t63984_10-q.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, 2008.   
 
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 x
Accelerated Filer o
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 42,305,883 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 3, 2008.
 


 
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2008
 
TABLE OF CONTENTS
 
   
PAGE
NO.
     
PART I.    
   
       
Item 1.
Consolidated Financial Statements
   
       
   
1
       
   
2
       
   
3
       
   
4
       
   
5
       
 
20
       
 
41
       
 
41
     
   
       
 
42
     
 
43
 

 
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
 
   
September 30, 2008
   
December 31, 2007
 
   
(Unaudited)
       
Assets
           
             
Investments in real estate:
           
Wholly-owned properties, net
  $ 1,979,090     $ 947,062  
On-campus participating properties, net
    70,313       72,905  
Investments in real estate, net
    2,049,403       1,019,967  
                 
Cash and cash equivalents
    37,300       12,073  
Restricted cash
    30,183       13,855  
Student contracts receivable, net
    4,806       3,657  
Other assets
    70,110       26,744  
                 
Total assets
  $ 2,191,802     $ 1,076,296  
                 
Liabilities and stockholders’ equity
               
                 
Liabilities:
               
Secured debt
  $ 1,154,376     $ 533,430  
Secured term loan
    100,000        
Unsecured revolving credit facility
          9,600  
Accounts payable and accrued expenses
    39,213       14,360  
Other liabilities
    61,744       43,278  
Total liabilities
    1,355,333       600,668  
                 
Minority interests
    29,038       31,251  
                 
Commitments and contingencies (Note 14)
               
                 
Stockholders’ equity:
               
Preferred stock
    131        
Common shares, $.01 par value, 800,000,000 shares authorized, 42,305,883 and 27,275,491 shares issued and outstanding at September 30, 2008 and December 31, 2007, respectively
    422           273  
Additional paid in capital
    903,003       494,160  
Accumulated earnings and distributions
    (94,021 )     (48,181 )
Accumulated other comprehensive loss
    (2,104 )     (1,875 )
Total stockholders’ equity
    807,431       444,377  
                 
Total liabilities and stockholders’ equity
  $ 2,191,802     $ 1,076,296  
 
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,
 
   
2008
   
2007
   
2008
   
2007
 
Revenues:
                       
 Wholly-owned properties
  $ 60,663     $ 30,045     $ 129,638     $ 85,197  
 On-campus participating properties
    4,301       4,083       14,993       14,160  
 Third party development services
    4,483       1,347       6,790       2,325  
 Third party development services – on-campus participating properties
    36       36       108       109  
 Third party management services
    2,041       627       4,185       1,999  
 Resident services
    610       380       1,409       1,044  
Total revenues
    72,134       36,518       157,123       104,834  
                                 
Operating expenses:
                               
Wholly-owned properties
    38,812       16,368       69,435       41,276  
On-campus participating properties
    3,274       2,317       8,068       6,842  
Third party development and management services
    3,277       1,484       7,713       3,925  
General and administrative
    3,191       2,286       8,562       15,804  
Depreciation and amortization
    18,148       7,797       37,291       22,535  
Ground/facility leases
    508       473       1,235       1,263  
Total operating expenses
    67,210       30,725       132,304       91,645  
                                 
Operating income
    4,924       5,793       24,819       13,189  
                                 
Nonoperating income and (expenses):
                               
Interest income
    244       221       1,048       1,242  
Interest expense
    (17,022 )     (7,560 )     (32,734 )     (20,940 )
Amortization of deferred financing costs
    (832 )     (324 )     (1,591 )     (936 )
Loss from unconsolidated joint ventures
    (926 )           (1,181 )      
Other nonoperating income
    486             486        
Total nonoperating expenses
    (18,050 )     (7,663 )     (33,972 )     (20,634 )
                                 
Loss before income taxes, minority interests, and discontinued operations
    (13,126 )     (1,870 )     (9,153 )     (7,445 )
Income tax provision
    (128 )     (576 )     (261 )     (696 )
Minority interests
    275       77       (198 )     309  
Loss from continuing operations
    (12,979 )     (2,369 )     (9,612 )     (7,832 )
                                 
Discontinued operations:
                               
Loss attributable to discontinued operations
    (115 )           (23 )      
Net loss
  $ (13,094 )   $ (2,369 )   $ (9,635 )   $ (7,832 )
                                 
Loss per share – basic:
                               
Loss from continuing operations per share
  $ (0.31 )   $ (0.10 )   $ (0.27 )   $ (0.34 )
Net loss per share
  $  (0.31 )   $  (0.10 )   $ (0.27 )   $ (0.34 )
Loss per share – diluted:
                               
Loss from continuing operations per share
  $  (0.30 )   $  (0.10 )   $ (0.26 )   $ (0.33 )
Net loss per share
  $  (0.31 )   $  (0.10 )   $ (0.26 )   $ (0.33 )
Weighted average common shares outstanding:
                               
Basic
    42,314,175       23,563,651       35,139,189       23,261,475  
Diluted
    43,577,493       25,320,144       36,549,728       25,273,845  
                                 
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 INCOME
(Unaudited, in thousands)
 
   
Nine Months Ended September 30,
 
   
2008
   
2007
 
Net loss
  $ (9,635 )   $ (7,832 )
                 
Other comprehensive loss:
               
Change in fair value of interest rate swaps
    (48 )     (917 )
Net comprehensive loss
  $ (9,683 )   $ (8,749 )
 
