs totaling approximately $80,000 and $30,000 was capitalized during the three months ended March 31, 2007, and 2006, respectively.

Management assesses whether there has been an impairment in the value of the Company’s investments in real estate whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment is recognized when estimated expected future cash flows (undiscounted and before interest charges) are less than the carrying value of the property. The estimation of expected future net cash flows is inherently uncertain and relies on assumptions regarding current and future economics and market conditions. If such conditions change, then an adjustment to the carrying value of the Company’s long-lived assets could occur in the future period in which the conditions change. To the extent that a property is impaired, the excess of the carrying amount of the property over its estimated fair value is charged to earnings. The Company believes that there were no impairments of the carrying values of its investments in real estate as of March 31, 2007.

6

 
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
The Company allocates the purchase price of acquired properties to net tangible and identified intangible assets based on relative fair values in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 141, Business Combinations. Fair value estimates are based on information obtained from a number of sources, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property and other market data. Information obtained about each property as a result of due diligence, marketing and leasing activities is also considered. The value of in-place leases is based on the difference between (i) the property valued with existing in-place leases adjusted to market rental rates and (ii) the property valued “as-if” vacant. As lease terms are typically one year or less, rates on in-place leases generally approximate market rental rates. Factors considered in the valuation of in-place leases include an estimate of the carrying costs during the expected lease-up period considering current market conditions, nature of the tenancy, and costs to execute similar leases. Carrying costs include estimates of lost rentals at market rates during the expected lease-up period, as well as marketing and other operating expenses. The value of in-place leases is amortized over the remaining initial term of the respective leases, generally less than one year. The purchase price of property acquisitions is not expected to be allocated to tenant relationships, considering the terms of the leases and the expected levels of renewals. The Company’s allocation of purchase price is contingent upon the final true-up of certain prorations.
 
Intangible Assets

In connection with property acquisitions completed during the three months ended March 31, 2007 and 2006, the Company capitalized approximately $1.2 million and $2.3 million, respectively, related to management’s estimate of the fair value of the in-place leases assumed. These intangible assets are amortized on a straight-line basis over a term of approximately six months, which represents the average remaining term of the underlying leases. The amortization is included in depreciation expense in the accompanying consolidated statements of operations. See Note 3 for a detailed discussion of the property acquisitions completed during the three months ended March 31, 2007.

Debt Premiums and Discounts

Debt premiums and discounts represent fair value adjustments to account for the difference between the stated rates and market rates of debt assumed in connection with the Company’s property acquisitions. The debt premiums and discounts are amortized to interest expense over the term of the related loans using the effective-interest method. As of March 31, 2007 and December 31, 2006, unamortized debt premiums were $6.1 million and $6.4 million, respectively, and unamortized debt discounts were $0.7 million and $0.4 million, respectively. Debt premiums and discounts are included in secured debt on the accompanying consolidated balance sheets.

Third-Party Development Services Revenue and Costs

Development revenues are generally recognized based on a proportionate performance method based on contract deliverables, while construction revenues are recognized using the percentage of completion method, as determined by construction costs incurred relative to total estimated construction costs. Costs associated with such projects are deferred and recognized in relation to the revenues earned on executed contracts. For projects where the Company’s fee is based on a fixed price, any cost overruns incurred during construction, as compared to the original budget, will reduce the net fee generated on those projects. Incentive fees are generally recognized when the project is complete and performance has been agreed upon by all parties, or when performance has been verified by an independent third-party.

The Company also evaluates the collectibility of fee income and expense reimbursements generated through the provision of development and construction management services based upon the individual facts and circumstances, including the contractual right to receive such amounts in accordance with the terms of the various projects, and reserves any amounts that are deemed to be uncollectible.

Pre-development expenditures such as architectural fees, permits and deposits associated with the pursuit of third-party and owned development projects are expensed as incurred, until such time that management believes it is probable that the contract will be executed and/or construction will commence. Because the Company frequently incurs these pre-development expenditures before a financing commitment and/or required permits and authorizations have been obtained, the Company bears the risk of loss of these pre-development expenditures if financing cannot ultimately be arranged on acceptable terms or the Company is unable to successfully obtain the required permits and authorizations. As such, management evaluates the status of third-party and owned projects that have not yet commenced construction on a periodic basis and expenses any deferred costs related to projects whose current status indicates the commencement of construction is unlikely and/or the costs may not provide future value to the Company in the form of revenues. Such write-offs are included in third-party development and management services expenses (in the case of third-party development projects) or general and administrative expenses (in the case of owned development projects) on the accompanying consolidated statements of operations. As of March 31, 2007, we have deferred approximately $3.7 million in pre-development costs related to third-party and owned development projects that have not yet commenced construction. Such costs are included in other assets on the accompanying consolidated balance sheets.

7

 
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Stock-Based Compensation

The Company accounts for equity based awards in accordance with SFAS No. 123 (R), Share-Based Payment. Accordingly, the Company has recognized compensation expense related to certain restricted stock awards (see Note 9) over the underlying vesting periods, which amounted to approximately $0.2 million and $0.1 million during the three months ended March 31, 2007 and 2006, respectively.

Income Taxes

The Company has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”). To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement that it currently distribute at least 90% of its adjusted taxable income to its stockholders. As a REIT, the Company will generally not be subject to corporate level federal income tax on taxable income it currently distributes to its stockholders. If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal income taxes at regular corporate rates (including any applicable alternative minimum tax) and may not be able to qualify as a REIT for the subsequent four taxable years. Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local income and excise taxes on its income and property, and to federal income and excise taxes on its undistributed income.

The TRS manages the Company’s non-REIT activities and is subject to federal, state and local income taxes.

Earnings Per Share

Basic earnings per share is computed using net income (loss) and the weighted average number of shares of the Company’s common stock outstanding during the period, including restricted stock units (“RSUs”) issued to outside directors. RSUs are included in both basic and diluted weighted average common shares outstanding because they were fully vested on the date of grant and all conditions required in order for the recipients to earn the RSUs have been satisfied. Diluted earnings per share reflects weighted average common shares issuable from the assumed conversion of restricted stock awards (“RSAs”) granted to employees and common and preferred units of limited partnership interest in the Operating Partnership (“Common Units” and “Series A Preferred Units,” respectively). See Note 7 for a discussion of Common Units and Series A Preferred Units.
 
8

 
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
The following is a summary of the elements used in calculating basic and diluted earnings per share:
 
     
Three Months Ended March 31,
 
     
2007
 
2006
 
 
Basic earnings per share calculation:
         
 
(Loss) income from continuing operations
 
$
(4,678
)
$
2,942
 
 
Discontinued operations
   
   
722
 
 
Net (loss) income
 
$
(4,678
)
$
3,664
 
                 
 
(Loss) income from continuing operations - per share
 
$
(0.20
)
$
0.17
 
 
Income from discontinued operations - per share
 
$
 
$
0.04
 
 
Net (loss) income - per share
 
$
(0.20
)
$
0.21
 
                 
 
Basic weighted average common shares outstanding
   
22,942,737
   
17,209,779
 
                 
 
Diluted earnings per share calculation:
             
 
(Loss) income from continuing operations
 
$
(4,678
)
$
2,942
 
 
Series A Preferred Unit distributions
   
46
   
15
 
 
(Loss) income from continuing operations allocated to
Common Units
   
(362
)
 
47
 
 
(Loss) income from continuing operations, as adjusted
   
(4,994
)
 
3,004
 
 
Discontinued operations
   
   
722
 
 
Income from discontinued operations allocated to
Common Units
   
   
30
 
 
Income from discontinued operations, as adjusted
   
   
752
 
 
Net (loss) income, as adjusted
 
$
(4,994
)
$
3,756
 
                 
 
(Loss) income from continuing operations - per share
 
$
(0.20
)
$
0.17
 
 
Income from discontinued operations - per share
 
$
 
$
0.04
 
 
Net (loss) income - per share
 
$
(0.20
)
$
0.21
 
                 
 
Basic weighted average common shares outstanding
   
22,942,737
   
17,209,779
 
 
Common Units
   
2,183,490
   
838,607
 
 
Series A Preferred Units
   
114,963
   
39,599
 
 
Restricted stock awards (1)
   
   
88,204
 
 
Diluted weighted average common shares outstanding
   
25,241,190
   
18,176,189
 

(1)
153,360 weighted average restricted stock awards are excluded from diluted weighted average common shares outstanding for the three months ended March 31, 2007 because they would be anti-dilutive due to the Company’s loss position for the period.  

3. Property Acquisitions

In January 2007, the Company acquired a 248-unit, 752-bed property (Village on Sixth) located near the campus of Marshall University in Huntington, West Virginia, for a purchase price of $25.6 million, which excludes $1.7 million of anticipated transaction costs, initial integration expenses and capital expenditures necessary to bring this property up to the Company’s operating standards. As part of the transaction, the Company assumed two fixed-rate mortgage loans, which includes one for $16.2 million with an annual interest rate of 5.5% and remaining term to maturity of 7.5 years and a second loan for $1.4 million with an annual interest rate of 6.6% and remaining term to maturity of 9.9 years.

In February 2007, the Company acquired a three property portfolio (the “Edwards Portfolio”) for a purchase price of $102.0 million, which excludes $3.7 million of anticipated transaction costs, initial integration expenses and capital expenditures necessary to bring these properties up to the Company’s operating standards. As part of the transaction, the Company assumed $70.7 million in fixed-rate mortgage debt with a weighted average annual interest rate of 5.7% and an average remaining term to maturity of 8.5 years. The transaction also includes the pre-purchase of an additional phase at one of the existing properties containing 84 beds currently under construction for $4.6 million, subject to the satisfaction of certain conditions. The completion of the additional phase is expected in August 2007.
 
