t66592_10q.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended September 30, 2009.   
 
o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Transition Period From ______________________ to _________________________.  
 
Commission file number 001-32265
 
AMERICAN CAMPUS COMMUNITIES, INC.
(Exact name of registrant as specified in its charter)
 
 Maryland
 
 76-0753089
 (State or Other Jurisdiction of
Incorporation or Organization)
 
 (IRS Employer Identification No.)
805 Las Cimas Parkway, Suite 400
Austin, TX
(Address of Principal Executive Offices)
 
78746
(Zip Code)
 
(512) 732-1000
Registrant’s telephone number, including area code
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
  Large accelerated filer x       Accelerated Filer o
       
  Non-accelerated filer o (Do not check if a smaller reporting company) Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
Yes o  Nox
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
There were 52,203,893 shares of American Campus Communities, Inc.’s common stock with a par value of $0.01 per share outstanding as of the close of business on October 30, 2009.

 
 

 

FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2009
 
TABLE OF CONTENTS
 
 
PAGE NO.
   
PART I.    
 
     
Item 1.
Consolidated Financial Statements
 
     
 
Consolidated Balance Sheets as of September 30, 2009 (unaudited) and December 31, 2008
1
     
 
Consolidated Statements of Operations for the three and nine months ended September 30, 2009 and 2008 (all unaudited)   
2
     
 
Consolidated Statement of Changes in Equity for the nine months ended September 30, 2009 (unaudited)   
3
     
 
Consolidated Statements of Cash Flows for the nine months ended September 30, 2009 and 2008 (all unaudited)
4
     
 
Notes to Consolidated Financial Statements
5
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
25
     
Item 3.
Quantitative and Qualitative Disclosure about Market Risk
44
     
Item 4.
Controls and Procedures
44
   
PART II.    
 
     
Item 6.
Exhibits
45
   
SIGNATURES
46


 
 

 
 

AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
 
   
September 30, 2009
   
December 31, 2008
 
   
(Unaudited)
       
Assets
           
             
Investments in real estate:
           
  Wholly-owned properties, net
  $ 2,050,352     $ 1,986,833  
  On-campus participating properties, net
    66,677       69,302  
Investments in real estate, net
    2,117,029       2,056,135  
                 
Cash and cash equivalents
    86,753       25,600  
Restricted cash
    29,103       32,558  
Student contracts receivable, net
    7,058       5,185  
Other assets
    59,760       64,431  
                 
Total assets
  $ 2,299,703     $ 2,183,909  
                 
Liabilities and equity
               
                 
Liabilities:
               
  Secured mortgage, construction and bond debt
  $ 1,055,526     $ 1,162,221  
  Senior secured term loan
    100,000       100,000  
  Secured revolving credit facility
    -       14,700  
  Secured agency facility
    94,000       -  
  Accounts payable and accrued expenses
    31,679       35,440  
  Other liabilities
    59,880       56,052  
Total liabilities
    1,341,085       1,368,413  
                 
Redeemable noncontrolling interests
    35,449       26,286  
                 
Equity:
               
  American Campus Communities, Inc. stockholders’ equity:
     Common stock, $.01 par value, 800,000,000 shares authorized, 52,190,493 and 42,354,283 shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively
        521           423  
     Additional paid in capital
    1,093,018       901,641  
     Accumulated earnings and dividends
    (169,477 )     (111,828 )
     Accumulated comprehensive loss
    (4,815 )     (5,117 )
     Total American Campus Communities, Inc. stockholders’ equity
    919,247       785,119  
  Noncontrolling interests
    3,922       4,091  
Total equity
    923,169       789,210  
                 
Total liabilities and equity
  $ 2,299,703     $ 2,183,909  
 
 
See accompanying notes to consolidated financial statements.
 
1

 
 

AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except share and per share data)
 
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2009
   
2008
   
2009
   
2008
 
Revenues:
                       
  Wholly-owned properties
  $ 69,735     $ 60,663     $ 203,219     $ 129,638  
  On-campus participating properties
    4,433       4,301       15,229       14,993  
  Third party development services
    1,760       4,519       3,698       6,898  
  Third party management services
    2,229       2,041       6,576       4,185  
  Resident services
    288       610       733       1,409  
Total revenues
    78,445       72,134       229,455       157,123  
                                 
Operating expenses:
                               
  Wholly-owned properties
    39,234       38,812       103,611       69,435  
  On-campus participating properties
    2,690       3,274       7,503       8,068  
  Third party development and management services
    2,842       3,277       8,629       7,713  
  General and administrative
    2,667       3,191       8,244       8,562  
  Depreciation and amortization
    18,630       18,148       59,132       37,291  
  Ground/facility leases
    474       508       1,478       1,235  
Total operating expenses
    66,537       67,210       188,597       132,304  
                                 
Operating income
    11,908       4,924       40,858       24,819  
                                 
Nonoperating income and (expenses):
                               
  Interest income
    21       244       101       1,048  
  Interest expense
    (15,789 )     (17,022 )     (47,121 )     (32,734 )
  Amortization of deferred financing costs
    (845 )     (832 )     (2,426 )     (1,591 )
  Loss from unconsolidated joint ventures
    (907 )     (926 )     (1,944 )     (1,181 )
  Other nonoperating income
    -       486       402       486  
Total nonoperating expenses
    (17,520 )     (18,050 )     (50,988 )     (33,972 )
                                 
Loss before income taxes, redeemable noncontrolling interests and discontinued operations
    (5,612 )     (13,126 )     (10,130 )     (9,153 )
Income tax provision
    (135 )     (128 )     (405 )     (261 )
Redeemable noncontrolling interests share of loss (income)
     87       307       114       (12 )
Loss from continuing operations
    (5,660 )     (12,947 )     (10,421 )     (9,426 )
Loss attributable to discontinued operations
    -       (115 )     -       (23 )
Net loss
    (5,660 )     (13,062 )     (10,421 )     (9,449 )
Net income attributable to noncontrolling interests
    (144 )     (32 )     (416 )     (186 )
Net loss attributable to common shareholders
  $ (5,804 )   $ (13,094 )   $ (10,837 )   $ (9,635 )
                                 
Loss per share attributable to common shareholders – basic:
                               
  Loss from continuing operations per share
  $ (0.11 )   $ (0.31 )   $ (0.24 )   $ (0.28 )
  Net loss per share
  $ (0.11 )   $ (0.31 )   $ (0.24 )   $ (0.28 )
Loss per share attributable to common shareholders – diluted:
                               
  Loss from continuing operations per share
  $ (0.11 )   $ (0.31 )   $ (0.23 )   $ (0.27 )
  Net loss per share
  $ (0.11 )   $ (0.31 )   $ (0.23 )   $ (0.27 )
                                 
Weighted-average common shares outstanding:
                               
  Basic
    52,195,869       42,314,175       47,526,198       35,139,189  
  Diluted
    53,516,117       43,577,493       48,804,267       36,549,728  
                                 
Distributions declared per common share
  $ 0.3375     $ 0.3375     $ 1.0125     $ 1.0125  
 
 
See accompanying notes to consolidated financial statements.
 
2

 
 
 

AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(unaudited, in thousands, except share data)
 
   
 
Common Shares
   
Par Value of
Common Shares
   
Additional Paid
in Capital
   
Accumulated
Earnings and
Distributions
   
Accumulated Other
Comprehensive
Income (Loss)
   
Noncontrolling
Interests
   
Total
 
Equity, December 31, 2008
    42,354,283     $ 423     $ 901,641     $ (111,828 )   $ (5,117 )   $ 4,091     $ 789,210  
Net proceeds from sale of common stock
    9,775,000       98       198,252       -       -       -       198,350  
Amortization of restricted stock awards
    -       -       1,976       -       -       -       1,976  
Vesting of restricted stock awards
    50,210       -       (313 )     -       -       -       (313 )
Issuance of fully vested restricted stock units
    9,000       -       55       -       -       -       55  
Distributions to common and restricted stockholders
    -       -       -       (46,812 )     -       -       (46,812 )
Distributions to joint venture partners
    -       -       -       -       -       (585 )     (585 )
 Conversion of common units to common stock
    2,000       -       23       -       -       -       23  
Reclassification of noncontrolling interests
    -       -       (8,616 )     -       -       -       (8,616 )
Comprehensive loss:
                                                       
Change in fair value of interest rate swaps
    -       -       -       -       302       -       302  
Net loss
    -       -       -       (10,837 )     -       416       (10,421 )
Total comprehensive loss
    -       -       -       -       -       -       (10,119 )
Equity, September 30, 2009
    52,190,493     $ 521     $ 1,093,018     $ (169,477 )   $ (4,815 )   $ 3,922     $ 923,169  
 
 
See accompanying notes to consolidated financial statements
 
3

 
 

AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
 
   
Nine Months Ended September 30,
 
   
2009
   
2008
 
Operating activities
           
Net loss
  $ (10,421 )   $ (9,449 )
Adjustments to reconcile net loss to net cash provided by operating activities:
               
     Redeemable noncontrolling interests share of (loss) income
    (114 )     12  
     Depreciation and amortization
    59,132       37,291  
     Amortization of deferred financing costs and debt premiums/discounts
    2,322       868  
 Share-based compensation
    2,078       1,512  
     Loss from unconsolidated joint ventures
    1,944       1,181  
     Amortization of gain on interest rate swap termination
    -       (181 )
     Income tax provision
    405       248  
     Changes in operating assets and liabilities:
               
              Restricted cash
    3,455       (2,499 )
              Student contracts receivable, net
    (1,873 )     336  
              Other assets
    (1,072 )     (8,079 )
              Accounts payable and accrued expenses
    (4,479 )     1,035  
              Other liabilities
    2,533       685  
Net cash provided by operating activities
    53,910       22,960  
Investing activities
               
     Net proceeds from dispositions of real estate
    -       4,418  
     Cash paid for company and property acquisitions
    -       (286,350 )
     Cash paid for land acquisitions
    (3,167 )     (3,226 )
     Investments in wholly-owned properties
    (99,893 )     (115,552 )
     Investments in unconsolidated joint ventures
    (255 )     (10,610 )
     Investments in on-campus participating properties
    (645 )     (637 )
     Purchase of corporate furniture, fixtures and equipment
    (1,468 )     (1,875 )
     Distributions received from unconsolidated joint ventures
    -       15  
     Net cash used in investing activities
    (105,428 )     (413,817 )
Financing activities
               
