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TABLE OF CONTENTS

			PAGE NO.
HPART I.
	Item 1.	Business	1
	Item 1A.	Risk Factors	7
	Item 1B.	Unresolved Staff Comments	17
	Item 2.	Properties	18
	Item 3.	Legal Proceedings	23
	Item 4.	Submission of Matters to a Vote of Security Holders	23
HPART II.
	Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters	24
	Item 6.	Selected Financial Data	26
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	47
	Item 8.	Financial Statements and Supplementary Data	47
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	48
	Item 9A.	Controls and Procedures	48
PART III.
	Item 10.	Directors, Executive Officers and Corporate Governance	49
	Item 11.	Executive Compensation	49
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	49
	Item 13.	Certain Relationships, Related Transactions and Director Independence	49
	Item 14.	Principal Accounting Fees and Services	49
PART IV.
	Item 15.	Exhibits and Financial Statement Schedules	50
SIGNATURES			54

 

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PART I

Item 1.  Business

Overview

American Campus Communities, Inc. (referred to herein as “the Company,” “us,” “we,” and “our”) is a real estate investment trust (“REIT”) that was incorporated on March 9, 2004 and commenced operations effective with the completion of our initial public offering (“IPO”) on August 17, 2004.  Through our controlling interest in American Campus Communities Operating Partnership LP (the “Operating Partnership”), 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.

As of December 31, 2008, 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 December 31, 2008, we also owned a minority 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.

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 December 31, 2008, we provided third-party management and leasing services for 34 properties (five of which we served as the third-party developer and construction manager) that represented approximately 24,300 beds in approximately 8,900 units.  Third-party management and leasing services are typically provided pursuant to multi-year management contracts that have initial terms that range from one to five years.  As of December 31, 2008, our total owned, joint venture and third-party managed portfolio was comprised of 141 properties with approximately 89,200 beds in approximately 29,700 units.

Business Objectives, Investment Strategies, and Operating Segments

Business Objectives

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

Investment Strategies

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

Acquisitions:   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.

 

In February 2008, we 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.

 

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In February 2008, we 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.  We believe our relationship with university systems and individual educational institutions, our knowledge of the student housing market and our prominence as the first publicly-traded REIT focused exclusively on student housing in the United States will afford us a competitive advantage in acquiring additional student housing properties.

Development:    Since 1996, we have developed 13 of our owned properties, consisting of nine wholly-owned properties and four on-campus participating properties.  This includes two wholly-owned properties that opened for occupancy in August 2008 and one that opened for occupancy in August 2007.  In addition, as of December 31, 2008, we had one wholly-owned property under development with a development budget of approximately $126.5 million, which is scheduled to open for occupancy in August 2009.

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

Operating Segments

We define business segments by their distinct customer base and service provided.  We have identified four reportable segments: Wholly-Owned Properties, On-Campus Participating Properties, Development Services and Property Management Services.  For a detailed financial analysis of our segments’ results of operations and financial position, please refer to Note 18 in the accompanying Notes to Consolidated Financial Statements contained in Item 8.

Property Operations

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

Management Philosophy:  Our management philosophy is based upon meeting the following objectives:

	●	Satisfying the specialized needs of residents by providing the highest levels of customer service;
	●	Developing and maintaining an academically oriented environment via a premier residence life/student development program;
	●	Maintaining each project’s physical plant in top condition;
	●	Maximizing revenue through the development and implementation of a strategic annual marketing plan and leasing administration program; and
	●	Maximizing cash flow through maximizing revenue coupled with prudent control of expenses.

Wholly-Owned Properties:  As of December 31, 2008, our Wholly-Owned Properties segment consisted of 80 owned off-campus properties within close proximity to 63 colleges and universities in 24 states and two ACE owned on-campus properties operated under ground/facility leases with a related university system.  Off-campus properties are generally located in close proximity to the school campus, generally with pedestrian, bicycle, or University shuttle access.  Off-campus housing tends to offer more relaxed rules and regulations than on-campus housing, resulting in off-campus housing being generally more appealing to upper-classmen.  We believe that the support of colleges and universities can be beneficial to the success of our wholly-owned properties.  We actively seek to have these institutions recommend our facilities to their students or to provide us with mailing lists so that we may directly market to students and parents.  In some cases, the institutions actually promote our off-campus facilities in their recruiting and admissions literature.  In cases where the educational institutions do not provide mailing lists or recommendations for off-campus housing, most provide comprehensive lists of suitable properties to their students, and we continually work to ensure that our properties are on these lists in each of the markets that we serve.