9

 
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
The Edwards Portfolio consists of one property in Lexington, Kentucky located near the campus of the University of Kentucky, one property in Toledo, Ohio located near the campus of the University of Toledo and one property in Ypsilanti, Michigan located near the campus of Eastern Michigan University. These three properties contain 740 units and 1,887 beds.

The acquired properties’ results of operations have been included in the accompanying consolidated statements of operations since their respective acquisition closing dates. The following pro forma information for the three months ended March 31, 2007 and 2006 presents consolidated financial information for the Company as if the property acquisitions discussed above, the Company’s 2006 acquisitions and the Company’s September 2006 equity offering had occurred at the beginning of the earliest period presented. The unaudited pro forma information is provided for informational purposes only and is not indicative of results that would have occurred or which may occur in the future:

   
Three Months Ended March 31,
 
   
2007
 
2006
 
Total revenues
 
$
37,188
 
$
35,518
 
Net (loss) income
 
$
(4,054
)
$
2,891
 
Net (loss) income per share - basic
 
$
(0.18
)
$
0.13
 
Net (loss) income per share - diluted
 
$
(0.17
)
$
0.13
 

4. Property Disposition and Discontinued Operations

The Village on University, an owned property, was sold in December 2006 for approximately $51.0 million, resulting in net cash proceeds of approximately $50.0 million. As such, the net income attributable to this property is reflected in the accompanying consolidated statements of operations as discontinued operations in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Below is a summary of the results of operations of the aforementioned property for all periods presented:

   
Three Months Ended March 31,
 
   
2007
 
2006
 
Total revenues
 
$
 
$
1,362
 
Total operating expenses
   
   
(640
)
 Net income
 
$
 
$
722
 

5. Investments in Owned Properties

Owned properties consisted of the following:

   
March 31, 2007
 
December 31, 2006
 
Land
 
$
91,648
 
$
75,263
 
Buildings and improvements
   
686,416
   
579,906
 
Furniture, fixtures and equipment
   
35,077
   
28,111
 
Construction in progress
   
74,839
   
56,958
 
 
   
887,980
   
740,238
 
Less accumulated depreciation
   
(51,510
)
 
(46,041
)
Owned properties, net
 
$
836,470
 
$
694,197
 

6. On-Campus Participating Properties

The Company is a party to ground/facility lease agreements (“Leases”) with certain state university systems and colleges (each, a “Lessor”) for the purpose of developing, constructing, and operating student housing facilities on university campuses. Under the terms of the Leases, title to the constructed facilities is held by the applicable Lessor and such Lessor receives a de minimus base rent paid at inception and 50% of defined net cash flows on an annual basis through the term of the lease. The Leases terminate upon the earlier to occur of the final repayment of the related debt, the amortization period of which is contractually stipulated, or the end of the lease term.
 
10

 
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Pursuant to the Leases, in the event the leasehold estates do not achieve Financial Break Even (defined as revenues less operating expenses, excluding management fees, less debt service), the applicable Lessor would be required to make a rental payment, also known as the Contingent Payment, sufficient to achieve Financial Break Even. The Contingent Payment provision remains in effect until such time as any financing placed on the facilities would receive an investment grade rating without the Contingent Payment provision. In the event that the Lessor is required to make a Contingent Payment, future net cash flow distributions would be first applied to repay such Contingent Payments and then to unpaid management fees prior to normal distributions. Beginning in November 1999 and December 2002, as a result of the debt financing on the facilities achieving investment grade ratings without the Contingent Payment provision, the Texas A&M University System is no longer required to make Contingent Payments under either the Prairie View A&M University Village or University College Leases. The Contingent Payment obligation continues to be in effect for the Texas A&M International University and University of Houston leases.
 
In the event the Company seeks to sell its leasehold interest, the Leases provide the applicable Lessor the right of first refusal of a bona fide purchase offer and an option to purchase the lessee’s rights under the applicable Lease.

In conjunction with the execution of each Lease, the Company has entered into separate five-year agreements to manage the related facilities for 5% of defined gross receipts. The five-year terms of the management agreements are not contingent upon the continuation of the Leases. Upon expiration of the initial five year terms, the agreements continue on a month-to-month basis.

On-campus participating properties are as follows:

           
Historical Cost
 
Lessor/University
 
Lease
Commencement
 
Required Debt
Repayment (1)
 
March 31, 2007
 
December 31, 2006
 
Texas A&M University System /
Prairie View A&M University (2)
   
2/1/96
   
9/1/23
 
$
38,302
 
$
38,277
 
Texas A&M University System /
Texas A&M International
   
2/1/96
   
9/1/23
   
6,015
   
6,009
 
Texas A&M University System /
Prairie View A&M University (3)
   
10/1/99
   
8/31/25 / 8/31/28
   
23,889
   
23,872
 
University of Houston System /
University of Houston (4)
   
9/27/00
   
8/31/35
   
34,645
   
34,628
 
 
         
   
102,851
   
102,786
 
Less accumulated amortization
               
(27,158
)
 
(26,098
)
On-campus participating properties, net
             
$
75,693
 
$
76,688
 

(1)
Represents the effective lease termination date. The Leases terminate upon the earlier to occur of the final repayment of the related debt or the end of the contractual lease term.
 
(2)
Consists of three phases placed in service between 1996 and 1998.
 
(3)
Consists of two phases placed in service in 2000 and 2003.
 
(4)
Consists of two phases placed in service in 2001 and 2005.
 
11

 
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7.    Minority Interests

The Company consolidates the accounts of the Operating Partnership and its subsidiaries into its consolidated financial statements. However, the Company does not own 100% of the Operating Partnership and certain consolidated real estate joint ventures. The amounts reported as minority interests on the Company’s consolidated balance sheet reflect the portion of these consolidated entities’ equity that the Company does not own. Accordingly, the amounts reported as minority interest on the Company’s consolidated statements of operations reflect the portion of these consolidated entities’ net income or loss not allocated to the Company.

Equity interests in the Operating Partnership not owned by the Company are held in the form of Common Units and Series A Preferred Units. Such Common Units and Series A Preferred Units are exchangeable into an equal number of shares of the Company’s common stock, or, at the Company’s election, cash. A Common Unit and a share of the Company’s common stock have essentially the same economic characteristics, as they effectively participate equally in the net income and distributions of the Operating Partnership. Series A Preferred Units have a cumulative preferential per annum cash distribution rate of 5.99%, payable quarterly concurrently with the payment of dividends on the Company’s common stock.

Income or loss allocated to minority interests on the Company’s consolidated statements of operations includes the Series A Preferred Unit distributions as well as the pro rata share of the Operating Partnership’s net income or loss allocated to Common Units. The Common Unitholders’ minority interest in the Operating Partnership is reported at an amount equal to their ownership percentage of the net equity of the Operating Partnership at the end of each reporting period. Common Units and Series A Preferred Units issued in connection with the 2006 acquisition of the Royal Portfolio became exchangeable into an equal number of shares of the Company’s common stock on March 1, 2007. As a result, 219,913 Common Units were converted into shares of the Company’s common stock during the three months ended March 31, 2007. As of March 31, 2007 and December 31, 2006, approximately 8% and 9%, respectively, of the equity interests of the Operating Partnership was held by persons affiliated with Royal Properties and certain current and former members of management in the form of Common Units and Series A Preferred Units.

Minority interests also include the equity interests of unaffiliated joint venture partners in four joint ventures. Two of the joint ventures own and operate the Company’s Callaway House and University Village at Sweet Home owned-off campus properties, which are located near the campuses of Texas A&M University and the State University of New York - Buffalo, respectively. The other two joint ventures own properties that are currently under development. One joint venture was formed to develop, own, and operate the Company’s University Centre owned off-campus property, which is scheduled to open for occupancy in Fall 2007 and is located near the campuses of Rutgers University, New Jersey Institute of Technology and Essex County Community College. The other joint venture was formed to develop, own, and operate the Company’s Chestnut Ridge owned off-campus property, which is scheduled to open for occupancy in Fall 2008 and is located near the campus of the State University of New York — Buffalo.

8. Debt

A summary of the Company’s outstanding consolidated indebtedness, including unamortized debt premiums and discounts, is as follows:

   
March 31, 2007
 
December 31, 2006
 
Debt secured by owned off-campus properties:
         
Mortgage loans payable
 
$
401,847
 
$
315,044
 
Construction loan payable
   
31,032
   
21,386
 
     
432,879
   
336,430
 
Debt secured by on-campus participating properties:
             
Mortgage loans payable
   
33,156
   
16,513
 
Construction loan payable
   
   
16,710
 
Bonds payable
   
56,675
   
56,675
 
     
89,831
   
89,898
 
Unamortized debt premiums/discounts
   
5,423
   
5,966
 
Total debt
 
$
528,133
 
$
432,294
 

12


AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Loans Assumed or Entered Into in Conjunction with Property Acquisitions

In connection with the January 2007 acquisition of The Village on Sixth (see Note 3), an owned off-campus property, the Company assumed approximately $17.6 million of fixed-rate mortgage debt, which is comprised of one $16.2 million mortgage loan with an annual interest rate of 5.5% and May 2014 maturity date, and a second mortgage loan for $1.4 million with an annual interest rate of 6.6% and October 2016 maturity date. Upon assumption of this debt, the Company recorded a debt discount of approximately $0.3 million on the $16.2 million mortgage loan and a debt premium of approximately $0.1 million on the $1.4 million mortgage loan, in each case to reflect the estimated fair value of the debt assumed. These mortgage loans are secured by liens on the related properties.
 