     Proceeds from sale of common stock
    207,719       264,500  
     Offering costs
    (9,369 )     (12,264 )
     Proceeds from sale of preferred stock
    -       131  
     Proceeds from contribution of properties to joint venture
    -       74,368  
     Proceeds from senior secured term loan
    -       100,000  
     Secured revolving credit facilities, net
    79,300       (9,600 )
     Proceeds from construction loans
    5,334       70,629  
     Pay-off of mortgage and construction loans
    (103,027 )     (24,225 )
     Principal payments on debt
    (8,898 )     (7,569 )
     Change in construction accounts payable
    (1,931 )     3,715  
     Debt issuance and assumption costs
    (7,751 )     (5,757 )
     Distributions to common and restricted stockholders
    (46,799 )     (36,254 )
     Distributions to noncontrolling partners
    (1,907 )     (1,590 )
     Net cash provided by financing activities
    112,671       416,084  
Net change in cash and cash equivalents
    61,153       25,227  
Cash and cash equivalents at beginning of period
    25,600       12,073  
Cash and cash equivalents at end of period
  $ 86,753     $ 37,300  
Supplemental disclosure of non-cash investing and financing activities
               
     Issuance of Common Units in connection with land acquisition
  $ (2,005 )   $ -  
     Issuance of common stock in connection with company acquisition
  $ -     $ (154,739 )
     Issuance of Common Units in connection with company acquisition
  $ -     $ (199 )
     Loans assumed in connection with company and property acquisitions
  $ -     $ (615,175 )
     Change in fair value of derivative instruments, net
  $ 302     $ (48 )
Supplemental disclosure of cash flow information
               
     Interest paid
  $ 48,350     $ 33,905  

 
See accompanying notes to consolidated financial statements.
 
4

 
 

AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1.     Organization and Description of Business 
 
American Campus Communities, Inc. (the “Company”) is a real estate investment trust (“REIT”) that was incorporated on March 9, 2004 and commenced operations effective with the completion of an initial public offering (“IPO”) on August 17, 2004.  Through the Company’s controlling interest in American Campus Communities Operating Partnership LP (the “Operating Partnership”), the Company is one of the largest owners, managers and developers of high quality student housing properties in the United States in terms of beds owned and under management.  The Company is a fully integrated, self-managed and self-administered equity REIT with expertise in the acquisition, design, financing, development, construction management, leasing and management of student housing properties.
 
On May 11, 2009, the Company completed an equity offering, consisting of the sale of 9,775,000 shares of the Company’s common stock at a price of $21.25 per share, including 1,275,000 shares issued as a result of the exercise of the underwriters’ overallotment option in full at closing.  The offering generated gross proceeds of $207.7 million.  The aggregate proceeds to the Company, net of the underwriting discount and expenses of the offering, were approximately $198.3 million.
 
As of September 30, 2009, the Company’s property portfolio contained 86 student housing properties with approximately 52,800 beds and approximately 17,200 apartment units, including 40 properties containing approximately 23,500 beds and approximately 7,500 units added as a result of the Company’s acquisition on June 11, 2008 of the student housing business of GMH Communities Trust (“GMH”), as more fully discussed in Note 3 herein.  The Company’s property portfolio consisted of 80 owned off-campus properties that are in close proximity to colleges and universities, two American Campus Equity (“ACETM”) properties operated under ground/facility leases with a related university system and four on-campus participating properties operated under ground/facility leases with the related university systems.  As of September 30, 2009, the Company also owned a noncontrolling interest in two joint ventures that owned an aggregate of 21 student housing properties with approximately 12,100 beds in approximately 3,600 units.  The Company’s communities contain modern housing units and are supported by a resident assistant system and other student-oriented programming, with many offering resort-style amenities.
 
Through the Company’s taxable REIT subsidiaries (“TRS”), it also provides construction management and development services, primarily for student housing properties owned by colleges and universities, charitable foundations, and others.  As of September 30, 2009, the Company provided third-party management and leasing services for 32 properties (five of which the Company served as the third-party developer and construction manager) that represented approximately 23,700 beds in approximately 9,200 units.  Third-party management and leasing services are typically provided pursuant to multi-year management contracts that have initial terms that range from one to five years.  As of September 30, 2009, the Company’s total owned, joint venture and third-party managed portfolio included 139 properties with approximately 88,600 beds in approximately 30,000 units.
 
2.   Summary of Significant Accounting Policies
 
Basis of Presentation
 
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and include the financial position, results of operations and cash flows of the Company, the Operating Partnership and subsidiaries of the Operating Partnership, including joint ventures in which the Company has a controlling interest.  Third-party equity interests in the Operating Partnership and consolidated joint ventures are reflected as noncontrolling interests in the consolidated financial statements.  The Company also has a noncontrolling interest in three unconsolidated joint ventures, which are accounted for under the equity method.  All significant intercompany amounts have been eliminated.  All dollar amounts in the tables herein, except share and per share amounts, are stated in thousands unless otherwise indicated.  Certain prior period amounts have been reclassified to conform to the current period presentation.
 
Recent Accounting Pronouncements
 
In June 2009, the Financial Accounting Standards Board (“FASB”) issued the Accounting Standards Codification (the “Codification”).  Effective July 1, 2009, the Codification is the single source of authoritative accounting principles recognized by the FASB to be applied by non-governmental entities in the preparation of financial statements in accordance with GAAP.  The guidance explicitly recognizes rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under federal securities laws as authoritative GAAP for SEC registrants.  Adoption of the Codification did not materially impact the Company’s consolidated financial statements.

 
5

 
 

AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS No. 167”), which is not yet included in the Codification.  SFAS No. 167 changes the consolidation analysis for Variable Interest Entities (“VIE’s”) and requires a qualitative analysis to determine the primary beneficiary.  The determination of the primary beneficiary of a VIE is based on whether the entity has the power to direct matters which most significantly impact the activities of the VIE and has the obligation to absorb losses, or the right to receive benefits, of the VIE which could potentially be significant to the VIE.  SFAS No. 167 requires additional disclosures for VIE’s, including disclosures about a reporting entity’s involvement with VIE’s, how a reporting entity’s involvement with a VIE affects the reporting entity’s financial statements, and significant judgments and assumptions made by the reporting entity to determine whether it must consolidate the VIE.  SFAS No. 167 is effective for the Company beginning on January 1, 2010.  The Company is currently evaluating what impact, if any, the adoption of SFAS No. 167 will have on its consolidated financial statements.
 
Effective June 30, 2009, the Company adopted a policy related to subsequent events which involves accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued.  The adoption of this new accounting guidance did not have any impact on the Company’s consolidated financial statements.
 
Effective January 1, 2009, the Company adopted policies related to disclosures about derivative instruments and hedging activities, which provides enhanced disclosures about (a) how and why the Company uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under the Company’s accounting policy, and (c) how derivative instruments and related hedged items affect the Company’s financial position, financial performance and cash flows. This adoption did not have a material effect on the Company’s consolidated financial statements.
 
Effective January 1, 2009, the Company retrospectively adopted newly issued accounting and reporting policies related to noncontrolling interests in consolidated financial statements (previously referred to as minority interests).  See Note 6 herein for a more detailed discussion of noncontrolling interests and the effect of the new accounting guidance on the Company’s consolidated financial statements.
 
Effective January 1, 2009, the Company adopted policies related to accounting for business combinations, which changes the accounting for business combinations including the measurement of acquirer shares issued in consideration for a business combination, the recognition of contingent consideration, the accounting for pre-acquisition gain and loss contingencies, the accounting for acquisition-related restructuring cost accruals, the treatment of acquisition-related transaction costs and the recognition of changes in the acquirer’s income tax valuation allowance. This adoption did not have a material effect on the Company’s financial statements.
 
Effective January 1, 2009, the Company adopted a policy which clarifies that share-based payment awards that entitle their holders to receive nonforfeitable dividends before vesting should be considered participating securities.  As participating securities, these instruments should be included in the computation of earnings per share (“EPS”) using the two-class method. Pursuant to this adoption, the Company’s computation of EPS has been retrospectively adjusted for the three and nine months ended September 30, 2008.
 
Interim Financial Statements
 
The accompanying interim financial statements are unaudited, but have been prepared in accordance with GAAP for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission.  Accordingly, they do not include all disclosures required by GAAP for complete financial statements.  In the opinion of management, all adjustments (consisting solely of normal recurring matters) necessary for a fair presentation of the financial statements for these interim periods have been included.  Because of the seasonal nature of the Company’s operations, the results of operations and cash flows for any interim period are not necessarily indicative of results for other interim periods or for the full year.  These financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.
 
Use of Estimates
 
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

 
6

 
 

AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Investments in Real Estate
 
Investments in real estate are recorded at historical cost.  Major improvements that extend the life of an asset are capitalized and depreciated over the remaining useful life of the asset.  The cost of ordinary repairs and maintenance are charged to expense when incurred.  Depreciation and amortization are recorded on a straight-line basis over the estimated useful lives of the assets as follows:
 
Buildings and improvements
 
7-40 years
Leasehold interest - on-campus participating properties
 
25-34 years (shorter of useful life or respective lease term)
Furniture, fixtures and equipment
 
3-7 years
 
Project costs directly associated with the development and construction of an owned real estate project, which include interest, property taxes, and amortization of deferred finance costs, are capitalized as construction in progress.  Upon completion of the project, costs are transferred into the applicable asset category and depreciation commences.  Interest totaling approximately $0.6 million and $1.1 million was capitalized during the three months ended September 30, 2009 and 2008, respectively, and $2.9 million and $4.7 million was capitalized during the nine months ended September 30, 2009 and 2008, respectively.  Amortization of deferred financing costs totaling approximately $35,000 and $0.2 million was capitalized during the three and nine months ended September 30, 2008, respectively.
 
Management assesses whether there has been an impairment in the value of the Company’s investments in real estate whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Impairment is recognized when estimated expected future cash flows (undiscounted and before interest charges) are less than the carrying value of the property.  The estimation of expected future net cash flows is inherently uncertain and relies on assumptions regarding current and future economics and market conditions.  If such conditions change, then an adjustment to the carrying value of the Company’s long-lived assets could occur in the future period in which the conditions change.  To the extent that a property is impaired, the excess of the carrying amount of the property over its estimated fair value is charged to earnings.  The Company believes that there were no impairments of the carrying values of its investments in real estate as of September 30, 2009.
 