 

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

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

American Campus Equity (ACE):  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.

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

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

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

 

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

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

Third-Party Services

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

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

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

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

Property Management Services:  Our Property Management Services segment, conducted by our TRSs, includes revenues generated from third-party management contracts in which we are typically responsible for all aspects of operations, including marketing, leasing administration, facilities maintenance, business administration, accounts payable, accounts receivable, financial reporting, capital projects, and residence life student development.  As of December 31, 2008, we provided third-party management and leasing services for 34 properties that represented approximately 24,300 beds in approximately 8,900 units, five of which we developed.  We provide these services pursuant to multi-year management agreements (generally ranging between one to five years).

 

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

 

Americans with Disabilities Act and Federal Fair Housing Act

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

Under the federal and state fair housing laws, discrimination on the basis of certain protected classes is prohibited.  Violation of these laws can result in significant damage awards to victims.

Environmental Matters

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

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

Insurance

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

 

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Employees

As of December 31, 2008, we had approximately 2,301 employees, consisting of:

	●	approximately 1,039 on-site employees in our wholly-owned properties segment, including 443 Resident Assistants;
	●	approximately 108 on-site employees in our on-campus participating properties segment, including 51 Resident Assistants;
	●	approximately 1,034 employees in our property management services segment, including 957 on-site employees and 77 corporate office employees;
	●	approximately 37 corporate office employees in our development services segment; and
	●	approximately 83 executive, corporate administration and financial personnel.

Our employees are not currently represented by a labor union.

Offices and Website

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

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

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

 

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Results of Operations

Comparison of the Years Ended December 31, 2008 and December 31, 2007

The following table presents our results of operations for the years ended December 31, 2008 and 2007, including the amount and percentage change in these results between the two periods.

		Year Ended December 31,
		2008				2007				Change ($)				Change (%)
Revenues:
Wholly-owned properties		$	196,535			$	116,286			$	80,249				69.0	%
On-campus participating properties			22,042				20,966				1,076				5.1	%
Third-party development services			7,922				5,490				2,432				44.3	%
Third-party management services			6,578				2,821				3,757				133.2	%
Resident services			2,336				1,572				764				48.6	%
Total revenues			235,413				147,135				88,278				60.0	%
Operating expenses:
Wholly-owned properties			102,686				55,155				47,531				86.2	%
On-campus participating properties			10,771				9,379				1,392				14.8	%
Third-party development and management services			11,123				5,708				5,415				94.9	%
General and administrative			11,274				17,660				(6,386	)			(36.2	%)
Depreciation and amortization			57,555				30,444				27,111				89.1	%
Ground/facility leases			1,778				1,622				156				9.6	%
Total operating expenses			195,187				119,968				75,219				62.7	%
Operating income			40,226				27,167				13,059				48.1	%
Nonoperating income and (expenses):
Interest income			1,131				1,477				(346	)			(23.4	%)
Interest expense			(50,038	)			(27,871	)			(22,167	)			79.5	%
Amortization of deferred financing costs			(2,570	)			(1,340	)			(1,230	)			91.8	%
Loss from unconsolidated joint ventures			(1,619	)			(108	)			(1,511	)			1399.1	%
Other nonoperating income			486				-				486				100.0	%
Total nonoperating expenses			(52,610	)			(27,842	)			(24,768	)			89.0	%
Loss before taxes, minority interests, and discontinued operations			(12,384	)			(675	)			(11,709	)			1734.7	%
Income tax provision			(388	)			(756	)			368				(48.7	%)
Minority interests			(236	)			(255	)			19				(7.5	%)
Loss from continuing operations			(13,008	)			(1,686	)			(11,322	)			671.5	%
Discontinued operations:
Loss attributable to discontinued operations			(47	)			-				(47	)			100.0	%
Net loss		$	(13,055	)		$	(1,686	)		$	(11,369	)			674.3	%

Wholly-Owned Properties Operations

Revenues from our wholly-owned properties increased by $80.2 million in 2008 as compared to 2007 primarily due to the acquisition of GMH’s student housing business in June 2008, the acquisition of two properties during the first quarter 2008, the completion of construction and opening of Vista del Sol and Villas at Chestnut Ridge in August 2008, and the completion of construction and opening of University Centre in August 2007.  Operating expenses increased by approximately $47.5 million in 2008 compared to 2007, primarily due to the same factors which affected the increase in revenues.