In connection with the February 2007 acquisition of the Edwards Portfolio (see Note 3), the Company assumed approximately $70.7 million in fixed-rate mortgage debt. At the time of assumption, the debt had a weighted average interest rate of 5.7% and an average remaining term to maturity of 8.3 years. Upon assumption of these three loans, the Company recorded debt premiums of approximately $0.1 million, to reflect the estimated fair value of the debt assumed. These three mortgage loans are secured by liens on the related properties.

Cullen Oaks Loans

In addition, in February 2007, the Company extended the maturity date of the Cullen Oaks Phase I and Phase II loans to February 2014. The extended loans bear interest at a rate of LIBOR plus 1.35% and require payments of interest only through May 2008 and monthly payments of principal and interest from May 2008 through the maturity date. In connection with these loan extensions, the Company terminated an existing interest rate swap agreement and entered into a new interest rate swap agreement (see Note 10).

Revolving Credit Facility

The Operating Partnership has a $115 million revolving credit facility, which may be expanded by up to an additional $110 million upon the satisfaction of certain conditions. The maturity date of the facility is August 17, 2009 and the Company guarantees the Operating Partnership’s obligations under the facility.
 
Availability under the revolving credit facility is limited to an “aggregate borrowing base amount” equal to the lesser of (i) 65% of the value of certain properties, calculated as set forth in the credit facility, and (ii) the adjusted net operating income from these properties divided by a formula amount. The facility bears interest at a variable rate, at the Company’s option, based upon a base rate or one-, two-, three-, or six-month LIBOR plus, in each case, a spread based upon the Company’s total leverage. Additionally, the Company is required to pay an unused commitment fee ranging from 0.15% to 0.20% per annum, depending on the aggregate unused balance. As of March 31, 2007, the total availability under the facility (subject to the satisfaction of certain financial covenants) was approximately $107.5 million.

The terms of the facility include certain restrictions and covenants, which limit, among other items, the incurrence of additional indebtedness, liens, and the disposition of assets. The facility contains customary affirmative and negative covenants and also contains financial covenants that, among other things, require the Company to maintain certain minimum ratios of “EBITDA” (earnings before interest, taxes, depreciation and amortization) to fixed charges. The Company may not pay distributions that exceed 100% of funds from operations for any four consecutive quarters. The financial covenants also include consolidated net worth and leverage ratio tests. As of March 31, 2007, the Company was in compliance with all such covenants.

13


AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
9. Incentive Award Plan

The Company has adopted the 2004 Incentive Award Plan (the “Plan”). The Plan provides for the grant to selected employees and directors of the Company and the Company’s affiliates of stock options, RSUs, RSAs, and other stock-based incentive awards. The Company has reserved a total of 1,210,000 shares of the Company’s common stock for issuance pursuant to the Plan, subject to certain adjustments for changes in the Company’s capital structure, as defined in the Plan. As of March 31, 2007, the Company has issued 701,228 awards under the Plan. A summary of the Company’s stock-based incentive awards under the Plan as of March 31, 2007 and changes during the three months ended March 31, 2007, is presented below:
   
 
 
Common Units
 
Restricted Stock Units (RSUs)
 
Restricted Stock Awards (RSAs)
 
 
Outperformance Bonus Plan (1)
 
 
 
Total
 
Outstanding at December 31, 2006
 
110,000
 
20,555
 
100,047
 
367,682
 
598,284
 
Granted (2)
 
 
 
91,607
 
 
91,607
 
Vested
 
 
 
(18,073
) 
 
(18,073
) 
Forfeited
   
   
   
(9,236
)
 
   
(9,236
)
Outstanding at March 31, 2007
   
110,000
   
20,555
   
164,345
   
367,682
   
662,582
 
Vested at March 31, 2007
   
110,000
   
20,555
   
27,646
   
   
158,201
 

(1)
The achievement of certain performance measures was considered probable as of March 31, 2007 and the Company recorded a compensation charge of approximately $9.6 million during the three months ended March 31, 2007.
 
(2)
On January 29, 2007, the Company granted 91,607 RSAs to its executive officers and certain employees that vest in equal annual installments over five years. Unvested awards are forfeited upon the termination of an individual’s employment with the Company. Recipients of RSAs receive dividends, as declared by the Company’s Board of Directors, on unvested shares provided that the respective recipient continues to be an employee of the Company.

Outperformance Bonus Plan

The outperformance bonus plan was adopted at the consummation of the Company’s IPO in August 2004 and contains performance hurdles that must be achieved by the third anniversary of the IPO in order for the awards granted under the Plan to vest. As of March 31, 2007, management has determined the achievement of these performance measures is probable and, therefore, the Company has recognized a prorated compensation charge of $9.6 million for the three-year service period, which began on the Company’s IPO date and ends in August 2007. Additional compensation charges may be recorded in future quarters, to the extent management continues to believe the achievement of these performance measures is probable.

10. Interest Rate Hedges

In February 2007, the Company extended the maturity date of the Cullen Oaks Phase I and Phase II loans to February 2014. The extended loans bear interest at a rate of LIBOR plus 1.35% and require payments of interest only through May 2008 and monthly payments of principal and interest from May 2008 through the maturity date. In connection with these loan extensions, the Company terminated the existing interest rate swap agreement and received a termination payment from the lender of approximately $0.4 million. In accordance with SFAS No. 133, the $0.4 million gain will be amortized from accumulated other comprehensive income to earnings over the remaining term of the terminated interest rate swap agreement (through November 2008).

In addition, the Company entered into an interest rate swap agreement effective February 15, 2007 through February 15, 2014, that is designated to hedge its exposure to fluctuations in interest payments attributed to changes in interest rates associated with payments on the Cullen Oaks Phase I and Phase II loans. Under the terms of the interest rate swap agreement, the Company pays a fixed rate of 6.69% and receives a floating rate of LIBOR plus 1.35%. The interest rate swap had an estimated negative fair value of approximately $0.8 million at March 31, 2007 and is reflected in other liabilities in the accompanying consolidated balance sheets. Ineffectiveness resulting from the Company’s hedges is not material.

11. Commitments and Contingencies

Commitments

Development-related guarantees: The Company commonly provides alternate housing and project cost guarantees, subject to force majeure. These guarantees are typically limited, on an aggregate basis, to the amount of the projects’ related development fees or a contractually agreed-upon maximum exposure amount. Alternate housing guarantees typically expire five days after construction is complete and generally require the Company to provide substitute living quarters and transportation for students to and from the university if the project is not complete by an agreed-upon completion date. Under project cost guarantees, the Company is responsible for the construction cost of a project in excess of an approved budget. The budget consists primarily of costs included in the general contractors’ guaranteed maximum price contract (“GMP”). In most cases, the GMP obligates the general contractor, subject to force majeure and approved change orders, to provide completion date guarantees and to cover cost overruns and liquidated damages. In addition, the GMP is typically secured with payment and performance bonds. Project cost guarantees expire upon completion of certain developer obligations, which are normally satisfied within one year after completion of the project.

14

 
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
On one completed project, the Company has guaranteed losses up to $3.0 million in excess of the development fee if the loss is due to any failure of the Company to maintain, or cause its professionals to maintain, required insurance for a period of five years after completion of the project (August 2009).

The Company’s estimated maximum exposure amount under the above guarantees is approximately $10.4 million

At March 31, 2007, management does not anticipate any material deviations from schedule or budget related to third-party development projects currently in progress.  The Company has estimated the fair value of guarantees entered into or modified after December 31, 2002, the effective date of FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, to be immaterial.

In the normal course of business, the Company enters into various development-related purchase commitments with parties that provide development-related goods and services.  In the event that the Company was to terminate development services prior to the completion of projects under construction, the Company could potentially be committed to satisfy outstanding purchase orders with such parties. 

Contingencies

Litigation: In the normal course of business, the Company is subject to claims, lawsuits, and legal proceedings. While it is not possible to ascertain the ultimate outcome of such matters, management believes that the aggregate amount of such liabilities, if any, in excess of amounts provided or covered by insurance, will not have a material adverse effect on the consolidated financial position or results of operations of the Company.

Letters of Intent: In the ordinary course of the Company’s business, the Company enters into letters of intent indicating a willingness to negotiate for acquisitions, dispositions or joint ventures. Such letters of intent are non-binding, and neither party to the letter of intent is obligated to pursue negotiations unless and until a definitive contract is entered into by the parties. Even if definitive contracts are entered into, the letters of intent relating to the acquisition and disposition of real property and resulting contracts generally contemplate that such contracts will provide the acquirer with time to evaluate the property and conduct due diligence, during which periods the acquiror will have the ability to terminate the contracts without penalty or forfeiture of any deposit or earnest money. There can be no assurance that definitive contracts will be entered into with respect to any matter covered by letters of intent or that the Company will consummate any transaction contemplated by any definitive contract. Furthermore, due diligence periods for real property are frequently extended as needed. An acquisition or disposition of real property becomes probable at the time that the due diligence period expires and the definitive contract has not been terminated. The Company is then at risk under a real property acquisition contract, but only to the extent of any earnest money deposits associated with the contract, and is obligated to sell under a real property sales contract.
 
Environmental Matters: The Company is not aware of any environmental liability with respect to the properties that would have a material adverse effect on the Company’s business, assets or results of operations. However, there can be no assurance that such a material environmental liability does not exist. The existence of any such material environmental liability could have an adverse effect on the Company’s results of operations and cash flows.
 
15

 
12. Segments

The Company defines business segments by their distinct customer base and service provided. The Company has identified four reportable segments: Owned Off-Campus Properties, On-Campus Participating Properties, Development Services, and Property Management Services. Management evaluates each segment’s performance based on operating income before depreciation, amortization, minority interests and allocation of corporate overhead. Intercompany fees are reflected at the contractually stipulated amounts.

