Form 10-Q


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

FORM 10-Q

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

For the quarterly period ended September 30, 2006.   

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

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

There were 22,903,073 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, 2006.
 



 
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2006

TABLE OF CONTENTS

 
PAGE
NO.
     
PART I.
   
     
Item 1.
Consolidated Financial Statements
 
     
 
1
 
 
 
 
2
     
 
3
 
 
 
 
4
 
 
 
 
5
 
 
 
17
     
34
   
 
34
     
PART II.
   
     
34
 
 
35
 

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


   
September 30, 2006
 
December 31, 2005
 
   
(Unaudited)
     
Assets
         
           
Investments in real estate:
         
Owned off-campus properties, net
 
$
684,160
 
$
384,758
 
Owned off-campus property-held for sale
   
31,851
   
32,340
 
On-campus participating properties, net
   
77,633
   
80,370
 
Investments in real estate, net
   
793,644
   
497,468
 
               
Cash and cash equivalents
   
32,245
   
24,641
 
Restricted cash
   
12,681
   
9,502
 
Student contracts receivable, net
   
3,028
   
2,610
 
Other assets
   
22,831
   
16,641
 
               
Total assets
 
$
864,429
 
$
550,862
 
               
Liabilities and stockholders’ equity
             
               
Liabilities:
             
Secured debt
 
$
425,421
 
$
291,646
 
Accounts payable and accrued expenses
   
16,133
   
7,983
 
Other liabilities
   
30,288
   
25,155
 
Total liabilities
   
471,842
   
324,784
 
               
Minority interests
   
38,176
   
2,851
 
               
Commitments and contingencies (Note 11)
             
               
Stockholders’ equity:
             
Common shares, $.01 par value, 800,000,000 shares authorized, 22,900,073 and 17,190,00 shares issued and outstanding at
             
September 30, 2006 and December 31, 2005, respectively
   
229
   
172
 
Additional paid in capital
   
382,115
   
233,388
 
Accumulated earnings and distributions
   
(28,374
)
 
(10,817
)
Accumulated other comprehensive income
   
441
   
484
 
Total stockholders’ equity
   
354,411
   
223,227
 
               
Total liabilities and stockholders’ equity
 
$
864,429
 
$
550,862
 
 

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,
 
   
2006
 
2005
 
2006
 
2005
 
Revenues:
                 
Owned off-campus properties
 
$
24,340
 
$
14,155
 
$
64,687
 
$
38,814
 
On-campus participating properties
   
3,971
   
3,637
   
13,450
   
12,263
 
Third party development services
   
1,693
   
1,979
   
4,355
   
3,882
 
Third party development services - on-campus participating properties
   
36
   
38
   
108
   
112
 
Third party management services
   
491
   
783
   
1,844
   
2,055
 
Resident services
   
328
   
256
   
993
   
676
 
Total revenues
   
30,859
   
20,848
   
85,437
   
57,802
 
                           
Operating expenses:
                         
Owned off-campus properties
   
13,178
   
7,696
   
31,710
   
18,876
 
On-campus participating properties
   
2,455
   
2,173
   
6,660
   
6,034
 
Third party development and management services
   
1,338
   
1,609
   
4,402
   
4,646
 
General and administrative
   
1,468
   
1,534
   
4,879
   
4,823
 
Depreciation and amortization
   
6,735
   
4,015
   
18,672
   
11,384
 
Ground/facility leases
   
238
   
245
   
676
   
697
 
Total operating expenses
   
25,412
   
17,272
   
66,999
   
46,460
 
                           
Operating income
   
5,447
   
3,576
   
18,438
   
11,342
 
                           
Nonoperating income and (expenses):
                         
Interest income
   
294
   
396
   
623
   
498
 
Interest expense
   
(7,445
)
 
(4,319
)
 
(19,847
)
 
(12,761
)
Amortization of deferred financing costs
   
(334
)
 
(318
)
 
(1,078
)
 
(840
)
Other nonoperating income
   
-
   
-
   
-
   
430
 
Total nonoperating expenses
   
(7,485
)
 
(4,241
)
 
(20,302
)
 
(12,673
)
                           
Loss before income taxes, minority interests, and discontinued operations
   
(2,038
)
 
(665
)
 
(1,864
)
 
(1,331
)
Income tax provision
   
-
   
(6
)
 
-
   
(6
)
Minority interests
   
149
   
(10
)
 
202
   
(85
)
Loss from continuing operations
   
(1,889
)
 
(681
)
 
(1,662
)
 
(1,422
)
                           
Discontinued operations:
                         
Income attributable to discontinued operations
   
278
   
85
   
1,648
   
1,343
 
Gain from disposition of real estate
   
-
   
-
   
-
   
5,883
 
Total discontinued operations
   
278
   
85
   
1,648
   
7,226
 
Net (loss) income
 
$
(1,611
)
$
(596
)
$
(14
)
$
5,804
 
                           
(Loss) income per share - basic:
                         
Loss from continuing operations per share
 
$
(0.10
)
$
(0.04
)
$
(0.09
)
$
(0.10
)
Net (loss) income per share
 
$
(0.09
)
$
(0.04
)
$
-
 
$
0.41
 
(Loss) income per share - diluted:
                         
Loss from continuing operations per share
 
$
(0.10
)
$
(0.04
)
$
(0.10
)
$
(0.09
)
Net (loss) income per share
 
$
(0.09
)
$
(0.03
)
$
(0.02
)
$
0.41
 
                           
Weighted average common shares outstanding:
                         
Basic
   
18,218,128
   
17,005,462
   
17,553,627
   
14,100,631
 
Diluted
   
20,535,276
   
17,126,462
   
19,397,571
   
14,221,631
 
                           
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, 
 
   
2006 
 
2005
 
Net (loss) income
 
$
(14
) 
$
5,804
 
 
Other comprehensive income:
             
Change in fair value of interest rate swap
   
(43
)  
362
 
Net comprehensive (loss) income
 
$
  (57
)
$
6,166
 

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,
 
   
2006
 
2005
 
Operating activities
         
Net (loss) income
 
$
(14
)
$
5,804
 
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
             
Gain from disposition of real estate
   
-
   
(5,883
)
Minority interests share of (loss) income
   
(202
)
 