New Property Operations.  On June 11, 2008, we acquired GMH’s student housing business, including 42 properties containing 24,939 beds located in various markets throughout the country.  Of the 42 properties acquired, two were under contract to be sold on the acquisition date and were sold in July and August 2008.  The sold properties’ net loss through the date of disposition is reflected as discontinued operations for 2008.  During 2008, the remaining 40 properties acquired from GMH contributed an additional $61.3 million of revenues and an additional $39.2 million of operating expenses.  In addition, we acquired two properties in February 2008: Pirate’s Place, located near the campus of East Carolina University in Greenville, North Carolina; and Sunnyside Commons, located near the campus of West Virginia University in Morgantown, West Virginia.  In August 2008, we completed construction of and opened Vista del Sol, serving students attending Arizona State University, and Villas at Chestnut Ridge, serving students attending SUNY-Buffalo.  Additionally, in August 2007, we completed construction of and opened University Centre, serving students attending Rutgers University, NJIT and various surrounding educational institutions.  These non-GMH new properties contributed an additional $16.1 million of revenues and an additional $6.2 million of operating expenses during 2008 as compared to 2007.

 

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Same Store Property Operations (Excluding New Property Activity).  We had 32 properties containing 16,440 beds which were operating during both 2008 and 2007.  These properties produced revenues of $106.2 million and $102.6 million during 2008 and 2007, respectively, an increase of $3.6 million.  This increase was primarily due to an increase in average rental rates during 2008 as compared to 2007.  The average occupancy for this group of properties remained relatively flat at 96.9% for both 2008 and 2007.  Revenues in 2009 will be dependent on our ability to maintain our current leases in effect for the 2008/2009 academic year and our ability to obtain appropriate rental rates and desired occupancy for the 2009/2010 academic year at our various properties during our leasing period, which typically begins in January and ends in August.

At these same store properties, operating expenses increased by $2.1 million, to $49.0 million in 2008 as compared to $46.9 million in 2007.  This increase was primarily due to marketing costs, costs associated with the 2008 hurricane season, property taxes, and utilities.  We anticipate that operating expenses for our same store property portfolio in 2009 will increase slightly as compared with 2008 as a result of expected increases in utility costs, insurance costs, property taxes and general inflation.

On-Campus Participating Properties (“OCPP”) Operations

Same Store OCPP Operations.  We had four participating properties containing 4,519 beds which were operating during both 2008 and 2007.  Revenues from our same store participating properties increased to $22.0 million in 2008 from $21.0 million in 2007, an increase of $1.0 million.  This increase was primarily due to an increase in average rental rates, offset by a decrease in average occupancy from 78.2% in 2007 to73.7% in 2008.

At these properties, operating expenses increased to $10.8 million in 2008 from $9.4 million in 2007, an increase of $1.4 million.  This increase was primarily due to costs associated with the 2008 hurricane season and utilities.  We anticipate that operating expenses in 2009 will increase slightly as compared with 2008 as a result of expected increases in insurance costs, utility costs and general inflation.

Third-Party Development Services Revenue

Third-party development services revenue increased by $2.4 million from $5.5 million in 2007 to $7.9 million in 2008.  This increase was primarily due to projects with larger fees in progress during 2008 as compared to 2007.  We had six projects in progress during 2008 with an average contractual fee of approximately $3.1 million, as compared to 2007 during which we had seven projects in progress with an average contractual fee of approximately $1.7 million.

Closing of additional third-party development services projects during 2009 will be dependent upon the Company’s university clients obtaining project financing, which has been adversely affected by current capital market conditions.  Subject to the university clients obtaining project financing, we anticipate third-party development services revenue to increase in 2009 due to awards obtained during 2008 and 2007 that are expected to commence during 2009.  Development services revenues are dependent on our ability to successfully be awarded such projects, the amount of the contractual fee related to the project and the timing and completion of the development and construction of the project.  In addition, to the extent projects are completed under budget, we may be entitled to a portion of such savings, which are recognized as revenue when performance has been agreed upon by all parties, or when performance has been verified by an independent third-party.  It is possible that projects for which we have deferred pre-development costs will not close and that we will not be reimbursed for such costs.  The pre-development costs associated therewith will ordinarily be charged against income for the then-current period.

