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ACC > SEC Filings for ACC > Form 10-Q on 8-Aug-2014All Recent SEC Filings

Show all filings for AMERICAN CAMPUS COMMUNITIES INC

Form 10-Q for AMERICAN CAMPUS COMMUNITIES INC


8-Aug-2014

Quarterly Report


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, do not relate solely to historical matters and are intended to identify forward-looking statements. Such statements are subject to risks, uncertainties and assumptions and may be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. We caution you that forward-looking statements are not guarantees of future performance and will be impacted by actual events when they occur after we make such statements. We expressly disclaim any responsibility to update forward-looking statements, whether as a result of new information, future events or otherwise. Accordingly, investors should use caution in relying on past forward-looking statements, which are based on results and trends at the time they were made, to anticipate future results or trends.

Some of the risks and uncertainties that may cause our actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements include, among others, the following: general risks affecting the real estate industry; risks associated with changes in University admission or housing policies; risks associated with the availability and terms of financing and the use of debt to fund acquisitions and developments; failure to manage effectively our growth and expansion into new markets or to integrate acquisitions successfully; risks and uncertainties affecting property development and construction; risks associated with downturns in the national and local economies, volatility in capital and credit markets, increases in interest rates, and volatility in the securities markets; costs of compliance with the Americans with Disabilities Act and other similar laws; potential liability for uninsured losses and environmental contamination; risks associated with our Company's potential failure to qualify as a REIT under the Internal Revenue Code of 1986 (the "Code"), as amended, and possible adverse changes in tax and environmental laws; and the other factors discussed in the "Risk Factors" contained in Item 1A of our Form 10-K for the year ended December 31, 2013.

Our Company and Our Business

Overview

American Campus Communities, Inc. ("ACC") is a real estate investment trust ("REIT") that commenced operations effective with the completion of an initial public offering ("IPO") on August 17, 2004. Through ACC's controlling interest in American Campus Communities Operating Partnership, L.P. ("ACCOP"), ACC 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. ACC 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. ACC's common stock is publicly traded on the New York Stock Exchange ("NYSE") under the ticker symbol "ACC." References to the "Company," "we," "us" or "our" mean collectively ACC, ACCOP and those entities/subsidiaries owned or controlled by ACC and/or ACCOP. References to the "Operating Partnership" mean collectively ACCOP and those entities/subsidiaries owned or controlled by ACCOP. Unless otherwise indicated, the accompanying discussion applies to both the Company and the Operating Partnership.

Property Portfolio

As of June 30, 2014, our total owned property portfolio contained 168 properties, consisting of owned off-campus student housing properties that are in close proximity to colleges and universities, American Campus Equity ("ACEŽ") properties operated under ground/facility leases with university systems, on-campus participating properties operated under ground/facility leases with the related university systems, and one property containing a hotel which we plan to redevelop into a new student housing facility. Of the 168 properties, ten were under development as of June 30, 2014, and when completed will consist of a total of approximately 7,100 beds in approximately 2,100 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.


As of June 30, 2014, through ACC's taxable REIT subsidiary ("TRS") entities, we provided third-party management and leasing services for 33 properties, bringing our total owned and third-party managed portfolio to 201 properties. Third-party management and leasing services are typically provided pursuant to management contracts that have initial terms that range from one to five years. Below is a summary of our property portfolio as of June 30, 2014:

Property portfolio:                          Properties     Units      Beds
Wholly-owned operating properties:
Off-campus properties (1)                           139    25,780     79,327
On-campus ACE                                        15     3,610     11,735
Subtotal - operating properties                     154    29,390     91,062

Wholly-owned properties under development:
Off-campus properties (2)                             6     1,141      4,119
On-campus ACE                                         3       711      2,428
Subtotal - properties under development               9     1,852      6,547

Total wholly-owned properties                       163    31,242     97,609

On-campus participating properties:
Operating properties                                  4     1,863      4,519
Properties under development                          1       224        567
Total on-campus participating properties              5     2,087      5,086

Total owned property portfolio                      168    33,329    102,695

Managed properties                                   33    10,281     25,760
Total property portfolio                            201    43,610    128,455

(1) Includes a hotel we acquired in January 2014 that is being operated by the seller until the fourth quarter 2014 or first quarter 2015, at which time the hotel will be demolished and construction on a new student housing facility will commence. This property currently has no units or beds included in the totals above.