85
 
Depreciation and amortization
   
19,305
   
12,143
 
Amortization of deferred financing costs and debt premiums/discounts
   
98
   
329
 
Share-based compensation
   
568
   
323
 
Income tax provision
   
-
   
6
 
Changes in operating assets and liabilities:
             
Restricted cash
   
(1,283
)
 
1,848
 
Student contracts receivable, net
   
(418
)
 
(120
)
Other assets
   
(5,697
)
 
(1,767
)
Accounts payable and accrued expenses
   
6,517
   
2,777
 
Other liabilities
   
467
   
401
 
Net cash provided by operating activities
   
19,341
   
15,946
 
Investing activities
             
Net proceeds from disposition of real estate
   
-
   
28,023
 
Cash paid for property acquisitions
   
(69,633
)
 
(72,763
)
Investments in owned off-campus properties
   
(66,209
)
 
(39,032
)
Investments in on-campus participating properties
   
(395
)
 
(16,280
)
Purchase of corporate furniture, fixtures and equipment
   
(442
)
 
(520
)
Net cash used in investing activities
   
(136,679
)
 
(100,572
)
Financing activities
             
Proceeds from sale of common stock
   
140,036
   
102,938
 
Offering costs
   
(6,755
)
 
(6,251
)
Paydowns of revolving credit facility, net of proceeds
   
-
   
(11,800
)
Proceeds from construction loans
   
33,541
   
15,135
 
Paydown of construction loan
   
(20,224
)
 
-
 
Proceeds from bridge/mortgage loan
   
-
   
38,800
 
Principal payments on debt
   
(5,153
)
 
(3,120
)
Change in construction accounts payable
   
4,184
   
694
 
Debt issuance and assumption costs
   
(1,823
)
 
(2,082
)
Distributions to common and restricted stockholders
   
(17,524
)
 
(14,383
)
Distributions to Predecessor owners
   
-
   
(1,671
)
Distributions to minority partners
   
(1,340
)
 
(123
)
Net cash provided by financing activities
   
124,942
   
118,137
 
Net change in cash and cash equivalents
   
7,604
   
33,511
 
Cash and cash equivalents at beginning of period
   
24,641
   
4,050
 
Cash and cash equivalents at end of period
 
$
32,245
 
$
37,561
 
Supplemental disclosure of non-cash investing and financing activities
             
Loans assumed in connection with property acquisitions
 
$
(123,649
)
$
(47,169
)
Issuance of Common Units in connection with property acquisitions
 
$
(49,096
)
$
-
 
Issuance of Preferred Units in connection with property acquisitions
 
$
(3,075
)
$
-
 
Change in fair value of derivative instruments, net
 
$
(43
)
$
362
 
Supplemental disclosure of cash flow information
             
Interest paid
 
$
21,771
 
$
14,282
 
 
See accompanying notes to consolidated financial statements.
 
4

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

1.     Organization and Description of Business  

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

On September 15, 2006, the Company completed an equity offering, consisting of the sale of 5,692,500 shares of the Company’s common stock at a price per share of $24.60, including the exercise of 742,500 shares issued as a result of the exercise of the underwriters’ overallotment option in full at closing. The offering generated gross proceeds of approximately $140.0 million. The aggregate proceeds to the Company, net of the underwriter’s discount and offering costs, were approximately $133.0 million.

As of September 30, 2006, the Company’s property portfolio contained 38 student housing properties with approximately 22,700 beds and approximately 7,400 apartment units, consisting of 34 owned off-campus properties that are in close proximity to colleges and universities and four on-campus participating properties operated under ground/facility leases with the related university systems. These communities contain modern housing units, offer resort-style amenities and are supported by a resident assistant system and other student-oriented programming.

Through the TRS, the Company also provides construction management and development services for student housing properties owned by colleges and universities, charitable foundations, and others. As of September 30, 2006, the Company provided third party management and leasing services for 15 student housing properties (9 of which the Company served as the third party developer and construction manager) that represented approximately 9,300 beds in approximately 3,200 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, 2006, the Company’s total owned and managed portfolio included 53 properties with approximately 32,000 beds in approximately 10,600 units.

2.   Summary of Significant Accounting Policies

Principles of Consolidation and Combination

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

Recent Accounting Pronouncements

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

In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company does not expect its adoption to have a material impact on the Company’s consolidated financial statements.
 
5

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

Interim Financial Statements

The accompanying interim financial statements are unaudited, but have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all disclosures required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting solely of normal recurring matters) necessary for a fair presentation of the financial statements for these interim periods have been included. Because of the seasonal nature of the Company’s operations, the results of operations and cash flows for any interim period are not necessarily indicative of results for other interim periods or for the full year. These financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

Use of Estimates

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

Investments in Real Estate 

Investments in real estate are recorded at historical cost. Major improvements that extend the life of an asset are capitalized and depreciated over the remaining useful life of the asset. The cost of ordinary repairs and maintenance is charged to expense when incurred. Depreciation and amortization are recorded on a straight-line basis over the estimated useful lives of the assets as follows:
 
Buildings and improvements
 
7-40 years
Leasehold interest - on-campus participating properties
 
25-34 years (shorter of useful life or respective lease term)
Furniture, fixtures and equipment
 
3-7 years
 
The cost of buildings and improvements includes the purchase price of the property, including legal fees and acquisition costs. Project costs directly associated with the development and construction of an owned real estate project, which include interest, property taxes, and amortization of deferred finance costs, are capitalized as construction in progress. Upon completion of the project, costs are transferred into the applicable asset category and depreciation commences. Interest totaling approximately $0.6 million was capitalized during both the three month periods ended September 30, 2006 and 2005, respectively, and $1.7 million and $1.4 million was capitalized during the nine months ended September 30, 2006 and 2005, respectively. Amortization of deferred financing costs totaling approximately $0.1 million and $38,000 was capitalized during the three months ended September 30, 2006 and 2005, respectively, and approximately 0.1 million was capitalized during both the nine month periods ended September 30, 2006 and 2005.

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, 2006.
 
