t60954_10q.htm


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

FORM 10-Q
 

 
x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 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 27,275,491 shares of American Campus Communities, Inc.'s common stock with a par value of $0.01 per share outstanding as of the close of business on November 5, 2007.
 

 
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2007

TABLE OF CONTENTS

 
 
 
PAGE NO.
   
PART I.    
 
     
 
     
 
1
 
 
 
 
2
 
 
 
 
3
 
 
 
 
4
 
 
 
 
5
 
 
 
19
     
38
     
38
 
 
PART II.    
 
     
39
 
 
40
 
 
 

 

AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)

   
September 30, 2007
   
December 31, 2006
 
   
(Unaudited)
       
Assets
           
             
Investments in real estate:
           
  Owned properties, net
  $
903,349
    $
694,197
 
  On-campus participating properties, net
   
73,896
     
76,688
 
Investments in real estate, net
   
977,245
     
770,885
 
                 
Cash and cash equivalents
   
10,852
     
79,107
 
Restricted cash
   
14,025
     
11,260
 
Student contracts receivable, net
   
4,316
     
3,129
 
Other assets
   
25,979
     
20,000
 
                 
Total assets
  $
1,032,417
    $
884,381
 
                 
Liabilities and stockholders’ equity
               
                 
Liabilities:
               
  Secured debt
  $
543,685
    $
432,294
 
  Unsecured revolving credit facility
   
47,900
     
-
 
  Accounts payable and accrued expenses
   
14,424
     
13,616
 
  Other liabilities
   
45,354
     
29,436
 
Total liabilities
   
651,363
     
475,346
 
                 
Minority interests
   
31,648
     
39,561
 
                 
Commitments and contingencies (Note 11)
               
                 
Stockholders’ equity:
               
  Common shares, $.01 par value, 800,000,000 shares authorized, 23,587,499 and 22,903,073 shares issued
and outstanding at September 30, 2007 and December 31, 2006, respectively
   
236
     
229
 
  Additional paid in capital
   
394,883
     
382,367
 
  Accumulated earnings and distributions
    (45,056 )     (13,533 )
  Accumulated other comprehensive (loss) income
    (657 )    
411
 
Total stockholders’ equity
   
349,406
     
369,474
 
                 
Total liabilities and stockholders’ equity
  $
1,032,417
    $
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 September 30,
   
Nine Months Ended September 30,
 
   
2007
   
2006
   
2007
   
2006
 
Revenues:
                       
  Owned off-campus properties
  $
30,045
    $
24,340
    $
85,197
    $
64,687
 
  On-campus participating properties
   
4,083
     
3,971
     
14,160
     
13,450
 
  Third party development services
   
1,347
     
1,693
     
2,325
     
4,355
 
  Third party development services – on-campus
    participating properties
   
36
     
36
     
109
     
108
 
  Third party management services
   
627
     
491
     
1,999
     
1,844
 
  Resident services
   
380
     
328
     
1,044
     
993
 
Total revenues
   
36,518
     
30,859
     
104,834
     
85,437
 
                                 
Operating expenses:
                               
  Owned off-campus properties
   
16,368
     
13,178
     
41,276
     
31,710
 
  On-campus participating properties
   
2,317
     
2,455
     
6,842
     
6,660
 
  Third party development and management services
   
1,484
     
1,338
     
3,925
     
4,402
 
  General and administrative
   
2,286
     
1,468
     
15,804
     
4,879
 
  Depreciation and amortization
   
7,797
     
6,735
     
22,535
     
18,672
 
  Ground/facility leases
   
473
     
238
     
1,263
     
676
 
Total operating expenses
   
30,725
     
25,412
     
91,645
     
66,999
 
                                 
Operating income
   
5,793
     
5,447
     
13,189
     
18,438
 
                                 
Nonoperating income and (expenses):
                               
  Interest income
   
221
     
294
     
1,242
     
623
 
  Interest expense
    (7,560 )     (7,445 )     (20,940 )     (19,847 )
  Amortization of deferred financing costs
    (324 )     (334 )     (936 )     (1,078 )
Total nonoperating expenses
    (7,663 )     (7,485 )     (20,634 )     (20,302 )
                                 
Loss before income taxes, minority interests, and discontinued operations
    (1,870 )     (2,038 )     (7,445 )     (1,864 )
Income tax provision
    (576 )    
-
      (696 )    
-
 