   
Three Months Ended March 31,
 
     
2007
   
2006
 
Owned Off-Campus Properties
             
Rental revenues
 
$
27,486
 
$
18,445
 
Interest and other income
   
71
   
16
 
Total revenues from external customers
   
27,557
   
18,461
 
Operating expenses before depreciation and amortization
   
11,766
   
7,631
 
Interest expense
   
5,464
   
3,775
 
Operating income before depreciation, amortization, minority
interests and allocation of corporate overhead
 
$
10,327
 
$
7,055
 
Depreciation and amortization
 
$
5,837
 
$
3,866
 
Capital expenditures
 
$
17,113
 
$
14,684
 
Total segment assets at March 31,
 
$
865,119
 
$
666,748
 
On-Campus Participating Properties
             
Rental revenues
 
$
6,337
 
$
5,982
 
Interest and other income
   
78
   
63
 
Total revenues from external customers
   
6,415
   
6,045
 
Operating expenses before depreciation, amortization,
ground/facility lease, and allocation of corporate overhead
   
1,866
   
1,801
 
Ground/facility lease
   
295
   
192
 
Interest expense
   
1,573
   
1,587
 
Operating income before depreciation, amortization, minority
interests and allocation of corporate overhead
 
$
2,681
 
$
2,465
 
Depreciation and amortization
 
$
1,060
 
$
1,032
 
Capital expenditures
 
$
65
 
$
49
 
Total segment assets at March 31,
 
$
89,679
 
$
92,528
 
Development Services
             
Development and construction management fees from
external customers
 
$
405
 
$
1,638
 
Intersegment revenues
   
   
 
Total revenues
   
405
   
1,638
 
Operating expenses
   
1,213
   
1,310
 
Operating (loss) income before depreciation, amortization,
minority interests and allocation of corporate overhead
 
$
(808
)
$
328
 
Total segment assets at March 31,
 
$
1,344
 
$
4,431
 
Property Management Services
             
Property management fees from external customers
 
$
722
 
$
662
 
Intersegment revenues
   
1,058
   
833
 
Total revenues
   
1,780
   
1,495
 
Operating expenses
   
694
   
640
 
Operating income before depreciation, amortization, minority
interests and allocation of corporate overhead
 
$
1,086
 
$
855
 
Total segment assets at March 31,
 
$
1,770
 
$
1,253
 
Reconciliations
             
Total segment revenues
 
$
36,157
 
$
27,639
 
Unallocated interest income earned on corporate cash
   
558
   
106
 
Elimination of intersegment revenues
   
(1,058
)
 
(833
)
Total consolidated revenues, including interest income
 
$
35,657
 
$
26,912
 
Segment operating income before depreciation, amortization,
minority interests and allocation of corporate overhead
 
$
13,286
 
$
10,703
 
Depreciation and amortization
   
(7,268
)
 
(5,373
)
Net unallocated expenses relating to corporate overhead
   
(10,894
)
 
(2,260
)
Income tax provision
   
(60
)
 
 
Minority interests
   
258
   
(128
)
Income from continuing operations
 
$
(4,678
)
$
2,942
 
Total segment assets
 
$
957,912
 
$
764,960
 
Unallocated corporate assets and assets held for sale
   
18,253
   
36,956
 
Total assets
 
$
976,165
 
$
801,916
 
 
 
16

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-looking Statements

This report contains forward-looking statements within the meaning of the federal securities laws. We caution investors that any forward-looking statements presented in this report, or which management may make orally or in writing from time to time, are based on management’s beliefs and assumptions made by, and information currently available to, management. When used, the words “anticipate,” “believe,” “expect,” “intend,” “may,” “might,” “plan,” “estimate,” “project,” “should,” “will,” “result” and similar expressions, which do not relate solely to historical matters, are intended to identify forward-looking statements. Such statements are subject to risks, uncertainties and assumptions and may be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. We caution you that while forward-looking statements reflect our good faith beliefs when we make them, they are not guarantees of future performance and are impacted by actual events when they occur after we make such statements. We expressly disclaim any responsibility to update forward-looking statements, whether as a result of new information, future events or otherwise. Accordingly, investors should use caution in relying on past forward-looking statements, which are based on results and trends at the time they were made, to anticipate future results or trends.

Some of the risks and uncertainties that may cause our actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements include, among others, the following: general risks affecting the real estate industry (including, without limitation, the inability to enter into or renew leases, dependence on tenants’ financial condition, and competition from other developers, owners and operators of real estate); risks associated with changes in University admission or housing policies; risks associated with the availability and terms of financing and the use of debt to fund acquisitions and developments; failure to manage effectively our growth and expansion into new markets or to integrate acquisitions successfully; risks and uncertainties affecting property development and construction (including, without limitation, construction delays, cost overruns, inability to obtain necessary permits and public opposition to such activities); risks associated with downturns in the national and local economies, increases in interest rates, and volatility in the securities markets; costs of compliance with the Americans with Disabilities Act and other similar laws; potential liability for uninsured losses and environmental contamination; risks associated with our potential failure to qualify as a REIT under the Internal Revenue Code of 1986 (the “Code”), as amended, and possible adverse changes in tax and environmental laws; and risks associated with our dependence on key personnel whose continued service is not guaranteed.

The risks included here are not exhaustive, and additional factors could adversely affect our business and financial performance, including factors and risks included in other sections of this report. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.

Our Company and Our Business

American Campus Communities, Inc. (referred to herein as “the Company,” “us,” “we,” and “our”) is a real estate investment trust (“REIT”) that was incorporated on March 9, 2004 and commenced operations effective with the completion of our initial public offering (“IPO”) on August 17, 2004. Through our controlling interest in American Campus Communities Operating Partnership LP (the “Operating Partnership”) and American Campus Communities Services, Inc., (our taxable REIT subsidiary or “TRS”), we are one of the largest owners, managers and developers of high quality student housing properties in the United States in terms of beds owned and under management. We are a fully integrated, self-managed and self-administered equity REIT with expertise in the acquisition, design, financing, development, construction management, leasing and management of student housing properties.

As of March 31, 2007, our property portfolio contained 43 student housing properties with approximately 26,800 beds and approximately 8,900 apartment units, consisting of 39 owned properties that are in close proximities to colleges and universities and four on-campus participating properties operated under ground/facility leases with the related university systems. These communities contain modern housing units, offer resort-style amenities and are supported by a resident assistant system and other student-oriented programming.
 
17

 
Through the TRS, we also provide construction management and development services for student housing properties owned by colleges and universities, charitable foundations, and others. As of March 31, 2007, we provided third party management and leasing services for 15 student housing properties (ten of which we served as the third party developer and construction manager) that represented approximately 9,600 beds in approximately 3,300 units. Third party management and leasing services are typically provided pursuant to multi-year management contracts that have initial terms that range from one to five years. As of March 31, 2007, our total owned and managed portfolio included 58 properties with approximately 36,400 beds in approximately 12,200 units.

Third-Party Development Services

Our third-party development and construction management services as of March 31, 2007 consisted of four projects under contract and currently in progress with fees ranging from $0.4 million to $3.1 million. As of March 31, 2007, fees of approximately $2.5 million remained to be earned by us with respect to these projects, which have scheduled completion dates of August 2007 through July 2008.

While we believe that our third party development/construction management and property management services allow us to develop strong and key relationships with colleges and universities, revenue from this area has over time become a smaller portion of our operations due to the continued focus on and growth of our owned property portfolio. Nevertheless, we believe these services continue to provide synergies with respect to our ability to identify, acquire or develop, and successfully operate, student housing properties.
 
Acquisitions

In January 2007, we acquired a 248-unit, 752-bed property (Village on Sixth) located near the campus of Marshall University in Huntington, West Virginia, for a purchase price of $25.6 million, which excludes $1.7 million of anticipated transaction costs, initial integration expenses and capital expenditures necessary to bring this property up to our operating standards. As part of the transaction, we assumed two fixed-rate mortgage loans, which includes one for $16.2 million with an annual interest rate of 5.5% and remaining term to maturity of 7.5 years and a second loan for $1.4 million with an annual interest rate of 6.6% and remaining term to maturity of 9.9 years.

In February 2007, we acquired a three property portfolio (the “Edwards Portfolio”) for a purchase price of $102.0 million, which excludes $3.7 million of anticipated transaction costs, initial integration expenses and capital expenditures necessary to bring these properties up to our operating standards. As part of the transaction, we assumed $70.7 million in fixed-rate mortgage debt with a weighted average annual interest rate of 5.7% and an average remaining term to maturity of 8.5 years. The transaction also includes the pre-purchase of an additional phase at one of the existing properties containing 84 beds currently under construction for $4.6 million, subject to the satisfaction of certain conditions. The completion of the additional phase is expected in August 2007.

The Edwards Portfolio consists of one property in Lexington, Kentucky located near the campus of the University of Kentucky, one property in Toledo, Ohio located near the campus of the University of Toledo and one property in Ypsilanti, Michigan located near the campus of Eastern Michigan University. These three properties contain 740 units and 1,887 beds.

Owned Development Activities

Overview: As of March 31, 2007, we were in the process of constructing two owned off-campus properties and one owned on-campus property. We estimate that the total development costs relating to these activities will be approximately $246.7 million. As of March 31, 2007, we have incurred development costs of approximately $74.1 million in connection with these properties, with the remaining development costs estimated at approximately $172.6 million. The activities are described below:

University Centre (formerly Village at Newark): As of March 31, 2007, our University Centre owned off-campus property was under construction with total development costs estimated to be approximately $74.4 million. The project is scheduled to complete construction and open for occupancy in Fall 2007, in connection with the commencement of the 2007/2008 academic year. As of March 31, 2007, the project was approximately 89% complete, and we estimate that remaining development costs will be approximately $13.5 million. As of March 31, 2007, we have funded $29.9 million of the project’s development costs internally, with the remaining development costs to be funded through a construction loan.
 