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,
 
   
2008
   
2007
 
Operating activities
           
Net loss
  $ (9,635 )   $ (7,832 )
Adjustments to reconcile net loss to net cash provided by operating activities:
               
     Minority interests share of loss
    198       (309 )
     Depreciation and amortization
    37,291       22,535  
     Amortization of deferred financing costs and debt premiums/discounts
    868       (165 )
 Share-based compensation
    1,512       4,662  
     Loss from unconsolidated joint ventures
    1,181        
     Amortization of gain on interest rate swap termination
    (181 )     (151 )
     Income tax provision
    248       696  
     Changes in operating assets and liabilities:
               
Restricted cash
    (2,499 )     (2,116 )
Student contracts receivable, net
    336       (1,137 )
Other assets
    (8,079 )     (5,471 )
Accounts payable and accrued expenses
    1,035       (8 )
Other liabilities
    685       998  
Net cash provided by operating activities
    22,960       11,702  
Investing activities
               
 Net proceeds from dispositions of real estate     
    4,418        
 Cash paid for property acquisitions
    (286,350 )     (43,183 )
     Cash paid for land purchases
    (3,226 )      
     Investments in wholly-owned properties
    (115,552 )     (92,863 )
     Investments in unconsolidated joint ventures
    (10,610 )      
     Investments in on-campus participating properties
    (637 )     (402 )
     Purchase of corporate furniture, fixtures and equipment
    (1,875 )     (347 )
     Distributions received from unconsolidated JVs
    15        
     Net cash used in investing activities
    (413,817 )     (136,795 )
Financing activities
               
     Proceeds from sale of common stock
    264,500        
     Offering costs
    (12,264 )      
     Proceeds from sale of preferred stock
    131        
     Pay-off of mortgage loans
    (24,225 )      
     Proceeds from contribution of properties to joint venture
    74,368        
     Proceeds from secured term loan
    100,000        
     Revolving credit facility, net
    (9,600 )     47,900  
     Proceeds from construction loans
    70,629       30,613  
     Principal payments on debt
    (7,569 )     (6,251 )
     Change in construction accounts payable
    3,715       12,165  
     Debt issuance and assumption costs
    (5,757 )     (1,638 )
     Distributions to common and restricted stockholders
    (36,254 )     (23,722 )
     Distributions to minority partners
    (1,590 )     (2,229 )
     Net cash provided by financing activities
    416,084       56,838  
Net change in cash and cash equivalents
  $ 25,227     $ (68,255 )
Cash and cash equivalents at beginning of period
    12,073       79,107  
Cash and cash equivalents at end of period
  $ 37,300     $ 10,852  
Supplemental disclosure of non-cash investing and financing activities
               
      Issuance of common stock in connection with company acquisition
  $ (154,739 )   $  
     Issuance of Common Units in connection with company acquisition
  $ (199 )   $  
     Loans assumed in connection with property acquisitions
  $ (615,175 )   $ (88,307 )
     Contribution of land from minority partner in development joint venture
  $     $ 2,756  
     Change in fair value of derivative instruments, net
  $ (48 )   $ (917 )
Supplemental disclosure of cash flow information
               
     Interest paid
  $ 33,905     $ 24,289  
 
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”), 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.
 
On April 23, 2008, the Company completed an equity offering, consisting of the sale of 9,200,000 shares of the Company’s common stock at a price of $28.75 per share, including the exercise of 1,200,000 shares issued as a result of the exercise of the underwriters’ overallotment option in full at closing.  The offering generated gross proceeds of $264.5 million.  The aggregate proceeds to the Company, net of the underwriting discount, structuring fee and expenses of the offering, was approximately $252.1 million.
 
As of September 30, 2008, the Company’s property portfolio contained 86 student housing properties with approximately 52,800 beds and approximately 17,500 apartment units, including 40 properties containing approximately 23,500 beds and approximately 7,500 units added as a result of the Company’s acquisition on June 11, 2008 of the student housing business of GMH Communities Trust (“GMH”), as more fully discussed in Note 3 herein.  The Company’s property portfolio consisted of 80 owned off-campus properties that are in close proximity to colleges and universities, two American Campus Equity (“ACETM”) properties operated under ground/facility leases with a related university system and four on-campus participating properties operated under ground/facility leases with the related university systems.  As of September 30, 2008, the Company also owned a minority interest in joint ventures that owned an aggregate of 21 student housing properties with approximately 12,100 beds in approximately 3,600 units. The Company’s communities contain modern housing units, offer resort-style amenities and are supported by a resident assistant system and other student-oriented programming.
 
Through the Company’s taxable REIT subsidiaries (“TRS”), it also provides construction management and development services, primarily for student housing properties owned by colleges and universities, charitable foundations, and others.  As of September 30, 2008, the Company provided third-party management and leasing services for 35 properties (six of which the Company served as the third-party developer and construction manager) that represented approximately 25,200 beds in approximately 9,100 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, 2008, the Company’s total owned, joint venture and third-party managed portfolio was comprised of 142 properties with approximately 90,100 beds in approximately 30,200 units.
 