Minority interests
   
77
     
149
     
309
     
202
 
Loss from continuing operations
    (2,369 )     (1,889 )     (7,832 )     (1,662 )
                                 
Discontinued operations:
                               
  Income attributable to discontinued operations
   
-
     
278
     
-
     
1,648
 
Net loss
  $ (2,369 )   $ (1,611 )   $ (7,832 )   $ (14 )
                                 
Loss per share – basic:
                               
  Loss from continuing operations per share
  $ (0.10 )   $ (0.10 )   $ (0.34 )   $ (0.09 )
  Net loss per share
  $ (0.10 )   $ (0.09 )   $ (0.34 )   $
-
 
Loss per share – diluted:
                               
  Loss from continuing operations per share
  $ (0.10 )   $ (0.10 )   $ (0.33 )   $ (0.11 )
  Net loss per share
  $ (0.10 )   $ (0.09 )   $ (0.33 )   $ (0.02 )
                                 
Weighted average common shares outstanding:
                               
  Basic
   
23,563,651
     
18,218,128
     
23,261,475
     
17,553,627
 
  Diluted
   
25,320,144
     
20,535,276
     
25,273,845
     
19,397,571
 
                                 
Distributions declared per common share
  $
0.3375
    $
0.3375
    $
1.0125
    $
1.0125
 



See accompanying notes to consolidated financial statements
2

AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited, in thousands)

   
Nine Months Ended September 30,
 
   
2007
   
2006
 
Net loss
  $ (7,832 )   $ (14 )
                 
Other comprehensive loss:
               
    Change in fair value of interest rate swaps
    (917 )     (43 )
Net comprehensive loss
  $ (8,749 )   $ (57 )



See accompanying notes to consolidated financial statements
3

AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
 

 
   
Nine Months Ended September 30,
 
   
2007
   
2006
 
Operating activities
           
Net loss
  $ (7,832 )   $ (14 )
Adjustments to reconcile net loss to net cash provided by operating activities:
               
     Minority interests share of loss
    (309 )     (202 )
     Depreciation and amortization
   
22,535
     
19,305
 
     Amortization of deferred financing costs and debt premiums/discounts
    (165 )    
98
 
 Share-based compensation
   
4,662
     
568
 
     Amortization of gain on interest rate swap termination
    (151 )    
-
 
     Income tax provision
   
696
     
-
 
     Changes in operating assets and liabilities:
               
              Restricted cash
    (2,116 )     (1,283 )
              Student contracts receivable, net
    (1,137 )     (418 )
              Other assets
    (5,471 )     (5,697 )
              Accounts payable and accrued expenses
    (8 )    
6,517
 
              Other liabilities
   
998
     
467
 
Net cash provided by operating activities
   
11,702
     
19,341
 
Investing activities
               
     Cash paid for property acquisitions
    (43,183 )     (69,633 )
     Investments in owned properties
    (92,863 )     (66,209 )
     Investments in on-campus participating properties
    (402 )     (395 )
     Purchase of corporate furniture, fixtures and equipment
    (347 )     (442 )
     Net cash used in investing activities
    (136,795 )     (136,679 )
Financing activities
               
     Proceeds from sale of common stock
   
-
     
140,036
 
     Offering costs
   
-
      (6,755 )
     Proceeds from revolving credit facility, net of paydowns
   
47,900
     
-
 
     Proceeds from construction loans
   
30,613
     
33,541
 
     Paydown of construction loan
   
-
      (20,224 )
     Principal payments on debt
    (6,251 )     (5,153 )
     Change in construction accounts payable
   
12,165
     
4,184
 
     Debt issuance and assumption costs
    (1,638 )     (1,823 )
     Distributions to common and restricted stockholders
    (23,722 )     (17,524 )
     Distributions to minority partners
    (2,229 )     (1,340 )
     Net cash provided by financing activities
   
56,838
     
124,942
 
Net change in cash and cash equivalents
    (68,255 )    
7,604
 
Cash and cash equivalents at beginning of period
   
79,107
     
24,641
 
Cash and cash equivalents at end of period
  $
10,852
    $
32,245
 
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
  $ (917 )   $ (43 )
Supplemental disclosure of cash flow information
               
