Our Company and Our Business

Overview

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. Refer to Item 1 contained herein for additional information regarding our business objectives, investment strategies, and operating segments.

Property Portfolio

As of December 31, 2012, our property portfolio contained 160 properties with approximately 98,800 beds in approximately 31,800 apartment units. Our property portfolio consisted of 143 owned off-campus student housing properties that are in close proximity to colleges and universities, 13 ACE properties operated under ground/facility leases with six university systems and four on-campus participating properties operated under ground/facility leases with the related university systems. Of the 160 properties, nine were under development as well as an additional phase under development at an existing property as of December 31, 2012, and when completed will consist of a total of approximately 6,200 beds in approximately 1,700 units. Our communities contain modern housing units and are supported by a resident assistant system and other student-oriented programming, with many offering resort-style amenities.

We believe that the ownership and operation of student housing communities in close proximity to selected colleges and universities presents an attractive long-term investment opportunity for our investors. We intend to continue to execute our strategy of identifying existing differentiated, typically highly amenitized, student housing communities or development opportunities in close proximity to university campuses with high barriers to entry which are projected to experience substantial increases in enrollment and/or are under-serviced in terms of existing on and/or off-campus student housing.

Third-Party Development and Management Services

We provide development and construction management services for student housing properties owned by universities, 501(c) 3 foundations and others. Our clients have included some of the nation's most prominent systems of higher education. We develop student housing properties for these clients and we are sometimes retained to manage these properties following their opening. As of December 31, 2012, we were under contract on three third-party development projects that are currently in progress and whose fees range from $2.3 million to $3.2 million. As of December 31, 2012, fees of approximately $3.5 million remained to be earned by us with respect to these projects, which have scheduled completion dates of August 2013 through August 2014.

As of December 31, 2012, we also provided third-party management and leasing services for 27 properties that represented approximately 22,500 beds in approximately 9,100 units. Our third-party management and leasing services are typically provided pursuant to management contracts that have initial terms that range from one to five years.

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

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States ("GAAP") requires management to make estimates and assumptions in certain circumstances that affect amounts reported in our consolidated and combined financial statements and related notes. In preparing these financial statements, management has utilized all available information, including its past history, industry standards and the current economic environment, among other factors, in forming its estimates and judgments of certain amounts included in the consolidated financial statements, giving due consideration to materiality. It is possible that the ultimate outcome anticipated by management in formulating its estimates may not be realized. Application of the critical accounting policies below involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. In addition, other companies in similar businesses may utilize different estimation policies and methodologies, which may impact the comparability of our results of operations and financial condition to those companies.

Revenue and Cost Recognition of Third-Party Development and Management Services

Development revenues are generally recognized based on a proportional 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. For projects where our 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.

We also evaluate the collectability 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 reserve 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 we frequently incur these pre-development expenditures before a financing commitment and/or required permits and authorizations have been obtained, we bear the risk of loss of these pre-development expenditures if financing cannot ultimately be arranged on acceptable terms or we are unable to successfully obtain the required permits and authorizations. 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 us 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 comprehensive income.

Third-party management fees are generally received and recognized on a monthly basis and are computed as a percentage of property receipts, revenues or a fixed monthly amount, in accordance with the applicable management contract. Incentive management fees are recognized when the contractual criteria have been met.

Student Housing Rental Revenue Recognition and Accounts Receivable

Student housing rental revenue is recognized on a straight-line basis over the term of the contract. Ancillary and other property related income is recognized in the period earned. In estimating the collectability of our accounts receivable, we analyze the aging of resident receivables, historical bad debts, and current economic trends. These estimates have a direct impact on our net income, as an increase in our allowance for doubtful accounts reduces our net income.

Allocation of Fair Value to Acquired Properties

The price that we pay to acquire a property is impacted by many factors, including the condition of the buildings and improvements, the occupancy of the building, favorable or unfavorable financing, and numerous other factors. Accordingly, we are required to make subjective assessments to allocate the purchase price paid to acquire investments in real estate among the assets acquired and liabilities assumed based on our estimate of the fair values of such assets and liabilities. This includes, among other items, determining the value of the buildings and improvements, land, in-place tenant leases, and any debt assumed from the seller. Each of these estimates requires a great deal of judgment and some of the estimates involve complex calculations. Our calculation methodology is summarized in Note 2 to our consolidated financial statements contained in Item 8. These allocation assessments have a direct impact on our results of operations because if we were to allocate more value to land there would be no depreciation with respect to such amount or if we were to allocate more value to the buildings as opposed to allocating to the value of in-place tenant leases, this amount would be recognized as an expense over a much longer period of time, since the amounts allocated to buildings are depreciated over the estimated lives of the buildings whereas amounts allocated to in-place tenant leases are amortized over the terms of the leases (generally less than one year).