2.    Summary of Significant Accounting Policies
 
Basis of Presentation
 
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and include the financial position, results of operations and cash flows of the Company, the Operating Partnership and subsidiaries of the Operating Partnership, including joint ventures in which the Company has a controlling interest.  Third-party equity interests in the Operating Partnership and consolidated joint ventures are reflected as minority interests in the consolidated financial statements.  The Company also has a non-controlling interest in three unconsolidated joint ventures, which are accounted for under the equity method.  All significant intercompany amounts have been eliminated.  All dollar amounts in the tables herein, except share and per share amounts, are stated in thousands unless otherwise indicated.
 
New Accounting Pronouncements
 
Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standard (“SFAS”) No. 157, “Fair Value Measurements” and SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.”  SFAS No. 157 defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements.  SFAS No. 159 permits an entity to elect fair value as the initial and subsequent measurement method for financial assets and liabilities.  The Company has not elected the fair value option for any financial instruments, however does reserve the right to elect to measure future eligible financial assets or liabilities at fair value.  The adoption of SFAS No. 157 and SFAS No. 159 did not have a material impact on the Company’s consolidated financial statements.  See Note 13 herein for a detailed discussion of fair value disclosures.
 
5

 
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  
Pending Accounting Pronouncements
 
In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations,” which replaces SFAS No. 141, “ Business Combinations,” which, among other things, establishes principles and requirements for how an acquirer entity recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed (including intangibles) and any noncontrolling interests in the acquired entity. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company is currently evaluating what impact the adoption of SFAS No. 141(R) will have on its consolidated financial statements.
 
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51.” SFAS No. 160 amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It also amends certain of ARB 51’s consolidation procedures for consistency with the requirements of SFAS No. 141(R). SFAS No. 160 is effective for the Company beginning January 1, 2009.  The Company is currently evaluating what impact the adoption of SFAS No. 160 will have on its consolidated financial statements.
 
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities,” which is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows.  SFAS No. 161 will be effective for the Company beginning January 1, 2009.  The Company is currently evaluating what impact the adoption of SFAS No. 161 will have on its consolidated financial statements, but anticipates it will only result in additional disclosures regarding derivative instruments.
 
Interim Financial Statements
 
The accompanying interim financial statements are unaudited, but have been prepared in accordance with 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, 2007.
 
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
 
6

 
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
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 $1.4 million was capitalized during the three months ended September 30, 2008 and 2007, respectively, and $4.7 million and $4.0 million was capitalized during the nine months ended September 30, 2008 and 2007, respectively.  Amortization of deferred financing costs totaling approximately $35,000 and $0.1 million was capitalized during the three months ended September 30, 2008 and 2007, respectively, and approximately $0.2 million and $0.3 million was capitalized during the nine months ended September 30, 2008 and 2007, 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, 2008.
 
The Company allocates the purchase price of acquired properties to net tangible and identified intangible assets based on relative fair values in accordance with 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 receipt of final third-party appraisals and additional analyses necessary to finalize the allocation.
 
Intangible Assets
 
In connection with property acquisitions completed during the nine months ended September 30, 2008 and 2007, the Company capitalized approximately $16.8 million and $1.2 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 the average remaining term of the underlying leases.  The Company also capitalized $1.5 million related to management’s estimate of the fair value of third-party management contracts acquired from GMH in June 2008.  These intangible assets are amortized on a straight-line basis over the average remaining term of the contracts.  The amortization is included in depreciation and amortization expense in the accompanying consolidated statements of operations.  See Note 3 herein for a detailed discussion of the property acquisitions completed during the nine months ended September 30, 2008.
 
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, 2008 and December 31, 2007, unamortized debt premiums were $6.2 million and $5.0 million, respectively, and unamortized debt discounts were $10.9 million and $0.7 million, respectively.  Debt premiums and discounts are included in secured debt on the accompanying consolidated balance sheets.
 
7

 
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
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, 2008, the Company deferred approximately $4.5 million in pre-development costs related to third-party and owned development projects that had not yet commenced construction.  Pre-development costs are included in other assets on the accompanying consolidated balance sheets.
 
Joint Ventures
 
The Company holds interests in both consolidated and unconsolidated joint ventures. The Company determines consolidation based on standards set forth in FASB Interpretation No. 46R, Consolidation of Variable Interest Entities  (“FIN 46”) and Emerging Issues Task Force (EITF) Issue No. 04-5,  Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights.  For joint ventures that are variable interest entities as defined under FIN 46 where the Company is not the primary beneficiary, it does not consolidate the joint venture for financial reporting purposes. Based on the guidance set forth in EITF 04-5, the Company consolidates certain joint venture investments because it exercises significant control over major operating decisions, such as approval of budgets, property management, investment activity and changes in financing.  For joint ventures under EITF 04-5, where the Company does not exercise significant control over major operating and management decisions, but where it exercises significant influence, the Company uses the equity method of accounting and does not consolidate the joint venture for financial reporting purposes.
 
Income Taxes
 
The Company and GMH have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”).  To qualify as a REIT, these entities must meet a number of organizational and operational requirements, including a requirement that they currently distribute at least 90% of their adjusted taxable income to their stockholders.   As REITs, these entities will generally not be subject to corporate level federal income tax on taxable income they currently distribute to their stockholders. If the entities fail to qualify as a REIT in any taxable year, they 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 these entities qualify for taxation as a REIT, they may be subject to certain state and local income and excise taxes on their income and property, and to federal income and excise taxes on their undistributed income.
 
The Company owns two TRS entities that manage the Company’s non-REIT activities and are subject to federal, state and local income taxes.
 
