Form 10-K
.


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-K

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

For the fiscal year ended December 31, 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)
 
Securities registered pursuant to Section 12(b) of the Act:

(Title of Each Class)
 
(Name of Each Exchange on Which Registered)
Common Stock, $.01 par value
 
New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o No x

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o      
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined 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 Act). Yes o No x
 
The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant was $374,644,365 based on the last sale price of the common equity on June 30, 2006, which is the last business day of the Company’s most recently completed second quarter.
 
There were 22,903,073 shares of the Company’s common stock with a par value of $0.01 per share outstanding as of the close of business on March 9, 2007.
 
DOCUMENTS INCORPORATED BY REFERENCE

Part III of this report incorporates information by reference from the definitive Proxy Statement for the 2007 Annual Meeting of Stockholders.





FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2006
 
TABLE OF CONTENTS

 
 
PAGE NO.
PART I.
 
 
1
7
16
16
20
20
     
 HPART II.H
 
 
21
23
24
45
45
46
46
     
PART III.
   
47
47
47
47
47
     
PART IV.
   
48
     
 
52
 

PART I

Item 1. Business

Overview

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.

Concurrent with the consummation of various formation transactions, the IPO consisted of the sale of 12,615,000 shares of our common stock at a price per share of $17.50, including the exercise of the underwriters’ over-allotment option. The offering generated gross proceeds of approximately $220.8 million (approximately $197.8 million net of the underwriters’ discount and offering costs). As part of the various formation transactions, we redeemed the ownership interests of its Predecessor owners, acquired a minority ownership interest in four owned off-campus properties, repaid certain construction and permanent indebtedness, distributed an owned off-campus property and other non-core assets to its Predecessor owners, and entered into a revolving credit facility.

As of December 31, 2006, our property portfolio contained 38 student housing properties with approximately 23,700 beds and approximately 7,700 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, we also provide construction management and development services for student housing properties owned by colleges and universities, charitable foundations, and others. As of December 31, 2006, we provided third-party management and leasing services for 15 student housing properties (nine 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 December 31, 2006, our total owned and managed portfolio included 53 properties with approximately 33,000 beds in approximately 10,900 units.

Business Objectives, Investment Strategies, and Operating Segments

Business Objectives

Our primary business objectives are to create long-term stockholder value by deploying capital to develop, redevelop, acquire and operate student housing communities, and to sell communities when they no longer meet our long-term investment strategy or when market conditions are favorable. We believe we can achieve these objectives by continuing to implement our investment strategies and successfully manage our operating segments, which are described in more detail below.

Investment Strategies

We seek to own high quality, well designed and well located student housing properties. We seek to acquire or develop properties in under-serviced markets that have stable or increasing student populations, are in submarkets with barriers to entry and provide opportunities for economic growth as a result of their differentiated design and close proximity to campuses, or through our superior operational capabilities. We believe that our reputation and close relationship with universities give us an advantage in sourcing acquisitions and developments and obtaining municipal approvals and community support for our development projects.

Acquisitions:   During 2006, we acquired a 13 property portfolio (the “Royal Portfolio”) containing 5,745 beds in 1,753 units for a contribution value of $244.3 million, not including closing costs, anticipated capital expenditures, and initial integration expenses necessary to bring the properties up to our operating standards. Also, as of December 31, 2006, we were in the due diligence period related to the acquisition of four operating properties. The acquisition of these four properties was consummated in January and February 2007. We believe that our relationship with university systems and individual educational institutions, our knowledge of the student housing market and our prominence as the first publicly-traded REIT focused exclusively on student housing in the United States will afford us a competitive advantage in acquiring additional student housing properties.

1

 
Development:    Since 1996, we have developed ten of our owned properties, consisting of six owned off-campus properties and four on-campus participating properties. This includes one owned off-campus property that opened for occupancy in August 2006 and one in August 2005, as well as an additional phase at one of our existing on-campus participating properties that opened for occupancy in August 2005. In addition, as of December 31, 2006, we had two owned properties under development with a total combined development budget of approximately $211.9 million. These two properties are scheduled to open for occupancy in Fall 2007 and August 2008.

Our experienced development staff intends to continue to identify and acquire land parcels in close proximity to colleges and universities that offer location advantages or that allow for the development of unique products that offer a competitive advantage. We will also continue to benefit from opportunities derived from our extensive network with colleges and universities as well as our relationship with certain developers with whom we have previously developed off-campus student housing properties.

Operating Segments

We define business segments by their distinct customer base and service provided. We have identified four reportable segments: Owned Off-Campus Properties, On-Campus Participating Properties, Development Services and Property Management Services. For a detailed financial analysis of our segments’ results of operations and financial position, please refer to Note 17 in the accompanying Notes to Consolidated and Combined Financial Statements contained in Item 8.

Property Operations

Unique Leasing Characteristics: Student housing properties are typically leased by the bed on an individual lease liability basis, unlike multifamily housing where leasing is by the unit. Individual lease liability limits each resident’s liability to his or her own rent without liability for a roommate’s rent. A parent or guardian is required to execute each lease as a guarantor unless the resident provides adequate proof of income. The number of lease contracts that we administer is therefore equivalent to the number of beds occupied and not the number of units. Unlike traditional multifamily housing, most of our leases commence and terminate on the same dates and may have terms of 9, 10, or 12 months. (Please refer to the property table contained in Item 2 - Properties for a listing of the typical lease terms at our properties.) As an example, in the case of our typical 12-month leases, the commencement date coincides with the commencement of the respective university’s Fall academic term and the termination date is the date of the last subsequent summer school session. As such, we must re-lease each property in its entirety each year.

Management Philosophy: Our management philosophy is based upon meeting the following objectives:
 
 
·
Satisfying the specialized needs of residents by providing the highest levels of customer service;

 
·
Developing and maintaining an academically oriented environment via a premier residence life/student development program;

 
·
Maintaining each project’s physical plant in top condition;

 
·
Maximizing revenue through the development and implementation of a strategic annual marketing plan and leasing administration program; and

 
·
Maximizing cash flow through maximizing revenue coupled with prudent control of expenses.
 
Owned Off-Campus Properties: As of December 31, 2006, our Owned Off-Campus Properties segment consisted of 34 owned off-campus properties within close proximity to 34 colleges and universities in 12 states. Off-campus properties are generally located in close proximity to the school campus, generally with pedestrian, bicycle, or University shuttle access. We tend to offer more relaxed rules and regulations than on-campus housing that is generally more appealing to upper-classmen. We believe that the support of colleges and universities can be beneficial to the success of our off-campus properties. We actively seek to have these institutions recommend our off-campus facilities to their students or to provide us with mailing lists so that we may directly market to students and parents. In some cases, the institutions actually promote our off-campus facilities in their recruiting and admissions literature. In cases where the educational institutions do not offer recommendations for off-campus housing or mailing lists, most nonetheless provide lists of suitable properties to their students, and we continually work to ensure that our properties are on these lists in each of the markets that we serve.

2

 
This segment is subject to competition for tenants with on-campus housing owned by colleges and universities. Colleges and universities can generally avoid real estate taxes and borrow funds at lower interest rates than us (and other private sector operators), thereby decreasing their operating costs. Residence halls owned and operated by the primary colleges and universities in the markets of our owned properties typically charge lower rental rates, but offer fewer amenities than those offered by our properties. Additionally, most universities are only able to house a small percentage of their overall enrollment, and are therefore highly dependant upon the off-campus market to provide housing for their students. High-quality, well run off-campus student housing can be a critical component to an institution’s ability to attract and retain students. Therefore, developing and maintaining good relationships with educational institutions can result in a privately owned off-campus facility becoming, in effect, an extension of the institution’s housing program, with the institution providing highly valued references and recommendations to students and parents.

This segment also competes with national and regional owner-operators of off-campus student housing in a number of markets as well as with smaller local owner-operators. Therefore, the performance of this segment could be affected by the construction of new off-campus residences in close proximity to our existing properties, increases or decreases in the general levels of rents for housing in competing communities, increases or decreases in the number of students enrolled at one or more of the colleges or universities in the market of a property, and other general economic conditions.

On-Campus Participating Properties: Our On-Campus Participating Properties segment includes on-campus properties owned by our TRS that are operated under ground/facility leases with the related university systems. We participate with two university systems in the operations and cash flows of four on-campus participating properties under long-term ground/facility leases. The subject universities hold title to both the land and improvements on these properties.

Under our ground/facility leases, we receive an annual distribution representing 50% of these properties’ net cash available for distribution after payment of operating expenses (which includes our management fees), debt service (which includes repayment of principal) and capital expenditures. We also manage these properties under multi-year management agreements and are paid a management fee representing 5% of receipts. We have developed each of our on-campus participating properties. For purposes of our consolidated financial statements contained in Item 8, the development fee earned by our TRS during the construction period is deferred and recognized in revenue over the term of the underlying ground leases. However, for purposes of our calculation of Funds from Operations Modified for Operational Performance of On-Campus Participating Properties (“FFOM”) contained in Item 7, we reflect such development fees as earned over the construction period based on the percentage-of-completion method.

While the terms of each specific ground/facility lease agreement tend to vary in certain respects, the following terms are generally common to all: (i) a term of 30-40 years, subject to early termination upon repayment of the related financing, which generally has a 25-year amortization; (ii) ground/facility lease rent of a nominal amount (e.g., $100 per annum over the lease term) plus 50% of net cash flow; (iii)  the right of first refusal by the institution to purchase our leasehold interest in the event we propose to sell it to any third-party; (iv) an obligation by the educational institution to promote the project, include information relative to the project in brochures and mailings and to permit us to advertise the project; (v) the requirement to receive the educational institution’s consent to increase rental rates by a percentage greater than the percentage increase in our property operating expenses plus the amount of any increases in debt service, and (vi) the option of the institution to purchase our interest in and assume management of the facility, with the purchase price calculated at the discounted present cash value of our leasehold interest.

We do not have access to the cash flows and working capital of these on-campus participating properties except for the annual net cash distribution. Additionally, a substantial portion of these properties’ cash flow is dedicated to capital reserves required under the applicable property indebtedness and to the amortization of such indebtedness. These amounts do not increase our economic interest in these properties since our interest, including our right to share in the net cash available for distribution from the properties, terminates upon the amortization of their indebtedness. Our economic interest in these properties is therefore limited to our interest in the net cash flow, management fees, and development fees from these properties. Accordingly, when considering these properties’ contribution to our operations, we focus upon our share of these properties’ net cash available for distribution and the management/development fees that we receive from these properties rather than upon their contribution to our gross revenues and expenses for financial reporting purposes.

Our on-campus participating properties are susceptible to some of the same risks as our owned off-campus properties, including: (i) seasonality in rents; (ii) annual re-leasing that is highly dependent on marketing and university admission policies; and (iii) competition for tenants from other on-campus housing operated by educational institutions or other off-campus properties.

3

 
Third-Party Services

Our third-party services consist of development services and management services and are typically provided to university and college clients. The majority of our third-party management services are provided to clients for whom we also provide development services. While management evaluates the operational performance of our third-party services based on the distinct segments identified below, at times we also evaluate these segments on a combined basis.

Development Services: Our Development Services segment consists of development and construction management services that we provide through our TRS for third-party owners. These services range from short-term consulting projects to long-term full-scale development and construction projects. Development revenues are generally recognized based on a proportionate performance method based on contract deliverables and construction revenues are generally recognized based on the percentage-of-completion method. We typically provide these services to colleges and universities seeking to modernize their on-campus student housing properties. They look to us to bring our student housing experience and expertise to ensure they develop marketable, functional, and financially sustainable facilities. Educational institutions usually seek to build housing that will enhance their recruitment and retention of students while facilitating their academic objectives. Most of these development service contracts are awarded via a competitive request for proposal (“RFP”) process that qualifies developers based on their overall capability to provide specialized student housing design, development, construction management, financial structuring, and property management services. Our development services typically include pre-development, design and financial structuring services. Our pre-development services typically include feasibility studies for third-party owners and design services. Feasibility studies include an initial feasibility analysis, review of conceptual design, and assistance with master planning. Some of the documents produced in this process include the conceptual design documents, preliminary development and operating budgets, cash flow projections and a preliminary market assessment. Our design services include coordination with the architect and other members of the design team, review of construction plans and assistance with project due diligence and project budgets.

Construction management services typically consist of coordinating and supervising the construction, equipping and furnishing process on behalf of the project owner, including site visits, hiring of a general contractor and project professionals, and full coordination and administration of all activities necessary for project completion in accordance with plans and specifications and with verification of adequate insurance.

Our development services activities benefit our primary goal of owning and operating student housing properties in a number of ways. By providing these services to others, we are able to expand and refine our unit plan and community design, the operational efficiency of our material specifications and our ability to determine market acceptance of unit and community amenities. Our development and construction management personnel enable us to establish relationships with general contractors, architects and project professionals throughout the nation. Through these services, we gain experience and expertise in residential and commercial construction methodologies under various labor conditions, including right-to-work labor markets, markets subject to prevailing wage requirements and fully unionized environments. This segment is subject to competition from other specialized student housing development companies as well as from national real estate development companies.

Property Management Services: Our Property Management Services segment, conducted by our TRS, includes revenues generated from third-party management contracts in which we are typically responsible for all aspects of operations, including marketing, leasing administration, facilities maintenance, business administration, accounts payable, accounts receivable, financial reporting, capital projects, and residence life student development. As of December 31, 2006, we provided third-party management and leasing services for 15 student housing properties that represented approximately 9,300 beds in approximately 3,200 units, nine of which we developed. We provide these services pursuant to multi-year management agreements (generally ranging between one to five years).