     Interest paid
  $
22,787
    $
21,771
 



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 September 30, 2007, the Company’s property portfolio contained 43 student housing properties with approximately 26,900 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 September 30, 2007, the Company provided third party management and leasing services for 13 student housing properties (nine of which the Company served as the third party developer and construction manager) that represented approximately 8,900 beds in approximately 3,100 units.  Third party management and leasing services are typically provided pursuant to multi-year management contracts that have initial terms that range from one to five years.  As of September 30, 2007, the Company’s total owned and managed portfolio included 56 properties with approximately 35,800 beds in approximately 12,000 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 became effective on January 1, 2007.  The Company, or its subsidiaries, files income tax returns in the U.S. Federal jurisdiction and various states’ jurisdictions.  Open tax years for federal income tax purposes generally include tax years 2004-2006 as of the date of adoption.  The Company adopted the provisions of FIN 48 on January 1, 2007.  The Company does not have any material unrecognized tax benefits; therefore, the adoption of FIN 48 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.

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.
 
 
5

AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO 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 $1.4 million and $0.8 million was capitalized during the three months ended September 30, 2007 and 2006, respectively, and $4.0 million and $2.1 million was capitalized during the nine months ended September 30, 2007 and 2006, respectively.  Amortization of deferred financing costs totaling approximately $0.1 million and $82,000 was capitalized during the three months ended September 30, 2007 and 2006, respectively, and approximately $0.3 million and $0.2 million was capitalized during the nine months ended September 30, 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 September 30, 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 nine months ended September 30, 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 nine months ended September 30, 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 September 30, 2007 and December 31, 2006, unamortized debt premiums were $5.4 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 September 30, 2007, the Company has deferred approximately $8.2 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 $0.3 million and $0.2 million during the three months ended September 30, 2007 and 2006, respectively, and $1.0 million and $0.6 million during the nine months ended September 30, 2007 and 2006, respectively.

The Company’s Outperformance Bonus Plan discussed in Note 9 vested on August 17, 2007.  Accordingly, the Compensation Committee of the Board of Directors elected to pay a portion of the awards to selected recipients in the form of profits interest units (“PIUs”), which are discussed in more detail in Note 7.  Approximately $3.7 million of the compensation charge recorded during the nine months ended September 30, 2007 reflects the settlement of the Outperformance Bonus Plan through the issuance of PIUs.

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.

In August 2007, in connection with the vesting of the Company’s Outperformance Bonus Plan discussed in Note 9, a portion of the compensation expense associated with the awards was recorded by the TRS.  As a result, the Company determined that it was more likely than not that the Company would not realize the benefit of its deferred tax asset and increased its valuation allowance by a discrete item of $0.5 million, which is reflected in income tax provision in the accompanying consolidated statements of operations.

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, PIUs, 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 PIUs, 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 September 30,
   
Nine Months Ended September 30,
 
   
2007
   
2006
   
2007
   
2006
 
Basic earnings per share calculation:
                       
  Loss from continuing operations
  $ (2,369 )   $ (1,889 )   $ (7,832 )   $ (1,662 )
  Discontinued operations
   
-
     
278
     
-
     
1,648
 
  Net loss
  $ (2,369 )   $ (1,611 )   $ (7,832 )   $ (14 )
                                 
  Loss from continuing operations – per share
  $ (0.10 )   $ (0.10 )   $ (0.34 )   $ (0.09 )
  Income from discontinued operations – per share
  $
-
    $
0.01
     
-
    $
0.09
 
  Net (loss) income – per share
  $ (0.10 )   $ (0.09 )   $ (0.34 )   $
-
 
                                 
  Basic weighted average common shares outstanding
   
23,563,651
     
18,218,128
     
23,261,475
     
17,553,627
 
                                 
Diluted earnings per share calculation:
                               
  Loss from continuing operations
  $ (2,369 )   $ (1,889 )   $ (7,832 )   $ (1,662 )
  Series A Preferred Unit distributions
   
46
     
46
     
138
     
107
 
  Loss from continuing operations allocated to
     Common Units
    (152 )     (255 )     (569 )     (546 )
  Loss from continuing operations, as adjusted
    (2,475 )     (2,098 )     (8,263 )     (2,101 )
  Discontinued operations
   