8

 
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
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.  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.
 
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,
 
   
2008
   
2007
   
2008
   
2007
 
Basic earnings per share calculation:
                       
Loss from continuing operations
  $ (12,979 )   $ (2,369 )   $ (9,612 )   $ (7,832 )
Loss from discontinued operations
    (115 )           (23 )      
Net loss
  $ (13,094 )   $ (2,369 )   $ (9,635 )   $ (7,832 )
                                 
Loss from continuing operations – per share
  $ (0.31 )   $ (0.10 )   $ (0.27 )   $ (0.34 )
Loss from discontinued operations – per share
  $     $     $     $  
Net loss – per share
  $ (0.31 )   $ (0.10 )   $ (0.27 )   $ (0.34 )
 
                               
Basic weighted average common shares outstanding
     42,314,175        23,563,651        35,139,189       23,261,475  
                                 
Diluted earnings per share calculation:
                               
Loss from continuing operations
  $ (12,979 )   $ (2,369 )   $ (9,612 )   $ (7,832 )
Series A Preferred Unit distributions
    46       46       138       138  
Loss from continuing operations allocated to Common Units
    (349 )     (152 )     (125 )     (569 )
Loss from continuing operations, as adjusted
    (13,282 )     (2,475 )     (9,599 )     (8,263 )
Loss from discontinued operations
    (115 )           (23 )      
Loss from discontinued operations allocated to Common Units
    (3 )      —       (1 )      —  
Loss from discontinued operations, as adjusted
    (118 )           (24 )      
Net loss, as adjusted
  $ (13,400 )   $ (2,475 )   $ (9,623 )   $ (8,263 )
                                 
Loss from continuing operations – per share
  $ (0.30 )   $ (0.10 )   $ (0.26 )   $ (0.33 )
Loss from discontinued operations – per share
  $ (0.01 )   $     $     $  
Net loss – per share
  $ (0.31 )   $ (0.10 )   $ (0.26 )   $ (0.33 )
                                 
Basic weighted average common shares outstanding
     42,314,175        23,563,651        35,139,189        23,261,475  
Common Units
    1,148,355       1,641,530       1,295,576       1,897,407  
Series A Preferred Units
    114,963       114,963       114,963       114,963  
Diluted weighted average common shares Outstanding (1)
     43,577,493        25,320,144        36,549,728        25,273,845  
 
(1)
283,174 and 173,569 weighted average RSAs are excluded from diluted weighted average common shares outstanding for the three months ended September 30, 2008 and 2007, respectively, and 277,749 and 163,724 weighted average RSAs are excluded from diluted weighted average common shares outstanding for the nine months ended September 30, 2008 and 2007, respectively, because they would be anti-dilutive due to the Company’s loss position for these periods.
 
9

 
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
3.    Property Acquisitions
 
On June 11, 2008, the Company completed the acquisition of GMH’s student housing business pursuant to an Agreement and Plan of Merger dated as of February 11, 2008 (the “Merger Agreement”).  At the time of closing, the GMH student housing portfolio consisted of 42 wholly-owned properties containing 24,953 beds located in various markets throughout the country.  Two of the acquired wholly-owned properties were sold during the third quarter (see Note 4).
 
The aggregate consideration paid for the merger was as follows:
 
Fair value of the Company’s common stock issued
  $ 154,739  
Fair value of Common Units issued
    199  
Cash consideration paid for GMH common shares and partnership units
    239,616  
Merger costs
    49,012  
Total consideration
    443,566  
Fair value of mortgage loans assumed (see Note 9)
    598,804  
Total purchase price
  $ 1,042,370  
 
Under the terms of the Merger Agreement, each GMH common share and each unit in GMH Communities, LP (the “GMH Operating Partnership”) issued and outstanding as of the date of the Merger Agreement, received cash consideration of $3.36 per share and 0.07642 of a share of the Company’s common stock, or at the election of the GMH Operating Partnership unitholder, 0.07642 of a unit in the Operating Partnership.  The value of the Company’s common stock and Common Units issued was based on the closing price of the Company’s common stock on February 11, 2008.  The Company issued 5.4 million shares of common stock and 7,004 Common Units valued at $28.43 per share.
 
In connection with the merger, the Company incurred approximately $49.0 million of merger costs related to severance, legal, banking, accounting and finance costs, of which approximately $8.9 million had not been paid as of September 30, 2008.
 
Concurrent with the closing of the GMH acquisition, the Company formed a joint venture with a wholly-owned subsidiary of Fidelity Real Estate Growth Fund III, LP (“Fidelity”) and transferred 15 GMH student housing properties to the venture with an estimated value of $325.9 million.  The Company also assumed GMH’s equity interest in an existing joint venture with Fidelity that owns six properties.  The Company serves as property manager for all of the joint venture properties and owns a 10% equity interest in these joint ventures. 
 
In February 2008, the Company acquired a 144-unit, 528-bed property (Pirate’s Place) located near the campus of East Carolina University in Greenville, North Carolina, for a purchase price of $10.6 million, which excludes $0.8 million of 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 approximately $7.0 million in fixed-rate mortgage debt with an annual interest rate of 7.15% and remaining term to maturity of 14.9 years.
 