6


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

Long-lived assets to be disposed of are classified as held for sale in the period in which all of the following criteria are met:

a.   Management, having the authority to approve the action, commits to a plan to sell the asset

b.   The asset is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets

c.   An active program to locate a buyer and other actions required to complete the plan to sell the asset have been initiated

d.   The sale of the asset is probable, and transfer of the asset is expected to qualify for recognition as a completed sale, within one year

e.   The asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value

f.        Actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.

Concurrent with this classification, the asset is recorded at the lower of cost or fair value, and depreciation ceases.

Intangible Assets

In connection with property acquisitions completed during the nine months ended September 30, 2006 and 2005, the Company capitalized approximately $2.3 million and $1.1 million, respectively, related to management’s estimate of the fair value of the in-place leases assumed. These intangible assets are amortized on a straight-line basis over a term of approximately six months, which represents the average remaining term of the underlying leases. The amortization is included in depreciation expense in the accompanying consolidated statements of operations. See Note 3 for a detailed discussion of the property acquisitions completed during the nine months ended September 30, 2006.

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, 2006 and December 31, 2005, net unamortized debt premiums were $6.8 million and $4.4 million,  respectively,  and net unamortized debt discounts were  $0.5 million  and  $-0-, 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 Costs

Costs associated with the pursuit of third party development and construction management contracts are expensed as incurred, until such time that management believes it is probable the contract will be executed. To the extent such costs will be reimbursed from a third party, those costs are capitalized and included in other assets on the accompanying consolidated balance sheets. If the costs will not be reimbursed, they are deferred and recognized in relation to the revenues earned on executed contracts. Management evaluates the status of awarded projects on a periodic basis and expenses any deferred costs related to projects whose current status indicates 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 on the accompanying consolidated statements of operations. As of September 30, 2006, the Company has deferred approximately $3.8 million in pre-development costs related to awarded projects that have not yet commenced construction. Such costs are included in other assets in the accompanying consolidated balance sheets.

Stock-Based Compensation

The Company accounts for equity based awards in accordance with SFAS No. 123 (R), Share-Based Payment. Accordingly, the Company has recognized compensation expense related to certain restricted stock grants (see Note 9) over the underlying vesting periods of approximately $0.2 million and $0.1 million during the three months ended September 30, 2006 and 2005, respectively, and $0.6 million and $0.3 million during the nine months ended September 30, 2006 and 2005, respectively.

Income Taxes

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

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

Other Nonoperating Income

Other nonoperating income of approximately $0.4 million for the nine months ended September 30, 2005 consists of a gain recognized related to insurance proceeds received for a fire that occurred at one of the Company’s owned off-campus properties in 2003.

Income Per Share

Basic income per share is computed using net income and the weighted average number of shares of the Company’s common stock outstanding during the period, including restricted stock units (“RSUs”) issued to outside directors. RSUs are included in both basic and diluted weighted average common shares outstanding because they were fully vested on the date of grant and all conditions required in order for the recipients to earn the RSUs have been satisfied. Diluted income per share reflects weighted average common shares issuable from the assumed conversion of unvested 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 and Note 9 for a discussion of RSAs.
 
8


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

The following is a summary of the elements used in calculating basic and diluted income per share:
 
   
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
   
2006
 
2005
 
2006
 
2005
 
Basic net (loss) income per share calculation:
                 
Loss from continuing operations
 
$
(1,889
)
$
(681
)
$
(1,662
)
$
(1,422
)
Discontinued operations
   
278
   
85
   
1,648
   
7,226
 
Net (loss) income
 
$
(1,611
)
$
(596
)
$
(14
)
$
5,804
 
                           
Loss from continuing operations - per share
 
$
(0.10
)
$
(0.04
)
$
(0.09
)
$
(0.10
)
Income from discontinued operations - per share
 
$
0.01
 
$
-
 
$
0.09
 
$
0.51
 
Net (loss) income - per share
 
$
(0.09
)
$
(0.04
)
$
-
 
$
0.41
 
                           
Basic weighted average common shares outstanding
   
18,218,128
   
17,005,462
   
17,553,627
   
14,100,631
 
                           
Diluted net (loss) income per share calculation:
                         
Loss from continuing operations
 
$
(1,889
)
$
(681
)
$
(1,662
)
$
(1,422
)
Series A Preferred Unit distributions
   
46
   
-
   
107
   
-
 
(Loss) income allocated to Common Units
   
(227
)
 
(1
)
 
(416
)
 
74
 
Loss from continuing operations, as adjusted
   
(2,070
)
 
(682
)
 
(1,971
)
 
(1,348
)
Discontinued operations
   
278
   
85
   
1,648
   
7,226
 
Net (loss) income, as adjusted
 
$
(1,792
)
$
(597
)
$
(323
)
$
5,878
 
                           
Loss from continuing operations - per share
 
$
(0.10
)
$
(0.04
)
$
(0.10
)
$
(0.09
)
Income from discontinued operations - per share
 
$
0.01
 
$
0.01
 
$
0.08
 
$
0.50
 
Net (loss) income - per share
 
$
(0.09
)
$
(0.03
)
$
(0.02
)
$
0.41
 
                           
Basic weighted average common shares outstanding
   
18,218,128
   
17,005,462
   
17,553,627
   
14,100,631
 
Common Units
   
2,202,185
   
121,000
   
1,753,826
   
121,000
 
Series A Preferred Units
   
114,963
   
-
   
90,118
   
-
 
Diluted weighted average common shares outstanding (1) 
   
20,535,276
   
17,126,462
   
19,397,571
   
14,221,631
 

(1)
Weighted average restricted stock awards are excluded from diluted weighted average common shares outstanding for the three and nine months ended September 30, 2006 and 2005 because they would be anti-dilutive due to the Company’s loss position for these periods.
 