(2) Includes University Walk, a 177-unit, 526-bed property we did not own as of June 30, 2014, but are obligated to purchase as long as the developer meets certain construction completion deadlines and other closing conditions. The development of the property is anticipated to be completed in August 2014.

Owned development activity

In June 2014, we completed the final stages of construction on Merwick Stanworth Phase I, an on-campus ACE property located in Princeton, New Jersey, which contains 214 beds in 127 units and primarily serves faculty and staff members of Princeton University. Total development costs incurred for this project were approximately $34.3 million.

Projects under construction: At June 30, 2014, we were in the process of constructing three on-campus ACE properties, five owned off-campus properties and one on-campus participating property. In addition, a third-party developer was in the process of constructing an off-campus property located in Knoxville, Tennessee (University Walk) that we did not own as of June 30, 2014, but are obligated to purchase as long as the developer meets certain construction completion deadlines and other closing conditions. These properties are summarized in the table below:


                                                                                                                      Scheduled
                                                   Primary                                                             to Open
                                                  University                           Estimated       Total Costs       for
   Project        Project Type     Location         Served       Units     Beds      Project Cost       Incurred      Occupancy
The Plaza on      Off-campus     Orlando, FL     University       364     1,313     $     112,300     $    95,560       August
University                                       of Central                                                              2014
                                                 Florida
U Club on Frey    Off-campus     Kennesaw, GA    Kennesaw         102       408            25,300          22,582       August
Phase II                                         State                                                                   2014
                                                 University
U Centre at           ACE        College         Texas A&M        196       784            37,500          31,934       August
Northgate                        Station, TX     University                                                              2014
The Suites            ACE        Flagstaff, AZ   Northern         164       328            19,300          12,679       August
Phase II                                         Arizona                                                                 2014
                                                 University
University         Pre-sale      Knoxville, TN   University       177       526            32,300          25,255       August
Walk (1)                                         of Tennessee                                                            2014
West Virginia      On-campus     Morgantown,     West             224       567            44,200          38,251       August
University       participating   WV              Virginia                                                                2014
Project (2)                                      University
                                   SUBTOTAL - 2014 DELIVERIES   1,227     3,926     $     270,900     $   226,261

Lancaster             ACE        Philadelphia,   Drexel           351     1,316     $     170,700     $    46,871     September
Project                          PA              University                                                              2015
2125 Franklin     Off-campus     Eugene, OR      University       192       734            64,600          24,007     September
                                                 of Oregon                                                               2015
160 Ross          Off-campus     Auburn, AL      Auburn           182       642            41,300          11,051       August
                                                 University                                                              2015
U Club on         Off-campus     Tallahassee,    Florida          124       496            37,100          11,460       August
Woodward Phase                   FL              State                                                                   2015
II                                               University


SUBTOTAL - 2015 DELIVERIES 849 3,188 $ 313,700 $ 93,389

TOTAL - ALL PROJECTS 2,076 7,114 $ 584,600 $ 319,650

(1) We did not own this property as of June 30, 2014 but are obligated to purchase the property as long as the developer meets certain construction completion deadlines and other closing conditions.

(2) In July 2013, we entered into long-term ground and facility leases with the University to finance, construct and manage this on-campus participating property. Under the terms of the leases, title to the constructed facility will be held by the University/lessor and the University will receive 50% of defined net cash flows on an annual basis through the term of the leases.

Acquisitions

As discussed in more detail in Note 3 in the accompanying Notes to Consolidated Financial Statements contained in Item 1, during the six months ended June 30, 2014, we acquired one property containing an existing hotel that we plan to redevelop into a student housing community.

Third-Party Development Services

Through ACC's TRS entities, we provide development and construction management services for student housing properties owned by colleges and universities, charitable foundations and others. As of June 30, 2014, we were under contract on a total of two third-party development projects that are currently in progress and whose fees range from $2.1 million to $3.2 million. As of June 30, 2014, fees of approximately $1.6 million remained to be earned by us with respect to these projects, which have scheduled completion dates ranging from August 2014 through August 2015.