-
     
278
     
-
     
1,648
 
  Income from discontinued operations allocated to
     Common Units
   
-
     
28
     
-
     
130
 
  Income from discontinued operations, as adjusted
   
-
     
306
     
-
     
1,778
 
  Net loss, as adjusted
  $ (2,475 )   $ (1,792 )   $ (8,263 )   $ (323 )
                                 
  Loss from continuing operations – per share
  $ (0.10 )   $ (0.10 )   $ (0.33 )   $ (0.11 )
  Income from discontinued operations – per share
  $
-
    $
0.01
    $
-
    $
0.09
 
  Net loss – per share
  $ (0.10 )   $ (0.09 )   $ (0.33 )   $ (0.02 )
                                 
  Basic weighted average common shares outstanding
   
23,563,651
     
18,218,128
     
23,261,475
     
17,553,627
 
  Common Units/PIUs
   
1,641,530
     
2,202,185
     
1,897,407
     
1,753,826
 
  Series A Preferred Units
   
114,963
     
114,963
     
114,963
     
90,118
 
  Restricted stock awards (1)
   
-
     
-
     
-
     
-
 
  Diluted weighted average common shares outstanding
   
25,320,144
     
20,535,276
     
25,273,845
     
19,397,571
 

 
(1)
173,569 and 101,963 weighted average restricted stock awards are excluded from diluted weighted average common shares outstanding for the three months ended September 30, 2007 and 2006, respectively, and 163,724 and 97,600 weighted average restricted stock awards are excluded from diluted weighted average common shares outstanding for the nine months ended September 30, 2007 and 2006, respectively, because they would be anti-dilutive due to the Company’s loss position for these periods.

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.  In August 2007, construction was completed on an additional phase at one of these properties.  As contemplated in the original transaction, concurrent with the completion of construction in August 2007, the Company purchased this additional phase consisting of 24 units and 84 beds, for approximately $4.6 million.

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.  Including the purchase of the additional phase discussed above, these three properties contain 764 units and 1,971 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 and nine months ended September 30, 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 September 30,
   
Nine Months Ended September 30,
 
   
2007
   
2006
   
2007
   
2006
 
Total revenues
  $
36,518
    $
34,449
    $
107,072
    $
101,340
 
Net loss
  $ (2,105 )   $ (2,413 )   $ (6,411 )   $ (1,881 )
Net loss per share – basic
  $ (0.09 )   $ (0.11 )   $ (0.28 )   $ (0.08 )
Net loss per share – diluted
  $ (0.09 )   $ (0.10 )   $ (0.27 )   $ (0.08 )

4.  Property Disposition and Discontinued Operations

The Company sold The Village on University, an owned off-campus property, 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 September 30,
   
Nine Months Ended September 30,
 
   
2007
   
2006
   
2007
   
2006
 
Total revenues
  $
-
    $
991
    $
-
    $
3,739
 
Total operating expenses
   
-
      (716 )    
-
      (2,094 )
   Operating income
   
-
     
275
     
-
     
1,645
 
Total nonoperating income
   
-
     
3
     
-
     
3
 
   Net income
  $
-
    $
278
    $
-
    $
1,648
 

5.  Investments in Owned Properties

Owned properties consisted of the following:

   
September 30, 2007
   
December 31, 2006
 
Land
  $
92,087
    $
75,263
 
Buildings and improvements
   
768,322
     
579,906
 
Furniture, fixtures and equipment
   
41,949
     
28,111
 
Construction in progress
   
64,704
     
56,958
 
     
967,062
     
740,238
 
Less accumulated depreciation
    (63,713 )     (46,041 )
Owned properties, net
  $
903,349
    $
694,197
 


10

AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
6.  On-Campus Participating Properties

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

Pursuant to the Leases, in the event the leasehold estates do not achieve Financial Break Even (defined as revenues less operating expenses, excluding management fees, less debt service), the applicable Lessor would be required to make a rental payment, also known as the Contingent Payment, sufficient to achieve Financial Break Even.  The Contingent Payment provision remains in effect until such time as any financing placed on the facilities would receive an investment grade rating without the Contingent Payment provision.  In the event that the Lessor is required to make a Contingent Payment, future net cash flow distributions would be first applied to repay such Contingent Payments and then to unpaid management fees prior to normal distributions.  Beginning in November 1999 and December 2002, as a result of the debt financing on the facilities achieving investment grade ratings without the Contingent Payment provision, the Texas A&M University System is no longer required to make Contingent Payments under either the Prairie View A&M University Village or University College Leases.  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 with 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)
 