18

 
Arizona State University - South Campus Residential Community: As of March 31, 2007, our Arizona State University - South Campus Residential Community (“ASU-SCRC”) owned on-campus property was under construction with total development costs estimated to be approximately $137.5 million. The project is scheduled to complete construction and open for occupancy in August 2008, in connection with the commencement of the 2008/2009 academic year. As of March 31, 2007, the project was approximately 5% complete, and we estimate that remaining development costs will be approximately $126.3 million. We expect that we will fund approximately $37.5 million of the project budget internally and the remaining $100.0 million will be funded with a construction loan.

Chestnut Ridge: As of March 31, 2007, our Chestnut Ridge owned off-campus property was under construction with total development costs estimated to be approximately $34.8 million. The project is scheduled to complete construction and open for occupancy in August 2008, in connection with the commencement of the 2008/2009 academic year. As of March 31, 2007, the project was approximately 2% complete, and we estimate that remaining development costs will be approximately $32.8 million. We expect that we will fund approximately $3.2 million of the project budget internally and the remaining $31.6 million will be funded with a construction loan.
 
19

 
Property Operations
 
As of March 31, 2007, our property portfolio consisted of the following:

PROPERTY
 
YEAR
ACQUIRED / DEVELOPED (1)
 
LOCATION
 
PRIMARY UNIVERSITY SERVED
 
UNITS
 
BEDS
Owned properties:
                   
1. Villas on Apache
 
1999
 
Tempe, AZ
 
Arizona State University Main Campus
 
111
 
288
2. The Village at Blacksburg
 
2000
 
Blacksburg, VA
 
Virginia Polytechnic Institute and
State University
 
288
 
1,056
3. River Club Apartments
 
1999
 
Athens, GA
 
The University of Georgia-Athens
 
266
 
792
4. River Walk Townhomes
 
1999
 
Athens, GA
 
The University of Georgia-Athens
 
100
 
336
5. The Callaway House
 
2001
 
College Station, TX
 
Texas A&M University
 
173
 
538
6. The Village at Alafaya Club
 
2000
 
Orlando, FL
 
The University of Central Florida
 
228
 
839
7. The Village at Science Drive
 
2001
 
Orlando, FL
 
The University of Central Florida
 
192
 
732
8. University Village at Boulder Creek
 
2002
 
Boulder, CO
 
The University of Colorado at Boulder
 
82
 
309
9. University Village at Fresno
 
2004
 
Fresno, CA
 
California State University, Fresno
 
105
 
406
10. University Village at TU
 
2004
 
Philadelphia, PA
 
Temple University
 
220
 
749
11. University Club Tallahassee
 
2005
 
Tallahassee, FL
 
Florida State University
 
152
 
608
12. The Grove at University Club
 
2005
 
Tallahassee, FL
 
Florida State University
 
64
 
128
13. College Club Tallahassee
 
2005
 
Tallahassee, FL
 
Florida A&M University
 
96
 
384
14. The Greens at College Club
 
2005
 
Tallahassee, FL
 
Florida A&M University
 
40
 
160
15. University Club Gainesville
 
2005
 
Gainesville, FL
 
University of Florida
 
94
 
376
16. City Parc at Fry Street
 
2005
 
Denton, TX
 
University of North Texas
 
136
 
418
17. The Estates
 
2005
 
Gainesville, FL
 
University of Florida
 
396
 
1,044
18. University Village at Sweet Home 
 
2005
 
Amherst, NY
 
State University of New York - Buffalo
 
269
 
828
19. Entrada Real
 
2006
 
Tucson, AZ
 
University of Arizona
 
98
 
363
20. Royal Oaks
 
2006
 
Tallahassee, FL
 
Florida State University
 
82
 
224
21. Royal Pavilion
 
2006
 
Tallahassee, FL
 
Florida State University
 
60
 
204
22. Royal Village Tallahassee
 
2006
 
Tallahassee, FL
 
Florida State University
 
75
 
288
23. Royal Village Gainesville
 
2006
 
Gainesville, FL
 
University of Florida
 
118
 
448
24. Northgate Lakes
 
2006
 
Orlando, FL
 
The University of Central Florida
 
194
 
710
25. Royal Lexington
 
2006
 
Lexington, KY
 
University of Kentucky
 
94
 
364
26. The Woods at Greenland
 
2006
 
Murfreesboro, TN
 
Middle Tennessee State University
 
78
 
276
27. Raiders Crossing
 
2006
 
Murfreesboro, TN
 
Middle Tennessee State University
 
96
 
276
28. Raiders Pass
 
2006
 
Lubbock, TX
 
Texas Tech University
 
264
 
828
29. Aggie Station
 
2006
 
College Station, TX
 
Texas A&M University
 
156
 
450
30. The Outpost San Marcos
 
2006
 
San Marcos, TX
 
Texas State University - San Marcos
 
162
 
486
31. The Outpost San Antonio
 
2006
 
San Antonio, TX
 
University of Texas - San Antonio
 
276
 
828
32. Callaway Villas (2)
 
2006
 
College Station, TX
 
Texas A&M University
 
236
 
704
33. Village on Sixth
 
2007
 
Huntington, WV
 
Marshall University
 
248
 
752
34. Newtown Crossing (3)
 
2007
 
Lexington, KY
 
University of Kentucky
 
332
 
858
35. Olde Towne University Square
 
2007
 
Toledo, OH
 
University of Toledo
 
224
 
550
36. Peninsular Place
 
2007
 
Ypsilanti, MI
 
Eastern Michigan University
 
184
 
479
37. University Centre (4)
 
2007
 
Newark, NJ
 
Rutgers University, NJIT, Essex CCC
 
234
 
838
38. ASU-SCRC Component I (5)
 
2008
 
Tempe, AZ
 
Arizona State University
 
613
 
1,866
39. Chestnut Ridge (5)
 
2008
 
Amherst, NY
 
State University of New York - Buffalo
 
196
 
552
Total owned properties
             
7,032
 
22,335
 
20

 
PROPERTY
 
YEAR
ACQUIRED / DEVELOPED (1)
 
LOCATION
 
PRIMARY UNIVERSITY SERVED
 
UNITS
 
BEDS
On-campus participating properties:
                   
40. University Village—PVAMU
 
1996 / 97 / 98
 
Prairie View, TX
 
Prairie View A&M University
 
612
 
1,920
41. University College—PVAMU
 
2000 / 2003
 
Prairie View, TX
 
Prairie View A&M University
 
756
 
1,470
42. University Village—TAMIU
 
1997
 
Laredo, TX
 
Texas A&M International University
 
84
 
250
43. Cullen Oaks - Phase I and II
 
2001 / 2006
 
Houston, TX
 
The University of Houston
 
411
 
879
Total on-campus participating properties
 
1,863
 
4,519
                     
Total all properties
             
8,895
 
26,854

(1)
As of March 31, 2007, the average age of our operating properties was approximately 6.3 years.
 
(2)
Construction was completed and property commenced operations in August 2006.
 
(3)
Excludes the pre-purchase of an additional phase containing 84 beds currently under construction for $4.6 million, subject to the satisfaction of certain conditions. The completion of the additional phase is expected in August 2007.
 
(4)
Currently under development with a scheduled completion date of Fall 2007.
 
(5)
Currently under development with a scheduled completion date of August 2008.
 
21

Results of Operations

Comparison of the Three Months Ended March 31, 2007 and March 31, 2006

The following table presents our results of operations for the three months ended March 31, 2007 and 2006, including the amount and percentage change in these results between the two periods:
 
 
 
 
Three Months Ended March 31, 
           
       
2007
 
 
2006
 
 
Change ($)
 
 
Change (%)
 
Revenues:
                         
 
Owned off-campus properties
 
$
27,145
 
$
18,125
 
$
9,020
   
49.8
%
 
On-campus participating properties
   
6,337
   
5,982
   
355
   
5.9
%
 
Third party development services
   
405
   
1,638
   
(1,233
)
 
(75.3
%)
 
Third party management services
   
722
   
662
   
60
   
9.1
%
 
Resident services
   
341
   
320
   
21
   
6.6
%
 
Total revenues
   
34,950
   
26,727
   
8,223
   
30.8
%
                             
 
Operating Expenses:
                         
 
Owned off-campus properties
   
11,862
   
7,766
   
4,096
   
52.7
%
 
On-campus participating properties
   
2,026
   
1,950
   
76
   
3.9
%
 
Third party development and management services
   
1,294
   
1,638
   
(344
)
 
(21.0
%)
 
General and administrative
   
11,328
   
1,587
   
9,741
   
613.8
%
 
Depreciation and amortization
   
6,970
   
5,018
   
1,952
   
38.9
%
 
Ground/facility leases
   
295
   
192
   
103
   
53.6
%
 
Total operating expenses
   
33,775
   
18,151
   
15,624
   
86.1
%
                             
 
Operating income
   
1,175
   
8,576
   
(7,401
)
 
(86.3
%)
                             
 
Nonoperating income and (expenses):
                         
 
Interest income
   
707
   
185
   
522
   
282.2
%
 
Interest expense
   
(6,460
)
 
(5,336
)
 
(1,124
)
 
21.1
%
 
Amortization of deferred financing costs
   
(298
)
 
(355
)
 
57
   
(16.1
%)
 
Total nonoperating expenses
   
(6,051
)
 
(5,506
)
 
(545
)
 
9.9
%
                             
 
(Loss) income before income tax provision, minority interests, and discontinued operations
   
(4,876
)
 
3,070
   
(7,946
)
 
(258.8
%)
 
Income tax provision
   
(60
)
 
   
(60
)
 
(100.0
%)
 
Minority interests
   
258
   
(128
)
 
386
   
(301.6
%)
 
(Loss) income from continuing operations
   
(4,678
)
 
2,942
   
(7,620
)
 
(259.0
%)
 
Discontinued operations:
                         
 
Income attributable to discontinued operations
   
   
722
   
(722
)
 
(100.0
%)
 
Net (loss) income
 
$
(4,678
)
$
3,664
 
$
( 8,342
)
 
(227.7
%)

Owned Properties Operations

Revenues from our owned properties for the three months ended March 31, 2007 compared with the same period in 2006 increased by $9.0 million primarily due to the acquisition of four properties during the three months ended March 31, 2007, the acquisition of a thirteen-property portfolio (the “Royal Portfolio”) in March 2006, and the completion of construction and opening of an owned development project in August 2006. Operating expenses increased approximately $4.1 million for the three months ended March 31, 2007 compared with the same period in 2006, primarily due to the same factors which affected the increase in revenues.