There are several housing options that compete with our third-party managed properties including, but not limited to, multifamily housing, for-rent single family dwellings, other off-campus specialized student housing and the aforementioned on-campus participating properties.
 
Americans with Disabilities Act and Federal Fair Housing Act

Many laws and governmental regulations are applicable to our properties and changes in the laws and regulations, or their interpretation by agencies and the courts, occur frequently. Our properties must comply with Title III of the Americans with Disabilities Act, or ADA, to the extent that such properties are “public accommodations” as defined by the ADA. The ADA may require removal of structural barriers to access by persons with disabilities in certain public areas of our properties where such removal is readily achievable. We believe that the existing properties are in substantial compliance with the ADA and that we will not be required to make substantial capital expenditures to address the requirements of the ADA. However, noncompliance with the ADA could result in imposition of fines or an award of damages to private litigants. The obligation to make readily achievable accommodations is an ongoing one, and we intend to continue to assess our properties and to make alterations as appropriate in this respect.

4

 
Under the Federal Fair Housing Act and state fair housing laws, discrimination on the basis of certain protected classes is prohibited. Violation of these laws can result in significant damage awards to victims. The Company has a strong policy against any kind of discriminatory behavior and trains its employees to avoid discrimination or the appearance of discrimination. There is no assurance, however, that an employee will not violate the Company’s policy against discrimination and thus violate fair housing laws. This could subject the Company to legal actions and the possible imposition of damage awards.

Environmental Matters

Under various laws and regulations relating to the protection of the environment, an owner of real estate may be held liable for the costs of removal or remediation of certain hazardous or toxic substances located on or in its property. These laws often impose liability without regard to whether the owner was responsible for, or even knew of, the presence of such substances. The presence of such substances may adversely affect the owner’s ability to rent or sell the property or use the property as collateral. Independent environmental consultants conducted Phase I environmental site assessments (which involve visual inspection but not soil or groundwater analysis) on all of the owned off-campus properties and on-campus participating properties in our existing portfolio. Phase I environmental site assessments did not reveal any environmental liabilities that would have a material adverse effect on us. In addition, we are not aware of any environmental liabilities that management believes would have a material adverse effect on the Company. There is no assurance that Phase I environmental site assessments would reveal all environmental liabilities or that environmental conditions not known to us may exist now or in the future which would result in liability to the Company for remediation or fines, either under existing laws and regulations or future changes to such requirements.

From time to time, the United States Environmental Protection Agency, or EPA, designates certain sites affected by hazardous substances as “Superfund” sites pursuant to CERCLA. Superfund sites can cover large areas, affecting many different parcels of land. Although CERCLA imposes joint and several liability for contamination on property owners and operators regardless of fault, the EPA may choose to pursue potentially responsible parties (“PRPs”) based on their actual contribution to the contamination. PRPs are liable for the costs of responding to the hazardous substances. Each of Villas on Apache, The Village on University (disposed of in December 2006) and University Village at San Bernardino (disposed of in January 2005) are located within federal Superfund sites. The EPA designated these areas as Superfund sites because groundwater underneath these areas is contaminated. We have not been named, and do not expect to be named, as a PRP with respect to these sites. However, there can be no assurance regarding potential future developments concerning such sites.

Insurance

We carry comprehensive liability and property insurance on our properties, which we believe is of the type and amount customarily obtained on real property assets. We intend to obtain similar coverage for properties we acquire in the future. However, there are certain types of losses, generally of a catastrophic nature, such as losses from floods or earthquakes, which may be subject to limitations in certain areas. When not otherwise contractually stipulated, we exercise our judgment in determining amounts, coverage limits, and deductibles, in an effort to maintain appropriate levels of insurance on our investments. If we suffer a substantial loss, our insurance coverage may not be sufficient due to market conditions at the time or other unforeseen factors. Inflation, changes in building codes and ordinances, environmental considerations and other factors also might make it infeasible to use insurance proceeds to replace a property after it has been damaged or destroyed.

Employees

As of December 31, 2006, we had approximately 897 employees, consisting of:

 
·
approximately 376 on-site employees in our owned off-campus properties segment, including 113 Resident Assistants;
 
5


 
·
approximately 99 on-site employees in our on-campus participating properties segment, including 41 Resident Assistants;

 
·
approximately 345 employees in our property management services segment, including 314 on-site employees and 31 corporate office employees;

 
·
approximately 23 corporate office employees in our development services segment; and

 
·
approximately 54 executive, corporate administration and financial personnel.
 
Our employees are not currently represented by a labor union.

Offices and Website

Our principal executive offices are located at 805 Las Cimas Parkway, Suite 400, Austin, Texas 78746. Our telephone number at that location is (512) 732-1000.

We file our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other reports required by Sections 13(a) and 15(d) of the Securities Exchange Act of 1934. You may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. The address of that site is www.sec.gov.

Our website is located at www.americancampuscommunities.com or www.studenthousing.com. We make available free of charge through our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Securities Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Our website also contains copies of our Corporate Governance Guidelines and Code of Business Ethics as well as the charters of our Nominating and Corporate Governance, Audit, and Compensation committees. The information on our website is not part of this filing.
 
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. 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 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, 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 this report.

6

 
Item 1A. Risk Factors

The following risk factors may contain defined terms that are different from those used in other sections of this report. Unless otherwise indicated, when used in this section, the terms “we” and “us” refer to American Campus Communities, Inc. and its subsidiaries, including American Campus Communities Operating Partnership LP, our Operating Partnership, and the term “securities” refers to shares of common stock of American Campus Communities, Inc. and units of limited partnership interest in our Operating Partnership.

The factors described below represent the Company’s principal risks. Other factors may exist that the Company does not consider to be significant based on information that is currently available or that the Company is not currently able to anticipate.

Risks Related to Our Properties and Our Business

Our results of operations are subject to an annual leasing cycle, short lease-up period, seasonal cash flows, changing university admission and housing policies and other risks inherent in the student housing industry.

We generally lease our owned properties under 12-month leases, and in certain cases, under ten-month, nine-month or shorter-term semester leases. As a result, we may experience significantly reduced cash flows during the summer months at properties leased under leases having terms shorter than 12 months. Furthermore, all of our properties must be entirely re-leased each year, exposing us to increased leasing risk. In addition, we are subject to increased leasing risk on our properties under construction and future acquired properties based on our lack of experience leasing those properties and unfamiliarity with their leasing cycles. Student housing properties are also typically leased during a limited leasing season that usually begins in January and ends in August of each year. We are therefore highly dependent on the effectiveness of our marketing and leasing efforts and personnel during this season.

Changes in university admission policies could adversely affect us. For example, if a university reduces the number of student admissions or requires that a certain class of students, such as freshman, live in a university owned facility, the demand for beds at our properties may be reduced and our occupancy rates may decline. While we may engage in marketing efforts to compensate for such change in admission policy, we may not be able to effect such marketing efforts prior to the commencement of the annual lease-up period or our additional marketing efforts may not be successful.
 
We rely on our relationships with colleges and universities for referrals of prospective student-tenants or for mailing lists of prospective student-tenants and their parents. Many of these colleges and universities own and operate their own competing on-campus facilities. Any failure to maintain good relationships with these colleges and universities could therefore have a material adverse effect on us. If colleges and universities refuse to make their lists of prospective student-tenants and their parents available to us or increase the costs of these lists, there could be a material adverse effect on us.
 
Federal and state laws require colleges to publish and distribute reports of on-campus crime statistics, which may result in negative publicity and media coverage associated with crimes occurring on or in the vicinity of our on-campus participating properties. Reports of crime or other negative publicity regarding the safety of the students residing on, or near, our properties may have an adverse effect on both our on-campus and off-campus business.

We face significant competition from university-owned on-campus student housing, from other off-campus student housing properties and from traditional multifamily housing located within close proximity to universities.

On-campus student housing has certain inherent advantages over off-campus student housing in terms of physical proximity to the university campus and integration of on-campus facilities into the academic community. Colleges and universities can generally avoid real estate taxes and borrow funds at lower interest rates than us and other private sector operators. We also compete with national and regional owner-operators of off-campus student housing in a number of markets as well as with smaller local owner-operators.

Currently, the industry is fragmented with no participant holding a significant market share. There are a number of student housing complexes that are located near or in the same general vicinity of many of our owned properties and that compete directly with us. Such competing student housing complexes may be newer than our properties, located closer to campus, charge less rent, possess more attractive amenities or offer more services or shorter term or more flexible leases.
 
Rental income at a particular property could also be affected by a number of other factors, including the construction of new on-campus and off-campus residences, increases or decreases in the general levels of rents for housing in competing communities, increases or decreases in the number of students enrolled at one or more of the colleges or universities in the market of the property and other general economic conditions.
 
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We believe that a number of other large national companies with substantial financial and marketing resources may be potential entrants in the student housing business. The entry of one or more of these companies could increase competition for students and for the acquisition, development and management of other student housing properties.

We may be unable to successfully complete and operate our properties or our third-party developed properties.

We intend to continue to develop and construct student housing in accordance with our growth strategies. These activities may also include any of the following risks:
 
 
·
we may be unable to obtain financing on favorable terms or at all;
 
 
·
we may not complete development projects on schedule, within budgeted amounts or in conformity with building plans and specifications;
 
 
·
we may encounter delays or refusals in obtaining all necessary zoning, land use, building, occupancy and other required governmental permits and authorizations;
 
 
·
occupancy and rental rates at newly developed or renovated properties may fluctuate depending on a number of factors, including market and economic conditions, and may reduce or eliminate our return on investment;
 
 
·
we may become liable for injuries and accidents occurring during the construction process and for environmental liabilities, including off-site disposal of construction materials;
 
 
·
we may decide to abandon our development efforts if we determine that continuing the project would not be in our best interests; and
 
 
·
we may encounter strikes, weather, government regulations and other conditions beyond our control.
 
Our newly developed properties will be subject to risks associated with managing new properties, including lease-up and integration risks. In addition, new development activities, regardless of whether or not they are ultimately successful, typically will require a substantial portion of the time and attention of our development and management personnel. Newly developed properties may not perform as expected.
 
We anticipate that we will, from time to time, elect not to proceed with ongoing development projects. If we elect not to proceed with a development project, the development costs associated therewith will ordinarily be charged against income for the then-current period. Any such charge could have a material adverse effect on our results of operations in the period in which the charge is taken.
 
We may in the future develop properties nationally, internationally or in geographic regions other than those in which we currently operate. We do not possess the same level of familiarity with development in these new markets, which could adversely affect our ability to develop such properties successfully or at all or to achieve expected performance. Future development opportunities may not be available to us on terms that meet our investment criteria or we may be unsuccessful in capitalizing on such opportunities. Our ability to capitalize on such opportunities will be largely dependent upon external sources of capital that may not be available to us on favorable terms or at all.
 
We typically provide guarantees of timely completion of projects that we develop for third parties. In certain cases, our contingent liability under these guarantees may exceed our development fee from the project. Although we seek to mitigate this risk by, among other things, obtaining similar guarantees from the project contractor, we could sustain significant losses if development of a project were to be delayed or stopped and we were unable to cover our guarantee exposure with the guarantee received from the project contractor.

We may be unable to successfully acquire properties on favorable terms.

Our future growth will be dependent upon our ability to successfully acquire new properties on favorable terms. As we acquire additional properties, we will be subject to risks associated with managing new properties, including lease-up and integration risks. Newly developed and recently acquired properties may not perform as expected and may have characteristics or deficiencies unknown to us at the time of acquisition. Future acquisition opportunities may not be available to us on terms that meet our investment criteria or we may be unsuccessful in capitalizing on such opportunities. Our ability to capitalize on such opportunities will be largely dependent upon external sources of capital that may not be available to us on favorable terms or at all.

8

 
Our ability to acquire properties on favorable terms and successfully operate them involves the following significant risks:

 
·
our potential inability to acquire a desired property may be caused by competition from other real estate investors;
 
 
·
competition from other potential acquirers may significantly increase the purchase price and decrease expected yields;
 
 
·
we may be unable to finance an acquisition on favorable terms or at all;
 
 
·
we may have to incur significant unexpected capital expenditures to improve or renovate acquired properties;
 
 
·
we may be unable to quickly and efficiently integrate new acquisitions, particularly acquisitions of portfolios of properties, into our existing operations;
 
 
·
market conditions may result in higher than expected costs and vacancy rates and lower than expected rental rates; and
 
 
·
we may acquire properties subject to liabilities but without any recourse, or with only limited recourse, to the sellers, or with liabilities that are unknown to us, such as liabilities for clean-up of undisclosed environmental contamination, claims by tenants, vendors or other persons dealing with the former owners of our properties and claims for indemnification by members, directors, officers and others indemnified by the former owners of our properties.
 
Our failure to finance property acquisitions on favorable terms, or operate acquired properties to meet our financial expectations, could adversely affect us.

Our debt level reduces cash available for distribution and may expose us to the risk of default under our debt obligations.