September 30, 2007
   
December 31, 2006
 
Texas A&M University System /
  Prairie View A&M University (2)
2/1/96
9/1/23
  $
38,458
    $
38,277
 
Texas A&M University System /
  Texas A&M International
2/1/96
9/1/23
   
6,033
     
6,009
 
Texas A&M University System /
  Prairie View A&M University (3)
10/1/99
8/31/25  /  8/31/28
   
24,011
     
23,872
 
University of Houston System /
  University of Houston (4)
9/27/00
8/31/35
   
34,686
     
34,628
 
         
103,188
     
102,786
 
Less accumulated amortization
        (29,292 )     (26,098 )
On-campus participating properties, net
      $
73,896
    $
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 PIUs, Common Units and Series A Preferred Units.  PIUs are a special class of partnership interests in the Operating Partnership and are convertible into an equal number of Common Units upon the occurrence of certain tax-related book-up events.  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 PIU, 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 PIUs and 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.  Subsequent to such date, 153,965 and 662,324 Common Units were converted into shares of the Company’s common stock during the three and nine months ended September 30, 2007, respectively.  Additionally, as partial consideration for the vesting of the Outperformance Bonus Plan, which occurred on August 17, 2007, 132,400 PIUs were issued to certain employees (see Note 9).  As of September 30, 2007 and December 31, 2006, approximately 7% 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  PIUs, Common Units and Series A Preferred Units.

Minority interests also include the equity interests of unaffiliated joint venture partners in four joint ventures consolidated by the Company for financial reporting purposes.  Three of the joint ventures own and operate the Company’s Callaway House, University Village at Sweet Home and University Centre owned-off campus properties.  The other joint venture was formed to develop, own, and operate the Company’s Villas at Chestnut Ridge owned off-campus property, which is scheduled to open for occupancy in August 2008.

8.  Debt

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

   
September 30, 2007
   
December 31, 2006
 
Debt secured by owned  properties:
           
  Mortgage loans payable
  $
398,811
    $
315,044
 
  Construction loans payable
   
52,000
     
21,386
 
     
450,811
     
336,430
 
Debt secured by on-campus participating properties:
               
  Mortgage loans payable
   
33,155
     
16,513
 
  Construction loan payable
   
-
     
16,710
 
  Bonds payable
   
55,030
     
56,675
 
     
88,185
     
89,898
 
Revolving credit facility
   
47,900
     
-
 
Unamortized debt premiums/discounts
   
4,689
     
5,966
 
Total debt
  $
591,585
    $
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 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.

Construction Loans

The development and construction of Vista del Sol, an owned on-campus property scheduled to complete construction and open for occupancy in August 2008, is partially financed with a construction loan.  The loan amount is $100.0 million and for each borrowing the Company has the option of choosing the Prime rate or one-, two-, or three-month LIBOR plus 1.45%.  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 December 27, 2009.  The term of the loan can be extended through December 2011 through the exercise of two 12-month extension periods.  The Company began making draws under this construction loan during the three months ended September 30, 2007.  As of September 30, 2007, the balance outstanding on this construction loan totaled $5.7 million, bearing interest at a rate of 7.08%.

The development and construction of Villas at Chestnut Ridge, an owned off-campus property scheduled to complete construction and open for occupancy in August 2008, is partially financed with a construction loan.  The loan amount is $31.6 million and for each borrowing the Company has the option of choosing the Prime rate or one-, two-, three-, or six-month LIBOR plus 1.25%.  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 June 4, 2009.  The term of the loan can be extended through June 2010 through the exercise of a 12-month extension period.  The Company began making draws under this construction loan during the three months ended September 30, 2007.  As of September 30, 2007, the balance outstanding on this construction loan totaled $2.7 million, bearing interest at a weighted average rate of 6.59%.

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 September 30, 2007, the balance outstanding on the revolving credit facility totaled $47.9 million, bearing interest at a weighted average rate of 6.94%, with remaining availability under the facility (subject to the satisfaction of certain financial covenants) totaling approximately $66.8 million.  In October 2007, the Company paid off the entire balance on the revolving credit facility by using proceeds from an equity offering (See Note 13).