Third-Party Management Services Revenue

Third-party management services revenues increased by $3.8 million from $2.8 million in 2007 to $6.6 million in 2008.  This increase was primarily due to an additional $2.5 million in management fees recognized during 2008 from third party management contracts assumed as part of the GMH acquisition, including 21 properties owned in two joint ventures in which we have a 10% interest.  The remainder of the increase was primarily the result of the commencement of five management contracts in the fourth quarter of 2007 and the commencement of six management contracts in the second quarter of 2008.  We anticipate that third-party management services revenues in 2009 will increase as compared with 2008, primarily as a result of the previously mentioned contracts assumed from GMH and new contracts obtained during 2008.

 

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Resident Services

Resident services revenue represents revenue earned by our TRS related to the provision of certain services to residents at our properties, such as food service, housekeeping, and resident programming activities.  These services are provided to the residents at market rates and under an agreement between the TRS and the Operating Partnership, payments from residents are collected by the properties on behalf of the TRS in conjunction with their collection of rents.  Revenue from resident services increased approximately $0.7 million from $1.6 million in 2007 to $2.3 million in 2008.  This increase was primarily due to additional revenue earned during 2008 from the acquired properties discussed above and the timing of completion of construction and opening of wholly-owned properties.  As a business strategy, our level of services provided to residents by the TRS is only incidental to that which is necessary to maintain or increase occupancy.  We anticipate that resident services revenue will increase in 2009 as compared to 2008 as additional revenues are generated from the timing of acquisitions and development properties placed into service.

Third Party Development and Management Services Expenses

Third party development and management services expenses increased by $5.4 million, from $5.7 million in 2007 to $11.1 million in 2008.  This increase was primarily due to an increase in payroll and related costs as a result of an increase in activity for potential ACE projects and new management contracts assumed from GMH.  Third-party development and management services expenses for 2009 will be dependent on the level of awards we pursue, the level of new management contracts obtained, and as previously mentioned, any pre-development costs charged against income for projects which do not close.

General and Administrative

General and administrative expenses decreased approximately $6.4 million, from $17.7 million in 2007 to $11.3 million in 2008.  This decrease was primarily due to a $10.4 million compensation charge recorded in 2007 related to the Company’s 2004 Outperformance Bonus Plan.  This decrease was offset by additional transition and integration expenses related to the acquisition of GMH and additional staffing, benefits, rent and public company costs related to both the GMH acquisition and company growth experienced during 2008.  We anticipate general and administrative expenses to increase in 2009 as a result of the previously mentioned increases in corporate staffing levels experienced as a result of the recent growth of our wholly-owned portfolio, including our acquisition of GMH.

Depreciation and Amortization

Depreciation and amortization increased approximately $27.1 million from $30.4 million in 2007 to $57.5 million in 2008.  This increase was primarily due to the acquisition of the GMH student housing business in June 2008, the acquisition of two properties during the first quarter 2008, the completion of construction and opening of Vista del Sol and Villas at Chestnut Ridge in August 2008, and the completion of construction and opening of University Centre in August 2007.   The GMH properties contributed an additional $22.6 million to depreciation expense in 2008, of which $8.8 million related to the valuation assigned to in-place leases for such properties.  We expect depreciation and amortization in 2009 to increase from 2008 as a result of the addition of the GMH properties to our portfolio and a full year of depreciation on properties acquired and placed in service during 2008.

Amortization of deferred financing costs increased approximately $1.2 million from $1.3 million in 2007 to $2.5 million in 2008, primarily due to the amortization of additional finance costs incurred to assume debt on properties acquired from GMH and the senior secured term loan entered into in May 2008.  We expect amortization of deferred financing costs in 2009 to increase due to debt assumed in connection with our acquisition of GMH’s student housing business as well as the senior secured term loan.