As of December 31, 2006, our total consolidated indebtedness was approximately $426.3 million (excluding unamortized debt premiums and discounts). Our debt service obligations expose us to the risk of default and reduce or eliminate cash resources that are available to operate our business or pay distributions that are necessary to maintain our qualification as a REIT. There is no limit on the amount of indebtedness that we may incur except as provided by the covenants in our revolving credit facility. We expect to incur additional indebtedness under our revolving credit facility to fund future property development and acquisitions and other working capital needs, which may include the payment of distributions to our security holders. The amount available to us and our ability to borrow from time to time under our revolving credit facility is subject to certain conditions and the satisfaction of specified financial covenants. Our level of debt and the limitations imposed on us by our debt agreements could have significant adverse consequences, including the following:

 
·
We may be unable to borrow additional funds as needed or on favorable terms.
 
 
·
We may be unable to refinance our indebtedness at maturity or the refinancing terms may be less favorable than the terms of our original indebtedness.
 
 
·
We may be forced to dispose of one or more of our properties, possibly on disadvantageous terms.
 
 
·
We may default on our scheduled principal payments or other obligations as a result of insufficient cash flow or otherwise, and the lenders or mortgagees may foreclose on our properties that secure their loans and receive an assignment of rents and leases.
 
 
·
Foreclosures could create taxable income without accompanying cash proceeds, a circumstance that could hinder our ability to meet the REIT distribution requirements imposed by the Internal Revenue Code.
 
9

 
We may not be able to recover pre-development costs for third-party university developments.

University systems and educational institutions typically award us development services contracts on the basis of a competitive award process, but such contracts are typically executed following the formal approval of the transaction by the institution’s governing body. In the intervening period, we may incur significant pre-development and other costs in the expectation that the development services contract will be executed. If an institution’s governing body does not ultimately approve our selection and the terms of the pending development contract, we may not be able to recoup these costs from the institution and the resulting losses could be material.

Our awarded projects may not be successfully structured or financed and may delay our recognition of revenues.

The recognition and timing of revenues from our awarded development services projects will, among other things, be contingent upon successfully structuring and closing project financing as well as the timing of construction. The development projects that we have been awarded have at times been delayed beyond the originally scheduled construction commencement date. If such delays were to occur with our current awarded projects, our recognition of expected revenues and receipt of expected fees from these projects would be delayed.

We may encounter delays in completion or experience cost overruns with respect to our properties that are under construction.

As of December 31, 2006, we were in the process of constructing two owned properties. These properties are subject to the various risks relating to properties that are under construction referred to elsewhere in these risk factors, including the risks that we may encounter delays in completion and that these projects may experience cost overruns. These properties may not be completed on time. Additionally, if we do not complete the construction of certain of our properties on schedule, we may be required to provide alternative housing to the students with whom we have signed leases. We generally do not make any arrangements for such alternative housing for these properties and we would likely incur significant expenses in the event we provide such housing. If construction is not completed on schedule, students may attempt to break their leases and our occupancy at such properties for that academic year may suffer.

Our guarantees could result in liabilities in excess of our development fees.

In third-party developments, we typically provide guarantees of the obligations of the developer, including development budgets and timely project completion. These guarantees include, among other things, the cost of providing alternate housing for students in the event we do not timely complete a development project. These guarantees typically exclude delays resulting from force majeure and also, in third-party transactions, are typically limited in amount to the amount of our development fees from the project. In certain cases, however, our contingent liability under these guarantees has exceeded our development fee from the project and we may agree to such arrangements in the future. Our obligations under alternative housing guarantees typically expire five days after construction is complete. Project cost guarantees are normally satisfied within one year after completion of the project.

Universities have the right to terminate our participating ground leases.

The ground leases through which we own our on-campus participating properties provide that the university lessor may purchase our interest in and assume the management of the facility, with the purchase price calculated at the discounted present value of cash flows from our leasehold interest. The exercise of any such buyout would result in a reduction in our portfolio.

Changes in laws and litigation risks could affect our business.

We are generally not able to pass through to our residents under existing leases real estate taxes, income taxes or other taxes. Consequently, any such tax increases may adversely affect our financial condition and limit our ability to satisfy our financial obligations and make distributions to security holders. Changes that increase our potential liability under environmental laws or our expenditures on environmental compliance could have the same impact.

As a publicly traded owner of properties, we may become involved in legal proceedings, including consumer, employment, tort or commercial litigation, that if decided adversely to or settled by us, and not adequately covered by insurance, could result in liability that is material to our financial condition or results of operations.

10


Risks Related to the Real Estate Industry

Our performance and value are subject to risks associated with real estate assets and with the real estate industry.

Our ability to satisfy our financial obligations and make expected distributions to our security holders depends on our ability to generate cash revenues in excess of expenses and capital expenditure requirements. Events and conditions generally applicable to owners and operators of real property that are beyond our control may decrease cash available for distribution and the value of our properties. These events include:

 
·
general economic conditions;
 
 
·
rising level of interest rates;
 
 
·
local oversupply, increased competition or reduction in demand for student housing;
 
 
·
inability to collect rent from tenants;
 
 
·
vacancies or our inability to rent units on favorable terms;
 
 
·
inability to finance property development and acquisitions on favorable terms;
 
 
·
increased operating costs, including insurance premiums, utilities, and real estate taxes;
 
 
·
costs of complying with changes in governmental regulations;
 
 
·
the relative illiquidity of real estate investments;
 
 
·
decreases in student enrollment at particular colleges and universities;
 
 
·
changes in university policies related to admissions and housing; and
 
 
·
changing student demographics.
 
In addition, periods of economic slowdown or recession, rising interest rates or declining demand for real estate, or the public perception that any of these events may occur, could result in a general decline in rents or an increased incidence of defaults under existing leases, which would adversely affect us.

Potential losses may not be covered by insurance.

We carry fire, earthquake, terrorism, business interruption, vandalism, malicious mischief, boiler and machinery, commercial general liability and workers’ compensation insurance covering all of the properties in our portfolio under various policies. We believe the policy specifications and insured limits are appropriate and adequate given the relative risk of loss, the cost of the coverage and industry practice. There are, however, certain types of losses, such as property damage from generally unsecured losses such as riots, wars, punitive damage awards or acts of God, that may be either uninsurable or not economically insurable. Some of our properties are insured subject to limitations involving large deductibles and policy limits that may not be sufficient to cover losses. In addition, we may discontinue earthquake, terrorism or other insurance on some or all of our properties in the future if the cost of premiums from any of these policies exceeds, in our judgment, the value of the coverage discounted for the risk of loss.

If we experience a loss that is uninsured or that exceeds policy limits, we could lose the capital invested in the damaged properties as well as the anticipated future cash flows from those properties. In addition, if the damaged properties are subject to recourse indebtedness, we would continue to be liable for the indebtedness, even if these properties were irreparably damaged and require substantial expenditures to rebuild or repair. In the event of a significant loss at one or more of our properties, the remaining insurance under our policies, if any, could be insufficient to adequately insure our other properties. In such event, securing additional insurance, if possible, could be significantly more expensive than our current policies.

11

 
Unionization or work stoppages could have an adverse effect on us.

We are at times required to use unionized construction workers or to pay the prevailing wage in a jurisdiction to such workers. Due to the highly labor intensive and price competitive nature of the construction business, the cost of unionization and/or prevailing wage requirements for new developments could be substantial. Unionization and prevailing wage requirements could adversely affect a new development’s profitability. Union activity or a union workforce could increase the risk of a strike, which would adversely affect our ability to meet our construction timetables.

We could incur significant costs related to government regulation and private litigation over environmental matters.

Under various environmental laws, including the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), a current or previous owner or operator of real property may be liable for contamination resulting from the release or threatened release of hazardous or toxic substances or petroleum at that property, and an entity that arranges for the disposal or treatment of a hazardous or toxic substance or petroleum at another property may be held jointly and severally liable for the cost to investigate and clean up such property or other affected property. Such parties are known as potentially responsible parties (“PRPs”). Such environmental laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence of the contaminants, and the costs of any required investigation or cleanup of these substances can be substantial. PRPs are liable to the government as well as to other PRPs who may have claims for contribution. The liability is generally not limited under such laws and could exceed the property’s value and the aggregate assets of the liable party. The presence of contamination or the failure to remediate contamination at our properties may expose us to third-party liability for personal injury or property damage, or adversely affect our ability to sell, lease or develop the real property or to borrow using the real property as collateral.

Environmental laws also impose ongoing compliance requirements on owners and operators of real property. Environmental laws potentially affecting us address a wide variety of matters, including, but not limited to, asbestos-containing building materials (“ACBM”), storage tanks, storm water and wastewater discharges, lead-based paint, wetlands, and hazardous wastes. Failure to comply with these laws could result in fines and penalties or expose us to third-party liability. Some of our properties may have conditions that are subject to these requirements and we could be liable for such fines or penalties or liable to third parties.
 
Existing conditions at some of our properties may expose us to liability related to environmental matters.

Some of the properties in our portfolio may contain asbestos-containing building materials, or ACBMs. Environmental laws require that ACBMs be properly managed and maintained, and may impose fines and penalties on building owners or operators for failure to comply with these requirements. Also, some of the properties in our portfolio contain, or may have contained, or are adjacent to or near other properties that have contained or currently contain storage tanks for the storage of petroleum products or other hazardous or toxic substances. These operations create a potential for the release of petroleum products or other hazardous or toxic substances. Third parties may be permitted by law to seek recovery from owners or operators for personal injury associated with exposure to contaminants, including, but not limited to, petroleum products, hazardous or toxic substances, and asbestos fibers. Also, some of the properties may contain regulated wetlands that can delay or impede development or require costs to be incurred to mitigate the impact of any disturbance. Absent appropriate permits, we can be held responsible for restoring wetlands and be required to pay fines and penalties.

Over the past several years, there have been an increasing number of lawsuits against owners and managers of residential properties, although not against us, alleging personal injury and property damage caused by the presence of mold in residential real estate. Some of these lawsuits have resulted in substantial monetary judgments or settlements. Insurance carriers have reacted to these liability awards by excluding mold related programs designed to minimize the existence of mold in any of our properties as well as guidelines for promptly addressing and resolving reports of mold to minimize any impact mold might have on residents or the property.
 
We do not carry environmental insurance on our properties. Environmental liability at any of our properties may have a material adverse effect on our financial condition, results of operations, cash flow, the trading price of our stock or our ability to satisfy our debt service obligations and pay dividends or distributions to our security holders.

We may incur significant costs complying with the Americans with Disabilities Act and similar laws.

Under the Americans with Disabilities Act of 1990, or the ADA, all public accommodations must meet federal requirements related to access and use by disabled persons. Additional federal, state and local laws also may require modifications to our properties, or restrict our ability to renovate our properties. For example, the Fair Housing Amendments Act of 1988, or FHAA, requires apartment properties first occupied after March 13, 1990 to be accessible to the handicapped. We have not conducted an audit or investigation of all of our properties to determine our compliance with present requirements. Noncompliance with the ADA or FHAA could result in the imposition of fines or an award or damages to private litigants and also could result in an order to correct any non-complying feature. We cannot predict the ultimate amount of the cost of compliance with the ADA, FHAA or other legislation. If we incur substantial costs to comply with the ADA, FHAA or any other legislation, we could be materially and adversely affected.

12

 
We may incur significant costs complying with other regulations.

The properties in our portfolio are subject to various federal, state and local regulatory requirements, such as state and local fire and life safety requirements. If we fail to comply with these various requirements, we might incur governmental fines or private damage awards. Furthermore, existing requirements could change and require us to make significant unanticipated expenditures that would materially and adversely affect us.

Joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on co-venturers’ financial condition and disputes between our co-venturers and us.

We have co-invested, and anticipate that we will continue in the future to co-invest, with third parties through partnerships, joint ventures or other entities, acquiring non-controlling interests in or sharing responsibility for managing the affairs of a property, partnership, joint venture or other entity. In connection with joint venture investments, we do not have sole decision-making control regarding the property, partnership, joint venture or other entity. Investments in partnerships, joint ventures or other entities may, under certain circumstances, involve risks not present were a third-party not involved, including the possibility that our partners or co-venturers might become bankrupt or fail to fund their share of required capital contributions. Our partners or co-venturers also may have economic or other business interests or goals that are inconsistent with our business interests or goals, and may be in a position to take actions contrary to our preferences, policies or objectives. Such investments also will have the potential risk of impasses on decisions, such as a sale, because neither we nor our partners or co-venturers would have full control over the partnership or joint venture. Disputes between us and our partners or co-venturers may result in litigation or arbitration that would increase our expenses and prevent our officers and/or directors from focusing their time and effort exclusively on our business. Consequently, actions by or disputes with our partners or co-venturers might result in subjecting properties owned by the partnership, joint venture or other entity to additional risk. In addition, we may in certain circumstances be liable for the actions of our partners or co-venturers.

Risks Related to Our Organization and Structure

We are recently organized and have a limited operating history.

We were organized in March 2004 and have a limited operating history. In addition, all of our properties have been acquired or developed by us or our predecessors within the past ten years and have limited operating histories under current management. Consequently, our historical operating results may not be useful in assessing our likely future performance. The operating performance of the properties may decline under our management. We may not be able to generate sufficient cash from operations to satisfy our financial obligations and make distributions to our security holders.

We will also be subject to the risks generally associated with the operation of a relatively new business.

To qualify as a REIT, we may be forced to limit the activities of our TRS.