New Property Operations. In January 2007, we acquired a 752-bed property (Village on Sixth) located near the campus of Marshall University in Huntington, West Virginia. In addition, In February 2007, we acquired a three-property portfolio consisting of 1,887 beds and serving students attending The University of Kentucky, the University of Toledo, and Eastern Michigan University (the “Edwards Portfolio”). In March 2006, we also acquired the thirteen-property Royal Portfolio, consisting of 5,745 beds. Finally, in August 2006, we completed construction of and opened Callaway Villas, a 704-bed property serving students attending Texas A&M University. These new properties contributed $8.4 million of additional revenues and $3.8 million of additional operating expenses during the three months ended March 31, 2007 as compared to the three months ended March 31, 2006.

22

 
Same Store Property Operations (Excluding New Property Activity). We had 18 properties containing 9,991 beds which were operating during both the three months ended March 31, 2007 and 2006. These properties produced revenues of $16.8 million and $16.1 million during the three months ended March 31, 2007 and 2006, respectively, an increase of $0.7 million. This increase was primarily due to an increase in average rental rates and other income during the three months ended March 31, 2007 as compared to the same period in 2006, which were offset by a slight decrease in average occupancy rates from 99.0% during the three months ended March 31, 2006 to 98.6% during the three months ended March 31, 2007. Revenues in 2007 will be dependent on our ability to maintain our current leases in effect for the 2006/2007 academic year and our ability to obtain appropriate rental rates and desired occupancy for the 2007/2008 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 by $0.3 million from $6.7 million during the three months ended March 31, 2006 to $7.0 million during the three months ended March 31, 2007. This increase was primarily the result of an increase in property taxes and insurance. We anticipate that operating expenses for the full year 2007 will increase slightly as compared with 2006 as a result of expected increases in insurance costs, utility costs, property taxes and general inflation.

On-Campus Participating Properties (“OCPP”) Operations

Same Store OCPP Operations. We had four participating properties containing 4,519 beds which were operating during both the three month periods ended March 31, 2007 and 2006. Revenues from our same store on-campus participating properties increased to $6.3 million during the three months ended March 31, 2007 from $6.0 million for the three months ended March 31, 2006, an increase of $0.3 million. This increase was primarily due to an increase in average occupancy from 89.5% during the three months ended March 31, 2006 to 93.3% for the three months ended March 31, 2007, as well as an increase in average rental rates during the three months ended March 31, 2007 as compared to the same period in 2006.

At these properties, operating expenses remained relatively constant at $2.0 million during both the three month periods ended March 31, 2007 and 2006. We anticipate that operating expenses for the full year 2007 will increase slightly as compared with 2006 as a result of expected increases in insurance costs, utility costs and general inflation.

Third Party Development Services Revenue

Third party development services revenue decreased by $1.2 million from $1.6 million during the three months ended March 31, 2006 to $0.4 million for the three months ended March 31, 2007. This decrease was primarily due to fewer projects in progress as well as a lower average contractual fee per project during the three months ended March 31, 2007 as compared to the same period in 2006. In addition, a lower percentage of the total contractual fees was recognized during the three months ended March 31, 2007 as compared to the same period in 2006. We had four projects in progress during the three months ended March 31, 2007 with an average contractual fee of approximately $1.6 million, as compared to the three months ended March 31, 2006 in which we had seven projects in progress with an average contractual fee of $1.8 million. Also, due to differences in the percentage of construction completed during the periods, approximately 5.8% of the total contractual fees was recognized during the three months ended March 31, 2007, compared to approximately 12.7% for the three months ended March 31, 2006.

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 development and construction of the project. In addition, to the extent projects are completed under budget, we may be entitled to a portion of such savings, which are recognized as revenue when performance has been agreed upon by all parties, or when performance has been verified by an independent third-party. It is possible that projects for which we have deferred 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.

Third Party Management Services Revenues

Third party management services revenues increased by $60,000 for the three months ended March 31, 2007 as compared to the same period in 2006. This increase was primarily the result of the commencement of four management contracts in August 2006, which was slightly offset by the discontinuation of the Texas State University System management contracts in July 2006. We anticipate that third-party management services revenues in 2007 will increase slightly as compared with 2006, as a result of the four management contracts obtained in August 2006 and anticipated new contracts in 2007.

Third Party Development and Management Services Expenses

Third party development and management services expenses decreased by $0.3 million, from $1.6 million during the three months ended March 31, 2006, to $1.3 million for the three months ended March 31, 2007. This decrease was primarily due to a decrease in payroll and related costs of $0.1 million as a result of fewer projects in progress. In addition, expenses incurred for the West Virginia University projects decreased by approximately $0.1 million as a result of the progress of those projects during the respective periods. Third-party development and management services expenses for the full year 2007 will be dependent on the level of awards we pursue, and as previously mentioned, any pre-development costs charged against income for projects which did not close.
 
23

 
General and Administrative

General and administrative expenses increased approximately $9.7 million, from $1.6 million during the three months ended March 31, 2006, to $11.3 million for the three months ended March 31, 2007. This increase was primarily due to a compensation charge recorded during the three months ended March 31, 2007 related to the Company’s 2004 Outperformance Bonus Plan, which is more fully discussed in Note 9 to the accompanying Notes to Consolidated Financial Statements contained in Item 1 herein. We anticipate general and administrative expenses to increase substantially in 2007 (assuming that our current stock price does not significantly decrease) as a result of additional compensation expense recorded to reflect the value of the 2004 Outperformance Bonus Plan, should management continue to deem the achievement of certain performance measures under the plan as probable. In addition, we anticipate increases in payroll and other related costs for the full year 2007 due to increases in corporate staffing levels experienced as a result of the recent growth of our owned portfolio.

Depreciation and Amortization

Depreciation and amortization increased by $2.0 million, from $5.0 million during the three months ended March 31, 2006 to $7.0 million for the three months ended March 31, 2007. This increase was due to the acquisition of four properties during the three months ended March 31, 2007, the acquisition of a thirteen-property portfolio in March 2006, and the completion of construction and opening of an owned development project in August 2006. We expect depreciation and amortization in 2007 to increase significantly from 2006 primarily due to a full year’s depreciation on properties acquired and placed in service during 2006 and the recently completed 2007 acquisitions. .

Interest Income

Interest income increased by $0.5 million, from $0.2 million during the three months ended March 31, 2006 to $0.7 million for the three months ended March 31, 2007. This increase was primarily due to interest earned during the three months ended March 31, 2007 on the remaining proceeds from our September 2006 equity offering and net proceeds from the disposition of an owned property in December 2006.

Interest Expense

Interest expense increased $1.1 million, from $5.3 million during the three months ended March 31, 2006, to $6.4 million for the three months ended March 31, 2007. This increase was primarily due to additional interest incurred during the three months ended March 31 2007 associated with debt assumed or incurred in connection with the previously mentioned 2007 and 2006 property acquisitions, net of the amortization of debt premiums and discounts recorded to reflect the market value of debt assumed. These increases were offset by a decrease of $0.4 million due to a zero balance on our revolving credit facility during the three months ended March 31, 2007. In addition, capitalized interest increased by $0.2 million as a result of more owned properties being under development during the three months ended March 31, 2007 as compared to the same period in 2006. We anticipate that interest expense in 2007 will increase from 2006 levels due to interest expense assumed or incurred in connection with property acquisitions and increases in potential borrowing rates that may impact our floating rate on our credit facility.

Minority Interests

The variance in minority interests is primarily due to the Company being in a net income position for the three months ended March 31, 2006 as compared to a net loss position for the three months ended March 31, 2007. Minority interests represent external partners in our Operating Partnership as well as certain third-party partners in joint ventures consolidated by us for financial reporting purposes. Accordingly, these external partners are allocated their share of income/loss during the respective reporting periods. See Note 7 in the accompanying Notes to Consolidated Financial Statements contained in Item 1 herein for a detailed discussion of minority interests.

24

 
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 Village on University, an owned property, was sold in December 2006. As such, the net income attributable to this property is included in discontinued operations for the three months ended March 31, 2006. Refer to Note 4 in the accompanying Notes to Consolidated Financial Statements contained in Item 1 herein for a more detailed description of discontinued operations.

Cash Flows

Comparison of Three Months Ended March 31, 2007 and March 31, 2006

Operating Activities

For the three months ended March 31, 2007, net cash provided by operating activities before changes in working capital accounts provided approximately $2.2 million, as compared to $9.3 million for the three months ended March 31, 2006, a decrease of $7.1 million.  Changes in working capital accounts provided $1.0 million for the three months ended March 31, 2007 while working capital accounts utilized $3.2 million for the three months ended March 31, 2006.  These changes were primarily due to an increase in depreciation and amortization and operating cash flow generated from the properties acquired during both periods and the opening of one owned off-campus property in August 2006.