3. Property Acquisitions

On March 1, 2006, the Company completed the acquisition of a portfolio of 13 student housing properties (the “Royal Portfolio”) pursuant to a contribution and sale agreement with contributors affiliated with Royal Properties for a contribution value of $244.3 million, which was paid as follows: (i) the issuance to certain partners of the contributors of approximately 2.1 million Common Units valued at $23.50 per unit and approximately 0.1 million Series A Preferred Units valued at $26.75 per unit (See Note 7); (ii) the assumption of $123.6 million of fixed-rate mortgage debt (see Note 8); and (iii) the remainder in cash and promissory notes. As of September 30, 2006, as anticipated, the Company has incurred an additional $4.9 million in closing costs and other external acquisition costs related to this acquisition.

The Company retained approximately $6.9 million of the contribution value, which will be utilized to satisfy indemnification obligations that may arise during a one-year survival period, with any remaining amounts to be paid to the contributors upon expiration of such one-year survival period. The retained amount is composed of Common Units, Series A Preferred Units, cash, and secured promissory notes of approximately $1.9 million, payable on February 28, 2007 together with accrued interest at 4.39% per annum.

The Royal Portfolio consists of five properties in Florida, four properties in Texas, two properties in Tennessee, and one property each in Arizona and Kentucky. The 13 properties contain approximately 1,800 units and approximately 5,700 beds.
 
9


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 the acquisition date. The following pro forma information for the three and nine months ended September 30, 2006 and 2005 presents consolidated information for the Company as if the property acquisitions discussed above, the 2005 acquisitions and the July 2005 and September 2006 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,
 
   
2006
 
2005
 
2006
 
2005
 
Total revenues
 
$
30,859
 
$
28,110
 
$
90,546
 
$
80,211
 
Net (loss) income
 
$
(1,101
)
$
(1,851
)
$
1,673
 
$
1,782
 
Net (loss) income per share - basic
 
$
(0.05
)
$
(0.08
)
$
0.07
 
$
0.08
 
Net (loss) income per share - diluted
 
$
(0.05
)
$
(0.07
)
$
0.05
 
$
0.07
 

4. Property Disposition and Discontinued Operations

In November 2004, California State University - San Bernardino exercised its option to purchase from the Company the University Village at San Bernardino off-campus student housing property for an aggregate purchase price of approximately $28.3 million. This transaction was consummated in January 2005, resulting in net proceeds of approximately $28.1 million. The resulting gain on disposition of approximately $5.9 million is included in discontinued operations in the accompanying consolidated statement of operations for the nine months ended September 30, 2005.

In August 2006, in accordance with the provisions of Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”), management classified The Village on University as Owned Off Campus Property - Held for Sale. The disposition of this property is expected to be consummated in the fourth quarter of 2006.
 
The related net income or loss of the aforementioned properties is reflected in the accompanying consolidated statements of operations as discontinued operations for the periods presented in accordance with SFAS 144. Below is a summary of the results of operations of University Village - San Bernardino through its disposition date as well as the results of operations of The Village on University for all periods presented:

   
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
   
2006
 
2005
 
2006
 
2005
 
Total revenues
 
$
991
 
$
1,029
 
$
3,739
 
$
3,652
 
Total operating expenses
   
(716
)
 
(944
)
 
(2,094
)
 
(2,309
)
Operating income
   
275
   
85
   
1,645
   
1,343
 
Total nonoperating income
   
3
   
-
   
3
   
-
 
Net income
 
$
278
 
$
85
 
$
1,648
 
$
1,343
 

5. Investments in Owned Off-Campus Properties

Owned off-campus properties consisted of the following:

   
September 30, 2006
 
December 31, 2005
Land
 
$
75,270
 
$
46,510
   
Buildings and improvements
   
577,906
   
330,380
   
Furniture, fixtures and equipment
   
28,850
   
17,119
   
Construction in progress
   
43,184
   
18,962
   
 
   
725,210
   
412,971
   
Less accumulated depreciation
   
(41,050
)
 
(28,213
)
 
Owned off-campus properties, net
 
$
684,160
 
$
384,758
   
 
10


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

 6. On-Campus Participating Properties

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

Pursuant to the Leases, in the event the leasehold estates do not achieve Financial Break Even (defined as revenues less operating expenses, excluding management fees, less debt service), the applicable Lessor would be required to make a rental payment, also known as the Contingent Payment, sufficient to achieve Financial Break Even. The Contingent Payment provision remains in effect until such time as any financing placed on the facilities would receive an investment grade rating without the Contingent Payment provision. In the event that the Lessor is required to make a Contingent Payment, future net cash flow distributions would be first applied to repay such Contingent Payments and then to unpaid management fees prior to normal distributions. Beginning in November 1999 and December 2002, as a result of the debt financing on the facilities achieving investment grade ratings without the Contingent Payment provision, the Texas A&M University System is no longer required to make Contingent Payments under either the Prairie View A&M University Village or University College Leases. In August 2006, Texas A&M International University made a Contingent Payment to achieve Financial Break Even under the Texas A&M International University Lease. 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, 2006
 
December 31, 2005
 
Texas A&M University System /
Prairie View A&M University (2)
   
2/1/96
   
9/1/23
 
$
38,229
 
$
38,037
 
Texas A&M University System /
Texas A&M International
   
2/1/96
   
9/1/23
   
5,994
   
5,920
 
Texas A&M University System /
Prairie View A&M University (3)
   
10/1/99
   
8/31/25 / 8/31/28
   
23,862
   
23,777
 
University of Houston System /
University of Houston (4)
   
9/27/00
   
8/31/35
   
34,599
   
34,603
 
 
             
102,684
   
102,337
 
Less accumulated amortization
               
(25,051
)
 
(21,967
)
On-campus participating properties, net
             
$
77,633
 
$
80,370
 

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


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

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

Equity interests in the Operating Partnership not owned by the Company are held in the form of Common Units and Series A Preferred Units. On March 1, 2006, approximately 2.1 million Common Units valued at $23.50 per unit and approximately 0.1 million Series A Preferred Units valued at $26.75 per unit were issued to individuals and entities affiliated with Royal Properties in connection with the acquisition of the Royal Portfolio (see Note 3). Such Common Units and Series A Preferred Units are exchangeable on or after March 1, 2007 into an equal number of shares of the Company’s common stock, or, at the Company’s election, cash. A Common Unit and a share of the Company’s common stock have essentially the same economic characteristics, as they effectively participate equally in the net income and distributions of the Operating Partnership. Series A Preferred Units have a cumulative preferential per annum cash distribution rate of 5.99%, payable quarterly concurrently with the payment of dividends on the Company’s common stock.