13

AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
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 September 30, 2007, the Company was in compliance with all such covenants.

9.  Incentive Award Plan

The Company has adopted the 2004 Incentive Award Plan (the “Plan”).  The Plan provides for the grant to selected employees and directors of the Company and the Company’s affiliates of stock options, 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 September 30, 2007, the Company has issued 484,173 awards under the Plan.  A summary of the Company’s stock-based incentive awards under the Plan as of September 30, 2007 and changes during the nine months ended September 30, 2007, is presented below:

   
Common
Units / PIUs
 
Restricted
Stock Units
(RSUs)
 
Restricted
Stock Awards
(RSAs)
 
 
 
 
Total
Outstanding at December 31, 2006
 
110,000
 
20,555
 
100,047
 
230,602
Granted
 
132,400
(1)
5,376
(2)
110,890
(4)
248,666
Vested / Settled in common shares
 
-
 
           (4,029)
(3)
         (18,073)
 
        (22,102)
Settled in cash
     
           (3,116)
(3)
                    -
 
            (3,116)
Forfeited
 
-
 
-
 
         (12,552)
 
        (12,552)
Converted to common shares
 
       (1,000)
 
-
 
-
 
            (1,000)
Outstanding at September 30, 2007
 
241,400
 
18,786
 
180,312
 
440,498

(1)
The Outperformance Bonus Plan was adopted upon consummation of the Company’s IPO in August 2004, and consisted of awards to key employees equal to the value of 367,682 shares of the Company’s common stock.  Such awards vested on the third anniversary of the IPO (August 2007), upon the Company’s achievement of specified performance measures.  Upon vesting, the Compensation Committee of the Board of Directors exercised its permitted discretion and granted 132,400 of the awards to selected recipients in the form of PIUs, with the remainder of the awards paid in cash in the amount of $6.7 million.  During the three and nine months ended September 30, 2007, the Company recorded a compensation charge of approximately $0.5 million and $10.4 million to reflect the value of such awards.  As a result of the October 2007 equity offering discussed in Note 13, a book-up event occurred for tax purposes, resulting in the 132,400 PIUs being converted to Common Units of the Operating Partnership.
   
(2)
In May 2007, one outside member of the Board of Directors was granted RSUs valued at $35,000 and the remaining outside members were each granted RSUs valued at $25,000, with the number of RSUs determined based on the fair market value of the company’s stock on the date of grant, as defined in the Plan.  All awards vested immediately on the date of grant; accordingly, a compensation charge of approximately $0.2 million was recorded during the nine months ended September 30, 2007 related to these awards.
   
(3)
On August 17, 2004, in conjunction with the IPO, 7,145 RSUs were granted to certain outside members of the Board of Directors and these awards vested immediately on the date of grant.  On August 17, 2007, the third anniversary of the date of grant, as determined by the Compensation Committee of the Board of Directors, 4,029 RSUs were settled through the delivery of shares of common stock and 3,116 RSUs were settled in cash.
   
(4)
In 2007, the Company granted 110,890 RSAs to its executive officers and certain employees that primarily 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.
 
 
14

AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
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 $0.9 million at September 30, 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.

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 $10.2 million

At September 30, 2007, management did 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:  The Company is subject to various 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.

15

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

12.   Segments

The Company defines business segments by their distinct customer base and service provided. The Company has identified four reportable segments: Owned Off-Campus Properties, On-Campus Participating Properties, Development Services, and Property Management Services. Management evaluates each segment’s performance based on operating income before depreciation, amortization, minority interests and allocation of corporate overhead. Intercompany fees are reflected at the contractually stipulated amounts.
 