To qualify as a REIT, no more than 20% of the value of our total assets may consist of the securities of one or more taxable REIT subsidiaries, such as American Campus Communities Services, Inc., our TRS. Certain of our activities, such as our third-party development, management and leasing services, must be conducted through our TRS for us to qualify as a REIT. In addition, certain non-customary services must be provided by a TRS or an independent contractor. If the revenues from such activities create a risk that the value of our TRS, based on revenues or otherwise, approaches the 20% threshold, we will be forced to curtail such activities or take other steps to remain under the 20% threshold. Since the 20% threshold is based on value, it is possible that the IRS could successfully contend that the value of our TRS exceeds the 20% threshold even if our TRS accounts for less than 20% of our consolidated revenues, income or cash flow. Our on-campus participating properties and our third-party services are held by our TRS. Consequently, income earned from our on-campus participating properties and our third-party services will be subject to regular federal income taxation and state and local income taxation where applicable, thus reducing the amount of cash available for distribution to our security holders.

13

 
Our TRS is not permitted to directly or indirectly operate or manage a “hotel, motel or other establishment more than one-half of the dwelling units in which are used on a transient basis.” We believe that our method of operating our TRS will not be considered to constitute such an activity. Future Treasury Regulations or other guidance interpreting the applicable provisions might adopt a different approach, or the IRS might disagree with our conclusion. In such event we might be forced to change our method of operating our TRS, which could adversely affect us, or our TRS could fail to qualify as a taxable REIT subsidiary, which would likely cause us to fail to qualify as a REIT.

Failure to qualify as a REIT would have significant adverse consequences to us and the value of our securities.

We intend to operate in a manner that will allow us to qualify as a REIT for federal income tax purposes under the Internal Revenue Code. If we lose our REIT status, we will face serious tax consequences that would substantially reduce or eliminate the funds available for investment and for distribution to security holders for each of the years involved, because:

 
·
we would not be allowed a deduction for dividends to security holders in computing our taxable income and such amounts would be subject to federal income tax at regular corporate rates;
 
 
·
we also could be subject to the federal alternative minimum tax and possibly increased state and local taxes; and
 
 
·
unless we are entitled to relief under applicable statutory provisions, we could not elect to be taxed as a REIT for four taxable years following the year during which we were disqualified.
 
In addition, if we fail to qualify as a REIT, we will not be required to pay dividends to stockholders, and all dividends to stockholders will be subject to tax as ordinary income to the extent of our current and accumulated earnings and profits. As a result of all these factors, our failure to qualify as a REIT also could impair our ability to expand our business and raise capital, and would adversely affect the value of our common stock.
 
Qualification as a REIT involves the application of highly technical and complex Internal Revenue Code provisions for which there are only limited judicial and administrative interpretations. The complexity of these provisions and of the applicable Treasury Regulations that have been promulgated under the Internal Revenue Code is greater in the case of a REIT that, like us, holds its assets through a partnership or a limited liability company. The determination of various factual matters and circumstances not entirely within our control may affect our ability to qualify as a REIT. In order to qualify as a REIT, we must satisfy a number of requirements, including requirements regarding the composition of our assets and “two gross income tests”: (a) at least 75% of our gross income in any year must be derived from qualified sources, such as “rents from real property,” mortgage interest, dividends from other REITs and gains from sale of such assets, and (b) at least 95% of our gross income must be derived from sources meeting the 75% income test above, and other passive investment sources, such as other interest and dividends and gains from sale of securities. Also, we must pay dividends to stockholders aggregating annually at least 90% of our REIT taxable income, excluding any net capital gains. In addition, legislation, new regulations, administrative interpretations or court decisions may adversely affect our investors, our ability to qualify as a REIT for federal income tax purposes or the desirability of an investment in a REIT relative to other investments.
 
Even if we qualify as a REIT for federal income tax purposes, we may be subject to some federal, state and local taxes on our income or property and, in certain cases, a 100% penalty tax, in the event we sell property as a dealer or if our TRS enters into agreements with us or our tenants on a basis that is determined to be other than an arm’s length basis.

To qualify as a REIT, we may be forced to borrow funds on a short-term basis during unfavorable market conditions.

In order to qualify as a REIT, we are required under the Internal Revenue Code to distribute annually at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain. Our TRS may, in its discretion, retain any income it generates net of any tax liability it incurs on that income without affecting the 90% distribution requirements to which we are subject as a REIT. Net income of our TRS is included in REIT taxable income and increases the amount required to be distributed, only if such amounts are paid out as a dividend by our TRS. If our TRS distributes any of its after-tax income to us, that distribution will be included in our REIT taxable income. In addition, we will be subject to income tax at regular corporate rates to the extent that we distribute less than 100% of our net taxable income, including any net capital gains. Because of these distribution requirements, we may not be able to fund future capital needs, including any necessary acquisition financing, from operating cash flow. Consequently, we will be compelled to rely on third-party sources to fund our capital needs. We may not be able to obtain this financing on favorable terms or at all. Any additional indebtedness that we incur will increase our leverage. Our access to third-party sources of capital depends, in part, on:

 
·
general market conditions;
 
14

 
 
·
our current debt levels and the number of properties subject to encumbrances;
 
 
·
our current performance and the market’s perception of our growth potential;
 
 
·
our cash flow and cash dividends; and
 
 
·
the market price per share of our stock.
 
If we cannot obtain capital from third-party sources, we may not be able to acquire or develop properties when strategic opportunities exist, satisfy our debt service obligations or make the cash distributions to our security holders, including those necessary to qualify as a REIT.

Our charter contains restrictions on the ownership and transfer of our stock.

Our charter provides that, subject to certain exceptions, no person or entity may beneficially own, or be deemed to own by virtue of the applicable constructive ownership provisions of the Internal Revenue Code, more than 9.8% (by value or by number of shares, whichever is more restrictive) of the outstanding shares of our common stock or more than 9.8% by value of all our outstanding shares, including both common and preferred stock. We refer to this restriction as the “ownership limit.” A person or entity that becomes subject to the ownership limit by virtue of a violative transfer that results in a transfer to a trust is referred to as a “purported beneficial transferee” if, had the violative transfer been effective, the person or entity would have been a record owner and beneficial owner or solely a beneficial owner of our stock, or is referred to as a “purported record transferee” if, had the violative transfer been effective, the person or entity would have been solely a record owner of our stock.

The constructive ownership rules under the Internal Revenue Code are complex and may cause stock owned actually or constructively by a group of related individuals and/or entities to be owned constructively by one individual or entity. As a result, the acquisition of less than 9.8% of our stock (or the acquisition of an interest in an entity that owns, actually or constructively, our stock) by an individual or entity, could, nevertheless cause that individual or entity, or another individual or entity, to own constructively in excess of 9.8% of our outstanding stock and thereby subject the stock to the ownership limit. Our charter, however, requires exceptions to be made to this limitation if our board of directors determines that such exceptions will not jeopardize our tax status as a REIT. This ownership limit could delay, defer or prevent a change of control or other transaction that might involve a premium price for our common stock or otherwise be in the best interest of our security holders.

Certain tax and anti-takeover provisions of our charter and bylaws may inhibit a change of our control.

Certain provisions contained in our charter and bylaws and the Maryland General Corporation Law may discourage a third-party from making a tender offer or acquisition proposal to us. If this were to happen, it could delay, deter or prevent a change in control or the removal of existing management. These provisions also may delay or prevent the security holders from receiving a premium for their securities over then-prevailing market prices. These provisions include:

 
·
the REIT ownership limit described above;
 
 
·
authorization of the issuance of our preferred shares with powers, preferences or rights to be determined by our board of directors;
 
 
·
the right of our board of directors, without a stockholder vote, to increase our authorized shares and classify or reclassify unissued shares;
 
 
·
advance-notice requirements for stockholder nomination of directors and for other proposals to be presented to stockholder meetings; and
 
 
·
the requirement that a majority vote of the holders of common stock is needed to remove a member of our board of directors for “cause.”
 
15

 
 
The Maryland business statutes also impose potential restrictions on a change of control of our company.

Various Maryland laws may have the effect of discouraging offers to acquire us, even if the acquisition would be advantageous to security holders. Our bylaws exempt us from some of those laws, such as the control share acquisition provisions, but our board of directors can change our bylaws at any time to make these provisions applicable to us.

Our rights and the rights of our security holders to take action against our directors and officers are limited.

Maryland law provides that a director or officer has no liability in that capacity if he or she performs his or her duties in good faith, in a manner he or she reasonably believe to be in our best interests and with the care that an ordinary prudent person in a like position would use under similar circumstances. In addition, our charter eliminates our directors’ and officers’ liability to us and our stockholders for money damages except for liability resulting from actual receipt of an improper benefit in money, property or services or active and deliberate dishonesty established by a final judgment and which is material to the cause of action. Our bylaws require us to indemnify directors and officers for liability resulting from actions taken by them in those capacitates to the maximum extent permitted by Maryland law. As a result, we and our security holders may have more limited rights against our directors and officers than might otherwise exist under common law. In addition, we may be obligated to fund the defense costs incurred by our directors and officers.

Item 1B. Unresolved Staff Comments

There were no unresolved comments from the staff of the SEC at December 31, 2006.

Item 2. Properties

The following table presents certain summary information about our properties. Our properties generally are modern facilities, and amenities at most of our properties include a swimming pool, basketball courts and a large community center featuring a fitness center, computer center, tanning beds, study areas, and a recreation room with billiards and other games. Some properties also have a jacuzzi/hot tub, volleyball courts, tennis courts and in-unit washers and dryers. Callaway House also has a food service facility. One owned property completed construction and opened in Fall 2006 and two owned properties are currently under construction with scheduled completion dates of Fall 2007 and August 2008. Lease terms are generally 12 months at our off-campus properties and nine months at our on-campus properties. These properties are included in the Owned Off-Campus Properties and On-Campus Participating Properties segments discussed in Item 1 and the accompanying Notes to Consolidated and Combined Financial Statements contained in Item 8. All dollar amounts in this table and others herein, except share and per share amounts, are stated in thousands unless otherwise indicated.

We own fee title to all of these properties except for:
 
 
·
University Village at TU, which is subject to a 75-year ground lease with Temple University (with four additional six-year extensions);

 
·
University Centre, which is subject to a 95-year ground lease;

 
·
Arizona State University South Campus Residential Community (“ASU-SCRC”), which is subject to a 65-year ground lease (with two additional ten-year extensions); and

 
·
Four on-campus participating properties held under ground/facility leases with two university systems.
 
16

 
Property
 
Year Built
 
Date Acquired/ Developed
 
Primary University Served
 
Typical Lease Term (Mos)
 
Year Ended December 31, 2006 Revenue
 
Average Monthly Revenue/ Bed (1)
 
2006 Average Occupancy (1)
 
Occupancy as of 12/31/06
 
# of Buildings
 
# of Units
 
# of Beds
OWNED PROPERTIES
                                             
Villas on Apache (2)
 
1987
 
May-99
 
Arizona State University Main Campus
 
12
 
$  1,829
 
$ 419
 
94.9%
 
99.0%
 
6
 
111
 
288
                                             
The Village at Blacksburg
 
1990/ 1998
 
Dec-00
 
Virginia Polytechnic Institute and State University
 
12
 
4,221
 
329
 
99.0%
 
99.3%
 
26
 
288
 
1,056
                                             
River Club Apartments
 
1996
 
Aug-99
 
The University of Georgia - Athens
 
12
 
3,450
 
359
 
98.5%
 
99.4%
 
18
 
266
 
792
                                             
River Walk Townhomes
 
1998
 
Aug-99
 
The University of Georgia - Athens
 
12
 
1,483
 
355
 
98.1%
 
99.1%
 
20
 
100
 
336
                                             
The Callaway House (3)
 
1999
 
Mar-01
 
Texas A&M University
 
9
 
6,140
(4)
n/a
(4)
103.6%
 
103.5%
 
1
 
173
 
538
                                             
The Village at Alafaya Club
 
1999
 
Jul-00
 
The University of Central Florida
 
12
 
5,734
 
528
 
99.4%
 
99.5%
 
20
 
228
 
839
                                             
The Village at Science Drive
 
2000
 
Nov-01
 
The University of Central Florida
 
12
 
4,992
 
535
 
98.9%
 
98.6%
 
17
 
192
 
732
                                             
University Village at Boulder Creek
 
2002
 
Aug-02
 
The University of Colorado at Boulder
 
12
 
2,423
 
648
 
95.1%
 
98.7%
 
4
 
82
 
309
                                             
University Village at Fresno
 
2004
 
Aug-04
 
California State University, Fresno
 
12
 
2,751
 
529
 
97.2%
 
95.1%
 
9
 
105
 
406
                                             
University Village at TU (5)
 
2004
 
Aug-04
 
Temple University
 
12
 
6,027
 
616
 
98.9%
 
99.5%
 
3
 
220
 
749
Subtotal - Same Store Owned Properties (6)
39,050
 
467
 
98.7%
 
99.3%
 
124
 
1,765
 
6,045
                                             
University Village at Sweet Home
 
2005
 
Aug-05
 
State University of New York - Buffalo
 
12
 
5,989
 
568
 
99.5%
 
99.5%
 
9
 
269
 
828
           
 
                               
University Club Tallahassee (7)
 
2000
 
Feb-05
 
Florida State University
 
12
 
3,821
 
400
 
98.6%
 
99.0%
 
17
 
152
 
608
                                             
The Grove at University Club (7)
 
2002
 
Feb-05
 
Florida State University
 
12
 
805
 
400
 
98.8%
 
99.2%
 
8
 
64
 
128
                                             
College Club Tallahassee (7)
 