The Company allocates the purchase price of acquired properties to net tangible and identified intangible assets based on relative fair values.  Fair value estimates are based on information obtained from a number of sources, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property and other market data.  Information obtained about each property as a result of due diligence, marketing and leasing activities is also considered.  The value of in-place leases is based on the difference between (i) the property valued with existing in-place leases adjusted to market rental rates and (ii) the property valued “as-if” vacant.  As lease terms are typically one year or less, rates on in-place leases generally approximate market rental rates.  Factors considered in the valuation of in-place leases include an estimate of the carrying costs during the expected lease-up period considering current market conditions, nature of the tenancy, and costs to execute similar leases.  Carrying costs include estimates of lost rentals at market rates during the expected lease-up period, as well as marketing and other operating expenses.  The value of in-place leases is amortized over the remaining initial term of the respective leases, generally less than one year.  The purchase price of property acquisitions is not expected to be allocated to tenant relationships, considering the terms of the leases and the expected levels of renewals.
 
Long-Lived Assets–Held for Sale
 
Long-lived assets to be disposed of are classified as held for sale in the period in which all of the following criteria are met:
 
 
a.
Management, having the authority to approve the action, commits to a plan to sell the asset.
 
 
b.
The asset is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets.
 
 
c.
An active program to locate a buyer and other actions required to complete the plan to sell the asset have been initiated.
 
 
d.
The sale of the asset is probable, and transfer of the asset is expected to qualify for recognition as a completed sale, within one year.
 
 
e.
The asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value.

 
7

 
 
 
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
f.
Actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
 
Concurrent with this classification, the asset is recorded at the lower of cost or fair value, and depreciation ceases.
 
Owned On-Campus Properties
 
The Company, as lessee, entered into two 65-year ground and facility leases with a university system to finance, construct, and manage two student housing facilities.  One property was completed in August 2008 and the other property was completed in August 2009.  Both leases include the option to extend the lease term for two additional terms of ten years each, and the lessor has title to the land and any improvements placed thereon.  The Company’s involvement in construction requires the lessor’s post construction ownership of the improvements to be treated as a sale with a subsequent leaseback by the Company.  However, these sale-leaseback transactions do not qualify for sale-leaseback accounting because of the Company’s continuing involvement in the constructed assets.  As a result of the Company’s continuing involvement, these leases are accounted for by the deposit method, in which the assets subject to the ground and facility leases are reflected at historical cost, less amortization, and the financing obligations are reflected at the terms of the underlying financing.
 
On-Campus Participating Properties
 
The Company enters into ground and facility leases with university systems and colleges to finance, construct, and manage student housing facilities.  Under the terms of the leases, the lessor has title to the land and any improvements placed thereon.  Each lease terminates upon final repayment of the construction related financing, the amortization period of which is contractually stipulated.  The Company’s involvement in construction requires the lessor’s post construction ownership of the improvements to be treated as a sale with a subsequent leaseback by the Company.  The sale-leaseback transaction has been accounted for as a financing, and as a result, any fee earned during construction is deferred and recognized over the term of the lease.  The resulting financing obligation is reflected at the terms of the underlying financing, i.e., interest is accrued at the contractual rates and principal reduces in accordance with the contractual principal repayment schedules.
 
The Company reflects these assets subject to ground/facility leases at historical cost, less amortization.  Costs are amortized, and deferred fee revenue in excess of the cost of providing the service are recognized, over the lease term.
 
Intangible Assets
 
In connection with property acquisitions completed during 2008, the Company capitalized approximately $19.0 million, related to management’s estimate of the fair value of the in-place leases assumed.  These intangible assets are amortized on a straight-line basis over the average remaining term of the underlying leases.  Amortization expense was approximately $1.4 million and $3.2 million for the three months ended September 30, 2009 and 2008, respectively, and approximately $9.6 million and $4.5 million for the nine months ended September 30, 2009 and 2008, respectively.  The Company also capitalized $1.5 million related to management’s estimate of the fair value of third-party management contracts acquired from GMH in June 2008.  These intangible assets are amortized on a straight-line basis over a period of three years.  Amortization expense related to these acquired management contracts was approximately $0.1 million for both three month periods ended September 30, 2009 and 2008, and approximately $0.4 million and $0.2 million for the nine months ended September 30, 2009 and 2008, respectively.  The amortization of intangible assets is included in depreciation and amortization expense in the accompanying consolidated statements of operations.  See Note 3 herein for a detailed discussion of the property acquisitions completed during 2008.
 
Deferred Financing Costs
 
The Company defers financing costs and amortizes the costs over the terms of the related debt using the effective interest method.  Upon repayment of or in conjunction with a material change in the terms of the underlying debt agreement, any unamortized costs are charged to earnings.
 
Amortization expense, net of amounts capitalized, was approximately $0.8 million for both three month periods ended September 30, 2009 and 2008, and approximately $2.4 million and $1.6 million for the nine months ended September 30, 2009 and 2008, respectively.  Accumulated amortization at September 30, 2009 and December 31, 2008 approximated $11.0 million and $8.9 million, respectively.  Deferred financing costs, net of amortization, are included in other assets on the accompanying consolidated balance sheets.

 
8

 
 

AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Joint Ventures
 
The Company holds interests in both consolidated and unconsolidated joint ventures.  The Company consolidates joint ventures when it exhibits financial or operational control, which is determined using accounting standards related to the consolidation of joint ventures and VIE’s.  For joint ventures that are defined as VIE’s, the primary beneficiary consolidates the entity.  In instances where the Company is not the primary beneficiary, it does not consolidate the joint venture for financial reporting purposes. For joint ventures that are not defined as variable interest entities, management first considers whether the Company is the general partner or a limited partner (or the equivalent in such investments which are not structured as partnerships).  The Company consolidates joint ventures where it is the general partner (or the equivalent) and the limited partners (or the equivalent) in such investments do not have rights which would preclude control and, therefore, consolidation for financial reporting purposes.  For joint ventures where the Company is the general partner (or the equivalent), but does not control the joint venture as the other partners (or the equivalent) hold substantive participating rights, the Company uses the equity method of accounting.  For joint ventures where the Company is a limited partner (or the equivalent), management considers factors such as ownership interest, voting control, authority to make decisions, and contractual and substantive participating rights of the partners (or the equivalent) to determine if the presumption that the general partner controls the entity is overcome.  In instances where these factors indicate the Company controls the joint venture, the Company consolidates the joint venture; otherwise it uses the equity method of accounting.
 
Debt Premiums and Discounts
 
Debt premiums and discounts represent fair value adjustments to account for the difference between the stated rates and market rates of debt assumed in connection with the Company’s property acquisitions.  The debt premiums and discounts are amortized to interest expense over the term of the related loans using the effective-interest method.  As of September 30, 2009 and December 31, 2008, net unamortized debt premiums were $4.2 million and $5.7 million, respectively, and net unamortized debt discounts were $9.0 million and $10.4 million, respectively.  Debt premiums and discounts are included in secured mortgage debt on the accompanying consolidated balance sheets.
 
Third-Party Development Services Revenue and Costs
 
Development revenues are generally recognized based on a proportionate performance method based on contract deliverables, while construction revenues are recognized using the percentage of completion method, as determined by construction costs incurred relative to total estimated construction costs.  Costs associated with such projects are deferred and recognized in relation to the revenues earned on executed contracts.  For projects where the Company’s fee is based on a fixed price, any cost overruns incurred during construction, as compared to the original budget, will reduce the net fee generated on those projects.  Incentive fees are generally recognized when the project is complete and performance has been agreed upon by all parties, or when performance has been verified by an independent third-party.  The Company also evaluates the collectibility of fee income and expense reimbursements generated through the provision of development and construction management services based upon the individual facts and circumstances, including the contractual right to receive such amounts in accordance with the terms of the various projects, and reserves any amounts that are deemed to be uncollectible.
 
Pre-development expenditures such as architectural fees, permits and deposits associated with the pursuit of third-party and owned development projects are expensed as incurred, until such time that management believes it is probable that the contract will be executed and/or construction will commence.  Because the Company frequently incurs these pre-development expenditures before a financing commitment and/or required permits and authorizations have been obtained, the Company bears the risk of loss of these pre-development expenditures if financing cannot ultimately be arranged on acceptable terms or the Company is unable to successfully obtain the required permits and authorizations.  As such, management evaluates the status of third-party and owned projects that have not yet commenced construction on a periodic basis and expenses any deferred costs related to projects whose current status indicates the commencement of construction is unlikely and/or the costs may not provide future value to the Company in the form of revenues.  Such write-offs are included in third-party development and management services expenses (in the case of third-party development projects) or general and administrative expenses (in the case of owned development projects) on the accompanying consolidated statements of operations.  As of September 30, 2009, the Company has deferred approximately $7.8 million in pre-development costs related to third-party and owned development projects that have not yet commenced construction.   Such costs are included in other assets on the accompanying consolidated balance sheets.
 
 
9

 
 

AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Derivative Instruments and Hedging Activities
 
The Company records all derivative financial instruments on the balance sheet at fair value.  Changes in fair value are recognized either in earnings or as other comprehensive income, depending on whether the derivative has been designated as a fair value or cash flow hedge and whether it qualifies as part of a hedging relationship, the nature of the exposure being hedged, and how effective the derivative is at offsetting movements in underlying exposure.  The Company discontinues hedge accounting when: (i) it determines that the derivative is no longer effective in offsetting changes in the fair value or cash flows of a hedged item; (ii) the derivative expires or is sold, terminated, or exercised; (iii) it is no longer probable that the forecasted transaction will occur; or (iv) management determines that designating the derivative as a hedging instrument is no longer appropriate.  In all situations in which hedge accounting is discontinued and the derivative remains outstanding, the Company will carry the derivative at its fair value on the balance sheet, recognizing changes in the fair value in current-period earnings.  The Company uses interest rate swaps to effectively convert a portion of its floating rate debt to fixed rate, thus reducing the impact of rising interest rates on interest payments.  These instruments are designated as cash flow hedges and the interest differential to be paid or received is accrued as interest expense. The Company’s counter-parties are major financial institutions.  See Note 10 herein for an expanded discussion on derivative instruments and hedging activities.
 
Income Taxes
 
The Company has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”).  To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement that it currently distribute at least 90% of its adjusted taxable income to its stockholders.  As a REIT, the Company will generally not be subject to corporate level federal income tax on taxable income it currently distributes to its stockholders. If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal income taxes at regular corporate rates (including any applicable alternative minimum tax) and may not be able to qualify as a REIT for the subsequent four taxable years.  Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local income and excise taxes on its income and property, and to federal income and excise taxes on its undistributed income.
 