In February 2008, the Company also acquired a 68-unit, 161-bed property (Sunnyside Commons) located near the campus of West Virginia University in Morgantown, West Virginia, for a purchase price of $7.5 million, which excludes $0.6 million of transaction costs, initial integration expenses and capital expenditures necessary to bring this property up to the Company’s operating standards.  The Company did not assume any debt as part of this transaction.
 
10

 
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
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, 2008 and 2007 presents consolidated financial information for the Company as if the property acquisitions discussed above, the Company’s 2007 acquisitions and the Company’s October 2007 and April 2008 equity offerings 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,
 
   
2008
   
2007
   
2008
   
2007
 
Total revenues
  $ 72,134     $ 63,687     $ 212,979     $ 201,267  
Net loss
  $ (10,016 )   $ (9,617 )   $ (2,695 )   $ (14,724 )
Net loss per share – basic
  $ (0.24 )   $ (0.23 )   $ (0.06 )   $ (0.36 )
Net loss per share – diluted
  $ (0.23 )   $ (0.23 )   $ (0.06 )   $ (0.35 )
 
4.    Property Dispositions and Discontinued Operations
 
As part of the acquisition of GMH on June 11, 2008, the Company acquired two properties (The Courtyards and The Verge) that were under contract to be sold as of such date.  The Courtyards was sold in July for approximately $17.4 million, resulting in net cash proceeds of approximately $0.4 million, and The Verge was sold in August for approximately $36.4 million, resulting in net proceeds of approximately $3.6 million.  There was no loss recorded on these dispositions for book purposes.
 
The related net loss of the aforementioned properties is reflected in the accompanying consolidated statements of operations as discontinued operations for the three and nine months ended September 30, 2008.  Below is a summary of the results of operations for The Courtyards and The Verge through their respective disposition dates:
 
   
Three Months Ended
September 30, 2008
   
Nine Months Ended
September 30, 2008
 
Total revenues
  $ 553     $ 895  
Total operating expenses
    (473 )     (579 )
    Operating income
    80       316  
Total nonoperating expense
    (195 )     (339 )
    Net loss
  $ (115 )   $ (23 )
 
5.    Investments in Wholly-owned Properties
 
Wholly-owned properties consisted of the following:
 
   
September 30, 2008
   
December 31, 2007
 
Land
  $ 224,188     $ 102,109  
Buildings and improvements
    1,733,339       768,551  
Furniture, fixtures and equipment
    79,396       42,225  
Construction in progress
    41,330       104,540  
      2,078,253       1,017,425  
Less accumulated depreciation
    (99,163 )     (70,363 )
Wholly-owned properties, net
  $ 1,979,090     $ 947,062  
 
The Company completed the acquisition of GMH on June 11, 2008 and the acquired properties are included in the wholly-owned properties, net balance as of September 30, 2008.  The Company’s allocation of the purchase price for GMH is contingent upon the receipt of final third-party appraisals and additional analyses necessary to finalize the allocation.
 
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.
 
11

 
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)
 
September 30, 2008
   
December 31, 2007
 
Texas A&M University System / Prairie View A&M University (2)
 
2/1/96
 
9/1/23
  $ 38,713     $ 38,499  
Texas A&M University System /  Texas A&M International
 
2/1/96
 
9/1/23
    6,120       6,039  
Texas A&M University System / Prairie View A&M University (3)
 
10/1/99
 
8/31/25  /  8/31/28
    24,178       24,037  
University of Houston System / University of Houston (4)
 
9/27/00
 
8/31/35
    34,892       34,691  
              103,903       103,266  
Less accumulated amortization
            (33,590 )     (30,361 )
On-campus participating properties, net
          $ 70,313     $ 72,905  
 
 
(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.
 
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 sheets 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.  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.
 
12

 
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
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 March 2006 acquisition of a portfolio of 13 student housing properties (“the Royal Properties”) became exchangeable into an equal number of shares of the Company’s common stock on March 1, 2007.  During the nine months ended September 30, 2008, 343,182 Common Units were converted into shares of the Company’s common stock.  As of September 30, 2008 and December 31, 2007, approximately 3% and 6%, 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.  These joint ventures own and operate the Company’s Callaway House, University Village at Sweet Home, University Centre, and Villas at Chestnut Ridge owned off-campus properties.
 
8.    Investment in Unconsolidated Joint Ventures
 
Concurrent with the closing of the GMH acquisition, the Company formed a joint venture with a subsidiary of Fidelity and transferred 15 GMH student housing properties to the venture with an estimated value of $325.9 million.  The Company also assumed GMH’s equity interest in an existing joint venture with Fidelity that owns six properties.  The Company serves as property manager for all of the joint venture properties and owns a 10% equity interest in these joint ventures.  The Company’s $9.6 million investment in these two joint ventures at September 30, 2008 is included in other assets in the accompanying consolidated balance sheets, and the Company’s $0.9 million and $1.0 million share in the loss from these two joint ventures for the three and nine months ended September 30, 2008, respectively, is included in loss from unconsolidated joint ventures in the accompanying consolidated statements of operations.
 
The Company also holds a minority equity interest in a joint venture that owns a military housing privatization project with the United States Navy to design, develop, construct, renovate, and manage unaccompanied soldier housing located on naval bases in Norfolk and Newport News, Virginia.  In December 2007, the joint venture obtained financing through taxable revenue bonds, at which time definitive legal agreements were executed.  The Company’s $1.3 million and $1.5 million investment in this joint venture at September 30, 2008 and December 31, 2007, respectively, is included in other assets in the accompanying consolidated balance sheets, and the Company’s $0.2 million share in the loss from this joint venture for both the three and nine months ended September 30, 2008, is included in loss from unconsolidated joint ventures in the accompanying consolidated statements of operations.
 