Income or loss allocated to minority interests on the Company’s consolidated statements of operations includes the Series A Preferred Unit distributions as well as the pro rata share of the Operating Partnership’s net income or loss allocated to Common Units. The Common Unitholders’ minority interest in the Operating Partnership is reported at an amount equal to their ownership percentage of the net equity of the Operating Partnership at the end of each reporting period. As of September 30, 2006, approximately 9% 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. As of December 31, 2005, approximately 0.7% of the equity interests of the Operating Partnership was held by certain current and former members of management in the form of Common Units.

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

8. Debt

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

   
September 30, 2006
 
December 31, 2005
 
Debt secured by owned off-campus properties:
         
Mortgage loans payable
 
$
316,204
 
$
195,871
 
Construction loan payable
   
12,782
   
-
 
     
328,986
   
195,871
 
Debt secured by on-campus participating properties:
             
Mortgage loans payable
   
16,584
   
16,786
 
Construction loan payable
   
16,852
   
16,411
 
Bonds payable
   
56,675
   
58,215
 
     
90,111
   
91,412
 
Unamortized debt premiums, net of discounts
   
6,324
   
4,363
 
Total debt
 
$
425,421
 
$
291,646
 
 
12


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

Loans Assumed or Entered Into in Conjunction with Property Acquisitions

In connection with the March 1, 2006 acquisition of the Royal Portfolio (see Note 3), the Company assumed approximately $123.6 million of fixed-rate mortgage debt. At the time of assumption, the debt had a weighted average interest rate of 5.95% and an average term to maturity of 6.3 years. Upon assumption of this debt, the Company recorded debt premiums of approximately $2.9 million, net of discounts, to reflect the estimated fair value of the debt assumed. These mortgage loans are secured by the related properties.

Revolving Credit Facility

On August 17, 2006, the Operating Partnership amended and restated its $100 million revolving credit facility to increase the size of the facility to $115 million, which may be expanded by up to an additional $110 million upon the satisfaction of certain conditions. The maturity date was extended two years to August 17, 2009 and the Company continues to guarantee the Operating Partnership’s obligations under the facility.
 
Availability under the revolving credit facility is limited to an "aggregate borrowing base amount" equal to the lesser of (i) 65% of the value of certain properties, calculated as set forth in the credit facility, and (ii) the adjusted net operating income from these properties divided by a formula amount. The facility bears interest at a variable rate, at the Company’s option, based upon a base rate or one-, two-, three-, or six-month LIBOR plus, in each case, a spread based upon the Company’s total leverage. Additionally, 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 September 2006, the Company paid off the entire balance on the revolving credit facility using proceeds from its September 15, 2006 equity offering (see Note 1). As of September 30, 2006, the total availability under the facility (subject to the satisfaction of certain financial covenants) totaled approximately $113.8 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 100% of funds from operations for any four consecutive quarters. The financial covenants also include consolidated net worth and leverage ratio tests. As of September 30, 2006, the Company was in compliance with all such covenants.

Construction Loan Activity

In connection with the September 15, 2006 equity offering, the Company paid off the entire $20.2 million balance of the construction loan for Callaway Villas, an owned off-campus property which completed construction and opened for occupancy in August 2006.

The development and construction of University Centre, an owned off-campus property scheduled to complete construction in Summer 2007 and open for occupancy in Fall 2007, is partially financed with a construction loan. The loan amount is $45.5 million and the Company began making draws on this loan in July 2006. As of September 30, 2006, the balance outstanding on the construction loan totaled $12.8 million, bearing interest at a rate of 6.83%.
 
9. Incentive Award Plan

The Company has adopted the 2004 Incentive Award Plan (the “Plan”). The Plan provides for the grant to selected employees and directors of the Company and the Company’s affiliates of stock options, RSUs, RSAs, and other stock-based incentive awards. The Company has reserved a total of 1,210,000 shares of the Company’s common stock for issuance pursuant to the Plan, subject to certain adjustments for changes in the Company’s capital structure, as defined in the Plan. As of September 30, 2006, the Company has issued 622,680 awards under the Plan. A summary of the Company’s stock-based incentive awards under the Plan as of September 30, 2006 and changes during the nine months ended September 30, 2006, is presented below:
 
13


AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
   
 
 
Common Units
 
Restricted Stock Units (RSUs)
 
Restricted Stock Awards (RSAs)
 
 
Outperformance Bonus Plan
 
 
 
Total
 
Outstanding at December 31, 2005
   
121,000
   
14,375
   
45,868
   
367,682
   
548,925
 
Granted (1) (2)
   
-
   
6,180
   
69,966
   
-
   
76,146
 
Vested
   
-
   
-
   
(12,194
)
 
-
   
(12,194
)
Forfeited
   
-
   
-
   
(2,391
)
 
-
   
(2,391
)
Converted to common shares
   
(8,000
)
 
-
   
-
   
-
   
(8,000
)
Outstanding at September 30, 2006
   
113,000
   
20,555
   
101,249
   
367,682
   
602,486
 
Vested at September 30, 2006
   
113,000
   
20,555
   
12,194
   
-
   
145,749
 

(1)  
In May 2006, certain outside members of the Board of Directors were each granted RSUs valued at $25,000, with the number of RSUs determined based on the fair market value of the Company’s stock on the date of grant, as defined in the Plan. All awards vested immediately on the date of grant; accordingly, a compensation charge of approximately $0.2 million was recorded during the three months ended June 30, 2006 related to these awards.
 
(2)  
On January 31, 2006, the Company granted 69,966 RSAs to its executive officers and certain employees that vest in equal annual installments over five years. Unvested awards are forfeited upon the termination of an individual’s employment with the Company. Each recipient of RSAs receives dividends, as declared by the Company’s Board of Directors, on unvested RSAs provided that such recipient continues to be an employee of the Company.
 