The Company owns two TRS entities that manage the Company’s non-REIT activities and each is subject to federal, state and local income taxes.
 
Earnings per Share
 
Basic earnings per share is computed using net income attributable to American Campus Communities, Inc. and Subsidiaries  and the weighted average number of shares of the Company’s common stock outstanding during the period, including restricted stock units (“RSUs”) issued to outside directors.  RSUs are included in both basic and diluted weighted average common shares outstanding because they were fully vested on the date of grant and all conditions required in order for the recipients to earn the RSUs have been satisfied.  Diluted earnings per share reflects weighted average common shares issuable from the vesting or conversion of restricted stock awards (“RSAs”) granted to employees, common units of limited partnership interest in the Operating Partnership (“Common Units”) and preferred units of limited partnership interest in the Operating Partnership (“Series A Preferred Units”).  See Note 6 for a discussion of Common Units and Series A Preferred Units and Note 9 for a discussion of RSUs and RSAs.
 
The following is a summary of the elements used in calculating basic and diluted earnings per share:
 
 
10

 
 

AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
Basic earnings per share calculation:
                       
  Loss from continuing operations attributable to common shareholders
  $ (5,804 )   $ (12,979 )   $ (10,837 )   $ (9,612 )
  Amount allocated to participating securities
    (157 )     (96 )     (496 )     (303 )
  Loss from continuing operations attributable to common shareholders, net of amount allocated to participating securities
    (5,961 )     (13,075 )     (11,333 )     (9,915 )
  Loss from discontinued operations attributable to common shareholders
     -       (115 )      -       (23 )
  Net loss attributable to common shareholders, as adjusted – basic
  $ (5,961 )   $ (13,190 )   $ (11,333 )   $ (9,938 )
                                 
  Loss from continuing operations attributable to common shareholders, as adjusted – per share
  $ (0.11 )   $ (0.31 )   $ (0.24 )   $ (0.28 )
  Loss from discontinued operations attributable to common shareholders – per share
     -        -        -        -  
  Net loss attributable to common shareholders, as adjusted – per share
  $ (0.11 )   $ (0.31 )   $ (0.24 )   $ (0.28 )
                                 
  Basic weighted average common shares outstanding
    52,195,869       42,314,175       47,526,198       35,139,189  
                                 
Diluted earnings per share calculation:
                               
  Loss from continuing operations attributable to common shareholders, net of amount allocated to participating securities
  $ (5,961 )   $ (13,075 )   $ (11,333 )   $ (9,915 )
  Income from continuing operations attributable to Series A Preferred Units
     46        46        138        138  
  Loss from continuing operations allocated to Common Units
    (133 )     (350 )     (252 )     (125 )
  Loss from continuing operations attributable to common shareholders, as adjusted
    (6,048 )     (13,379 )     (11,447 )     (9,902 )
  Loss from discontinued operations attributable to common shareholders
    -       (115 )     -       (23 )
  Loss from discontinued operations allocated to Common Units
    -       (3 )     -       (1 )
  Loss from discontinued operations attributable to common shareholders, as adjusted
     -       (118 )      -       (24 )
  Net loss attributable to common shareholders, as adjusted
  $ (6,048 )   $ (13,497 )   $ (11,447 )   $ (9,926 )
                                 
  Loss from continuing operations attributable to common shareholders, as adjusted – per share
  $ (0.11 )   $ (0.31 )   $ (0.23 )   $ (0.27 )
  Loss from discontinued operations attributable to common shareholders, as adjusted – per share
     -        -        -        -  
  Net loss attributable to common shareholders, as adjusted –  per share
  $ (0.11 )   $ (0.31 )   $ (0.23 )   $ (0.27 )
                                 
  Basic weighted average common shares outstanding    
52,195,869
     
42,314,175
     
47,526,198
      35,139,189  
  Common Units    
1,205,285
     
1,148,355
     
1,163,106
     
1,295,576
 
  Series A Preferred Units    
114,963
     
114,963
     
114,963
     
114,963
 
  Diluted weighted average common shares outstanding (1)     53,516,117      
43,577,493
      48,804,267      
36,549,728
 
 
 
(1)
465,533 and 283,174 weighted average RSAs are excluded from diluted weighted average common shares outstanding for the three months ended September 30, 2009 and 2008, respectively, and 458,785 and 277,749 weighted average RSAs are excluded from diluted weighted average common shares outstanding for the nine months ended September 30, 2009 and 2008, respectively, because they would be anti-dilutive due to the Company’s loss position for these periods.

 
11

 
 

AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
3.  Property Acquisitions
 
On June 11, 2008, the Company completed the acquisition of GMH’s student housing business pursuant to an Agreement and Plan of Merger dated as of February 11, 2008 (the “Merger Agreement”).  Concurrent with the closing of the GMH acquisition, the Company formed a joint venture with a wholly-owned subsidiary of Fidelity Real Estate Growth Fund III, LP (“Fidelity”) and contributed 15 GMH student housing properties to the venture with an estimated value of $325.9 million.  The Company also assumed GMH’s equity interest in an existing joint venture with Fidelity that owns six properties.  At the time of closing, the GMH student housing portfolio consisted of 42 wholly-owned properties containing 24,939 beds located in various markets throughout the country.  Two of the acquired wholly-owned properties totaling 1,468 beds were sold during the third quarter of 2008.
 
The total consideration paid for the GMH student housing portfolio (exclusive of 15 properties contributed to the Fidelity joint venture) was approximately $1,018.7 million, inclusive of transaction costs.  Under the terms of the Merger Agreement, each GMH common share and each unit in GMH Communities, LP (the “GMH Operating Partnership”) issued and outstanding as of the date of closing, received cash consideration of $3.36 and 0.07642 of a share of the Company’s common stock, or at the election of the GMH Operating Partnership unitholder, 0.07642 of a unit in the Operating Partnership.  The value of the Company’s common stock and Common Units issued was based on the closing price of the Company’s common stock on February 11, 2008.  The Company issued 5.4 million shares of common stock and 7,004 Common Units, each valued at $28.43 per share or unit.
 
In February 2008, the Company acquired a 144-unit, 528-bed property (Pirate’s Place) located near the campus of East Carolina University in Greenville, North Carolina, for a purchase price of $10.6 million, which excludes $0.8 million of transaction costs, initial integration expenses and capital expenditures.  As part of the transaction, the Company assumed approximately $7.0 million in fixed-rate mortgage debt with an annual interest rate of 7.15% and remaining term to maturity of 14.9 years.
 
In February 2008, the Company also acquired a 68-unit, 161-bed property (Sunnyside Commons) located near the campus of West Virginia University in Morgantown, West Virginia, for a purchase price of $7.5 million, which excludes $0.6 million of transaction costs, initial integration expenses and capital expenditures.  The Company did not assume any debt as part of this transaction.
 
The acquired properties’ results of operations have been included in the accompanying consolidated statements of operations since their respective acquisition closing dates.  The following pro forma information for the nine months ended September 30, 2008, presents consolidated financial information for the Company as if the property acquisitions discussed above, the $100 million senior secured term loan borrowing, and the April 2008 equity offering and subsequent paydown of the revolving credit facility had occurred on January 1, 2008.  The unaudited pro forma information is provided for informational purposes only and is not indicative of results that would have occurred or which may occur in the future:
 
   
Nine Months Ended
September 30, 2008
 
Total revenues
  $ 212,979  
Net loss
  $ (14,852 )
Net loss per share – basic
  $ (0.36 )
Net loss per share – diluted
  $ (0.35 )
 
4.  Investments in Wholly-Owned Properties
 
Wholly-owned properties consisted of the following:
 
   
September 30, 2009
   
December 31, 2008
 
Land (1)
  $ 247,824     $ 242,653  
Buildings and improvements
    1,849,181       1,706,184  
Furniture, fixtures and equipment
    111,820       87,633  
Construction in progress
    -       63,715  
 
    2,208,825       2,100,185  
Less accumulated depreciation
    (158,473 )     (113,352 )
Wholly-owned properties, net
  $ 2,050,352     $ 1,986,833  
 
(1) The land balance above includes undeveloped land parcels valued at $23.4 million and $18.2 million as of September 30, 2009 and December 31, 2008, respectively.

 
12

 
 
 
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
        
5.  On-Campus Participating Properties
 
The Company is a party to ground/facility lease agreements (“Leases”) with certain state university systems and colleges (each, a “Lessor”) for the purpose of developing, constructing, and operating student housing facilities on university campuses. Under the terms of the Leases, title to the constructed facilities is held by the applicable Lessor and such Lessor receives a de minimus base rent paid at inception and 50% of defined net cash flows on an annual basis through the term of the lease.  The Leases terminate upon the earlier to occur of the final repayment of the related debt, the amortization period of which is contractually stipulated, or the end of the lease term.
 
Pursuant to the Leases, in the event the leasehold estates do not achieve Financial Break Even (defined as revenues less operating expenses, excluding management fees, less debt service), the applicable Lessor would be required to make a rental payment, also known as the Contingent Payment, sufficient to achieve Financial Break Even.  The Contingent Payment provision remains in effect until such time as any financing placed on the facilities would receive an investment grade rating without the Contingent Payment provision.  In the event that the Lessor is required to make a Contingent Payment, future net cash flow distributions would be first applied to repay such Contingent Payments and then to unpaid management fees prior to normal distributions.  Beginning in November 1999 and December 2002, as a result of the debt financing on the facilities achieving investment grade ratings without the Contingent Payment provision, the Texas A&M University System is no longer required to make Contingent Payments under either the Prairie View A&M University Village or University College Leases.  The Contingent Payment obligation continues to be in effect for the Texas A&M International University and University of Houston leases.
 
In the event the Company seeks to sell its leasehold interest, the Leases provide the applicable Lessor the right of first refusal of a bona fide purchase offer and an option to purchase the lessee’s rights under the applicable Lease.
 
In conjunction with the execution of each Lease, the Company has entered into separate five-year agreements to manage the related facilities for 5% of defined gross receipts. The five-year terms of the management agreements are not contingent upon the continuation of the Leases. Upon expiration of the initial five year terms, the agreements continue on a month-to-month basis.
 