Ground Lease Expense

Ground lease expense increased by $0.2 million, from $1.6 million in 2007 to $1.8 million in 2008, primarily due to ground/facility lease costs incurred for Vista del Sol which completed construction and opened in August 2008.  We expect ground lease expense in 2009 to increase due to the timing of Vista del Sol being placed in service during 2008 and the anticipated completion and opening of Barrett Honors College in August 2009.

 

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Interest Income

Interest income decreased by approximately $0.4 million, from $1.5 million in 2007 to $1.1 million in 2008.  This decrease was primarily due to interest earned during 2007 on the remaining proceeds from our September 2006 equity offering and net proceeds from the disposition of an owned off-campus property in December 2006, which was offset by interest earned during 2008 on proceeds from our April 2008 equity offering.

Interest Expense

Interest expense increased approximately $22.1 million, from $27.9 million in 2007 to $50.0 million in 2008.  This increase was primarily due to $598.8 million of mortgage debt assumed from GMH in June 2008 at a weighted average rate of 5.43% (including a net discount of $9.4 million to reflect the fair market value of debt assumed.)  The debt assumed for properties acquired from GMH contributed an additional $18.3 million of interest expense in 2008.  We also incurred an additional $2.4 million of interest expense related to the senior secured term loan entered into in May 2008 to fund a portion of the cash consideration paid in our acquisition of GMH.  An additional $1.9 million of interest expense was incurred during 2008 related to the loans for Vista del Sol and Villas at Chestnut Ridge, which completed construction and were placed into service in August 2008.  Acquisitions during 2007 and 2008 also contributed an additional $0.9 million of interest expense during 2008.  These increases were offset by a decrease in interest expense of approximately $0.4 million associated with the pay-down of the construction loan for University Centre in October 2007, as well as a decrease of approximately $0.2 million associated with a lower interest rate incurred on our variable rate revolving credit facility.  We anticipate that interest expense will increase in 2009 due to additional interest expense incurred in connection with our acquisition of GMH’s student housing business as well as the senior secured term loan entered into in May 2008.

Loss from unconsolidated joint venture

Loss from unconsolidated joint ventures represents our share of the net income (loss) from the Hampton Roads military housing joint venture in which we have a minimal economic interest, as well as our 10 % share of the income (loss) from two joint ventures owning 21 properties formed or assumed as part of our acquisition of GMH in June 2008.

The loss from unconsolidated joint ventures of $1.6 million for 2008 was primarily due to the loss from a 15-property joint venture entered into in connection with our acquisition of GMH.  The joint venture recognized a net loss for 2008 primarily because of the amortization recorded on the value assigned to in-place leases on the joint venture formation date.  In addition, this 15-property joint venture includes two properties located in Louisiana that incurred significant maintenance costs during 2008 associated with the hurricane season.

 

Other Nonoperating Income

 

Other nonoperating income of $0.5 million for 2008 represents tax incentive amounts received in cash during the period related to a property we acquired in February 2007 located in Ypsilanti, Michigan.  Upon acquisition of this property, any future potential benefit of such tax incentive was assumed from the seller.

 

Income Tax Provision

The provision for income taxes decreased by $0.4 million, from $0.8 million in 2007 to $0.4 million in 2008.  This decrease was primarily related to the write-off of the Company’s deferred tax asset in the amount of $0.5 million during 2007 in order to account for the tax impact of the 2004 Outperformance Bonus Plan.

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

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Comparison of the Years Ended December 31, 2007 and December 31, 2006

The following table presents our results of operations for the years ended December 31, 2007 and 2006, including the amount and percentage change in these results between the two periods.