10.   Interest Rate Hedges

In connection with the December 2003 extension of a construction loan payable for Cullen Oaks, an on-campus participating property, the Company’s predecessor entered into an interest rate swap (effective December 15, 2003 through November 15, 2008) that was designated to hedge its exposure to fluctuations on interest payments attributed to changes in interest rates associated with payments on its advancing construction loan payable. Under the terms of the interest rate swap agreement, the Company pays a fixed rate of 5.5% and receives a floating rate of LIBOR plus 1.9%. The interest rate swap had an estimated fair value of approximately $0.5 million at both September 30, 2006 and December 31, 2005 and is reflected in other assets in the accompanying consolidated balance sheets.

The Company does not expect to reclassify a material amount of net gains on hedge instruments from accumulated other comprehensive income to earnings in 2006. Ineffectiveness resulting from the Company’s hedges is not material.

11. Commitments and Contingencies

Commitments

Development-related guarantees: The Company commonly provides alternate housing and project cost guarantees, subject to force majeure. These guarantees are typically limited, on an aggregate basis, to the amount of the projects’ related development fees or a contractually agreed-upon maximum exposure amount. Alternate housing guarantees typically expire five days after construction is complete and generally require the Company to provide substitute living quarters and transportation for students to and from the university if the project is not completed by an agreed-upon completion date. Project cost guarantees hold the Company responsible for the 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 normally expire within one year after completion of the project.

On two completed projects, the Company has guaranteed losses up to $6.0 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 projects (August 2009 and August 2011, respectively).

The Company’s estimated maximum exposure amount under the above guarantees is approximately $13.7 million.
 
14


AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
At September 30, 2006, management does not anticipate any material deviations from schedule or budget related to third party development projects currently in progress.  The Company has estimated the fair value of guarantees entered into or modified after December 31, 2002, the effective date of FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, to be immaterial.

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

Contract to Acquire Development Property: The Company is under contract to acquire a $24.8 million development property in Waco, Texas. The closing of this transaction is dependent upon completion of construction and lease-up and the achievement of certain occupancy levels and rental rates. There can be no assurance that such conditions will be satisfied or that this acquisition will be consummated.
 
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.

Environmental Matters: The Company is not aware of any environmental liability with respect to the properties that would have a material adverse effect on the Company's business, assets or results of operations. However, there can be no assurance that such a material environmental liability does not exist. The existence of any such material environmental liability could have an adverse effect on the Company's results of operations and cash flows.

12. Segments

The Company defines business segments by their distinct customer base and service provided. The Company has identified four reportable segments: Owned Off-Campus Properties, On-Campus Participating Properties, Development Services, and Property Management Services. Management evaluates each segment’s performance based on operating income before depreciation, amortization, minority interests and allocation of corporate overhead. Intercompany fees are reflected at the contractually stipulated amounts.
 
15

 
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
   
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
   
2006
 
2005
 
2006
 
2005
 
Owned Off-Campus Properties
                 
Rental revenues
 
$
24,668
 
$
14,411
 
$
65,680
 
$
39,490
 
Interest income
   
79
   
2
   
127
   
52
 
Total revenues from external customers
   
24,747
   
14,413
   
65,807
   
39,542
 
Operating expenses before depreciation and amortization
   
13,105
   
7,601
   
31,402
   
18,584
 
Interest expense
   
5,113
   
3,290
   
13,788
   
9,008
 
Insurance gain
   
-
   
-
   
-
   
430
 
Operating income before depreciation and amortization, minority
                         
interests and allocation of corporate overhead
 
$
6,529
 
$
3,522
 
$
20,617
 
$
12,380
 
Depreciation and amortization
 
$
5,563
 
$
2,996
 
$
15,201
 
$
8,418
 
Capital expenditures
 
$
26,260
 
$
13,711
 
$
66,209
 
$
39,032
 
Total segment assets at September 30,
 
$
710,141
 
$
393,736
 
$
710,141
 
$
393,736
 
                           
On-Campus Participating Properties
                         
Rental revenues
 
$
3,971
 
$
3,637
 
$
13,450
 
$
12,263
 
Interest income
   
102
   
53
   
255
   
105
 
Total revenues from external customers
   
4,073
   
3,690
   
13,705
   
12,368
 
Operating expenses before depreciation, amortization, and                          
ground/facility leases
   
2,305
   
2,032
   
6,217
   
5,635
 
Ground/facility leases
   
238
   
245
   
676
   
697
 
Interest expense
   
1,638
   
1,403
   
4,838
   
4,103
 
Operating (loss) income before depreciation and amortization, minority                          
interests and allocation of corporate overhead
 
$
(108
)
$
10
 
$
1,974
 
$
1,933
 
Depreciation and amortization
 
$
1,037
 
$
913
 
$
3,083
 
$
2,675
 
Capital expenditures
 
$
275
 
$
5,330
 
$
395
 
$
16,280
 
Total segment assets at September 30,
 
$
88,735
 
$
92,484
 
$
88,735
 
$
92,484
 
                           
Development Services
                         
Development and construction management fees from
                         
external customers
 
$
1,729
 
$
2,017
 
$
4,463
 
$
3,994
 
Intersegment revenues
   
-
   
15
   
-
   
173
 
Total revenues
   
1,729
   
2,032
   
4,463
   
4,167
 
Operating expenses
   
1,150
   
1,057
   
3,618
   
2,929
 
Operating income before depreciation and amortization,
                         
minority interests and allocation of corporate overhead
 
$
579
 
$
975
 
$
845
 
$
1,238
 
Total segment assets at September 30,
 
$
6,275
 
$
2,272
 
$
6,275
 
$
2,272
 
                           
Property Management Services
                         
Property management fees from external customers
 
$
491
 
$
783
 
$
1,844
 
$
2,055
 
Intersegment revenues
   
862
   
614
   
2,535
   
1,866
 
Total revenues
   
1,353
   
1,397
   
4,379
   
3,921
 
Operating expenses
   
577
   
501
   
1,865
   
1,367
 
Operating income before depreciation and amortization, minority
                         
interests and allocation of corporate overhead
 
$
776
 
$
896
 
$
2,514
 
$
2,554
 
Total segment assets at September 30,
 
$
1,296
 
$
1,652
 
$
1,296
 
$
1,652
 
                           
Reconciliations
                         
Total segment revenues
 
$
31,902
 
$
21,532
 
$
88,354
 
$
59,998
 
Unallocated interest income earned on corporate cash
   
113
   
341
   
241
   
341
 
Elimination of intersegment revenues
   
(862
)
 