9.    Debt
 
A summary of the Company’s outstanding consolidated indebtedness, including unamortized debt premiums and discounts, is as follows:
 
   
September 30, 2008
   
December 31, 2007
 
Debt secured by wholly-owned properties:
           
Mortgage loans payable
  $ 958,454     $ 397,270  
Construction loans payable
    114,280       43,652  
      1,072,734       440,922  
Debt secured by on-campus participating properties:
               
Mortgage loans payable
    33,058       33,156  
Bonds payable
    53,275       55,030  
      86,333       88,186  
Secured term loan
    100,000        
Revolving credit facility
          9,600  
Unamortized debt premiums
    6,219       4,988  
Unamortized debt discounts
    (10,910 )     (666 )
Total debt
  $ 1,254,376     $ 543,030  
 
13

 
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Loans Assumed in Conjunction with Property Acquisition
 
In connection with the June 11, 2008 acquisition of GMH’s student housing business (see Note 3), the Company assumed approximately $608.2 million of fixed rate debt mortgage debt.  At the time of assumption, the debt had a weighted average interest rate of 5.43% and an average term to maturity of 6.2 years.  Upon assumption of this debt, the Company recorded debt discounts and debt premiums of approximately $11.8 million and $2.3 million, respectively, to reflect the estimated fair value of the debt assumed.  These mortgage loans are secured by the related properties.
 
In connection with the February 2008 acquisition of Pirate’s Place (see Note 3), a wholly-owned property, the Company assumed approximately $7.0 million of fixed-rate mortgage debt with an annual interest rate of 7.15% and January 2023 maturity date.  Upon assumption of this debt, the Company recorded a debt premium of approximately $0.3 million, to reflect the estimated fair value of the debt assumed.  This mortgage loan is secured by a lien on the related property.
 
Revolving Credit Facility
 
In May 2008, the Operating Partnership amended its $115 million revolving credit facility to increase the size of the facility to $160 million, which may be expanded by up to an additional $65 million upon the satisfaction of certain conditions.  The maturity date of the facility is August 17, 2009 and the Company continues to 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.  In April 2008, the Company paid off the entire balance on the revolving credit facility using proceeds from its equity offering (see Note 1).  As of September 30, 2008, the total availability under the facility balance (subject to the satisfaction of certain financial covenants) totaled approximately $143.8 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 a specified percentage 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, 2008, the Company was in compliance with all such covenants.
 
Senior Secured Term Loan
 
On May 23, 2008, the Operating Partnership obtained a $100 million senior secured term loan.  The secured term loan has an initial term of 36 months and can be extended through May 2012 through the exercise of a 12-month extension period.  The secured term loan 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.  On June 11, 2008, the Operating Partnership borrowed in full from the secured term loan and used the proceeds to fund a portion of the total cash consideration for the GMH acquisition.  As of September 30, 2008, the balance outstanding on the secured term loan was $100 million, bearing interest at a rate of 4.49%.  The Company guarantees the Operating Partnership’s obligations under the secured term loan.  The secured term loan includes the same restrictions and covenants as the revolving credit facility, described above.
 
10.   Incentive Award Plan
 
Pursuant to the 2004 Incentive Award Plan (the “Plan”), selected employees and directors of the Company and the Company’s affiliates are granted stock options, RSUs, RSAs, Common Units, profit interest units (“PIUs”), 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, 2008, 586,316 shares were available for issuance under the Plan.
 
14

 
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Restricted Stock Units
 
Upon initial appointment to the Board of Directors and reelection to the Board of Directors at each Annual Meeting of Stockholders, each outside member of the Board of Directors is granted RSUs.  For all 2006 and 2007 RSU grants, no shares of stock were issued at the time of the RSU awards, and the Company was not required to set aside a fund for the payment of any such award; however, the stock was deemed to be awarded on the date of grant.  Upon the Settlement Date, which is three years from the date of grant, the Company will deliver to the recipients a number of shares of common stock or cash, as determined by the Compensation Committee of the Board of Directors, equal to the number of RSUs held by the recipients.  In addition, recipients of RSUs are entitled to dividend equivalents equal to the cash distributions paid by the Company on one share of common stock for each RSU issued, payable currently or on the Settlement Date, as determined by the Compensation Committee of the Board of Directors.
 
Upon reelection to the Board of Directors in May 2008, the Chairman of the Board of Directors was granted RSUs valued at $42,500 and the remaining outside members were each granted RSUs valued at $32,500.  In connection with the GMH acquisition on June 11, 2008, the Company appointed a new member to the Board of Directors and granted RSUs to him valued at $32,500.  The number of RSUs was 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 and settled immediately on the date of grant; accordingly, a compensation charge of approximately $0.2 million was recorded during the nine months ended September 30, 2008 related to these awards.  A summary of the Company’s RSUs under the Plan as of September 30, 2008 and changes during the nine months ended September 30, 2008, is presented below:
 
   
Number of
RSUs
 
Outstanding at December 31, 2007
    18,786  
Granted
    7,831  
Settled in common shares
    (11,897 )
Settled in cash
    (3,164 )
Outstanding at September 30, 2008
    11,556  
 