On-campus participating properties are as follows:
 
           
Historical Cost
 
Lessor/University
 
Lease
Commencement
 
Required Debt
Repayment (1)
 
September 30, 2009
   
December 31, 2008
 
Texas A&M University System /
Prairie View A&M University (2)
 
2/1/96
 
9/1/23
  $ 38,892     $ 38,732  
Texas A&M University System /
Texas A&M International
 
2/1/96
 
9/1/23
    6,211       6,163  
Texas A&M University System /
Prairie View A&M University (3)
 
10/1/99
 
   8/31/25  /  8/31/28
    24,371       24,191  
University of Houston System /
University of Houston (4)
 
9/27/00
 
8/31/35
    35,156       34,899  
 
     
 
    104,630       103,985  
Less accumulated amortization
            (37,953 )     (34,683 )
On-campus participating properties, net
          $ 66,677     $ 69,302  
 
 
(1)
Represents the effective lease termination date.  The Leases terminate upon the earlier to occur of the final repayment of the related debt or the end of the contractual lease term.
 
 
(2)
Consists of three phases placed in service between 1996 and 1998.
 
 
(3)
Consists of two phases placed in service in 2000 and 2003.
 
 
(4)
Consists of two phases placed in service in 2001 and 2005.

 
13

 
 
 
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
6.   Noncontrolling Interests
 
Third-party joint venture partners:  Effective January 1, 2009, the Company adopted accounting guidance governing the portions of equity (net assets) in subsidiaries that are held by owners other than the parent, referred to as noncontrolling interests (formerly minority interests).  The Company consolidates four joint ventures that own and operate the Callaway House, University Village at Sweet Home, University Centre and Villas at Chestnut Ridge owned-off campus properties.  The portion of net assets attributable to the third-party partners in these joint ventures is classified as “noncontrolling interests” within equity on the accompanying consolidated balance sheets.  Accordingly, the third-party partners’ share of the income or loss of the joint ventures is reported on the consolidated statements of operations as “noncontrolling interests share of net income / loss.”
 
Operating Partnership units:  The Company also follows accounting guidance stipulating that securities that are redeemable for cash or other assets at a fixed or determinable price on a fixed or determinable date, at the option of the holder, or upon the occurrence of an event that is not solely within the control of the issuer, must be classified outside of permanent equity in the mezzanine section of the consolidated balance sheets.  In accordance with such guidance, management evaluates whether the Company controls the actions or events necessary to issue the maximum number of shares that could be required to be delivered under share settlement of the contract.  Based on this assessment, which includes evaluating terms in the applicable agreements related to redemption provisions, the Company has determined that Common Units and Series A Preferred Units in the Operating Partnership should be classified as “redeemable noncontrolling interests” in the mezzanine section of the consolidated balance sheets.
 
Common Units and Series A Preferred Units are exchangeable into an equal number of shares of the Company’s common stock, or, at the Company’s election, cash.  A Common Unit and a share of the Company’s common stock have essentially the same economic characteristics, as they effectively participate equally in the net income and distributions of the Operating Partnership.  Series A Preferred Units have a cumulative preferential per annum cash distribution rate of 5.99%, payable quarterly concurrently with the payment of dividends on the Company’s common stock.  The Company made this determination based on terms in applicable agreements, specifically in relation to redemption provisions.  The value of redeemable noncontrolling interests on the consolidated balance sheets is reported at the greater of fair value or historical cost at the end of each reporting period. Accordingly, income or loss allocated to these redeemable noncontrolling interests on the Company’s consolidated statements of operations includes the Series A Preferred Unit distributions as well as the pro rata share of the Operating Partnership’s net income or loss allocated to Common Units.
 
During the nine months ended September 30, 2009 and 2008, 2,000 and 343,182 Common Units, respectively, were converted into shares of the Company’s common stock.  As of September 30, 2009 and December 31, 2008, approximately 2% and 3%, respectively, of the equity interests of the Operating Partnership was held by owners of Common Units and Series A Preferred Units.
 
7.   Investment in Unconsolidated Joint Ventures
 
Investments in unconsolidated joint ventures are accounted for utilizing the equity method.   As discussed in Note 2 herein, the equity method is used when the Company has the ability to exercise significant influence over operating and financial policies of the joint venture but does not have control of the joint venture.  Under the equity method, these investments are initially recognized in the balance sheet at cost and are subsequently adjusted to reflect the Company’s proportionate share of net earnings or losses of the joint venture, distributions received, contributions, and certain other adjustments, as appropriate.   When circumstances indicate there may have been a loss in value of an equity method investment, the Company evaluates the investment for impairment by estimating the Company’s ability to recover its investment from future expected discounted cash flows.  If the Company determines the loss in value is other than temporary, the Company recognizes an impairment charge to reflect the investment at fair value. The Company believes that there were no impairments of the carrying values of its equity method investments as of September 30, 2009.
 
Fidelity Joint Ventures: Concurrent with the closing of the GMH acquisition, a wholly-owned subsidiary of the Company formed a joint venture with a subsidiary of Fidelity and transferred 15 GMH student housing properties to the venture with an estimated value of $325.9 million.  The Company also assumed GMH’s equity interest in an existing joint venture with Fidelity that owns six properties.  The Company serves as property manager for all of the joint venture properties and owns a 10% equity interest in these joint ventures (hereinafter referred to collectively as the “Fidelity Joint Ventures”).

 
14

 
 
 
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
The Fidelity Joint Ventures are funded in part with secured third party debt in the amount of $342.2 million.  The Operating Partnership serves as non-recourse, carve-out guarantor of this debt, which means the Operating Partnership is liable to the lender for any loss, damage, cost, expense, liability, claim or other obligation incurred by the lender arising out of or in connection with certain non-recourse exceptions in connection with the debt.  Pursuant to the respective limited liability company agreements, the Fidelity Joint Ventures agreed to indemnify, defend and hold harmless the Operating Partnership with respect to such obligations, except to the extent such obligations were caused by the willful misconduct, gross negligence, fraud or bad faith of the Operating Partnership or its employees, agents or affiliates.  Therefore, the Operating Partnership’s exposure under the guarantees for obligations not caused by the willful misconduct, gross negligence, fraud or bad faith of the Operating Partnership or its employees, agents or affiliates is not expected to exceed the Company’s 10% proportionate interest in the related mortgage debt.
 
The Company’s $8.2 million and $9.4 million investment in these two joint ventures at September 30, 2009 and December 31, 2008, respectively, is included in other assets in the accompanying consolidated balance sheets, and the Company’s $0.8 million and $1.4 million share in the loss from these two joint ventures for the three and nine months ended September 30, 2009, respectively, is included in loss from unconsolidated joint ventures in the accompanying consolidated statements of operations.  For the three and nine months ended September 30, 2009, the Company earned $0.6 million and $1.8 million, respectively, in property management fees from these joint ventures.  Due to the respective limited liability company agreements not providing for maximum capital commitments from the members, the Company’s maximum exposure to loss stemming from its investment in the Fidelity Joint Ventures could be unlimited.
 
Hampton Roads Joint Venture:  The Company also holds a noncontrolling equity interest in a joint venture that owns a military housing privatization project with the United States Navy to design, develop, construct, renovate, and manage unaccompanied soldier housing located on naval bases in Norfolk and Newport News, Virginia.  The project is financed through taxable revenue bonds.  The Company’s $0.4 million and $1.0 million investment in this joint venture at September 30, 2009 and December 31, 2008, respectively, is included in other assets in the accompanying consolidated balance sheets, and the Company’s share in the loss from this joint venture of $59,000 and $0.2 million for the three months ended September 30, 2009 and 2008, respectively, and $0.5 million and $0.2 million for the nine months ended September 30, 2009 and 2008, respectively, is included in loss from unconsolidated joint ventures in the accompanying consolidated statements of operations.  The Company earned combined development and management fees from this joint venture of $0.3 million and $0.2 million for the three months ended September 30, 2009 and 2008, respectively, and $0.9 million and $0.6 million for the nine months ended September 30, 2009 and 2008, respectively.
 
8.   Debt
 
A summary of the Company’s outstanding consolidated indebtedness, including unamortized debt premiums and discounts, is as follows:
 
   
September 30, 2009
   
December 31, 2008
 
Debt secured by wholly-owned properties:
           
  Mortgage loans payable
  $ 876,160     $ 955,847  
  Construction loans payable
    100,000       124,819  
      976,160       1,080,666  
Debt secured by on-campus participating properties:
               
  Mortgage loans payable
    32,790       32,991  
  Bonds payable
    51,390       53,275  
      84,180       86,266  
Senior secured term loan
    100,000       100,000  
Secured revolving credit facility
    -       14,700  
Secured agency facility
    94,000       -  
Unamortized debt premiums
    4,174       5,682  
Unamortized debt discounts
    (8,988 )     (10,393 )
Total debt
  $ 1,249,526     $ 1,276,921  
 
Pay-off of Mortgage and Construction Debt
 
During the nine months ended September 30, 2009, the Company borrowed from the secured revolving credit facility and used equity offering proceeds (see Note 1) to pay off $72.8 million of fixed-rate mortgage debt and $30.2 million of variable-rate construction debt, secured by 11 of its wholly-owned properties.
 
 
15

 
 
 
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Loans Assumed or Entered Into in Conjunction with Property Acquisitions
 
In connection with the June 11, 2008 acquisition of GMH’s student housing business (see Note 3), the Company assumed approximately $608.2 million of fixed-rate mortgage debt.  At the time of assumption, the debt had a weighted average annual interest rate of 5.43% and an average term to maturity of 6.2 years.  Upon assumption of this debt, the Company recorded debt discounts and debt premiums of approximately $11.8 million and $2.3 million, respectively, to reflect the estimated fair value of the debt assumed.  These mortgage loans are secured by liens on the related properties.
 
In connection with the February 2008 acquisition of Pirate’s Place (see Note 3), a wholly-owned property, the Company assumed approximately $7.0 million of fixed-rate mortgage debt with an annual interest rate of 7.15% and January 2023 maturity date.  Upon assumption of this debt, the Company recorded a debt premium of approximately $0.3 million, to reflect the estimated fair value of the debt assumed.  This mortgage loan is secured by a lien on the related property.
 
Secured Revolving Credit Facility
 
In August 2009, the Operating Partnership renewed its revolving credit facility and increased the size of the facility from $160 million to $225 million.  The facility may be expanded by up to an additional $75 million upon the satisfaction of certain conditions.  The maturity date of the facility is August 14, 2012 and can be extended 12 months through August 2013.  The facility is currently secured by seven of the Company’s wholly-owned properties.
 