 
16

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

 
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2007
   
2006
   
2007
   
2006
 
Owned Off-Campus Properties
                       
Rental revenues
  $
30,425
    $
24,668
    $
86,241
    $
65,680
 
Interest income
   
74
     
79
     
245
     
127
 
Total revenues from external customers
   
30,499
     
24,747
     
86,486
     
65,807
 
Operating expenses before depreciation and amortization
   
16,307
     
13,105
     
41,024
     
31,402
 
Interest expense
   
6,464
     
5,113
     
18,020
     
13,788
 
Operating income before depreciation and amortization, minority
   interests and allocation of corporate overhead
  $
7,728
    $
6,529
    $
27,442
    $
20,617
 
Depreciation and amortization
  $
6,586
    $
5,563
    $
18,972
    $
15,201
 
Capital expenditures
  $
48,903
    $
26,260
    $
92,863
    $
66,209
 
Total segment assets at September 30,
  $
935,416
    $
710,141
    $
935,416
    $
710,141
 
                                 
On-Campus Participating Properties
                               
Rental revenues
  $
4,083
    $
3,971
    $
14,160
    $
13,450
 
Interest income
   
116
     
102
     
285
     
255
 
Total revenues from external customers
   
4,199
     
4,073
     
14,445
     
13,705
 
Operating expenses before depreciation, amortization, and
   ground/facility leases
   
2,163
     
2,305
     
6,372
     
6,217
 
Ground/facility leases
   
473
     
238
     
1,263
     
676
 
Interest expense
   
1,548
     
1,638
     
4,683
     
4,838
 
Operating income (loss) before depreciation and amortization, minority
interests and allocation of corporate overhead
  $
15
    $ (108 )   $
2,127
    $
1,974
 
Depreciation and amortization
  $
1,068
    $
1,037
    $
3,194
    $
3,083
 
Capital expenditures
  $
175
    $
275
    $
402
    $
395
 
Total segment assets at September 30,
  $
86,206
    $
88,735
    $
86,206
    $
88,735
 
                                 
Development Services
                               
Development and construction management fees from
   external customers
  $
1,383
    $
1,729
    $
2,434
    $
4,463
 
Intersegment revenues
   
-
     
-
     
-
     
-
 
Total revenues
   
1,383
     
1,729
     
2,434
     
4,463
 
Operating expenses
   
1,543
     
1,150
     
3,978
     
3,618
 
Operating (loss) income before depreciation and amortization,
   minority interests and allocation of corporate overhead
  $ (160 )   $
579
    $ (1,544 )   $
845
 
Total segment assets at September 30,
  $
3,598
    $
6,275
    $
3,598
    $
6,275
 
                                 
Property Management Services
                               
Property management fees from external customers
  $
627
    $
491
    $
1,999
    $
1,844
 
Intersegment revenues
   
1,043
     
862
     
3,084
     
2,535
 
Total revenues
   
1,670
     
1,353
     
5,083
     
4,379
 
Operating expenses
   
644
     
577
     
2,014
     
1,865
 
Operating income before depreciation and amortization, minority
   interests and allocation of corporate overhead
  $
1,026
    $
776
    $
3,069
    $
2,514
 
Total segment assets at September 30,
  $
1,851
    $
1,296
    $
1,851
    $
1,296
 
                                 
Reconciliations
                               
Total segment revenues
  $
37,751
    $
31,902
    $
108,448
    $
88,354
 
Unallocated interest income earned on corporate cash
   
31
     
113
     
712
     
241
 
Elimination of intersegment revenues
    (1,043 )     (862 )     (3,084 )     (2,535 )
Total consolidated revenues, including interest income
  $
36,739
    $
31,153
    $
106,076
    $
86,060
 
Segment operating income before depreciation, amortization,
   minority interests and allocation of corporate overhead
  $
8,609
    $
7,776
    $
31,094
    $
25,950
 
Depreciation and amortization, including amortization of deferred
   financing costs
    (8,121 )     (7,069 )     (23,471 )     (19,750 )
Net unallocated expenses relating to corporate overhead
    (2,358 )     (2,745 )     (15,068 )     (8,064 )
Income tax provision
    (576 )    
-
      (696 )    
-
 
Minority interests
   
77
     
149
     
309
     
202
 
Loss from continuing operations
  $ (2,369 )   $ (1,889 )   $ (7,832 )   $ (1,662 )
Total segment assets at September 30,
  $
1,027,071
    $
806,447
    $
1,027,071
    $
806,447
 
Unallocated corporate assets and assets held for sale
   
5,346
     
57,982
     
5,346
     
57,982
 
Total assets at September 30,
  $
1,032,417
    $
864,429
    $
1,032,417
    $
864,429
 



17

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

13.   Subsequent Events

October 2007 Equity Offering:

On October 10, 2007, the Company completed an equity offering, consisting of the sale of 3,500,000 shares of the Company’s common stock at a price of $28.29 per share, resulting in gross proceeds of approximately $99.0 million.  The company received approximately $98.7 million in net proceeds after deducting estimated expenses of approximately $0.3 million.  The Company used $47.9 million to repay the outstanding balance on its revolving credit facility and $43.9 million to repay the outstanding balance on the University Centre construction loan.
 