Investing Activities

Investing activities utilized $55.7 million and $84.1 million for the three months ended March 31, 2007 and 2006, respectively. The decrease in cash utilized in investing activities during the three months ended March 31, 2007 related primarily to a $30.9 million decrease in the use of cash to acquire properties. We acquired the 13-property Royal Portfolio during the first quarter of 2006 as compared to four properties acquired during the first quarter of 2007. This decrease was offset by a $2.3 million increase in cash used to fund the construction of our owned development properties. During the three months ended March 31, 2007, three owned properties were under development while two properties were under development during the three months ended March 31, 2006, one of which was completed in Fall 2006. For the three months ended March 31, 2007 and 2006, our cash utilized in investing activities was comprised of the following:

 
 
Three Months Ended March 31, 
     
2007
 
 
2006
 
Property acquisitions
 
$
(38,330
)
$
(69,241
)
Capital expenditures for on-campus participating properties
   
(65
)
 
(49
)
Capital expenditures for owned properties
   
(637
)
 
(545
)
Investment in owned properties under development
   
(16,476
)
 
(14,139
)
Purchase of corporate furniture, fixtures, and equipment
   
(235
)
 
(139
)
Total
 
$
(55,743
)
$
(84,113
)

Financing Activities

Cash used for financing activities totaled $1.5 million for the three months ended March 31, 2007 as compared to $64.4 million provided by financing activities for the three months ended March 31, 2006. The decrease in cash provided by financing activities was primarily the result of a $67.0 million decrease in proceeds received from our revolving credit facility, which was used to fund the acquisition of the Royal Portfolio during the first quarter of 2006. In addition, there was a $2.6 million increase in distributions to common and restricted stockholders and minority partners as a result of the September 2006 equity offering and the issuance of common and preferred units in the Operating Partnership as partial consideration for the purchase of the Royal Portfolio. These decreases were offset by a $3.9 million increase in proceeds from construction loans used to fund our owned development properties.
 
25


Structure of On-campus Participating Properties

At our on-campus participating properties, the subject universities own both the land and improvements. We then have a leasehold interest under a ground/facility lease. Under the lease, we receive an annual distribution representing 50% of these properties’ net cash available for distribution after payment of operating expenses (which includes our management fees), debt service (which includes repayment of principal) and capital expenditures. We also manage these properties under multi-year management agreements and are paid a management fee representing 5% of receipts.

We do not have access to the cash flows and working capital of these participating properties except for the annual net cash distribution as described above. Additionally, a substantial portion of these properties’ cash flow is dedicated to capital reserves required under the applicable property indebtedness and to the amortization of such indebtedness. These amounts do not increase our economic interest in these properties since our interest, including our right to share in the net cash available for distribution from the properties, terminates upon the amortization of their indebtedness. Our economic interest in these properties is therefore limited to our interest in the net cash flow and management and development fees from these properties, as reflected in our calculation of Funds from Operations modified for the operational performance of on-campus participating properties (“FFOM”) contained herein. Accordingly, when considering these properties’ contribution to our operations, we focus upon our share of these properties’ net cash available for distribution and the management fees that we receive from these properties, rather than upon their contribution to our gross revenues and expenses for financial reporting purposes.

The following table reflects the amounts included in our consolidated financial statements for the three months ended March 31, 2007 and 2006:

 
 
Three Months Ended March 31, 
     
2007
 
 
2006
 
Revenues
 
$
6,337
 
$
5,982
 
Direct operating expenses (1)
   
(1,866
)
 
(1,801
)
Amortization
   
(1,061
)
 
(1,032
)
Amortization of deferred financing costs
   
(43
)
 
(78
)
Ground/facility leases (2)
   
(295
)
 
(192
)
Net operating income
   
3,072
   
2,879
 
Interest income
   
78
   
63
 
Interest expense (3)
   
(1,573
)
 
(1,587
)
Net income
 
$
1,577
 
$
1,355
 
 
(1)
Excludes property management fees of $0.3 million for both the three month periods ended March 31, 2007 and 2006. This expense and the corresponding fee revenue we recognized have been eliminated in consolidation. Also excludes allocation of expenses related to corporate management and oversight.
 
(2)
Represents the universities’ 50% share of the properties’ net cash available for distribution after payment of operating expenses, debt service (including payment of principal) and capital expenditures.
 
(3)
Debt service expenditures for these properties totaled $2.2 million and $2.1 million for the three months ended March 31, 2007 and 2006, respectively.

Liquidity and Capital Resources

Cash Balances and Liquidity

As of March 31, 2007, excluding our on-campus participating properties, we had $29.1 million in cash and cash equivalents and restricted cash as compared to $83.5 million in cash and cash equivalents and restricted cash as of December 31, 2006. This decrease was primarily due to the use of the remaining proceeds from our December 2006 disposition of an owned off-campus property, The Village on University, to fund our recent property acquisitions and the construction of our owned development projects. Restricted cash primarily consists of escrow accounts held by lenders and resident security deposits, as required by law in certain states. Additionally, restricted cash as of March 31, 2007 also included $0.1 million of funds held in escrow in connection with potential development opportunities.
 
26

 
As of March 31, 2007, our short-term liquidity needs included, but were not limited to, the following: (i) anticipated distribution payments to our common and restricted stockholders totaling approximately $31.5 million based on an anticipated annual distribution of $1.35 per share based on the number of our shares outstanding as of March 31, 2007, including those distributions required to maintain our REIT status and satisfy our current distribution policy, (ii) anticipated distribution payments to our Operating Partnership unitholders totaling approximately $2.9 million based on an anticipated annual distribution of $1.35 per Common Unit and a cumulative preferential per annum cash distribution rate of 5.99% on our Series A Preferred Units based on the number of units outstanding as of March 31, 2007, (iii) remaining development costs on our ASU-SCRC owned development project funded outside of the construction loan, estimated to be approximately $28.6 million, (iv) remaining development costs on our Chestnut Ridge owned development project funded outside of the construction loan, estimated to be approximately $1.8 million, (v) funds for other potential future acquisitions and development projects, including remaining pre-development expenditures for component II and III of the Arizona State University project which are estimated to range from $6.8 to $7.0 million, and (vi) potential payments to certain members of management and key employees under the 2004 Outperformance Bonus Plan, should the Compensation Committee of the Board of Directors elect to settle such awards in cash. We expect to meet our short-term liquidity requirements by using remaining proceeds from our recent equity offering, net proceeds from the disposition of The Village on University, net cash provided by operations, borrowings under our revolving credit facility, and offerings under a shelf registration statement under which we may offer up to $360 million of debt securities, preferred stock, common stock and securities warrants.

We may seek additional funds to undertake initiatives not contemplated by our business plan or obtain additional cushion against possible shortfalls. We also may pursue additional financing as opportunities arise. Future financings may include a range of different sizes or types of financing, including the sale of additional debt or equity securities. While we believe we will be able to obtain such funds, these funds may not be available on favorable terms or at all. Our ability to obtain additional financing depends on several factors, including future market conditions, our success or lack of success in penetrating our markets, our future creditworthiness, and restrictions contained in agreements with our investors or lenders, including the restrictions contained in the agreements governing our revolving credit facility. These financings could increase our level of indebtedness or result in dilution to our equity holders.

Revolving Credit Facility

The Operating Partnership has a $115 million revolving credit facility, which may be expanded by up to an additional $110 million upon the satisfaction of certain conditions. The maturity date of the facility is August 17, 2009 and we guarantee the Operating Partnership’s obligations under the facility.
 
Availability under the revolving credit facility is limited to an "aggregate borrowing base amount" equal to the lesser of (i) 65% of the value of certain properties, calculated as set forth in the credit facility, and (ii) the adjusted net operating income from these properties divided by a formula amount. The facility bears interest at a variable rate, at the Company’s option, based upon a base rate or one-, two-, three-, or six-month LIBOR plus, in each case, a spread based upon the Company’s total leverage. Additionally, we are required to pay an unused commitment fee ranging from 0.15% to 0.20% per annum, depending on the aggregate unused balance. As of March 31, 2007, the total availability under the facility (subject to the satisfaction of certain financial covenants) was approximately $107.5 million.

The terms of the facility include certain restrictions and covenants, which limit, among other items, the incurrence of additional indebtedness, liens, and the disposition of assets. The facility contains customary affirmative and negative covenants and also contains financial covenants that, among other things, require us to maintain certain minimum ratios of "EBITDA" (earnings before interest, taxes, depreciation and amortization) to fixed charges. We may not pay distributions that exceed 100% of funds from operations for any four consecutive quarters. The financial covenants also include consolidated net worth and leverage ratio tests. As of March 31, 2007, we were in compliance with all such covenants.

Distributions

We are required to distribute 90% of our REIT taxable income (excluding capital gains) on an annual basis in order to qualify as a REIT for federal income tax purposes. Accordingly, we intend to make, but are not contractually bound to make, regular quarterly distributions to common stockholders and unit holders. Distributions to common stockholders are at the discretion of the Board of Directors. We may be required to use borrowings under the credit facility, if necessary, to meet REIT distribution requirements and maintain our REIT status. The Board of Directors considers market factors and our Company’s performance in addition to REIT requirements in determining distribution levels.