2001
 
Feb-05
 
Florida A&M University
 
12
 
2,190
 
371
 
93.5%
 
88.8%
 
11
 
96
 
384
                                             
The Greens at College Club (7)
 
2004
 
Feb-05
 
Florida A&M University
 
12
 
912
 
353
 
98.0%
 
99.4%
 
5
 
40
 
160
                                             
University Club Gainesville
 
1999
 
Feb-05
 
University of Florida
 
12
 
1,975
 
366
 
98.1%
 
98.9%
 
8
 
94
 
376
                                             
City Parc at Fry Street
 
2004
 
Mar-05
 
University of North Texas
 
12
 
2,573
 
489
 
98.7%
 
97.6%
 
7
 
136
 
418
                                             
The Estates
 
2002
 
Mar-05
 
University of Florida
 
12
 
6,681
 
517
 
98.8%
 
98.3%
 
18
 
396
 
1,044
                                             
Entrada Real (8)
 
1999
 
Mar-06
 
University of Arizona
 
12
 
1,721
 
459
 
98.6%
 
99.4%
 
8
 
98
 
363
                                             
Royal Oaks (7) (8)
 
1990
 
Mar-06
 
Florida State University
 
12
 
934
 
391
 
99.7%
 
98.7%
 
4
 
82
 
224
                                             
Royal Pavilion (7) (8)
 
1991
 
Mar-06
 
Florida State University
 
12
 
851
 
394
 
99.1%
 
98.0%
 
4
 
60
 
204
                                             
Royal Village Tallahassee (7) (8)
 
1992
 
Mar-06
 
Florida State University
 
12
 
1,201
 
396
 
98.5%
 
99.3%
 
4
 
75
 
288
                                             
Royal Village Gainesville (8)
 
1996
 
Mar-06
 
University of Florida
 
12
 
2,031
 
443
 
96.3%
 
97.5%
 
8
 
118
 
448
                                             
Northgate Lakes (8)
 
1998
 
 
Mar-06
 
The University of Central Florida
 
12
 
3,467
 
460
 
99.2%
 
98.0%
 
13
 
194
 
710
                                             
Royal Lexington (8)
 
1994
 
 
Mar-06
 
The University of Kentucky
 
12
 
1,362
 
366
 
93.6%
 
92.0%
 
4
 
94
 
364
                                             
The Woods at Greenland (8)
 
2001
 
 
Mar-06
 
Middle Tennessee State University
 
12
 
1,020
 
376
 
93.2%
 
95.7%
 
3
 
78
 
276

17


 
 
Property
 
 
 
Year Built
 
 
Date Acquired/ Developed
 
 
 
Primary University Served
 
Typical Lease Term (Mos)
 
Year Ended December 31, 2006 Revenue
 
Average Monthly Revenue/ Bed (1)
 
2006 Average
Occupancy (1)
 
Occupancy as of 12/31/06
 
 
 
# of Buildings
 
 
 
# of Units
 
 
 
# of Beds
                                             
Raider’s Crossing (8)
 
2002
 
Mar-06
 
Middle Tennessee State University
 
12
 
$    1,091
 
$ 399
 
93.5%
 
95.7%
 
4
 
96
 
276
                                             
Raider’s Pass (8)
 
2002
 
Mar-06
 
Texas Tech University
 
12
 
2,914
 
447
 
75.4%
 
69.4%
 
12
 
264
 
828
                                             
Aggie Station (8)
 
2002
 
Mar-06
 
Texas A&M University
 
12
 
2,003
 
439
 
97.3%
 
98.0%
 
5
 
156
 
450
                                             
The Outpost San Marcos (8)
 
2004
 
Mar-06
 
Texas State University - San Marcos
 
12
 
2,232
 
429
 
99.3%
 
99.6%
 
5
 
162
 
486
                                             
The Outpost San Antonio (8)
 
2005
 
Mar-06
 
University of Texas - San Antonio
 
12
 
3,938
 
447
 
99.8%
 
100.0%
 
10
 
276
 
828
                                             
Callaway Villas (9)
 
2006
 
Aug-06 (9)
 
Texas A&M University
 
12
 
1,922
 
574
 
99.9%
 
100.0%
 
18
 
236
 
704
                                             
University Centre (10)
 
2007
 
Fall 2007 (10)
 
Rutgers University, NJIT, Essex CCC
 
12
 
 
n/a
 
n/a
 
n/a
 
2
 
234
 
838
                                             
ASU-SCRC (11)
 
2008
 
Aug-08 (11)
 
Arizona State University
 
12
 
 
n/a
 
n\a
 
n/a
 
10
 
613
 
1,866
Subtotal New Owned Properties
 
51,633
 
454
 
96.3%
 
95.8%
 
197
 
4,083
 
13,099
Total Owned Properties
 
90,683
 
459
 
97.2%
 
97.1%
 
321
 
5,848
 
19,144
                                             
ON-CAMPUS PARTICIPATING PROPERTIES (12) (13)
                           
                                             
University Village PVAMU
 
1996/ 97/98
 
Aug-96-
Aug-98
 
Prairie View A&M University
 
9
 
7,982
 
448
 
94.5%
 
95.8%
 
30
 
 
612
 
1,920
                                             
University College PVAMU
 
2000/ 2003
 
Aug-00
Aug-03
 
Prairie View A&M University
 
9
 
5,281
 
434
 
84.6%
 
89.3%
 
14
 
756
 
1,470
                                             
University Village TAMIU
 
1997
 
Aug-97
 
Texas A&M International University
 
9
 
1,114
 
431
 
84.7%
 
83.6%
 
4
 
 
84
 
250
                                             
Cullen Oaks
 
2001/
2005
 
Aug-01
Aug-05
 
The University of Houston
 
9
 
5,583
 
614
 
98.4%
 
96.1%
 
4
 
411
 
879
Total - On-Campus Participating Properties
 
19,960
 
475
 
91.5%
 
93.1%
 
52
 
1,863
 
4,519
Grand Total- All Properties
   
$110,643
(14)
$ 462
(15)
96.0%
 
96.2%
 
373
 
7,711
 
23,663

18


(1)
Average monthly revenue per bed is calculated based upon our base rental revenue earned during typical lease terms for the year ended December 31, 2006 divided by average occupied beds over the typical lease term. Average occupancy is calculated based on the average number of occupied beds during typical lease terms for the year ended December 31, 2006 divided by total beds.
 
(2)
Formerly Commons on Apache
 
(3)
Although we hold an 80% interest in the property, because of our preferred distribution rights, we currently receive substantially all of the property’s net cash flow.
 
(4)
As rent at this property includes food services, revenue is not comparable to the other properties in this chart. Subsequent to our IPO, this property’s food services revenue is now recognized by our TRS.
 
(5)
Subject to a 75-year ground lease with Temple University.
 
(6)
Our same store portfolio represents properties that were owned by us for both of the full years ended December 31, 2006 and 2005.
 
(7)
For lease administration purposes, University Club Tallahassee and The Grove at University Club are reported combined, College Club Tallahassee and The Greens at College Club are reported combined, and Royal Oaks, Royal Pavilion, and Royal Village Tallahassee are reported combined. As a result, revenue for the year ended December 31, 2006 is allocated to the respective properties based on relative bed count.
 
(8)
These properties were acquired during 2006. Average occupancy is calculated based on the period these properties were owned and operated by us in 2006.
 
(9)
This property completed construction and opened in the Fall 2006 semester. Average occupancy is calculated based on the period this property was operating in 2006.
 
(10)
Currently under development with a scheduled completion date of Fall 2007. Subject to a 95-year ground lease.
 
(11)
Currently under development with a scheduled completion date of August 2008. Subject to a 65-year ground lease with Arizona State University.
 
(12)
Although our on-campus participating properties accounted for 24.2% of our units, 19.1% of our beds and 18.0% of our revenues for the year ended December 31, 2006, because of the structure of their ownership and financing we have only received approximately $0.9 million in distributions of excess cash flow during the year ended December 31, 2006. The ground/facility leases through which we own our on-campus participating properties provide that the university lessor may purchase our interest in and assume the management of the facility.
 
(13)
Subject to ground/facility leases with their primary university systems. Average occupancy is calculated based on the nine month academic year (excluding the summer months).
 
(14)
Excludes revenue from The Village on University, which was sold in December 2006. These revenues are included in discontinued operations discussed in Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 8 – Consolidated and Combined Financial Statements.
 
(15)
Does not include revenues from The Callaway House because of its food service component, which is now recognized by our TRS subsequent to our IPO.
 
19


 

Property Activity Subsequent to Year End

Acquisitions

In January 2007, we acquired a 248-unit, 752-bed property (The Village on Sixth) located near the campus of Marshall University in Huntington, West Virginia, for a purchase price of $25.6 million, which excludes $1.7 million of anticipated transaction costs, initial integration expenses and capital expenditures necessary to bring this property up to our operating standards. As part of the transaction, we assumed two fixed-rate mortgage loans, which includes one for $16.2 million with an annual interest rate of 5.5% and remaining term to maturity of 7.5 years and the second loan for $1.4 million with an annual interest rate of 6.6% and remaining term to maturity of 9.9 years.

In February 2007, we acquired a three property portfolio (the “Edwards Portfolio”) for a purchase price of $102.0 million, which excludes $3.5 million of anticipated transaction costs, initial integration expenses and capital expenditures necessary to bring these properties up to our operating standards. As part of the transaction, we assumed $70.7 million in fixed-rate mortgage debt with a weighted average annual interest rate of 5.7% and an average remaining term to maturity of 8.5 years. The transaction also includes the pre-sale of an additional phase containing 84 beds currently under construction for $4.6 million, subject to the satisfaction of certain conditions. The completion of the additional phase is expected in August 2007.

The Edwards Portfolio consists of one property in Lexington, Kentucky located near the campus of the University of Kentucky, one property in Toledo, Ohio located near the campus of the University of Toledo and one property in Ypsilanti, Michigan located near the campus of Eastern Michigan University. These three properties total 764 units and 1,971 beds. Subsequent to these transactions, our total owned and managed portfolio is comprised of 57 properties that represent approximately 35,700 beds in approximately 11,900 units.

Item 3. Legal Proceedings

From time to time, we are subject to various lawsuits, claims and proceedings arising in the ordinary course of business. As of December 31, 2006, none of these were expected to have a material adverse effect on our cash flows, financial condition, or results of operations.

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of our stockholders during the quarter ended December 31, 2006.

20

 
PART II
 
Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters

Market Information

The Company’s common stock has been listed and is traded on the New York Stock Exchange (“NYSE”) under the symbol “ACC”. The following table sets forth, for the periods indicated, the high and low sale prices in dollars on the NYSE for our common stock and the distributions we declared with respect to the periods indicated.

 
 
High
 
Low
 
Distributions Declared
 
Quarter ended March 31, 2005
 
$
22.75
 
$
19.09
 
$
0.3375
 
Quarter ended June 30, 2005
 
$
23.36
 
$
19.04
 
$
0.3375
 
Quarter ended September 30, 2005
 
$
25.25
 
$
21.75
 
$
0.3375
 
Quarter ended December 31, 2005
 
$
26.49
 
$
22.60
 
$
0.3375
 
Quarter ended March 31, 2006
 
$
28.58
 
$
24.24
 
$
0.3375
 
Quarter ended June 30, 2006
 
$
26.20
 
$
22.40
 
$
0.3375
 
Quarter ended September 30, 2006
 
$
26.27
 
$
23.80
 
$
0.3375
 
Quarter ended December 31, 2006
 
$
30.23
 
$
24.85
 
$
0.3375
 

Holders

As of March 9, 2007, there were approximately 5,100 holders of record of the Company’s common stock and 22,903,073 shares of common stock outstanding.

Distributions

We intend to continue to declare quarterly distributions on our common stock. The actual amount and timing of distributions, however, will be at the discretion of our Board of Directors and will depend upon our financial condition in addition to the requirements of the Code, and no assurance can be given as to the amounts or timing of future distributions. The payment of distributions is subject to restrictions under the Company’s $115 million revolving credit facility described in Note 10 to the Consolidated and Combined Financial Statements in Item 8 and discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 under Liquidity and Capital Resources.
 
Equity Compensation Plans

We have 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, common units of limited partnership interest in the Operating Partnership (formerly profits interest units or “PIUs”), restricted stock units (“RSUs”), restricted stock awards (“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. Refer to Note 11 in the accompanying Notes to Consolidated and Combined Financial Statements in Item 8 for a more detailed description of the Plan. As of December 31, 2006, the total units and shares issued under the Plan were as follows:

 
21

 

   
# of Securities to be Issued Upon Exercise of Outstanding Options, Warrants, and Rights
   
Weighted-Average Exercise Price of Outstanding Options, Warrants, and Rights
 
# of Securities Remaining Available for Future Issuance Under Equity Compensation Plans
 
Equity Compensation Plans Approved by Security Holders (2)
   
251,175
(1) 
 
$
-0-
   
958,825
 
Equity Compensation Plans Not Approved by Security Holders
   
n/a
     
n/a
   
n/a
 

(1)  
Consists of RSUs granted to non-employee Board of Director members in connection with our IPO and in May 2005 and May 2006, RSAs granted to its executive officers and certain employees in February 2005 and January 2006 and common units of limited partnership interest in the Operating Partnership

(2)  
Table does not include 367,682 common stock awards in the form of an outperformance bonus plan. Upon the occurrence of certain events or the achievement of certain performance measures, the common stock awards under the outperformance bonus plan will be paid to the recipients in either stock or cash, at the discretion of the Compensation Committee of the Board of Directors. If these awards were included in the above table, we would have 591,143 shares available for future issuance under the Plan.
 