As of June 30, 2014, we were also under contract on one on-campus participating property that is currently in progress with fees of $2.4 million and a scheduled completion date of August 2014. Due to our involvement in the construction of this on-campus participating property, development and construction management fees paid during the construction period are deferred and amortized to income over the term of the ground lease.


Results of Operations

Comparison of the Three Months Ended June 30, 2014 and June 30, 2013

The following table presents our results of operations for the three months
ended June 30, 2014 and 2013, including the amount and percentage change in
these results between the two periods.
                                       Three Months Ended June 30,
                                         2014               2013           Change ($)      Change (%)
Revenues
Wholly-owned properties            $     163,056       $     145,598     $     17,458           12.0  %
On-campus participating
properties                                 4,735               4,703               32            0.7  %
Third-party development services           1,581                 555            1,026          184.9  %
Third-party management services            1,997               1,924               73            3.8  %
Resident services                            608                 432              176           40.7  %
Total revenues                           171,977             153,212           18,765           12.2  %

Operating expenses
Wholly-owned properties                   76,034              68,922            7,112           10.3  %
On-campus participating
properties                                 2,780               2,929             (149 )         (5.1 )%
 Third-party development and
management services                        2,720               2,422              298           12.3  %
General and administrative                 4,978               4,626              352            7.6  %
Depreciation and amortization             48,450              47,153            1,297            2.8  %
Ground/facility leases                     1,582               1,160              422           36.4  %
Total operating expenses                 136,544             127,212            9,332            7.3  %

Operating income                          35,433              26,000            9,433           36.3  %

Nonoperating income and
(expenses)
Interest income                            1,037                 947               90            9.5  %
Interest expense                         (20,989 )           (19,369 )         (1,620 )          8.4  %
Amortization of deferred
financing costs                           (1,461 )            (1,413 )            (48 )          3.4  %
Total nonoperating expenses              (21,413 )           (19,835 )         (1,578 )          8.0  %
Income before income taxes and
discontinued operations                   14,020               6,165            7,855          127.4  %
Income tax provision                        (289 )              (255 )            (34 )         13.3  %
Income from continuing
operations                                13,731               5,910            7,821          132.3  %
Income attributable to
discontinued operations                        -               2,756           (2,756 )       (100.0 )%

Net income                                13,731               8,666            5,065           58.4  %
Net income attributable to
noncontrolling interests
Redeemable noncontrolling
interests                                   (205 )              (134 )            (71 )         53.0  %
Partially owned properties                   (88 )              (483 )            395          (81.8 )%
Net income attributable to
noncontrolling interests                    (293 )              (617 )            324          (52.5 )%
Net income attributable to
common shareholders                $      13,438       $       8,049     $      5,389           67.0  %

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.

A reconciliation of our same store and new property operations to our consolidated statements of comprehensive income is set forth below:

                              Same Store Properties                 New Properties (1)                 Total - All Properties
                           Three Months Ended June 30,          Three Months Ended June 30,          Three Months Ended June 30,
                               2014               2013              2014              2013               2014               2013
Number of properties               140               140                   14              -                154                140
Number of beds                  83,537            83,537                7,525              -             91,062             83,537

Revenues (2)           $       146,831        $  145,675     $         16,833     $      355     $      163,664         $  146,030
Operating expenses              68,281            68,874                7,753             48             76,034             68,922

(1) Does not include properties under construction as of June 30, 2014. Number of properties and number of beds also excludes properties undergoing redevelopment as of June 30, 2014, 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 due to an increase in average rental rates for the 2013/2014 academic year and an increase in average occupancy from 92.5% during the three months ended June 30, 2013 to 93.3% during the three months ended June 30, 2014. Future revenues will be dependent on our ability to maintain our current leases in effect for the 2013/2014 academic year and our ability to obtain appropriate rental rates and desired occupancy for the 2014/2015 academic year at our various properties.

The decrease in operating expenses for our same store properties was primarily a result of reductions in most major operating expense categories, including a 34.3% decrease in marketing expense as a result of expense control efforts and improved leasing progress for the upcoming academic year, offset by an increase in utility costs associated with an unusually cold winter as well as an increase in property taxes. We anticipate that operating expenses for our same store property portfolio for 2014 will increase slightly as compared with 2013 as a result of general inflation.