Availability under the revolving credit facility is limited to an “aggregate borrowing base amount” equal to the lesser of (i) 50% to 65% of the value of certain properties, calculated as set forth in the credit facility, and (ii) the adjusted net operating income from these properties divided by a formula amount.  The facility bears interest at a variable rate, at the Company’s option, based upon a base rate or one-, two-, or three-month LIBOR, with a LIBOR floor of 2.0%, plus, in each case, a spread based upon the Company’s total leverage.  Additionally, the Company is required to pay an unused commitment fee of 0.35% per annum.  In September 2009, the Company paid off the entire balance on the revolving credit facility using proceeds from the secured agency facility discussed below.  As of September 30, 2009, the total availability under the facility (subject to the satisfaction of certain financial covenants) totaled $155.4 million.
 
The terms of the facility include certain restrictions and covenants, which limit, among other items, the incurrence of additional indebtedness, liens, and the disposition of assets. The facility contains customary affirmative and negative covenants and also contains financial covenants that, among other things, require the Company to maintain certain minimum ratios of “EBITDA” (earnings before interest, taxes, depreciation and amortization) to fixed charges.  The Company may not pay distributions that exceed a specified percentage of funds from operations, as adjusted, for any four consecutive quarters.  The financial covenants also include consolidated net worth and leverage ratio tests.  As of September 30, 2009, the Company was in compliance with all such covenants.
 
Secured Agency Facility
 
In September 2009, the Company closed a $125 million secured revolving credit facility with a Freddie Mac lender.  The facility has a five-year term and is currently secured by eight properties referred to as the “Collateral Pool.”  The facility bears interest at one- or three-month LIBOR plus a spread that varies based on the debt service ratio of the Collateral Pool.  Additionally, the Company is required to pay an unused commitment fee of 1.0% per annum.  As of September 30, 2009, the balance outstanding on the secured agency facility totaled $94.0 million, bearing interest at a weighted average rate of 2.3%.
 
Senior Secured Term Loan
 
On May 23, 2008, the Operating Partnership obtained a $100 million senior secured term loan.  The secured term loan has an initial term of 36 months and can be extended through May 2012 through the exercise of a 12-month extension period.  The secured term loan bears interest at a variable rate, at the Company’s option, based upon a base rate or one-, two-, three-, or six-month LIBOR plus, in each case, a spread based upon the Company’s total leverage.  On June 11, 2008, the Operating Partnership borrowed in full from the secured term loan and used the proceeds to fund a portion of the total cash consideration for the GMH acquisition.  As of September 30, 2009, the balance outstanding on the secured term loan was $100 million.  The Company guarantees the Operating Partnership’s obligations under the secured term loan.  The secured term loan includes the same restrictions and covenants as the revolving credit facility, described above.
 
 
16

 
 
 
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
On February 23, 2009, the Company entered into two $50.0 million interest rate swap agreements effective March 20, 2009 through February 20, 2012, which are both used to hedge the Company’s exposure to fluctuations in interest payments on its LIBOR-based senior secured term loan.  Under the terms of the two interest rate swap agreements, the Company pays an average fixed rate of 1.7925% and receives a one-month LIBOR floating rate.  As a result of these two interest rate swaps, the Company effectively fixed the interest rate on its senior secured term loan to 3.79% as of September 30, 2009 (1.7925% + 2.0% spread).  In the event that the swaps at any time have a negative fair value below a certain threshold level, the Company is required to post cash into a collateral account pledged to the interest rate swap providers.  As of September 30, 2009, the Company had deposited approximately $0.4 million into a collateral account related to one of the interest rate swaps.  See Note 10 herein for a more detailed discussion of the Company’s derivative instruments and hedging activities.
 
9.  Incentive Award Plan
 
The Company has adopted the 2004 Incentive Award Plan (the “Plan”).  The Plan provides for the grant to selected employees and directors of the Company and the Company’s affiliates of stock options, RSUs, RSAs, Common Units, profits interest units (“PIUs”), and other stock-based incentive awards.  The Company has reserved a total of 1,210,000 shares of the Company’s common stock for issuance pursuant to the Plan, subject to certain adjustments for changes in the Company’s capital structure, as defined in the Plan.  As of September 30, 2009, 351,736 shares were available for issuance under the Plan.
 
Restricted Stock Units
 
Upon initial appointment to the Board of Directors and reelection to the Board of Directors at each Annual Meeting of Stockholders, each outside member of the Board of Directors is granted RSUs.  For all 2006 and 2007 RSU grants, no shares of stock were issued at the time of the RSU awards, and the Company was not required to set aside a fund for the payment of any such award; however, the stock was deemed to be awarded on the date of grant.  Upon the Settlement Date, which is three years from the date of grant, the Company will deliver to the recipients a number of shares of common stock or cash, as determined by the Compensation Committee of the Board of Directors, equal to the number of RSUs held by the recipients.  In addition, recipients of RSUs are entitled to dividend equivalents equal to the cash distributions paid by the Company on one share of common stock for each RSU issued, payable currently or on the Settlement Date, as determined by the Compensation Committee of the Board of Directors.
 
Upon reelection to the Board of Directors in May 2009, the Chairman of the Board of Directors was granted RSUs valued at $51,500 and the remaining outside members were each granted RSUs valued at $41,500.  The number of RSUs was determined based on the fair market value of the Company’s stock on the date of grant, as defined in the Plan.  All awards vested and settled immediately on the date of grant, and the Company delivered shares of common stock and cash, as determined by the Compensation Committee of the Board of Directors.  A compensation charge of approximately $0.3 million was recorded during the nine months ended September 30, 2009 related to these awards.  A summary of the Company’s RSUs under the Plan as of September 30, 2009 and changes during the nine months ended September 30, 2009, is presented below:
 
   
Number of
RSUs
 
Outstanding at December 31, 2008
    11,556  
Granted
    11,870  
Settled in common shares
    (8,594 )
Settled in cash
    (9,456 )
Outstanding at September 30, 2009
    5,376  
 
Restricted Stock Awards
 
The Company awards RSAs to its executive officers and certain employees that vest in equal annual installments over a three to five year period.  Unvested awards are forfeited upon the termination of an individual’s employment with the Company under specified circumstances.  Recipients of RSAs receive dividends, as declared by the Company’s Board of Directors, on unvested shares, provided that the recipient continues to be employed by the Company.

 
17

 
 

AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
A summary of the Company’s RSAs under the Plan as of September 30, 2009 and changes during the nine months ended September 30, 2009, is presented below:
 
   
Number of
RSAs
 
Nonvested balance at December 31, 2008
    282,408  
Granted
    256,650  
Vested
    (50,210 )
Forfeited
    (24,089 )
Nonvested balance at September 30, 2009
    464,759  
 
The Company recognizes the value of these awards as an expense over the vesting periods, which amounted to approximately $0.7 million and $0.4 million for the three months ended September 30, 2009 and 2008, respectively, and $2.0 million and $1.3 million for the nine months ended September 30, 2009 and 2008, respectively.
 
Common Units
 
PIUs were issued to certain executive and senior officers upon consummation of the IPO.  In connection with the Company’s equity offering in July 2005, all 121,000 PIUs were converted to Common Units, as contemplated in the Operating Partnership’s operating agreement.
 
The Outperformance Bonus Plan was adopted upon consummation of the Company’s IPO in August 2004, and consisted of awards to key employees equal to the value of 367,682 shares of the Company’s common stock.  Such awards vested on the third anniversary of the IPO (August 2007), upon the Company’s achievement of specified performance measures.  Upon vesting, the Compensation Committee of the Board of Directors exercised its permitted discretion and granted 132,400 of the awards to selected recipients in the form of PIUs, with the remainder of the awards paid in cash.  As a result of the October 2007 equity offering, a book-up event occurred for tax purposes, resulting in the 132,400 PIUs being converted to Common Units.
 
Each common unit is deemed equivalent to one share of the Company’s common stock.  Common units receive the same quarterly per unit distribution as the per share distributions on the Company’s common stock.
 
10.   Derivatives Instruments and Hedging Activities
 
The Company is exposed to certain risk arising from both its business operations and economic conditions.  The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities.  The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments.  Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates.  The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s investments and borrowings.
 
Cash Flow Hedges of Interest Rate Risk
 
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements.  To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy.  Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. 
 
The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in Accumulated Other Comprehensive Income (Loss) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings.  During the nine months ended September 30, 2009, such derivatives were used to hedge the variable cash flows associated with the Company’s $100 million senior secured term loan and the Cullen Oaks Phase I and Phase II loans.

 
18

 
 

AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
The following table summarizes the Company’s outstanding interest rate swap contracts as of September 30, 2009:
 
 
Date Entered
 
Effective Date
Maturity
Date
  Pay Fixed Rate
Receive Floating
 Rate Index
 
Notional
Amount
   
Fair Value
 
Feb. 12, 2007
Feb. 15, 2007
Feb. 15, 2014
6.689%
LIBOR – 1 mo. plus 1.35%
  $ 33,156     $ (3,906 )
Feb. 23, 2009
March 20, 2009
Feb. 20, 2012
1.785%
LIBOR – 1 month
    50,000       (445 )
Feb. 23, 2009
March 20, 2009
Feb. 20, 2012
1.800%
LIBOR – 1 month
    50,000       (464 )
 
The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the consolidated balance sheets as of September 30, 2009 and December 31, 2008:
 
   
Derivative Liabilities as of
 
   
September 30, 2009
 
December 31, 2008
 
   
Balance Sheet
Location
 
Fair Value
 
Balance Sheet
Location
 
Fair Value
 
                       
Interest rate swap contracts
 
Other liabilities
  $ 4,815  
Other Liabilities
  $ 5,117  
Total derivatives designated as hedging instruments
      $ 4,815       $ 5,117  
 
The table below presents the effect of the Company’s derivative financial instruments on other comprehensive income (“OCI”) and the consolidated statements of operations for the nine months ended September 30, 2009 and 2008:
                                   
Cash Flow Hedging
Relationships
 
Amount of Income (Loss)Recognized in OCI on Derivative
(Effective Portion)
 
Location of Gain
Reclassified from
Accumulated
OCI Into Income
 
Amount of Gain Reclassified from
Accumulated OCI Into Income
(Effective Portion)
 
 
Nine Months Ended September 30,
   
Nine Months Ended September 30,
 
  2009     2008     2009     2008  
                                   
Interest rate swap contracts
  $ 302     $ (48 )
Interest expense
  $ -     $ 181  
                                   
Total
  $ 302     $ (48 )     $ -     $ 181  
 
The Company reported comprehensive loss of $9.7 million for the nine months ended September 30, 2008, which includes net loss attributable to American Campus Communities, Inc. and Subsidiaries of $9.6 million as well as an unrealized loss of $48,000 (reflected in the table above).
 