Impairment of Long-Lived Assets

On a periodic basis, management is required to assess whether there are any indicators that the value of our real estate properties may be impaired. A property's value is considered impaired if management's estimate of the aggregate future undiscounted cash flows to be generated by the property are less than the carrying value of the property. These estimates of cash flows consider factors such as expected future operating income, trends and prospects, as well as the effects of demand, competition and other factors. To the extent impairment has occurred, the loss will be measured as the excess of the carrying amount of the property over the fair value of the property, thereby reducing our net income.

We distinguish between capital expenditures necessary for the ongoing operations of our properties and acquisition-related improvements incurred within one to two years of acquisition of the related property. (Acquisition-related improvements are expenditures that have been identified at the time the property is acquired, and which we intended to incur in order to position the property to be consistent with our physical standards). We capitalize non-recurring expenditures for additions and betterments to buildings and land improvements. In addition, we generally capitalize expenditures for exterior painting, roofing, and other major maintenance projects that substantially extend the useful life of the existing assets. The cost of ordinary repairs and maintenance that do not improve the value of an asset or extend its useful life are charged to expense when incurred. Planned major repair, maintenance and improvement projects are capitalized when performed. In some circumstances, lenders require us to maintain a reserve account for future repairs and capital expenditures. These amounts are classified as restricted cash on the accompanying consolidated balance sheets, as the funds are not available to us for current use.

For our properties under development, capitalized interest is generally based on the weighted average interest rate of our total debt. Upon substantial completion of the properties, cost capitalization ceases. The total capitalized development costs are then transferred to the applicable asset category and depreciation commences. These estimates used by management require judgment, and accordingly we believe cost capitalization to be a critical accounting estimate.

Results of Operations

Comparison of the Years Ended December 31, 2012 and December 31, 2011

The following table presents our results of operations for the years ended
December 31, 2012 and 2011, including the amount and percentage change in these
results between the two periods.

                                             Year Ended December 31,
                                               2012             2011        Change ($)       Change (%)
Revenues:
 Wholly-owned properties                   $    448,052       $ 345,411     $   102,641             29.7 %
 On-campus participating properties              26,166          25,252             914              3.6 %
 Third-party development services                 8,574           7,497           1,077             14.4 %
 Third-party management services                  6,893           7,254            (361 )           (5.0 %)
 Resident services                                1,605           1,353             252             18.6 %
Total revenues                                  491,290         386,767         104,523             27.0 %

Operating expenses:
 Wholly-owned properties                        210,307         163,857          46,450             28.3 %
 On-campus participating properties              11,073          10,180             893              8.8 %
 Third-party development and management
  services                                       10,898          11,368            (470 )           (4.1 %)
 General and administrative                      22,965          12,752          10,213             80.1 %
 Depreciation and amortization                  115,884          86,229          29,655             34.4 %
 Ground/facility leases                           4,248           3,608             640             17.7 %
Total operating expenses                        375,375         287,994          87,381             30.3 %

Operating income                                115,915          98,773          17,142             17.4 %

Nonoperating income and (expenses):
 Interest income                                  1,760             582           1,178            202.4 %
 Interest expense                               (56,577 )       (51,593 )        (4,984 )            9.7 %
 Amortization of deferred financing
costs                                            (4,482 )        (5,107 )           625            (12.2 %)
 Income (loss) from unconsolidated joint
ventures                                            444            (641 )         1,085           (169.3 %)
 Other nonoperating income                          411               -             411            100.0 %
Total nonoperating expenses                     (58,444 )       (56,759 )        (1,685 )            3.0 %

Income before income taxes and
discontinued
 operations                                      57,471          42,014          15,457             36.8 %
Income tax provision                               (725 )          (433 )          (292 )           67.4 %
Income from continuing operations                56,746          41,581          15,165             36.5 %

Discontinued operations:
 Income attributable to discontinued
operations                                          771           1,585            (814 )          (51.4 %)
 Loss from early extinguishment of debt          (1,591 )             -          (1,591 )          100.0 %
 Gain from disposition of real estate             4,312          14,806         (10,494 )          (70.9 %)
Total discontinued operations                     3,492          16,391         (12,899 )          (78.7 %)

Net income                                       60,238          57,972           2,266              3.9 %
Net income attributable to
noncontrolling  interests                        (3,602 )        (1,343 )        (2,259 )          168.2 %
Net income attributable to common
shareholders                               $     56,636       $  56,629     $         7              0.0 %

Same Store and New Property Operations

We define our same store property portfolio as wholly-owned properties that were owned and/or operating for both of the entire periods being compared, and which are not conducting or planning to conduct substantial development or redevelopment activities or are classified as Held for Sale in accordance with generally accepted accounting principles.