22


Item 6. Selected Financial Data

The following table sets forth selected financial and operating data on a consolidated historical basis for the Company and on a combined historical basis for the Predecessor. Results for the year ended December 31, 2004 represent the combined historical data for our Predecessor for the period from January 1, 2004 to August 16, 2004 as well as the consolidated results for our Company for the period from August 17, 2004 to December 31, 2004.

The following data should be read in conjunction with the Notes to Consolidated and Combined Financial Statements in Item 8 and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Item 7.

   
As of and for the Year Ended December 31,
 
   
2006
 
2005
 
2004
 
2003
 
2002
 
Statements of Operations Information:
                     
Revenues
 
$
118,953
 
$
82,522
 
$
56,230
 
$
52,792
 
$
47,091
 
Income (loss) from continuing operations
   
1,662
   
1,751
   
(1,350
)
 
(186
)
 
(2,790
)
Discontinued operations:
                               
Income (loss) attributable to
                               
discontinued operations
   
2,287
   
2,028
   
50
   
(774
)
 
356
 
Gain (loss) from disposition of real estate
   
18,648
   
5,883
   
(39
)
 
16
   
295
 
Net Income (loss)
   
22,597
   
9,662
   
(1,339
)
 
(944
)
 
(2,139
)
                                 
Per Share and Distribution Data:
                               
Income per diluted share:
                               
Income from continuing operations
 
$
0.08
 
$
0.12
 
$
0.05
(1) 
           
Discontinued operations
   
1.09
   
0.53
   
0.10
(1) 
           
Net income
   
1.17
   
0.65
   
0.15
(1) 
           
Cash distributions declared per share / unit
   
1.35
   
1.35
   
0.1651
(1) 
           
Cash distributions declared
   
25,287
   
20,180
   
2,084
(1) 
           
                                 
Balance Sheet Data:
                               
Total assets
 
$
884,381
 
$
550,862
 
$
367,628
 
$
330,566
 
$
307,658
 
Secured debt
   
432,294
   
291,646
   
201,014
   
267,518
   
249,706
 
Capital lease obligations
   
2,348
   
1,679
   
598
   
410
   
402
 
Stockholders’ and Predecessor owners’
                               
equity (2)
   
369,474
   
223,227
   
138,229
   
27,658
   
35,526
 
                                 
Selected Owned Property Information:
                               
Owned properties
   
38
   
25
   
18
   
14
   
14
 
Units
   
7,711
   
5,620
   
4,317
   
3,567
   
3,459
 
Beds
   
23,663
   
17,109
   
12,955
   
10,546
   
10,336
 
Occupancy as of December 31,
   
96.2
%
 
97.0
%
 
97.1
%
 
91.5
%
 
91.0
%
 
                               
Net cash provided by operating activities
 
$
35,237
 
$
20,429
 
$
17,778
 
$
6,846
 
$
7,647
 
Net cash used in investing activities
   
(102,718
)
 
(111,755
)
 
(63,621
)
 
(33,738
)
 
(21,678
)
Net cash provided by financing activities
   
121,947
   
111,332
   
45,251
   
21,553
   
11,646
 
                                 
Funds From Operations (“FFO”):
                               
Net income (loss)
 
$
22,597
 
$
9,662
 
$
(1,339
)
$
(944
)
$
(2,139
)
Minority interests
   
2,038
   
164
   
(100
)
 
(16
)
 
(30
)
(Gain) loss from disposition of real estate
   
(18,648
)
 
(5,883
)
 
39
   
(16
)
 
(295
)
Real estate related depreciation and
                               
amortization
   
24,956
   
16,032
   
10,009
   
8,937
   
8,233
 
Funds from operations (3)(4)
 
$
30,943
 
$
19,975
 
$
8,609
 
$
7,961
 
$
5,769
 
 
23

 
(1)
Represents per share information and cash distributions declared during the period from August 17, 2004 (our IPO date) through December 31, 2004.
 
(2)
Information for the years ended December 31, 2006, 2005 and 2004 reflects our stockholders’ equity as a result of and subsequent to the IPO while previous years reflect our Predecessor owners’ equity.
 
(3)
As defined by the National Association of Real Estate Investment Trusts or NAREIT, funds from operations or FFO represents income (loss) before allocation to minority interests (computed in accordance with GAAP), excluding gains (or losses) from sales of property, plus real estate related depreciation and amortization (excluding amortization of loan origination costs) and after adjustments for unconsolidated partnerships and joint ventures. We present FFO because we consider it an important supplemental measure of our operating performance and believe it is frequently used by securities analysts, investors and other interested parties in the evaluation of REITs, many of which present FFO when reporting their results. FFO is intended to exclude GAAP historical cost depreciation and amortization of real estate and related assets, which assumes that the value of real estate diminishes ratably over time. Historically, however, real estate values have risen or fallen with market conditions. Because FFO excludes depreciation and amortization unique to real estate, gains and losses from property dispositions and extraordinary items, it provides a performance measure that, when compared year over year, reflects the impact to operations from trends in occupancy rates, rental rates, operating costs, development activities and interest costs, providing perspective not immediately apparent from net income.
 
We compute FFO in accordance with standards established by the Board of Governors of NAREIT in its March 1995 White Paper (as amended in November 1999 and April 2002), which may differ from the methodology for calculating FFO utilized by other equity REITs and, accordingly, may not be comparable to such other REITs. Further, FFO does not represent amounts available for management’s discretionary use because of needed capital replacement or expansion, debt service obligations or other commitments and uncertainties. FFO should not be considered as an alternative to net income (loss) (computed in accordance with GAAP) as an indicator of our financial performance or to cash flow from operating activities (computed in accordance with GAAP) as an indicator of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to pay distributions.
 
(4)
When considering our FFO, we believe it is also a meaningful measure of our performance to make certain adjustments related to our on-campus participating properties. See Management’s Discussion and Analysis of Financial Condition and Results of Operations—Funds from Operations in Item 7 contained herein.
 
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Our Company and Our Business

Overview

We are one of the largest owners, managers and developers of high quality student housing properties in the United States in terms of beds owned and under management. We are a fully integrated, self-managed and self-administered equity REIT with expertise in the acquisition, design, financing, development, construction management, leasing and management of student housing properties.

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 (See Note 9); (ii) the assumption of $123.6 million of fixed-rate mortgage debt (see Note 10); and (iii) the remainder in cash and promissory notes. As of December 31, 2006, as anticipated, the Company has 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. As of December 31, 2006, we were also under contract to acquire a $24.8 million property in Waco, Texas. The closing of this transaction was dependent upon completion of construction and lease-up and the achievement of certain occupancy levels and rental rates, which were not met and the contract was terminated in 2007.

24

 
Property Portfolio

As of December 31, 2006, our total property portfolio contained 38 student housing properties with approximately 23,700 beds and 7,700 apartment units, all of which we manage. These communities contain modern housing units, offer resort-style amenities and are supported by a resident assistant system and other student-oriented programming.

Our property portfolio includes 34 owned properties that are in close proximities to 34 colleges and universities in 12 states, two of which are currently under construction. The net operating income of these student housing communities, which is one of the financial measures that we use to evaluate community performance, is affected by the demand and supply dynamics within our markets, which drives our rental rates and occupancy levels and is affected by our ability to control operating costs. Our overall operating performance is also impacted by the general availability and cost of capital and the performance of our newly developed and acquired student housing communities. We create long-term stockholder value by accessing capital on cost effective terms, deploying that capital to develop, redevelop and acquire student housing communities and selling communities when they no longer meet our long-term investment strategy and when market conditions are favorable.

Additionally, we participate with two university systems in the ownership of four on-campus properties under long-term ground/facility leases; we refer to these properties as our “on-campus participating properties.”

Third-Party Development and Management Services

We also provide development and construction management services for student housing properties owned by universities, 501(c) 3 foundations and others. Our clients have included some of the nation’s most prominent systems of higher education, including the State University of New York System, the University of California System, the University of Houston System, the Texas A&M University System, the Texas State University System, the University of Georgia System, the University of North Carolina System, the Purdue University System, the University of Colorado System, and the West Virginia University System. We have developed student housing properties for these clients and a majority of the time have been retained to manage these properties following their opening. Since 1996, we have developed and assisted in securing financing for 28 third-party student housing properties, including four projects with scheduled completion dates ranging between August 2007 and July 2008. As of December 31, 2006, we were under contract on four projects that are currently in progress and whose fees range from $0.4 million to $3.1 million. As of December 31, 2006, fees of approximately $2.8 million remained to be earned by us with respect to these projects, which have scheduled completion dates of August 2007 through July 2008.

We also provide third-party management and leasing services for 15 student housing properties that represent approximately 9,300 beds in approximately 3,200 units, nine of which we developed. Our third-party management and leasing services are typically provided pursuant to multi-year management contracts that have an initial term that ranges from one to five years. As of December 31, 2006, our total owned and managed portfolio included 53 properties that represented approximately 33,000 beds in approximately 10,900 units.

We believe that the ownership and operation of student housing communities in close proximity to selected colleges and universities present an attractive long-term investment opportunity for our investors. We intend to continue to execute our strategy of identifying existing differentiated, typically highly amenitized, student housing communities or development opportunities in close proximity to university campuses with high barriers to entry which are projected to experience substantial increases in enrollment and/or are under-serviced in terms of existing on and/or off-campus student housing. While fee revenue from our third-party development, construction management and property management services allows us to develop strong and key relationships with colleges and universities, this area has over time become a smaller portion of our operations due to the continued focus on and growth of our owned property portfolio. Nevertheless, we believe these services continue to provide synergies with respect to our ability to identify, close, and successfully operate student housing properties.

Critical Accounting Policies

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

25

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

Costs associated with the pursuit of third-party development and management service contracts are expensed as incurred until such time as we have been notified of a contract award or otherwise believe that it is probable a contract will be awarded. At such time, the reimbursable portion of such costs are recorded as receivables with the remaining portion deferred and expensed in relation to the revenues earned on such contracts. Development revenues are generally recognized based on a proportionate performance method based on contract deliverables, while construction revenues are recognized and related costs (including the costs of our construction personnel involved in the project) are deferred and expensed using the percentage of completion method as determined by construction costs incurred relative to the total estimated construction costs. Fees received in excess of those recognized are reflected as deferred revenue, which is included in other liabilities in the accompanying consolidated balance sheets. Revenues recognized in excess of amounts received are included in other assets on the accompanying consolidated balance sheets. Incentive fees are generally recognized when the project is complete and performance has been agreed upon by all parties, or when performance has been verified by an independent third-party.

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

Student Housing Rental Revenue Recognition and Accounts Receivable

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

Allocation of Fair Value to Acquired Properties

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

Long-Lived AssetsImpairment

On a periodic basis, management is required to assess whether there are any indicators that the value of our real estate properties may be impaired. A property’s value is considered impaired if management’s estimate of the aggregate future cash flows (undiscounted and without interest charges) to be generated by the property are less than the carrying value of the property. These estimates of cash flows consider factors such as expected future operating income, trends and prospects, as well as the effects of demand, competition and other factors. To the extent impairment has occurred, the loss will be measured as the excess of the carrying amount of the property over the fair value of the property, thereby reducing our net income.
 
26

 
Outperformance Bonus Plan

Vesting of stock-based awards under our outperformance bonus plan (discussed in Note 11 in the accompanying Notes to Consolidated and Combined Financial Statements contained in Item 8 herein) will occur on the third anniversary of our IPO, provided that the employees have maintained continued service and that at least one performance measure, as outlined in our 2004 Incentive Award Plan, has been achieved. Management’s assessment of the probability of the achievement of the required performance measures is a highly judgmental determination that is based on the facts and circumstances existing at the date of the financial statements as well as management’s expectations of our and our peer group’s future performance. As of December 31, 2006, nothing has been reflected in our financial statements related to these awards, because management has determined that the achievement of the required performance measures is not probable. In the event that in a future period management determines that one of the required performance measures becomes probable, a charge to compensation expense will be recognized based on a proportionate amount of the total fair value of the awards from the date the award is considered probable to the ultimate settlement date. The total potential charge to compensation expense, should management determine that the vesting of the awards becomes probable, could be in excess of $10.0 million.

Construction Property Savings and Fire Proceeds

An entity formed by our Predecessor owners was entitled to any savings in the budgeted completion cost of three of our owned off-campus construction properties that were completed in Fall 2004. In February 2005, our Predecessor owners received such funds. Additionally, in April 2005, our Predecessor owners received insurance proceeds originally received by the Company in connection with the fire that occurred at the University Village at Fresno in 2003. These payments were accounted for as equity distributions.

Capital Expenditures

We distinguish between capital expenditures necessary for the ongoing operations of our properties and acquisition-related improvements incurred within one to two years of acquisition of the related property. (Acquisition-related improvements are expenditures that have been identified at the time the property is acquired, and which we intended to incur in order to position the property to be consistent with our physical standards). We capitalize non-recurring expenditures for additions and betterments to buildings and land improvements. In addition, we generally capitalize expenditures for exterior painting, roofing, and other major maintenance projects that substantially extend the useful life of the existing assets. The cost of ordinary repairs and maintenance that do not improve the value of an asset or extend its useful life are charged to expense when incurred. Planned major repair, maintenance and improvement projects are capitalized when performed. In some circumstances, lenders require us to maintain a reserve account for future repairs and capital expenditures. These amounts are classified as restricted cash on the accompanying consolidated balance sheets, as the funds are not available to us for current use.
 