11.   Fair Value Disclosures
 
The following table presents information about the Company’s liabilities measured at fair value on a recurring basis as of September 30, 2009, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.  In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities the Company has the ability to access.  Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.  Level 2 inputs include quoted prices for similar assets and liabilities in active markets and inputs other than quoted prices observable for the asset or liability, such as interest rates and yield curves observable at commonly quoted intervals.  Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.
 
In instances in which the inputs used to measure fair value may fall into different levels of the fair value hierarchy, the level in the fair value hierarchy within which the fair value measurement in its entirety has been determined is based on the lowest level input significant to the fair value measurement in its entirety.  The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.  Disclosures concerning assets and liabilities measured at fair value are as follows:

 
19

 
 

AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Liabilities Measured at Fair Value on a Recurring Basis
 
   
Quoted Prices in
Active Markets for
Identical Assets
and Liabilities
(Level 1)
   
Significant Other
Observable Inputs
(Level 2)
   
Significant
Unobservable
Inputs (Level 3)
   
 
Balance at
September 30, 2009
 
Derivative financial instruments
  $ -     $ 4,815     $ -     $ 4,815  
 
The Company uses derivative financial instruments, specifically interest rate swaps, for nontrading purposes.  The Company uses interest rate swaps to manage interest rate risk arising from previously unhedged interest payments associated with variable rate debt.  Through September 30, 2009, derivative financial instruments were designated and qualified as cash flow hedges.  Derivative contracts with positive net fair values inclusive of net accrued interest receipts or payments, are recorded in other assets.  Derivative contracts with negative net fair values, inclusive of net accrued interest payments or receipts, are recorded in other liabilities.  The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative.  This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves.  The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.
 
The Company incorporates credit valuation adjustments to appropriately reflect its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.  In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds and guarantees.
 
Although the Company has determined the majority of the inputs used to value its derivative fall within Level 2 of the fair value hierarchy, the credit valuation adjustment associated with its derivative utilizes Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparty.  However, as of September 30, 2009, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of the Company’s derivative financial instruments.  As a result, the Company has determined its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
 
Other Fair Value Disclosures
 
Cash and Cash Equivalents, Restricted Cash, Student Contracts Receivable, Other Assets, Account Payable and Accrued Expenses and Other Liabilities:  The Company estimated that the carrying amount approximates fair value, due to the short maturity of these instruments.
 
Derivative Instruments: These instruments are reported on the balance sheet at fair value, which is based on calculations provided by independent, third-party financial institutions and represent the discounted future cash flows expected, based on the projected future interest rate curves over the life of the instrument.
 
Senior Secured Term Loan, Secured Credit Facilities and Construction Loans: the fair value of the Company’s secured term loan, secured credit facilities and construction loans approximate carrying values due to the variable interest rate feature of these instruments.
 
Mortgage Loans: the fair value of mortgage loans is based on the present value of the cash flows at current rates through maturity.
 
Bonds Payable: the fair value of bonds payable is based on market quotes for bonds outstanding.

 
20

 
 
 
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The table below contains the estimated fair value and related carrying amounts for the Company’s mortgage loans and bonds payable as of September 30, 2009 and December 31, 2008:
 
   
September 30, 2009
   
December 31, 2008
 
   
Fair Value
   
Carrying Amount
   
Fair Value
   
Carrying Amount
 
Mortgage loans
  $ 943.5     $ 904.1     $ 1,000.1     $ 984.1  
Bonds payable
    51.6       51.4       52.8       53.3  
 
12.  Commitments and Contingencies
 
Commitments
 
Development-related guarantees: The Company commonly provides alternate housing and project cost guarantees, subject to force majeure.  These guarantees are typically limited, on an aggregate basis, to the amount of the projects’ related development fees or a contractually agreed-upon maximum exposure amount.  Alternate housing guarantees typically expire five days after construction is complete and generally require the Company to provide substitute living quarters and transportation for students to and from the university if the project is not complete by an agreed-upon completion date.  Under project cost guarantees, the Company is responsible for the construction cost of a project in excess of an approved budget.   The budget consists primarily of costs included in the general contractors’ guaranteed maximum price contract (“GMP”).  In most cases, the GMP obligates the general contractor, subject to force majeure and approved change orders, to provide completion date guarantees and to cover cost overruns and liquidated damages.  In addition, the GMP is typically secured with payment and performance bonds.  Project cost guarantees expire upon completion of certain developer obligations, which are normally satisfied within one year after completion of the project.
 
In the normal course of business, the Company enters into various development-related purchase commitments with parties that provide development-related goods and services.  In the event that the Company was to terminate development services prior to the completion of projects under construction, the Company could potentially be committed to satisfy outstanding purchase orders with such parties.  At September 30, 2009, management did not anticipate any material deviations from schedule or budget related to third-party development projects currently in progress. 
 
Guaranty of Joint Venture Mortgage Debt: As mentioned in Note 7, the Fidelity Joint Ventures are funded in part with secured third party debt in the amount of $342.2 million.  The Operating Partnership serves as non-recourse, carve-out guarantor of this debt, which means the Operating Partnership is liable to the lender for any loss, damage, cost, expense, liability, claim or other obligation incurred by the lender arising out of or in connection with certain non-recourse exceptions in connection with the debt.  Pursuant to the respective limited liability company agreements, the Fidelity Joint Ventures agreed to indemnify, defend and hold harmless the Operating Partnership with respect to such obligations, except to the extent such obligations were caused by the willful misconduct, gross negligence, fraud or bad faith of the Operating Partnership or its employees, agents or affiliates.  Therefore, the Operating Partnership’s exposure under the guarantees for obligations not caused by the willful misconduct, gross negligence, fraud or bad faith of the Operating Partnership or its employees, agents or affiliates is not expected to exceed the Company’s 10% proportionate interest in the related mortgage debt.
 
The Company has estimated the fair value of guarantees entered into to be immaterial.  The Company’s estimated maximum exposure amount under the above guarantees is approximately $351.8 million.
 
Contingencies
 
Litigation:  In the normal course of business, the Company is subject to claims, lawsuits, and legal proceedings.  While it is not possible to ascertain the ultimate outcome of such matters, management believes that the aggregate amount of such liabilities, if any, in excess of amounts provided or covered by insurance, will not have a material adverse effect on the consolidated financial position or results of operations of the Company.

 
21

 
 
 
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Letters of Intent:  In the ordinary course of the Company’s business, the Company enters into letters of intent indicating a willingness to negotiate for acquisitions, dispositions or joint ventures.  Such letters of intent are non-binding, and neither party to the letter of intent is obligated to pursue negotiations unless and until a definitive contract is entered into by the parties.  Even if definitive contracts are entered into, the letters of intent relating to the acquisition and disposition of real property and resulting contracts generally contemplate that such contracts will provide the acquirer with time to evaluate the property and conduct due diligence, during which periods the acquiror will have the ability to terminate the contracts without penalty or forfeiture of any deposit or earnest money.  There can be no assurance that definitive contracts will be entered into with respect to any matter covered by letters of intent or that the Company will consummate any transaction contemplated by any definitive contract.  Furthermore, due diligence periods for real property are frequently extended as needed.  An acquisition or disposition of real property becomes probable at the time that the due diligence period expires and the definitive contract has not been terminated.  The Company is then at risk under a real property acquisition contract, but only to the extent of any earnest money deposits associated with the contract, and is obligated to sell under a real property sales contract.
 
Environmental Matters:  The Company is not aware of any environmental liability with respect to the properties that would have a material adverse effect on the Company’s business, assets or results of operations. However, there can be no assurance that such a material environmental liability does not exist. The existence of any such material environmental liability could have an adverse effect on the Company’s results of operations and cash flows.
 
13.   Segments
 
The Company defines business segments by their distinct customer base and service provided.  The Company has identified four reportable segments: Wholly-Owned Properties, On-Campus Participating Properties, Development Services, and Property Management Services.  Management evaluates each segment’s performance based on operating income before depreciation, amortization, noncontrolling interests and allocation of corporate overhead.  Intercompany fees are reflected at the contractually stipulated amounts.

 
22

 
 
 
AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2009
   
2008
   
2009
   
2008
 
Wholly-Owned Properties
                       
Rental revenues
  $ 70,023     $ 61,274     $ 203,952     $ 131,047  
Interest and other income
    10       17       32       90  
Total revenues from external customers
    70,033       61,291       203,984       131,137  
Operating expenses before depreciation, amortization,
   ground/facility lease, and allocation of corporate overhead
    39,607       38,546       104,492       68,753  
Ground/facility lease
    251       125       763       125  
Interest expense
    13,496       14,994       41,724       28,942  
Other nonoperating income
    -       486       402       486  
Operating income before depreciation, amortization,
   noncontrolling interests and allocation of corporate overhead
  $ 16,679     $ 8,112     $ 57,407     $ 33,803  
Depreciation and amortization
  $ 17,202     $ 16,709     $ 54,833     $ 33,404  
Capital expenditures
  $ 31,537     $ 48,788     $ 99,893     $ 118,778  
Total segment assets at September 30,
  $ 2,134,602     $ 1,954,105     $ 2,134,602     $ 1,954,105  
                                 
On-Campus Participating Properties
                               
Rental revenues
  $ 4,433     $ 4,301     $ 15,229     $ 14,993  
Interest and other income
    7       47       40       179  
Total revenues from external customers
    4,440       4,348       15,269       15,172  
Operating expenses before depreciation, amortization,
   ground/facility lease, and allocation of corporate overhead
    2,544       3,091       7,085       7,533  
Ground/facility lease
    223       383       715       1,110  
Interest expense
    1,535       1,521       4,650       4,614  
Operating income (loss) before depreciation, amortization,
   noncontrolling interests and allocation of corporate overhead
  $ 138     $ (647 )   $ 2,819     $ 1,915  
Depreciation and amortization
  $ 1,087     $ 1,087     $ 3,269     $ 3,230  
Capital expenditures
  $ 464     $ 441     $ 645     $ 637  
Total segment assets at September 30,
  $ 78,577     $ 82,615     $ 78,577     $ 82,615  
                                 