Restricted Stock Awards
 
The Company awards RSAs to its executive officers and certain employees that vest in equal annual installments over a three to five year period.  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 recipient continues to be an employee of the Company.  A summary of the Company’s RSAs under the Plan as of September 30, 2008 and changes during the nine months ended September 30, 2008, is presented below:
 
   
Number of
RSAs
 
Nonvested balance at December 31, 2007
    178,921  
Granted
    151,492  
Vested
    (32,353 )
Forfeited
    (15,257 )
Nonvested balance at September 30, 2008
    282,803  
 
In accordance with SFAS No. 123(R), the Company recognizes the value of these awards as an expense over the vesting periods, which amounted to approximately $0.4 million and $0.3 million for the three months ended September 30, 2008 and 2007, respectively, and $1.3 million and $0.8 million for the nine months ended September 30, 2008 and 2007, respectively.
 
Common Units/PIUs
 
PIUs were issued to certain executive and senior officers upon consummation of the IPO.  In connection with the Company’s equity offering in July 2005, all 121,000 PIUs were converted to Common Units, as contemplated in the OP Agreement.
 
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, respectively, to reflect the value of such awards.  As a result of the October 2007 equity offering, a book-up event occurred for tax purposes, resulting in the 132,400 PIUs being converted to Common Units.  There was no compensation charge recorded in 2008 as a result of these awards.
 
15

 
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Each Common Unit is deemed equivalent to one share of the Company’s common stock.  Common Units receive the same quarterly per unit distribution as the per share distributions on the Company’s common stock.
 
11.   Preferred Stock
 
As part of the Company’s acquisition of GMH’s student housing business, the Company acquired the GMH REIT, an entity that has elected to be taxed as a REIT under the Code.  In order to ensure that the entity meets certain organizational requirements, this entity issued 131 shares of 15% Series A Cumulative Non-voting Preferred Stock.  Holders of Series A Preferred Stock are entitled to receive, when and as authorized by the Company’s Board of Directors, cumulative preferential cash dividends at the rate of 15% per annum of the total of $1,000 per share plus all accumulated and unpaid dividends thereon.  The Company may redeem shares of the Series A Preferred Stock at any time at a redemption price equal to $1,000 per share, plus a redemption premium per share that varies based on the date of redemption.
 
12.   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 required 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).  As of September 30, 2008, approximately $30,000 of the $0.4 million gain remained unamortized and will be amortized from accumulated other comprehensive income to earnings during the fourth quarter 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 $2.1 million at September 30, 2008 and is reflected in other liabilities in the accompanying consolidated balance sheets.  Ineffectiveness resulting from the Company’s hedges is not material.
 
13.   Fair Value Disclosures
 
On January 1, 2008, the Company adopted SFAS No. 157, which defines fair value, establishes a framework for measuring fair value and also expands disclosures about fair value measurements.  SFAS No. 157 applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements; accordingly, the standard does not require any new fair value measurements of reported balances.  The following table presents information about our liability measured at fair value on a recurring basis as of September 30, 2008, and indicates the fair value hierarchy of the valuation techniques utilized by us to determine such fair value.  The Company completed the acquisition of GMH’s student housing business on June 11, 2008 and the acquired properties are included in the wholly-owned properties, net balance as of September 30, 2008.  The Company’s allocation of purchase price for GMH is contingent upon the receipt of final third-party appraisals and additional analyses necessary to finalize the allocation.
 
16

 
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities the Company has the ability to access.  Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.  Level 2 inputs include quoted prices for similar assets and liabilities in active markets and inputs other than quoted prices observable for the asset or liability, such as interest rates and yield curves observable at commonly quoted intervals.  Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.  In instances in which the inputs used to measure fair value may fall into different levels of the fair value hierarchy, the level in the fair value hierarchy within which the fair value measurement in its entirety has been determined is based on the lowest level input significant to the fair value measurement in its entirety.  The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.  Disclosures concerning assets and liabilities measured at fair value are as follows:
 
Liability Measured at Fair Value on a Recurring Basis at September 30, 2008
 
   
Quoted Prices in
Active Markets for
Identical Assets
and Liabilities
(Level 1)
   
Significant Other
Observable Inputs
(Level 2)
   
Significant
Unobservable
Inputs (Level 3)
   
Balance at
September 30,
2008
 
Liability:
                       
Derivative financial instrument
  $     $ 2,136     $     $ 2,136  
 
The Company uses derivative financial instruments, specifically interest rate swaps, for nontrading purposes.  The Company uses interest rate swaps to manage interest rate risk arising from previously unhedged interest payments associated with variable rate debt.  Through September 30, 2008, derivative financial instruments were designated and qualified as cash flow hedges.  Derivative contracts with positive net fair values inclusive of net accrued interest receipts or payments, are recorded in other assets.  Derivative contracts with negative net fair values, inclusive of net accrued interest payments or receipts, are recorded in other liabilities.  The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative.  This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves.  The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.
 
To comply with the provisions of SFAS No. 157, the Company incorporates credit valuation adjustments to appropriately reflect its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.  In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds and guarantees.
 
Although the Company has determined the majority of the inputs used to value its derivative fall within Level 2 of the fair value hierarchy, the credit valuation adjustment associated with its derivative utilizes Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparty.  However, as of September 30, 2008, the Company has assessed the significance of the impact of the credit valuation adjustment on the overall valuation of its derivative position and has determined that the credit valuation adjustment is not significant to the overall valuation of the Company’s derivative.  As a result, the Company has determined its derivative valuation in its entirety is classified in Level 2 of the fair value hierarchy.
 