27


 
Results of Operations

Comparison of the Years Ended December 31, 2006 and December 31, 2005

The following table presents our results of operations for the years ended December 31, 2006 and 2005, including the amount and percentage change in these results between the two periods.

   
Year Ended December 31,
         
   
2006
 
2005
 
Change($)
 
Change(%)
 
Revenues:
                 
Owned off-campus properties
 
$
89,264
 
$
54,287
 
$
34,977
   
64.4
%
On-campus participating properties
   
19,960
   
18,470
   
1,490
   
8.1
%
Third-party development services
   
5,778
   
5,854
   
(76
)
 
(1.3
%)
Third-party management services
   
2,532
   
2,786
   
(254
)
 
(9.1
%)
Resident services
   
1,419
   
1,125
   
294
   
26.1
%
Total revenues
   
118,953
   
82,522
   
36,431
   
44.1
%
                           
Operating expenses:
                         
Owned off-campus properties
   
42,620
   
25,653
   
16,967
   
66.1
%
On-campus participating properties
   
8,970
   
8,325
   
645
   
7.7
%
Third-party development and management services
   
5,564
   
6,969
   
(1,405
)
 
(20.2
%)
General and administrative
   
6,278
   
6,714
   
(436
)
 
(6.5
%)
Depreciation and amortization
   
24,864
   
15,447
   
9,417
   
61.0
%
Ground/facility lease
   
857
   
873
   
(16
)
 
(1.8
%)
Total operating expenses
   
89,153
   
63,981
   
25,172
   
39.3
%
                           
Operating income
   
29,800
   
18,541
   
11,259
   
60.7
%
                           
Nonoperating income and (expenses):
                         
Interest income
   
1,230
   
825
   
405
   
49.1
%
Interest expense
   
(25,937
)
 
(17,368
)
 
(8,569
)
 
49.3
%
Amortization of deferred financing costs
   
(1,365
)
 
(1,176
)
 
(189
)
 
16.1
%
Other nonoperating income
   
   
1,279
   
(1,279
)
 
(100.0
%)
Total nonoperating expenses
   
(26,072
)
 
(16,440
)
 
(9,632
)
 
58.6
%
                           
Income before income taxes, minority interests, and discontinued operations
   
3,728
   
2,101
   
1,627
   
77.4
%
Income tax provision
   
(28
)
 
(186
)
 
158
   
(84.9
%)
Minority interests
   
(2,038
)
 
(164
)
 
(1,874
)
 
1,142.7
%
Income from continuing operations
   
1,662
   
1,751
   
(89
)
 
5.1
%
                           
Discontinued operations:
                         
Income attributable to discontinued operations
   
2,287
   
2,028
   
259
   
12.8
%
Gain from disposition of real estate
   
18,648
   
5,883
   
12,765
   
217.0
%
Total discontinued operations
   
20,935
   
7,911
   
13,024
   
164.6
%
Net income
 
$
22,597
 
$
9,662
 
$
12,935
   
133.9
%

Owned Off-Campus Properties Operations

Revenues and operating expenses from our owned off-campus properties increased by $35.0 million and $17.0 million, respectively, in 2006 as compared to 2005. These increases were primarily due to the acquisition of the Royal Portfolio on March 1, 2006 and the completion of construction and opening of University Village at Sweet Home in August 2005 and Callaway Villas in August 2006. The Village on University was sold in December 2006 and is therefore not reflected in operating revenues and expenses but is included in discontinued operations.

New Property Operations. On March 1, 2006, we acquired the Royal Portfolio, which consists of 13 properties containing 5,745 beds located in Florida, Texas, Tennessee, Arizona and Kentucky. In addition, in August 2005 we completed construction of and opened an 828-bed property serving the State University of New York Buffalo and in August 2006 we completed construction of and opened a 704-bed property serving Texas A&M University. These new properties contributed $34.2 million of additional revenues and $16.9 million of additional operating expenses in 2006 as compared to 2005.

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Same Store Property Operations (Excluding New Property Activity). We had ten properties containing 6,045 beds which were operating during both 2006 and 2005. These properties produced revenues of $39.1 million and $38.0 million during 2006 and 2005, respectively, an increase of $1.1 million. Excluding resident services revenues, which are provided through our TRS subsequent to our IPO, these properties produced revenues of $38.1 million during 2006, as compared to $37.0 million in 2005, an increase of $1.1 million. This increase was primarily due to an increase in average rental rates during 2006 as compared to 2005, as well as the improved lease up for the 2006/2007 academic year, which resulted in average occupancy rates increasing to 96.6% in 2006 from 96.2% in 2005. Revenues in 2007 will be dependent on our ability to maintain our current leases in effect for the 2006/2007 academic year and our ability to obtain appropriate rental rates and desired occupancy for the 2007/2008 academic year at our various properties during our leasing period, which typically begins in January and ends in August.

At these existing properties, operating expenses remained relatively constant at $16.5 million for both 2006 and 2005. We anticipate that operating expenses in 2007 will increase slightly as compared with 2006 as a result of expected increases in insurance costs, utility costs, property taxes and general inflation.

On-Campus Participating Properties (“OCPP”) Operations

New Property Operations. In August 2005, we completed construction of and opened an additional phase of our Cullen Oaks property, consisting of 180 units and 354 beds. This additional phase contributed approximately $1.3 million of additional revenues and approximately $0.6 million of additional operating expenses during 2006.

Same Store OCPP Operations. We had four on-campus participating properties containing 4,165 beds which were operating during both 2006 and 2005. Revenues from our same store on-campus participating properties increased to $17.7 million in 2006 from $17.6 million in 2005, an increase of $0.1 million. This increase was due to increased rental rates, which were offset by a decrease in average occupancy from 73.3% in 2005 to 71.9% in 2006.

At these existing properties, operating expenses remained relatively constant at $8.1 million and $8.0 million for the years ended December 31, 2006 and 2005, respectively. We anticipate that operating expenses in 2007 will increase slightly as compared with 2006 as a result of expected increases in utility costs, insurance costs and general inflation.

Third-Party Development Services Revenue

Third-party development services revenue was approximately $5.8 million in both 2006 and 2005. Development services revenues are dependent on our ability to successfully be awarded such projects, the amount of the contractual fee related to the project and the timing and completion of the development and construction of the project. In addition, to the extent projects are completed under budget, we may be entitled to a portion of such savings, which are recognized as revenue when performance has been agreed upon by all parties, or when performance has been verified by an independent third-party. It is possible that projects for which we have deferred pre-development costs will not close and that we will not be reimbursed for such costs. The pre-development costs associated therewith will ordinarily be charged against income for the then-current period.

Third-Party Management Services Revenue

Third-party management services revenues decreased by $0.3 million from $2.8 million in 2005 to $2.5 million in 2006. This decrease was primarily the result of the discontinuation of the Texas State University System management contracts in July 2006, which was slightly offset by the commencement of four management contracts in August 2006. We anticipate that third-party management services revenues in 2007 will increase slightly as compared with 2006, as a result of the four management contracts obtained in August 2006 and anticipated new contracts in 2007.

Third-Party Development and Management Services Expenses

Third-party development and management services expenses decreased approximately $1.4 million, from $7.0 million in 2005 to $5.6 million in 2006. This decrease was primarily due to a decrease of approximately $0.9 million in expenses incurred during 2006 as compared to 2005 in relation to the West Virginia University third-party development projects, a result of the progress of those projects during the respective years. Additionally, a reserve of approximately $0.3 million was recorded in 2005 related to our Blinn College development project which was not awarded as anticipated. Third-party development and management services expenses in 2007 will be dependent on the level of awards we pursue, and as previously mentioned, any pre-development costs charged against income for projects which did not close.

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Resident Services

Resident services revenue represents revenue earned by our TRS related to the provision of certain services to residents at our properties, such as food service, housekeeping, and resident programming activities. These services are provided to the residents at market rates and under an agreement between the TRS and the Operating Partnership, payments from residents are collected by the properties on behalf of the TRS in conjunction with their collection of rents. Revenue from resident services increased approximately $0.3 million from $1.1 million in 2005 to $1.4 million in 2006. This increase was primarily due to additional revenue earned during 2006 from the acquired properties discussed above and the completion of construction and opening of University Village at Sweet Home in August 2005 and Callaway Villas in August 2006. As a business strategy, our level of services provided to residents by the TRS is only incidental to that which is necessary to maintain or increase occupancy. We anticipate that resident services revenue will increase in 2007 as compared to 2006 as additional revenues are generated from the timing of acquisitions and development properties placed into service.

General and Administrative

General and administrative expenses (relating primarily to corporate operations) decreased approximately $0.4 million from $6.7 million in 2005 to $6.3 million in 2006. This decrease was primarily due to a $0.4 million compensation charge recorded in April 2005 to reflect a separation agreement entered into with a former executive officer. In addition, the level of cash incentive awards decreased in 2006 as compared to 2005, which was offset by an increase in payroll and other related costs as a result of overall increases in corporate staffing levels due to recent growth in our owned portfolio from the property acquisitions completed in 2006 and 2005. As a result of this growth, we anticipate general and administrative expenses to increase substantially in 2007 as a result of the annualization of these costs as well as increases in general inflation.

Depreciation and Amortization

Depreciation and amortization increased approximately $9.4 million from $15.5 million in 2005 to $24.9 million in 2006. This increase was primarily due to the acquisition of the Royal Portfolio on March 1, 2006, the acquisition of seven properties during 2005, the opening of one owned off-campus property in August 2005 and one owned off-campus property in August 2006, and the completion of an additional phase at an on-campus participating property in August 2005. In conjunction with the acquisition of the 13-property Royal Portfolio on March 1, 2006 and the seven properties acquired during the first quarter of 2005, a valuation was assigned to in-place leases which was amortized over the remaining lease terms of the acquired leases (generally less than one year). This contributed $2.3 million and $1.1 million of additional depreciation and amortization expense for the year ended December 31, 2006 and 2005, respectively, an increase of $1.2 million. We expect depreciation and amortization in 2007 to increase significantly from 2006 primarily due to a full year’s depreciation on properties acquired and placed in service during 2006 and the $127.6 million of recently completed 2007 acquisitions.

Amortization of deferred financing costs increased $0.2 million from $1.2 million in 2005 to $1.4 million in 2006. This increase was primarily due to debt assumed in connection with the previously mentioned Royal Portfolio acquisition and additional finance costs incurred in June 2005 related to an amendment to our revolving credit facility. This increase was slightly offset by a decrease related to the August 2006 amendment to our revolving credit facility, which extended the term of the facility through August 2009. We expect amortization of deferred financing costs in 2007 to remain fairly constant as compared to 2006 due to a full year’s amortization of debt assumed in connection with acquisitions made during 2006 and the debt assumed in connection with the $127.6 million of recently completed 2007 acquisitions, which will be offset by a reduction in amortization on the revolving credit facility as a result of the previously mentioned August 2006 amendment.

Interest Income

Interest income increased by approximately $0.4 million, from $0.8 million in 2005 to $1.2 million in 2006. This increase is primarily due to additional interest earned in 2006 on the remaining proceeds from our September 2006 equity offering and net proceeds from the sale of our owned off-campus property in December 2006, which was invested in money market investments during the year. In addition, higher interest rates in 2006 resulted in more interest earned on cash and cash equivalents and restricted cash.

30

 
Interest Expense

Interest expense increased approximately $8.5 million, from $17.4 in 2005 to $25.9 million in 2006. This increase was primarily due to $6.4 million of additional interest incurred in 2006 associated with debt assumed in connection with the previously mentioned 2006 and 2005 acquisitions, net of the amortization of debt premiums and discounts recorded to reflect the market value of debt assumed. In addition, we incurred additional interest expense on our revolving credit facility as a result of an increase in the weighted average balance from $13.5 million to $41.1 million for the years ended December 31, 2005 and 2006, respectively, and an increase in the weighted average interest rate incurred under the revolving credit facility from 4.5% to 6.6% for the years ended December 31, 2005 and 2006, respectively. We also incurred additional interest in 2006 related to the construction loans incurred to fund the additional phase at an on-campus participating property that opened in August 2005. These increases were offset by an increase in capitalized interest as a result of two owned off-campus properties being under construction during 2006 as compared to one owned off-campus property being under construction for the same period in 2005. We anticipate that interest expense in 2007 will increase from 2006 levels due to interest expense assumed or incurred in connection with property acquisitions and increases in potential borrowing rates that may impact our floating rate on our credit facility.

Other Nonoperating Income

Other non-operating income for 2005 includes a gain of approximately $0.9 million related to the sale of our option to acquire a 23.33% interest in Dobie Center, an off-campus student housing property held by an affiliate of our Predecessor owners. In addition, we also recognized a gain of approximately $0.4 million in 2005 related to insurance proceeds received for a fire that occurred at one of our owned off-campus properties in 2003.

Income Taxes

Subsequent to our IPO formation transactions, our TRS manages our non-REIT activities. The TRS is subject to federal, state and local income taxes and is required to recognize the future tax benefits attributable to deductible temporary differences between book and tax basis, to the extent that the asset will be realized. Accordingly, an initial income tax benefit of $0.7 million was recorded in connection with our IPO during 2004. An income tax provision of approximately $0.2 million and $28,000 was recorded by our TRS during 2005 and 2006, respectively, to better reflect our estimate of the realization of our deferred tax asset based on management’s estimate of future taxable income of our TRS.