Development Services
                               
Development and construction management fees from
   external customers
  $ 1,760     $ 4,519     $ 3,698     $ 6,898  
Operating expenses
    2,205       2,226       6,580       6,671  
Operating (loss) income before depreciation, amortization,
   noncontrolling interests and allocation of corporate overhead
  $ (445 )   $ 2,293     $ (2,882 )   $ 227  
Total segment assets at September 30,
  $ 7,724     $ 8,971     $ 7,724     $ 8,971  
                                 
Property Management Services
                               
Property management fees from external customers
  $ 2,229     $ 2,041     $ 6,576     $ 4,185  
Intersegment revenues
    2,682       2,421       7,929       5,006  
Total revenues
    4,911       4,462       14,505       9,191  
Operating expenses
    1,816       2,557       5,583       4,578  
Operating income before depreciation, amortization,
   noncontrolling interests and allocation of corporate overhead
  $ 3,095     $ 1,905     $ 8,922     $ 4,613  
Total segment assets at September 30,
  $ 4,715     $ 4,407     $ 4,715     $ 4,407  
                                 
Reconciliations
                               
Total segment revenues
  $ 81,144     $ 74,620     $ 237,456     $ 162,398  
Unallocated interest income earned on corporate cash
    4       179       29       779  
Elimination of intersegment revenues
    (2,682 )     (2,421 )     (7,929 )     (5,006 )
Total consolidated revenues, including interest income
  $ 78,466     $ 72,378     $ 229,556     $ 158,171  
Segment operating income before depreciation, amortization,
   noncontrolling interests and allocation of corporate overhead
  $ 19,467     $ 11,663     $ 66,266     $ 40,558  
Depreciation and amortization
    (19,475 )     (18,980 )     (61,558 )     (38,882 )
Net unallocated expenses relating to corporate overhead
    (4,697 )     (4,883 )     (12,894 )     (9,648 )
Loss from unconsolidated joint ventures
    (907 )     (926 )     (1,944 )     (1,181 )
Income tax provision
    (135 )     (128 )     (405 )     (261 )
Noncontrolling interests share of loss (income)
    (57 )     275       (302 )     (198 )
Loss from continuing operations attributable to
   common shareholders
  $ (5,804 )   $ (12,979 )   $ (10,837 )   $ (9,612 )
                                 
Total segment assets
  $ 2,225,618     $ 2,050,098     $ 2,225,618     $ 2,050,098  
Unallocated corporate assets
    74,085       141,704       74,085       141,704  
Total assets
  $ 2,299,703     $ 2,191,802     $ 2,299,703     $ 2,191,802  

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

14.  Subsequent Events
 
The Company evaluates events and transactions that occur after the balance sheet date as potential subsequent events. This evaluation was performed through November 6, 2009, the date on which the Company’s financial statements were issued.
 
Pay-off of Mortgage Debt:  In October 2009, the Company paid off $7.9 million in fixed-rate mortgage debt secured by one of our wholly-owned properties (University Club Gainesville).
 
Distributions:  On November 5, 2009, the Company declared a third quarter 2009 distribution per share of $0.3375 which will be paid on November 30, 2009 to all common stockholders of record as of November 16, 2009.  At the same time, the Operating Partnership will pay an equivalent amount per unit to holders of Common Units, as well as the quarterly cumulative preferential distribution to holders of Series A Preferred Units (see Note 6).

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

Forward-looking Statements

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

Some of the risks and uncertainties that may cause our actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements include, among others, the following: general risks affecting the real estate industry; risks associated with changes in university admission or housing policies; risks associated with the availability and terms of financing and the use of debt to fund acquisitions and developments; failure to manage effectively our growth and expansion into new markets or to integrate acquisitions successfully; risks and uncertainties affecting property development and construction; risks associated with downturns in the national and local economies, volatility in capital and credit markets, increases in interest rates, and volatility in the securities markets; costs of compliance with the Americans with Disabilities Act and other similar laws; potential liability for uninsured losses and environmental contamination; and 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.

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

Our Company and Our Business

American Campus Communities, Inc. (referred to herein as the “Company,” “us,” “we,” and “our”) is a real estate investment trust (“REIT”) that was incorporated on March 9, 2004 and commenced operations effective with the completion of our initial public offering (“IPO”) on August 17, 2004.  Through our controlling interest in American Campus Communities Operating Partnership LP (the “Operating Partnership”), 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, developed, 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 May 11, 2009, we completed an equity offering, consisting of the sale of 9,775,000 shares of our common stock at a price of $21.25 per share, including 1,275,000 shares issued as a result of the exercise of the underwriters’ overallotment option in full at closing.  The offering generated gross proceeds of $207.7 million.  The aggregate proceeds, net of the underwriting discount and expenses of the offering, were approximately $198.3 million.

As of September 30, 2009, our property portfolio contained 86 student housing properties with approximately 52,800 beds and approximately 17,200 apartment units, including 40 properties containing approximately 23,500 beds and approximately 7,500 units added as a result of our acquisition of the student housing business of GMH Communities Trust (“GMH”) on June 11, 2008.  Our property portfolio consisted of 80 owned off-campus properties that are in close proximity to colleges and universities, two American Campus Equity (“ACETM”) properties operated under ground/facility leases with a related university system and four on-campus participating properties operated under ground/facility leases with the related university systems.  As of September 30, 2009, we also owned a noncontrolling interest in two joint ventures that owned an aggregate of 21 student housing properties with approximately 12,100 beds in approximately 3,600 units.  Our communities contain modern housing units and are supported by a resident assistant system and other student-oriented programming, with many offering resort-style amenities.

 
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Through our taxable REIT subsidiaries (“TRS”), we provide construction management and development services, primarily for student housing properties owned by colleges and universities, charitable foundations, and others.  As of September 30, 2009, we provided third-party management and leasing services for 32 properties (five of which we served as the third-party developer and construction manager) that represented approximately 23,700 beds in approximately 9,200 units.  Third-party management and leasing services are typically provided pursuant to multi-year management contracts that have initial terms that range from one to five years.  As of September 30, 2009, our total owned, joint venture and third-party managed portfolio was comprised of 139 properties with approximately 88,600 beds in approximately 30,000 units.
 
Third-Party Development Services

Our third-party development and construction management services as of September 30, 2009 consisted of three projects under contract and currently in progress with fees ranging from $2.5 million to $7.6 million.  As of September 30, 2009, fees of approximately $3.8 million remained to be earned by us with respect to these projects, which have scheduled completion dates of March 2010 through August 2011.

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

On June 11, 2008, we completed the acquisition of GMH’s student housing business.  At the time of closing, the GMH student housing portfolio consisted of 42 wholly-owned properties containing 24,939 beds located in various markets throughout the country.  Two of the acquired properties totaling 1,468 beds were sold in the third quarter of 2008.  The total consideration paid for GMH was approximately $1,018.7 million, inclusive of transaction costs, which included: (i) the issuance of approximately 5.4 million shares of our common stock and 7,004 Common Units, each valued at $28.43 per share or unit; (ii) cash consideration paid of approximately $239.6 million which represented the payment of $3.36 per share for each GMH common share and each unit in the GMH Operating Partnership; and (iii) the assumption of $608.2 million of fixed-rate mortgage debt, which included a net debt discount of $9.4 million.

American Campus Equity (“ACETM”) Development Activities

An emerging opportunity in the wholly-owned property segment is the equity investment and ownership of on-campus housing via traditional long-term ground leases.  Branded and marketed to colleges and universities as the ACE program, the transaction structure provides us with what we believe is a lower-risk opportunity compared to other off-campus projects, as our ACE projects will have premier on-campus locations with marketing and operational assistance from the university.  The subject university substantially benefits by increasing its housing capacity with modern, well-amenitized student housing with no or minimal impacts to its own credit ratios, preserving the university’s credit capacity to fund academic and research facilities.  During the first nine months of 2009, we were selected by four universities to begin the planning process for the development, ownership and operation of an ACE project.  These 2009 awards, along with the ASU Component III and Boise State University awards, provide us the opportunity to exclusively negotiate with the subject universities with commencement subject to final determination of feasibility, execution and closing of definitive agreements, and various university and municipal approval processes.

Barrett Honors College:  In August 2009, we completed the final stages of construction on our second ACE property located in Tempe, Arizona, which contains 1,721 beds in 602 units and serves students attending Arizona State University.  Total development costs incurred for the project were approximately $132.0 million.

 
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Property Operations
 
As of September 30, 2009, our property portfolio consisted of the following:
                     
PROPERTY
 
YR ACQUIRED / DEVELOPED (1)
 
LOCATION
 
PRIMARY UNIVERSITY SERVED
 
UNITS
 
BEDS
                     
Wholly-Owned properties:
                   
                     
1. Villas on Apache
 
1999
 
Tempe, AZ
 
Arizona State University Main Campus
 
111
 
288
                     
2. River Club Apartments
 
1999
 
Athens, GA
 
The University of Georgia – Athens
 
266
 
792
                     
3. River Walk Townhomes
 
1999
 
Athens, GA
 
The University of Georgia – Athens
 
100
 
336
                     
4. The Village at Blacksburg
 
2000
 
Blacksburg, VA
 
Virginia Polytechnic Inst. & State University
 
288
 
1,056
                     
5. The Callaway House
 
2001
 
College Station, TX
 
Texas A&M University
 
173
 
538
                     
6. The Village at Alafaya Club
 
2000
 
Orlando, FL
 
The University of Central Florida
 
228
 
839
                     
7. The Village at Science Drive
 
2001
 
Orlando, FL
 
The University of Central Florida
 
192
 
732
                     
8. University Village at Boulder Creek
 
2002
 
Boulder, CO
 
The University of Colorado at Boulder
 
82
 
309
                     
9. University Village at Fresno
 
2004
 
Fresno, CA
 
California State University – Fresno
 
105
 
406
                     
10. University Village at TU (2)
 
2004
 
Philadelphia, PA
 
Temple University
 
220
 
749
                     
11. University Club Tallahassee
 
2005
 
Tallahassee, FL
 
Florida State University
 
152
 
608
                     
12. The Grove at University Club
 
2005
 
Tallahassee, FL
 
Florida State University
 
64
 
128
                     
13. College Club Tallahassee
 
2005
 
Tallahassee, FL
 
Florida A&M University
 
96