(629
)
 
(2,535
)
 
(2,039
)
Total consolidated revenues, including interest income
 
$
31,153
 
$
21,244
 
$
86,060
 
$
58,300
 
Segment operating income before depreciation, amortization,
                         
minority interests and allocation of corporate overhead
 
$
7,776
 
$
5,403
 
$
25,950
 
$
18,105
 
Depreciation and amortization, including amortization of deferred
                         
financing costs
   
7,069
   
4,333
   
19,750
   
12,224
 
Net unallocated expenses relating to corporate overhead
   
2,745
   
1,735
   
8,064
   
7,212
 
Income tax provision
   
-
   
(6
)
 
-
   
(6
)
Minority interests
   
149
   
(10
)
 
202
   
(85
)
Loss from continuing operations
 
$
(1,889
)
$
(681
)
$
(1,662
)
$
(1,422
)
Total segment assets
 
$
806,447
 
$
490,144
 
$
806,447
 
$
490,144
 
Unallocated corporate assets and assets held for sale
   
57,982
   
64,325
   
57,982
   
64,325
 
Total assets
 
$
864,429
 
$
554,469
 
$
864,429
 
$
554,469
 
 
 
16

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

Forward-looking Statements

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

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

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

Our Company and Our Business

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

On September 15, 2006, we completed an equity offering, consisting of the sale of 5,692,500 shares of our common stock at a price per share of $24.60, including the exercise of 742,500 shares issued as a result of the exercise of the underwriters’ overallotment option in full at closing. The offering generated gross proceeds of approximately $140.0 million. The aggregate proceeds, net of the underwriter’s discount and offering costs, were approximately $133.0 million.

As of September 30, 2006, our property portfolio contained 38 student housing properties with approximately 22,700 beds and approximately 7,400 apartment units, consisting of 34 owned off-campus properties that are in close proximity to colleges and universities and four on-campus participating properties operated under ground/facility leases with the related university systems. These communities contain modern housing units, offer resort-style amenities and are supported by a resident assistant system and other student-oriented programming.
 
17

 
Through the TRS, we also provide construction management and development services for student housing properties owned by colleges and universities, charitable foundations, and others. As of September 30, 2006, we provided third party management and leasing services for 15 student housing properties (9 of which we served as the third party developer and construction manager) that represented approximately 9,300 beds in approximately 3,200 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, 2006, our total owned and managed portfolio included 53 properties with approximately 32,000 beds in approximately 10,600 units.

Third-Party Development Services

Our third-party development and construction management services as of September 30, 2006 consisted of three projects under contract and currently in progress with fees ranging from $0.7 million to $2.1 million. As of September 30, 2006, fees of approximately $2.0 million remained to be earned by us with respect to these projects, which have scheduled completion dates of August 2007 through July 2008. In addition, as of September 30, 2006, we had been awarded three projects which have not yet commenced construction.

We completed four projects in August 2006 with a total of approximately 2,800 beds in approximately 900 units, and earned approximately $6.1 million of fees for these four projects over a period of approximately 22 months.

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

Callaway Villas: In August 2006, we completed the final stages of construction on this owned off-campus property, which contains 704 beds in 236 units. Total development costs incurred for the project were approximately $37.5 million.

University Centre: As of September 30, 2006, our University Centre (formerly Village at Newark) owned off-campus property was under construction with total development costs estimated to be approximately $74.4 million. The project is scheduled to complete construction in Summer 2007 and open for occupancy in Fall 2007 in connection with the commencement of the 2007/2008 academic year. As of September 30, 2006, the project was approximately 64% complete and we estimate that remaining development costs will be approximately $32.8 million. As of September 30, 2006, we have funded $25.5 million of the project’s development costs internally, with the remaining development costs to be funded through a construction loan.

Acquisitions

On March 1, 2006, we completed the acquisition of a portfolio of 13 student housing properties (the “Royal Portfolio”) pursuant to a contribution and sale agreement with contributors affiliated with Royal Properties for a contribution value of $244.3 million, which was paid as follows: (i) the issuance to certain partners of the contributors of approximately 2.1 million Common Units valued at $23.50 per unit and approximately 0.1 million Series A Preferred Units valued at $26.75 per unit; (ii) the assumption of $123.6 million of fixed-rate mortgage debt; and (iii) the remainder in cash and promissory notes. As of September 30, 2006, as anticipated, we have incurred an additional $4.9 million in closing costs and other external acquisition costs related to this acquisition.

We retained approximately $6.9 million of the contribution value, which will be utilized to satisfy indemnification obligations that may arise during a one-year survival period with any remaining amounts to be paid to the contributors upon expiration of such one-year survival period. The retained amount is composed of Common Units, Series A Preferred Units, cash, and secured promissory notes of approximately $1.9 million, payable on February 28, 2007 together with accrued interest at 4.39% per annum.

The Royal Portfolio consists of five properties in Florida, four properties in Texas, two properties in Tennessee, and one property each in Arizona and Kentucky. The 13 properties contain approximately 1,800 units and approximately 5,700 beds.
 