We are subject to federal, state and local income taxes as a result of the services provided by our TRS, which include our third-party services revenues, resident services revenues and the operations of our on-campus participating properties. As a result, the income earned by our TRS, unlike our results from our owned properties, is subject to taxation. The amount of income taxes to be recognized is dependent on the operating results of the TRS.

Minority Interests

Minority interests increased by approximately $1.8 million from $0.2 million in 2005 to $2.0 million in 2006. This increase was primarily due to the issuance of Common Units and Series A Preferred Units in our Operating Partnership on March 1, 2006 in connection with our acquisition of the Royal Portfolio. See Note 9 in the accompanying Notes to Consolidated and Combined Financial Statements contained in Item 8 herein for a detailed description of minority interests.

Discontinued Operations

Statement of Financial Accounting Standards (“SFAS”) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, requires, among other items, that the operating results of real estate properties sold or classified as held for sale be included in discontinued operations in the statements of operations for all periods presented.  The Village on University, an owned off-campus property, was sold in December 2006 for $51.0 million and the resulting gain on disposition of $18.6 million is included in discontinued operations for the year ended December 31, 2006. The net operating income attributable to this property is included in discontinued operations for the years ended December 31, 2006 and 2005. In addition, our University Village at San Bernardino property was sold to Cal State University - San Bernardino in January 2005. The net operating loss and the resulting gain on disposition are also included in discontinued operations for the year ended December 31, 2005.
 
Please refer to Note 6 in the accompanying Notes to Consolidated and Combined Financial Statements contained in Item 8 herein for a table summarizing the results of operations of the properties sold during the years ended December 31, 2006 and 2005.

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Comparison of the Years Ended December 31, 2005 and December 31, 2004

The following table presents our results of operations for the years ended December 31, 2005 and 2004, including the amount and percentage change in these results between the two periods. The results for the year ended December 31, 2004 as presented below represent the consolidated financial results of our Company for the period from August 17, 2004 to December 31, 2004 and the combined financial results of our Predecessor for the period from January 1, 2004 to August 16, 2004. The presentation of results for the year ended December 31, 2004 below is not in accordance with GAAP and is presented only for comparison purposes.

   
Year Ended December 31,
         
   
2005
 
2004
 
Change($)
 
Change(%)
 
Revenues:
                 
Owned off-campus properties
 
$
54,287
 
$
30,522
 
$
23,765
   
77.9
%
On-campus participating properties
   
18,470
   
17,418
   
1,052
   
6.0
%
Third-party development services
   
5,854
   
5,803
   
51
   
0.9
%
Third-party management services
   
2,786
   
2,105
   
681
   
32.4
%
Resident services and other income
   
1,125
   
382
   
743
   
194.5
%
Total revenues
   
82,522
   
56,230
   
26,292
   
46.8
%
                           
Operating expenses:
                         
Owned off-campus properties
   
25,653
   
14,894
   
10,759
   
72.2
%
On-campus participating properties
   
8,325
   
7,995
   
330
   
4.1
%
Third-party development and management services
   
6,969
   
5,543
   
1,426
   
25.7
%
General and administrative
   
6,714
   
5,234
   
1,480
   
28.3
%
Depreciation and amortization
   
15,447
   
8,985
   
6,462
   
71.9
%
Ground/facility lease
   
873
   
812
   
61
   
7.5
%
Total operating expenses
   
63,981
   
43,463
   
20,518
   
47.2
%
                           
Operating income
   
18,541
   
12,767
   
5,774
   
45.2
%
                           
Nonoperating income and (expenses):
                         
Interest income
   
825
   
81
   
744
   
918.5
%
Interest expense
   
(17,368
)
 
(14,835
)
 
(2,533
)
 
17.1
%
Amortization of deferred financing costs
   
(1,176
)
 
(1,118
)
 
(58
)
 
5.2
%
Other nonoperating income
   
1,279
   
927
   
352
   
38.0
%
Total nonoperating expenses
   
(16,440
)
 
(14,945
)
 
(1,495
)
 
10.0
%
                           
Income (loss) before income taxes, minority interests, and discontinued operations
   
2,101
   
(2,178
)
 
4,279
   
(196.5
%)
Income tax (provision) benefit
   
(186
)
 
728
   
(914
)
 
(125.5
%)
Minority interests
   
(164
)
 
100
   
(264
)
 
(264.0
%)
Income (loss) from continuing operations
   
1,751
   
(1,350
)
 
3,101
   
(229.7
%)
                           
Discontinued operations:
                         
Income attributable to discontinued operations
   
2,028
   
50
   
1,978
   
3,956.0
%
Gain (loss) from disposition of real estate
   
5,883
   
(39
)
 
5,922
   
(15,184.6
%)
Total discontinued operations
   
7,911
   
11
   
7,900
   
71,818.2
%
Net Income (loss)
 
$
9,662
 
$
(1,339
)
 
11,001
   
(821.6
%)

Owned Off-Campus Properties Operations

Revenues and operating expenses from our owned off-campus properties increased by $23.8 million and $10.8 million, respectively, in 2005 as compared to 2004. These increases were primarily due to the acquisition of seven properties during the first quarter of 2005, the completion of construction and opening of two properties in August 2004, the completion of construction and opening of one property in August 2005, and higher year-to-date occupancy at a majority of the same store properties operated during both periods, as described below. The Village on University and University Village at San Bernardino owned off-campus properties were sold in December 2006 and January 2005, respectively, and are therefore not reflected in operating revenues and expenses but are included in discontinued operations.

32

 
New Property Operations. We acquired seven properties containing 3,118 beds at various times during the first quarter of 2005, located in Florida (Gainesville and Tallahassee) and Denton, Texas. We also completed construction of and opened an 828-bed property serving the State University of New York - Buffalo in August 2005. Additionally, in August 2004, we completed construction of and opened a 406-bed property serving California State University, Fresno and a 749-bed property serving Temple University. These new properties contributed $22.9 million of additional revenues and $10.7 million of additional operating expenses in 2005 as compared to 2004.

Same Store Property Operations (Excluding New Property Activity). We had eight properties containing 5,053 beds which were operating during both 2005 and 2004. These properties produced revenues of $29.3 million and $27.7 million during 2005 and 2004, respectively, an increase of $1.6 million. Excluding resident services revenues, which are provided through our TRS subsequent to our IPO, these properties produced revenues of $28.4 million during 2005, as compared to $27.3 million in 2004, an increase of $1.1 million. These increases were due primarily to the improved lease up for the 2005/2006 academic year, which resulted in average occupancy rates increasing to 95.7% in 2005 from 90.8% in 2004.

At these existing properties, operating expenses remained relatively constant at $13.5 million and $13.4 million for 2005 and 2004, respectively.

On-Campus Participating Properties (“OCPP”) Operations

New Property Operations. In August 2005, we completed construction of and opened an additional phase of our Cullen Oaks property, consisting of 180 units and 354 beds. This additional phase contributed approximately $0.6 million of additional revenues and approximately $0.2 million of additional operating expenses during 2005.

Same Store OCPP Operations. We had four on-campus participating properties containing 4,167 beds which were operating during both 2005 and 2004. Revenues from our same store on-campus participating properties increased to $17.6 million in 2005 from $17.4 million in 2004, an increase of $0.2 million. This increase was due to increased rental rates, which were offset by a decrease in average occupancy from 76.1% in 2004 to 73.3% in 2005, as well as an increase in other miscellaneous income items.

At these existing properties, operating expenses remained constant at $8.0 million for both 2005 and 2004.

Third-Party Development Services Revenue

Third-party development services revenue increased by $0.1 million from $5.8 million in 2004 as compared to $5.9 million in 2005. The increase in our third-party development revenue was primarily due to a slightly higher average contractual fee per project and a higher percentage of the contractual fees recognized during 2005 as compared to 2004. These factors were offset by fewer projects in progress and a decrease in construction savings revenue earned during 2005. We had eight projects in progress during 2005 with an average contractual fee of approximately $1.2 million compared to 2004 in which we had 12 projects in progress with an average contractual fee of $1.1 million. Also, due to differences in the percentage of construction completed during the periods, of the total contractual fees of the projects in progress during the respective periods, approximately 57.3% of the total contractual fees were recognized during 2005 compared to approximately 34.6% for 2004. In addition, our third-party development revenue decreased as a result of approximately $0.6 million of construction savings revenue that was recognized during 2004. No construction savings revenue was earned on our third-party development projects during 2005.
 
Development services revenue earned in relation to our on-campus participating properties is recognized over the term of the underlying ground leases. Approximately $0.4 million of deferred development and construction revenue was recognized in 2004 upon the transfer of one of our on-campus participating properties (Coyote Village) to Weatherford College in April 2004.

Third-Party Management Services Revenues

Third-party management services revenue increased $0.7 million from $2.1 million in 2004 as compared to $2.8 million in 2005. The increase was due to a full academic year of revenues earned related to seven new management contracts that commenced in Fall 2004.

33

 
Third-Party Development and Management Services Expenses

Third-party development and management services operating expenses increased approximately $1.4 million, from $5.5 million in 2004, to $6.9 million in 2005. This increase was primarily due to expenses incurred during 2005 in relation to three West Virginia University fixed price projects that were in progress during 2005 which contributed $1.1 million to the increase and a reserve of approximately $0.3 million of development costs associated with our Blinn College development project which was not awarded as anticipated.

Resident Services

Concurrent with our commencement of operations and our designation as a REIT in 2004, certain services previously provided to residents by our properties are now provided by our TRS. Revenue from resident services increased by $0.7 million in 2005 as compared to 2004. This increase is due to 2004 reflecting only approximately 4.5 months of resident services revenue, which was classified as such beginning with our IPO and concurrent formation of our TRS on August 17, 2004. Accordingly, resident services revenue for 2005 reflects a full year of revenue.

General and Administrative

General and administrative expenses (relating primarily to corporate operations) increased $1.5 million in 2005 compared to 2004. This increase was primarily due to the following items: (i) additional expenses of $0.5 million incurred in 2005 related to Sarbanes-Oxley Section 404 compliance costs, (ii) a compensation charge of approximately $0.4 million to reflect a separation agreement entered into with an executive officer in April 2005, (iii) a full year of expenses incurred as a public company during 2005, (iv) general increases in corporate staffing as a result of the growth experienced by the Company in 2005, and (v) normal inflationary increases in such items as payroll costs, benefits, and other related corporate items. These increases were offset by a compensation charge of approximately $2.1 million recorded during 2004 in connection with the issuance of profits interest units (“PIUs”) to certain of our executive and senior officers in connection with our IPO.

Depreciation and Amortization

Depreciation and amortization increased $6.5 million in 2005 compared to 2004 primarily due to the acquisition of seven properties during the first quarter of 2005, the opening of two owned off-campus properties in August 2004, and the opening of one owned off-campus property in August 2005. In conjunction with the acquisition of the seven previously mentioned properties, a valuation was assigned to in-place leases which was amortized over the average remaining lease terms of the acquired leases (generally less than one year). This contributed approximately $1.1 million of additional depreciation and amortization expense in 2005.

Amortization of deferred financing costs increased by $0.1 million, from $1.1 million in 2004 to $1.2 million in 2005. This increase was primarily due to additional finance cost amortization incurred in 2005 related to debt assumed or incurred in connection with the property acquisitions closed during the first quarter of 2005 as well as finance costs incurred under our revolving credit facility. These increases were offset by a reduction in amortization of deferred financing costs as a result of the payoff of one mortgage loan in connection with our IPO.

Interest Income

Interest income increased by $0.7 million, from $0.1 million in 2004 to $0.8 million in 2005. This increase is primarily due to additional interest earned in 2005 on the remaining proceeds from our July 2005 equity offering that were invested in commercial paper and money market investments during the year.

Interest Expense

Interest expense increased $2.5 million in 2005 compared to 2004. This increase was primarily due to additional interest of $3.8 million related to debt assumed or incurred in relation to the acquisition of the seven previously mentioned properties in the first quarter 2005 as well as additional interest expense of $0.5 million incurred in 2005 under our revolving credit facility. Approximately six months of interest was recognized under our revolving credit facility in 2005 as a result of the facility being fully paid down in July 2005 in connection with our equity offering. This is in comparison to only approximately 4.5 months of interest recognized under our revolving credit facility in 2004 due to the facility being obtained in connection with the IPO in August 2004. These increases were offset by a $1.3 million increase of capitalized interest in 2005 as compared to 2004 as a result of increased activity related to the construction of our owned off-campus properties. The retirement of a $19.5 million mortgage loan in connection with our IPO resulted in an additional decrease in interest expense of approximately $0.7 million.

34

 
Other Nonoperating Income

Other non-operating income for 2005 includes a gain of approximately $0.9 million related to the sale of our option to acquire a 23.33% interest in Dobie Center, an off-campus student housing property held by an affiliate of our Predecessor owners. In addition, we also recognized a gain of approximately $0.4 and $0.7 million in 2005 and 2004, respectively, related to insurance proceeds received for a fire that occurred at one of our owned off-campus properties in 2003. A gain of approximately $0.2 million was also recognized in 2004 related to insurance proceeds received for hail damage that occurred at one of our on-campus participating properties in 2003.