Same store revenues are defined as revenues generated from our same store portfolio and consist of rental revenue earned from student leases as well as other income items such as utility income, damages, parking income, summer conference rent, application and administration fees, income from retail tenants, and income earned by one of our taxable REIT subsidiaries ("TRS") from ancillary activities such as the provision of food services.

Same store operating expenses are defined as operating expenses generated from our same store portfolio and include usual and customary expenses incurred to operate a property such as payroll, maintenance, utilities, marketing, general and administrative costs, insurance, property taxes, and bad debt. Same store operating expenses also include an allocation of payroll and other administrative costs related to corporate management and oversight.

                           Same Store Properties           New Properties (1)          Total - All Properties (1)
                                 Year Ended                    Year Ended                      Year Ended
                                December 31,                  December 31,                    December 31,
                             2012           2011           2012          2011             2012               2011
Number of properties               88            88             59             8                147               96
Number of beds                 52,632        52,632         35,457         5,679             88,089           58,311

Revenues (2)             $    344,447     $ 335,465     $  105,210     $  11,299     $      449,657       $  346,764
Operating expenses            159,986       157,084         50,321         6,773            210,307          163,857

(1) Does not include properties under construction as of December 31, 2012. Number of properties and number of beds also excludes properties undergoing redevelopment as of December 31, 2012, although the results of operations of those properties are included in revenues and operating expenses prior to commencement of redevelopment activities.

(2) Includes revenues which are reflected as resident services revenue on the accompanying consolidated statements of comprehensive income.

Same Store Properties. The increase in revenue from our same store properties was primarily due to an increase in average rental rates for the 2011/2012 and 2012/2013 academic years, offset by a slight decrease in average occupancy from ญญญ96.9% during the year ended December 31, 2011 to 96.5% during the year ended December 31, 2012. Future revenues will be dependent on our ability to maintain our current leases in effect for the 2012/2013 academic year and our ability to obtain appropriate rental rates and desired occupancy for the 2013/2014 academic year at our various properties during our leasing period, which typically begins in January and ends in August.

The increase in operating expenses for our same store properties was primarily due to inflationary increases in payroll and maintenance costs offset by a decrease in property taxes. We anticipate that operating expenses for our same store property portfolio for 2013 will increase slightly as compared with 2012 as a result of general inflation.

New Property Operations. Our new properties for the year ended December 31, 2012 consist of the following: (i) Campus Trails, a property that experienced significant property damage in April 2010 as a result of a fire in which 72 beds were destroyed and reopened for occupancy in August 2011; (ii) four owned development projects that opened for occupancy in August 2011; (iii) The Plaza on University (formerly referred to as University Shoppes - Orlando), acquired in July 2011 and currently undergoing redevelopment; (iv) Eagles Trail, acquired in September 2011, (v) U Club Townhomes on Woodward (formerly referred to as Studio Green), acquired in November 2011 and currently being redeveloped into a 448-bed townhome community scheduled to open for occupancy in August 2013; (vi) 26 West and The Varsity, both acquired in December 2011, (vii) University Heights- Knoxville, acquired from Fund II in January 2012, (viii) Avalon Heights, acquired in May 2012, (ix) University Commons, acquired in June 2012,
(x) The Block, acquired in August 2012, (xi) The Retreat, acquired in September 2012, (xii) 11 owned development projects that opened for occupancy in August and September 2012 (xiii) a 15-property student housing portfolio acquired in September 2012, (xiv) a 19-property student housing portfolio acquired in November 2012, and (xv) University Edge, a property previously subject to a pre-sale agreement that we acquired in December 2012.