14.   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.
 
17

 
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 $15.7 million
 
At September 30, 2008, 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.
 
Guaranty of Joint Venture Mortgage Debt: As discussed in Note 8 herein, the Company holds a 10% equity interest in two unconsolidated joint ventures with mortgage debt outstanding of approximately $342.7 million as of September 30, 2008.  The Company serves as the guarantor of this debt which means it agreed to be liable to the lender for any loss, damage, cost, expense, liability, claim or other obligation incurred by the lender arising out of or in connection with certain non-recourse exceptions in connection with the loans.
 
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.   Segments
 
The Company defines business segments by their distinct customer base and service provided.  The Company has identified four reportable segments: Wholly-Owned 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.
 
18

 
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2008
   
2007
   
2008
   
2007
 
Wholly-Owned Properties
                       
Rental revenues
  $ 61,274     $ 30,425     $ 131,047     $ 86,241  
Interest income
    17       74       90       245  
Total revenues from external customers
    61,291       30,499       131,137       86,486  
Operating expenses before depreciation, amortization, and ground/facility leases
    38,546       16,307       68,753       41,024  
Ground/facility leases
    125             125        
Interest expense
    14,994       6,464       28,942       18,020  
Other nonoperating income
    486             486        
Operating income before depreciation and amortization, minority interests and allocation of corporate overhead
  $ 8,112     $ 7,728     $ 33,803     $ 27,442  
Depreciation and amortization
  $ 16,709     $ 6,586     $ 33,404     $ 18,972  
Capital expenditures
  $ 48,788     $ 48,903     $ 118,778     $ 92,863  
Total segment assets at September 30,
  $ 1,954,105     $ 935,416     $ 1,954,105     $ 935,416  
 
                               
On-Campus Participating Properties
                               
Rental revenues
  $ 4,301     $ 4,083     $ 14,993     $ 14,160  
Interest income
    47       116       179       285  
Total revenues from external customers
    4,348       4,199       15,172       14,445  
Operating expenses before depreciation, amortization, and ground/facility leases
    3,091       2,163       7,533       6,372  
Ground/facility leases
    383       473       1,110       1,263  
Interest expense
    1,521       1,548       4,614       4,683  
Operating (loss) income before depreciation and amortization, minority interests and allocation of corporate overhead
  $ (647 )   $ 15     $ 1,915     $ 2,127  
Depreciation and amortization
  $ 1,087     $ 1,068     $ 3,230     $ 3,194  
Capital expenditures
  $ 441     $ 175     $ 637     $ 402  
Total segment assets at September 30,
  $ 82,615     $ 86,206     $ 82,615     $ 86,206  
 
                               
Development Services
                               
Development and construction management fees
  $ 4,519     $ 1,383     $ 6,898     $ 2,434  
Operating expenses
    2,226       1,543       6,671       3,978  
Operating income (loss) before depreciation and amortization, minority interests and allocation of corporate overhead
  $ 2,293     $ (160 )   $ 227     $ (1,544 )
Total segment assets at September 30,
  $ 8,971     $ 3,598     $ 8,971     $ 3,598  
                                 
Property Management Services
                               
Property management fees from external customers
  $ 2,041     $ 627     $ 4,185     $ 1,999  
Intersegment revenues
    2,421       1,043       5,006       3,084  
Total revenues
    4,462       1,670       9,191       5,083  
Operating expenses
    2,557       644       4,578       2,014  
Operating income before depreciation and amortization, minority interests and allocation of corporate overhead
  $ 1,905     $ 1,026     $ 4,613     $ 3,069  
Total segment assets at September 30,
  $ 4,407     $ 1,851     $ 4,407     $ 1,851  
                                 
Reconciliations
                               
Total segment revenues
  $ 74,620     $ 37,751     $ 162,398     $ 108,448  
Unallocated interest income earned on corporate cash
    179       31       779       712  
Elimination of intersegment revenues
    (2,421 )     (1,043 )     (5,006 )     (3,084 )
Total consolidated revenues, including interest income
  $ 72,378     $ 36,739     $ 158,171     $ 106,076  
Segment operating income before depreciation, amortization, minority interests and allocation of corporate overhead
  $ 11,663     $ 8,609     $ 40,558     $ 31,094  
Depreciation and amortization, including amortization of deferred financing costs
    (18,980 )     (8,121 )     (38,882 )     (23,471 )
Net unallocated expenses relating to corporate overhead
    (4,883 )     (2,358 )     (9,648 )     (15,068 )
Loss from unconsolidated joint ventures
    (926 )           (1,181 )      
Income tax provision
    (128 )     (576 )     (261 )     (696 )
Minority interests
    275       77       (198 )     309  
Loss from continuing operations
  $ (12,979 )   $ (2,369 )   $ (9,612 )   $ (7,832 )
Total segment assets at September 30,
  $ 2,050,098     $ 1,027,071     $ 2,050,098     $ 1,027,071  
Unallocated corporate assets
    141,704       5,346       141,704       5,346  
Total assets at September 30,
  $ 2,191,802     $ 1,032,417     $ 2,191,802     $ 1,032,417  
 
19

 
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 unknow