New Property Operations. Our new properties for the three months ended June 30, 2014 consist of the following: (i) 7th Street Station, acquired in July 2013,
(ii) The Lodges of East Lansing Phase II, an additional phase at an existing property previously subject to a pre-sale agreement that we acquired in July 2013, (iii) Townhomes at Newtown Crossing, a property previously subject to a pre-sale agreement that we acquired in September 2013, (iv) seven owned development projects that opened for occupancy in August and September 2013, (v) Park Point, acquired in October 2013, (vi) U Centre at Fry Street and Cardinal Towne, both acquired in November 2013, (vii) Boulder Outlook Hotel, acquired in January 2014, and (viii) Merwick Stanworth Phase I, an owned development project that opened for occupancy in June 2014.


Third-Party Development Services Revenue

Third-party development services revenue increased by approximately $1.0 million, from $0.6 million during the three months ended June 30, 2013 to $1.6 million for the three months ended June 30, 2014. This increase was primarily due to the closing of bond financing and commencement of construction in June 2014 on a third-party on-campus development project containing 492 beds at the University of Toledo, resulting in $1.1 million of revenue recognized during three months ended June 30, 2014. During the three months ended June 30, 2014, we had two projects in progress with an average contractual fee of approximately $2.7 million, as compared to the three months ended June 30, 2013 in which we had three projects in progress with an average contractual fee of approximately $2.7 million.

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 Development and Management Services Expenses

Third-party development and management services expenses increased by approximately $0.3 million, from $2.4 million during the three months ended June 30, 2013 to $2.7 million for the three months ended June 30, 2014. This increase was primarily a result of payroll and benefits, branding initiatives and general inflation. We anticipate that third-party development and management services expenses will increase in 2014 as a result of the timing of new management contracts awarded in 2013 along with expected contracts to be awarded in 2014, as well as general inflation.

General and Administrative

General and administrative expenses increased by approximately $0.4 million, from $4.6 million during the three months ended June 30, 2013 to $5.0 million for the three months ended June 30, 2014. This increase was primarily due to additional salary, health care and benefits expense, public company costs and other general inflationary factors.

Depreciation and Amortization

Depreciation and amortization increased by approximately $1.3 million, from $47.1 million during the three months ended June 30, 2013 to $48.4 million for the three months ended June 30, 2014. This increase was primarily a result of additional depreciation and amortization expense of approximately $3.0 million recorded during the three months ended June 30, 2014 related to properties acquired during 2013 and 2014. In addition, the completion of construction and opening of seven owned development properties in August and September 2013 and one owned development property in June 2014 contributed an additional $3.4 million of depreciation and amortization expense during the three months ended June 30, 2014. These increases were offset by a decrease in the amortization of in-place leases of approximately $5.1 million related to the purchase of 40 properties in 2012. The value assigned to in-place leases upon acquisition of these properties was fully amortized by the end of 2013. We expect depreciation and amortization expense to increase in 2014 for the reasons discussed above, as well as the anticipated completion of four owned development projects in August 2014, the completion of one on-campus participating property in August 2014, and the anticipated purchase of a property in August 2014 which is subject to a pre-sale arrangement.

Ground/Facility Leases

Ground/facility leases expense increased by approximately $0.4 million, from $1.2 million during the three months ended June 30, 2013 to $1.6 million for the three months ended June 30, 2014. This increase was primarily due to the timing of ACE development projects placed into service during 2013. We anticipate ground/facility leases expense to increase in 2014 as compared to 2013 for the reason discussed above as well as the recently completed ACE development project placed into service in June 2014 and the planned completion of construction and commencement of operations of two ACE development projects and one on-campus participating property in August 2014.

Interest Expense

Interest expense increased by approximately $1.6 million, from $19.4 million during the three months ended June 30, 2013 to $21.0 million for the three months ended June 30, 2014. In December 2013, we borrowed $250 million under a new term loan facility ("Term Loan II Facility") which resulted in approximately $1.0 million of additional interest expense for the three months


ended June 30, 2014. Interest expense increased by approximately $0.9 million as a result of a decrease in capitalized interest due to the timing and volume of . . .

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