 
18

 
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 September 30, 2007, our property portfolio contained 43 student housing properties with approximately 26,900 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.

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 September 30, 2007, we provided third party management and leasing services for 13 student housing properties (nine of which we served as the third party developer and construction manager) that represented approximately 8,900 beds in approximately 3,100 units.  Third party management and leasing services are typically provided pursuant to multi-year management contracts that have initial terms that range from one to five years.  As of September 30, 2007, our total owned and managed portfolio included 56 properties with approximately 35,800 beds in approximately 12,000 units.

19

 
Third-Party Development Services

Our third-party development and construction management services as of September 30, 2007 consisted of four projects under contract and currently in progress with fees ranging from $0.2 million to $3.1 million.  As of September 30, 2007, fees of approximately $1.6 million remained to be earned by us with respect to these projects, which have scheduled completion dates of October 2007 through July 2009.

We recently completed two projects with a total of approximately 1,100 beds in approximately 338 units, with total fees of approximately $2.2 million.

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.  In August 2007, construction was completed on an additional phase at one of these properties.  As contemplated in the original transaction, concurrent with the completion of construction in August 2007, we purchased this additional phase consisting of 24 units and 84 beds, for approximately $4.6 million.

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.  Including the purchase of the additional phase discussed above, these three properties contain 763 units and 1,970 beds.

Owned Development Activities

University Centre: In August 2007, we completed the final stages of construction on this owned off-campus property located in Newark, New Jersey, which contains 838 beds in 234 units and serves students attending Newark and metro New York area colleges and universities.  Total development costs incurred for the project were approximately $77.8 million.

Vista del Sol: As of September 30, 2007, our Vista del Sol (formerly Arizona State University – South Campus Residential Community) owned on-campus property was under construction with total development costs estimated to be approximately $137.5 million.  The project, which is located in Tempe, Arizona, is scheduled to complete construction and open for occupancy in August 2008 and serves students attending Arizona State University.  As of September 30, 2007, the project was approximately 42% complete, and we estimate that remaining development costs will be approximately $86.0 million.  As of September 30, 2007, we have funded $37.5 million of the project’s development costs internally, with the remaining development costs to be funded through a construction loan.  We began drawing under this construction loan during the third quarter 2007.

20

 
Villas at Chestnut Ridge:  As of September 30, 2007, our Villas at Chestnut Ridge owned off-campus property was under construction with total development costs estimated to be approximately $34.8 million.  The project, which is located in Amherst, New York, is scheduled to complete construction and open for occupancy in August 2008, and serves students attending State University of New York - Buffalo.  As of September 30, 2007, the project was approximately 44% complete, and we estimate that remaining development costs will be approximately $18.8 million.  As of September 30, 2007, we have funded $3.2 million of the project’s development costs internally, with the remaining development costs to be funded through a construction loan.  We began drawing under this construction loan during the third quarter 2007.
 
 
21


 
Property Operations

As of September 30, 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
 
2006
 
College Station, TX
 
Texas A&M University
 
        236
 
      704
33. Village on Sixth
 
2007
 
Huntington, WV
 
Marshall University
 
248
 
752
34. Newtown Crossing  (2)
 
2007
 
Lexington, KY
 
University of Kentucky
 
356
 
942
35. Olde Towne University Square
 
2007
 
Toledo, OH
 
University of Toledo
 
224
 
550
36. Peninsular Place
 
2007
 
Ypsilanti, MI
 
Eastern Michigan University
 
183
 
478
37. University Centre  (3)
 
2007
 
Newark, NJ
 
Rutgers University, NJIT, Essex CCC
 
        234
 
      838
38. Vista del Sol (4)
 
2008
 
Tempe, AZ
 
Arizona State University
 
613
 
1,866
39. Villas at Chestnut Ridge  (4)
 
2008
 
Amherst, NY
 
State University of New York - Buffalo
 
196
 
552
Total owned properties
 
 
 
 
 
 
 
 7,055
 
22,418
 
 
22

 

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