18


Property Operations

As of September 30, 2006, our property portfolio consisted of the following:
 
 
PROPERTY
 
YEAR ACQUIRED / DEVELOPED (1)
 
LOCATION
 
 
PRIMARY UNIVERSITY SERVED
 
 
UNITS
 
BEDS
                     
Owned off-campus properties:
                   
1. Villas on Apache (2)  
 
1999
 
Tempe, AZ
 
Arizona State University Main Campus
 
111
 
288
2. The Village at Blacksburg
 
2000
 
Blacksburg, VA
 
Virginia Polytechnic Institute and
State University
 
288
 
1,056
3. The Village on University(3)
 
1999
 
Tempe, AZ
 
Arizona State University Main Campus
 
288
 
918
4. River Club Apartments
 
1999
 
Athens, GA
 
The University of Georgia-Athens
 
266
 
794
5. River Walk Townhomes
 
1999
 
Athens, GA
 
The University of Georgia-Athens
 
100
 
340
6. The Callaway House
 
2001
 
College Station, TX
 
Texas A&M University
 
173
 
538
7. The Village at Alafaya Club
 
2000
 
Orlando, FL
 
The University of Central Florida
 
228
 
840
8. The Village at Science Drive
 
2001
 
Orlando, FL
 
The University of Central Florida
 
192
 
732
9. University Village at Boulder Creek
 
2002
 
Boulder, CO
 
The University of Colorado at Boulder
 
82
 
309
10. University Village at Fresno
 
2004
 
Fresno, CA
 
California State University, Fresno
 
105
 
406
11. University Village at TU
 
2004
 
Philadelphia, PA
 
Temple University
 
220
 
749
12. University Club Tallahassee
 
2005
 
Tallahassee, FL
 
Florida State University
 
152
 
608
13. The Grove at University Club
 
2005
 
Tallahassee, FL
 
Florida State University
 
64
 
128
14. College Club Tallahassee
 
2005
 
Tallahassee, FL
 
Florida A&M University
 
96
 
384
15. The Greens at College Club
 
2005
 
Tallahassee, FL
 
Florida A&M University
 
40
 
160
16. University Club Gainesville
 
2005
 
Gainesville, FL
 
University of Florida
 
94
 
376
17. City Parc at Fry Street
 
2005
 
Denton, TX
 
University of North Texas
 
136
 
418
18. The Estates
 
2005
 
Gainesville, FL
 
University of Florida
 
396
 
1,044
19. University Village at Sweet Home
 
2005
 
Amherst, NY
 
State University of New York - Buffalo
 
269
 
828
20. Entrada Real
 
2006
 
Tucson, AZ
 
University of Arizona
 
98
 
363
21. Royal Oaks
 
2006
 
Tallahassee, FL
 
Florida State University
 
82
 
224
22. Royal Pavilion
 
2006
 
Tallahassee, FL
 
Florida State University
 
60
 
204
23. Royal Village Tallahassee
 
2006
 
Tallahassee, FL
 
Florida State University
 
75
 
288
24. Royal Village Gainesville
 
2006
 
Gainesville, FL
 
University of Florida
 
118
 
448
25. Northgate Lakes
 
2006
 
Orlando, FL
 
The University of Central Florida
 
194
 
710
26. Royal Lexington
 
2006
 
Lexington, KY
 
University of Kentucky
 
94
 
364
27. The Woods at Greenland
 
2006
 
Murfreesboro, TN
 
Middle Tennessee State University
 
78
 
276
28. Raiders Crossing
 
2006
 
Murfreesboro, TN
 
Middle Tennessee State University
 
96
 
276
29. Raiders Pass
 
2006
 
Lubbock, TX
 
Texas Tech University
 
264
 
828
30. Aggie Station
 
2006
 
College Station, TX
 
Texas A&M University
 
156
 
450
31. The Outpost San Marcos
 
2006
 
San Marcos, TX
 
Texas State University - San Marcos
 
162
 
486
32. The Outpost San Antonio
 
2006
 
San Antonio, TX
 
University of Texas - San Antonio
 
276
 
828
33. Callaway Villas (4)
 
2006
 
College Station, TX
 
Texas A&M University
 
236
 
704
34. University Centre (5)
 
2007
 
Newark, NJ
 
Rutgers University, NJIT, Essex CCC
 
234
 
838
Total owned off-campus properties
             
5,523
 
18,203
 
19

 
PROPERTY
 
YEAR
ACQUIRED / DEVELOPED (1)
 
LOCATION
 
PRIMARY UNIVERSITY SERVED
 
UNITS
 
BEDS
                     
On-campus participating properties:
                   
35. University Village—PVAMU
 
1996 / 97 / 98
 
Prairie View, TX
 
Prairie View A&M University
 
612
 
1,920
36. University College—PVAMU
 
2000 / 2003
 
Prairie View, TX
 
Prairie View A&M University
 
756
 
1,470
37. University Village—TAMIU
 
1997
 
Laredo, TX
 
Texas A&M International University
 
84
 
252
38. Cullen Oaks - Phase I and II
 
2001 / 2005
 
Houston, TX
 
The University of Houston
 
411
 
879
Total on-campus participating properties
             
1,863
 
4,521
                     
Total - all properties
             
7,386
 
22,724

(1)  
As of September 30, 2006, the average age of our operating properties was approximately 6.5 years.
 
(2)  
Villas on Apache (formerly Commons on Apache) was reconfigured from 444 beds to 288 beds in August 2006.
 
(3)  
This property is expected to be sold in the fourth quarter 2006.
 
(4)  
Construction was completed and property commenced operations in August 2006.
 
(5)  
Formerly Village at Newark. Currently under development - scheduled to complete construction in Summer 2007 and open for occupancy in Fall 2007.
 
20


Results of Operations

Comparison of the Three Months Ended September 30, 2006 and September 30, 2005

The following table presents our results of operations for the three months ended September 30, 2006 and 2005, including the amount and percentage change in these results between the two periods:

   
Three Months Ended
September 30,
         
   
2006
 
2005
 
Change ($)
 
Change (%)
 
Revenues:
                 
Owned off-campus properties
 
$
24,340
 
$
14,155
 
$
10,185
   
72.0
%
On-campus participating properties
   
3,971
   
3,637
   
334
   
9.2
%
Third party development services
   
1,729
   
2,017
   
(288
)
 
(14.3
%)
Third party management services
   
491
   
783
   
(292
)
 
(37.3
%)
Resident services
   
328
   
256
   
72
   
28.1
%
Total revenues
   
30,859
   
20,848
   
10,011
   
48.0
%
                           
Operating Expenses:
                         
Owned off-campus properties
   
13,178
   
7,696
   
5,482
   
71.2
%
On-campus participating properties
   
2,455
   
2,173
   
282
   
13.0
%
Third party development and management services
   
1,338
   
1,609
   
(271
)
 
(16.8
%)
General and administrative
   
1,468
   
1,534
   
(66
)
 
(4.3
%)
Depreciation and amortization