On-Campus Participating Properties ("OCPP") Operations

We had four participating properties containing 4,519 beds which were operating during both years ended December 31, 2012 and 2011. Revenues from our participating properties increased to $26.2 million during the year ended December 31, 2012 from $25.3 million for the year ended December 31, 2011, an increase of $0.9 million. This increase was primarily a result of an increase in average rental rates for the 2011/2012 and 2012/2013 academic years, offset by a slight decrease in average occupancy from 78.3% for the year ended December 31, 2011 to 77.6% for the year ended December 31, 2012.

At these properties, operating expenses increased from $10.2 million for the years ended December 31, 2011 to $11.1 million for the year ended December 31, 2012, an increase of $0.9 million. This increase was primarily due to a utility refund of approximately $0.7 million received at one of the properties during the prior year. We anticipate that operating expenses in 2013 will increase slightly as compared with 2012 as a result of general inflation.

Third-Party Development Services Revenue

Third-party development services revenue increased by approximately $1.1 million, from $7.5 million during the year ended December 31, 2011 to $8.6 million for the year ended December 31, 2012. This increase was primarily due to the closing of financing and commencement of construction for the Southern Oregon University and College of Staten Island projects and the commencement of construction on the Lakeside Graduate Community at Princeton University during the year ended December 31, 2012. These new projects contributed an additional $4.6 million of revenue during that period. In addition, we recognized approximately $0.8 million of revenue during the year ended December 31, 2012 related to our participation in cost savings on the Northern Illinois University and Illinois State University projects. These increases were offset by the closing of bond financing and commencement of construction for the Illinois State and Northern Illinois University projects during the year ended December 31, 2011, which contributed an additional $2.5 million of revenue during that period. In addition, revenues of approximately $1.3 million were recognized during the year ended December 31, 2011 for the Edinboro Phase II and Cleveland State University Phase II projects, both of which completed construction and opened for occupancy in August 2011.

During the year ended December 31, 2012, we had seven projects in progress with an average contractual fee of approximately $2.4 million, as compared to the year ended December 31, 2011 in which we had six projects in progress with an average contractual fee of approximately $2.2 million. We anticipate that third-party development services revenue in 2013 will decrease significantly as compared to 2012 as a result of fewer currently outstanding awarded projects in this business segment.

Development services revenues are dependent on our ability to successfully be awarded such projects, the amount of the contractual fee related to the project and the timing and completion of the development and construction of the project. In addition, to the extent projects are completed under budget, we may be entitled to a portion of such savings, which are recognized as revenue when performance has been agreed upon by all parties, or when performance has been verified by an independent third-party. It is possible that projects for which we have deferred pre-development costs will not close and that we will not be reimbursed for such costs. The pre-development costs associated therewith will ordinarily be charged against income for the then-current period.

Third-Party Management Services Revenue

Third-party management services revenue decreased by approximately $0.4 million, from $7.3 million for the year ended December 31, 2011 to $6.9 million for the year ended December 31, 2012. This decrease was primarily a result of the discontinuation of a management contract during the prior year, for which we recognized a $0.3 million termination fee. We anticipate that revenue earned in 2013 from newly awarded management contracts will be offset by the discontinuance of other existing management contracts, resulting in 2013 third-party management revenue that is consistent with 2012 levels.

Third-Party Development and Management Services Expenses

Third party development and management services expenses decreased by approximately $0.5 million, from $11.4 million during the year ended December 31, 2011 to $10.9 million for the year ended December 31, 2012. This decrease was primarily a result of the growth in our wholly-owned property portfolio, as well as a lower number of newly awarded contracts in this business segment during 2012 as compared to the prior year. We anticipate that third-party development and management services expenses will continue to decrease in 2013 for these same reasons.

General and Administrative

General and administrative expenses increased by approximately $10.2 million, from $12.8 million during the year ended December 31, 2011 to $23.0 million for the year ended December 31, 2012. This increase was primarily a result of $7.4 million of acquisition-related costs such as broker fees, due diligence costs and legal and accounting fees incurred in 2012 in connection with our purchase of the Campus Acquisitions Portfolio in September 2012 and the Kayne Anderson Portfolio in November 2012. The remaining increase is a result of additional salary and benefits expense, public company costs and other general inflationary factors experienced during 2012. We anticipate that general and administrative expenses will decrease in 2013 as compared to 2012, primarily due to acquisition costs incurred in 2012 that are not expected to be incurred in 2013.

Depreciation and Amortization

Depreciation and amortization increased by approximately $29.7 million, from $86.2 million during the year ended December 31, 2011 to $115.9 million for the year ended December 31, 2012. This increase was a result of the following items:
(i) additional depreciation and amortization expense of approximately $22.4 . . .