27


Pre-Development Expenditures

Our third-party and owned development activities have historically required us to fund pre-development expenditures such as architectural fees, permits and deposits. The closing and/or commencement of construction of these development projects is subject to a number of risks such as our inability to obtain financing on favorable terms and delays or refusals in obtaining necessary zoning, land use, building, and other required governmental permits and authorizations As such, we cannot always predict accurately the liquidity needs of these activities. We frequently incur these pre-development expenditures before a financing commitment and/or required permits and authorizations have been obtained. Accordingly, we bear the risk of the loss of these pre-development expenditures if financing cannot ultimately be arranged on acceptable terms or we are unable to successfully obtain the required permits and authorizations. Historically, our third-party and owned development projects have been successfully structured and financed; however, these developments have at times been delayed beyond the period initially scheduled, causing revenue to be recognized in later periods. As of March 31, 2007, we had deferred approximately $3.7 million in pre-development costs related to third-party and owned development projects that have not yet commenced construction.

Indebtedness

As of March 31, 2007, we had approximately $522.7 million of outstanding consolidated indebtedness (excluding unamortized debt premiums/discounts of approximately $5.4 million), comprised of $432.9 million in mortgage and construction loans secured by 32 of our owned off-campus properties, $33.1 million in mortgage loans secured by two phases of an on-campus participating property, and $56.7 million in bond issuances secured by three of our on-campus participating properties. The weighted average interest rate on our consolidated indebtedness as of March 31, 2007 was 6.51%. As of March 31, 2007, approximately 5.9% of our total consolidated indebtedness was variable rate debt, comprised of our University Centre construction loan discussed below.

Owned Off-Campus Properties

The weighted average interest rate of the $401.9 million of owned off-campus mortgage debt was 6.34% as of March 31, 2007. Each of the 32 mortgages is a non-recourse obligation subject to customary exceptions. Each of these mortgages has a 30-year amortization, and none are cross-defaulted or cross-collateralized to any other indebtedness. The loans generally may not be prepaid prior to maturity; in certain cases prepayment is allowed, subject to prepayment penalties.

The development and construction of University Centre, an owned off-campus property scheduled to complete construction and open for occupancy in Fall 2007, is partially financed with a construction loan. The loan amount is $45.5 million and for each borrowing we have the option of choosing the Prime rate or one-, two-, or three-month LIBOR plus 1.50%. The loan requires payments of interest only during the term of the loan and any accrued interest and outstanding borrowings become due on the maturity date of October 1, 2008. As of March 31, 2007, the balance outstanding on the construction loan totaled $31.0 million, bearing interest at a rate of 6.82%.

On-Campus Participating Properties

Three of our on-campus participating properties are 100% financed with $56.7 million of outstanding project-based taxable bonds. Under the terms of these financings, one of our special purpose subsidiaries publicly issued three series of taxable bonds and loaned the proceeds to three special purpose subsidiaries that each hold a separate leasehold interest. Although a default in payment by these special purpose subsidiaries could result in a default under one or more series of bonds, the indebtedness of any of these special purpose subsidiaries is not cross-defaulted or cross-collateralized with indebtedness of the Company, the Operating Partnership or other special purpose subsidiaries. Repayment of principal and interest on these bonds is insured by MBIA, Inc. The loans encumbering the leasehold interests are non-recourse, subject to customary exceptions.

Cullen Oaks Phase I and Phase II loans are currently encumbered by mortgage loans with balances as of March 31, 2007 of approximately $16.5 million and $16.6 million, respectively. In February 2007, we extended the maturity date of these loans to February 2014 and the loans bear interest at a rate of LIBOR plus 1.35%. These loans require payments of interest only through May 2008 and monthly payments of principal and interest from May 2008 through the maturity date. In connection with these loan extensions, we terminated the existing interest rate swap agreement on the Cullen Oaks Phase I loan and entered into a new interest rate swap agreement effective February 15, 2007 through February 15, 2014, that is designated to hedge our exposure to fluctuations on interest payments attributed to changes in interest rates associated with payments on the Cullen Oaks Phase I and Phase II loans. Under the terms of the interest rate swap agreement, we pay a fixed rate of 6.69% and receive a floating rate of LIBOR plus 1.35%. Pursuant to the Leases, in the event the leasehold estate does not achieve Financial Break Even (defined as revenues less operating expenses, excluding management fees, less debt service), the applicable Lessor would be required to make a rental payment, also known as the Contingent Payment, sufficient to achieve Financial Break Even. The Contingent Payment provision remains in effect until such time as any financing placed on the facilities would receive an investment grade rating without the Contingent Payment provision. In the event that the Lessor is required to make a Contingent Payment, future net cash flow distributions would be first applied to repay such Contingent Payments and then to unpaid management fees prior to normal distributions. In turn, we have guaranteed payment of this property’s indebtedness.
 
28


The weighted average interest rate of the indebtedness encumbering our on-campus participating properties was 7.16% at March 31, 2007.

Off Balance Sheet Items

We do not have any off-balance sheet arrangements.

Funds From Operations

As defined by NAREIT, FFO represents income (loss) before allocation to minority interests (computed in accordance with GAAP), excluding gains (or losses) from sales of property, plus real estate related depreciation and amortization (excluding amortization of loan origination costs) and after adjustments for unconsolidated partnerships and joint ventures. We present FFO because we consider it an important supplemental measure of our operating performance and believe it is frequently used by securities analysts, investors and other interested parties in the evaluation of REITs, many of which present FFO when reporting their results. FFO is intended to exclude GAAP historical cost depreciation and amortization of real estate and related assets, which assumes that the value of real estate diminishes ratably over time. Historically, however, real estate values have risen or fallen with market conditions. Because FFO excludes depreciation and amortization unique to real estate, gains and losses from property dispositions and extraordinary items, it provides a performance measure that, when compared
year over year, reflects the impact to operations from trends in occupancy rates, rental rates, operating costs, development activities and interest costs, providing perspective not immediately apparent from net income.

We compute FFO in accordance with standards established by the Board of Governors of NAREIT in its March 1995 White Paper (as amended in November 1999 and April 2002), which may differ from the methodology for calculating FFO utilized by other equity REITs and, accordingly, may not be comparable to such other REITs. Further, FFO does not represent amounts available for management’s discretionary use because of needed capital replacement or expansion, debt service obligations or other commitments and uncertainties. FFO should not be considered as an alternative to net income (loss) (computed in accordance with GAAP) as an indicator of our financial performance or to cash flow from operating activities (computed in accordance with GAAP) as an indicator of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends or make distributions.

The following table presents a reconciliation of our FFO to our net income:

   
Three Months Ended March 31,
 
   
2007
 
2006
 
Net (loss) income
 
$
(4,678
)
$
3,664
 
Minority interests
   
(258
)
 
128
 
Real estate related depreciation and amortization:
             
Total depreciation and amortization
   
6,970
   
5,275
 
Corporate furniture, fixtures, and equipment depreciation
   
(94
)
 
(120
)
Funds from operations (“FFO”) (1)
 
$
1,940
 
$
8,947
 
               
FFO per share - diluted (1)
 
$
0.08
 
$
0.49
 
               
Weighted average common shares outstanding - diluted
   
25,394,550
   
18,176,189
 

(1)
During the three months ended March 31, 2007, we recorded a compensation charge of approximately $9.6  million, or $0.38 per fully diluted share, related to the 2004 Outperformance Bonus Plan. Excluding this  compensation charge, FFO for the three months ended March 31, 2007 would have been $11.6 million, or $0.46 per  fully diluted share. For a detailed discussion of the 2004 Outperformance Bonus Plan, refer to Note 9 in  the  accompanying Notes to Consolidated Financial Statements contained in Item 1 herein.
 
29

 
While our on-campus participating properties contributed $6.3 million and $6.0 to our revenues for the three months ended March 31, 2007 and 2006, respectively, under our participating ground leases, we and the participating university systems each receive 50% of the properties’ net cash available for distribution after payment of operating expenses, debt service (which includes significant amounts towards repayment of principal) and capital expenditures. A substantial portion of our revenues attributable to these properties is reflective of cash that is required to be used for capital expenditures and for the amortization of applicable property indebtedness. These amounts do not increase our economic interest in these properties or otherwise benefit us since our interest in the properties terminates upon the repayment of the applicable property indebtedness.

As noted above, FFO excludes GAAP historical cost depreciation and amortization of real estate and related assets because these GAAP items assume that the value of real estate diminishes over time. However, unlike the ownership of our owned off-campus properties, the unique features of our ownership interest in our on-campus participating properties cause the value of these properties to diminish over time. For example, since the ground/facility leases under which we operate the participating properties require the reinvestment from operations of specified amounts for capital expenditures and for the repayment of debt while our interest in these properties terminates upon the repayment of the debt, such capital expenditures do not increase the value of the property to us and mortgage debt amortization only increases the equity of the ground lessor. Accordingly, when considering our FFO, we believe it is also a meaningful measure of our performance to modify FFO to exclude the operations of our on-campus participating properties and to consider their impact on performance by including only that portion of our revenues from those properties that are reflective of our share of net cash flow and the management fees that we receive, both of which increase and decrease with the operating measure of the properties, a measure referred to herein as FFOM.

Funds From Operations—Modified for Operational Performance of On-Campus Participating Properties:

   
Three Months Ended March 31,
 
   
2007
 
2006
 
Funds from operations
 
$
1,940
 
$
8,947
 
Elimination of operations of on-campus participating properties:
             
Net income from on-campus participating properties
   
(1,577
)
 
(1,355
)
Amortization of investment in on-campus participating properties
   
(1,061
)
 
(1,032
)
     
(698
)
 
6,560
 
Modifications to reflect operational performance of on-campus
participating properties:
             
Our share of net cash flow (1)
   
295
   
192
 
Management fees
   
290
   
278
 
Impact of on-campus participating properties
   
585
   
470
 
Funds from operations - modified for operational performance of
on-campus participating properties (“FFOM”) (2)
 
$
(113
)
$
7,030
 
               
FFOM per share - diluted (2)
 
$
 
$
0.39
 
               
Weighted average common shares outstanding - diluted