		Year Ended December 31,
		2007				2006				Change ($)				Change (%)
Revenues:
Wholly-owned properties		$	116,286			$	89,264			$	27,022				30.3	%
On-campus participating properties			20,966				19,960				1,006				5.0	%
Third-party development services			5,490				5,778				(288	)			(5.0	%)
Third-party management services			2,821				2,532				289				11.4	%
Resident services			1,572				1,419				153				10.8	%
Total revenues			147,135				118,953				28,182				23.7	%
Operating expenses:
Wholly-owned properties			55,155				42,620				12,535				29.4	%
On-campus participating properties			9,379				8,970				409				4.6	%
Third-party development and management services			5,708				5,564				144				2.6	%
General and administrative			17,660				6,278				11,382				181.3	%
Depreciation and amortization			30,444				24,864				5,580				22.4	%
Ground/facility lease			1,622				857				765				89.3	%
Total operating expenses			119,968				89,153				30,815				34.6	%
Operating income			27,167				29,800				(2,633	)			(8.8	%)
Nonoperating income and (expenses):
Interest income			1,477				1,230				247				20.1	%
Interest expense			(27,871	)			(25,937	)			(1,934	)			7.5	%
Amortization of deferred financing costs			(1,340	)			(1,365	)			25				(1.8	%)
Loss from unconsolidated joint venture			(108	)			-				(108	)			100.0	%
Total nonoperating expenses			(27,842	)			(26,072	)			(1,770	)			6.8	%
(Loss) income before income taxes, minority interests, and discontinued operations			(675	)			3,728				(4,403	)			(118.1	%)
Income tax provision			(756	)			(28	)			(728	)			2600.0	%
Minority interests			(255	)			(2,038	)			1,783				(87.5	%)
(Loss) income from continuing operations			(1,686	)			1,662				(3,348	)			(201.4	%)
Discontinued operations:
Income attributable to discontinued operations			-				2,287				(2,287	)			(100.0	%)
Gain from disposition of real estate			-				18,648				(18,648	)			(100.0	%)
Total discontinued operations			-				20,935				(20,935	)			(100.0	%)
Net (loss) income		$	(1,686	)		$	22,597			$	(24,283	)			(107.5	%)

Wholly-Owned Properties Operations

Revenues and operating expenses from our wholly-owned properties increased by $27.0 million and $12.5 million, respectively, in 2007 as compared to 2006.  These increases were primarily due to the acquisition of four properties during the first quarter of 2007, the acquisition of a 13-property portfolio (the “Royal Portfolio”) in March 2006, and the completion of construction and opening of Callaway Villas in August 2006 and University Centre in August 2007.  The Village on University was sold in December 2006 and is therefore not reflected in operating revenues and expenses but is included in discontinued operations.

New Property Operations.  In January 2007, we acquired Village on Sixth and in February and August 2007 we acquired the Edwards Portfolio.  In March 2006, we also acquired the 13-property Royal Portfolio, consisting of 5,745 beds.  Finally, in August 2006, we completed construction of and opened Callaway Villas and in August 2007 we completed construction of and opened University Centre.  These new properties contributed $24.7 million of additional revenues and $11.8 million of additional operating expenses in 2007 as compared to 2006.

 

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Same Store Property Operations (Excluding New Property Activity).  We had 18 properties containing 9,991 beds which were operating during both 2007 and 2006.  These properties produced revenues of $66.4 million and $64.0 million during 2007 and 2006, respectively, an increase of $2.4 million.  This increase was primarily due to an increase in average rental rates and other income during 2007 as compared to 2006, which was offset by a slight decrease in average occupancy rates from 97.3% in 2006 to 97.0% in 2007.

At these same store properties, operating expenses increased by $0.7 million, to $29.7 million in 2007 as compared to $29.0 million in 2006.  This increase was primarily the result of an increase in maintenance costs, payroll and bad debt expense, offset by utility savings and marketing cost savings related to our early lease-up for the 2007/2008 academic year.

On-Campus Participating Properties (“OCPP”) Operations

Same Store OCPP Operations.  We had four participating properties containing 4,519 beds which were operating during both 2007 and 2006.  Revenues from our same store participating properties increased to $21.0 million in 2007 from $20.0 million in 2006, an increase of $1.0 million.  This increase was primarily due to an increase in average occupancy from 73.1% in 2006 to 78.2% in 2007, as well as an increase in average rental rates.

At these existing properties, operating expenses increased to $9.4 million in 2007 from $9.0 million in 2006, an increase of $0.4 million.  This increase was primarily the result of an increase in maintenance costs incurred at one of our participating properties and an increase in bad debt expense at another one of our participating properties.

Third-Party Development Services Revenue

Third-party development services revenue decreased by $0.3 million from $5.8 million in 2006 to $5.5 million in 2007.  This decrease was primarily due to fewer projects in progress during 2007 as compared to 2006.  We had seven projects in progress during 2007 with an average contractual fee of approximately $1.7 million, as compared to 2006 in which we had nine projects in progress with an average contractual fee of approximately $1.6 million.

Third-Party Management Services Revenue

Third-party management services revenues increased by $0.3 million from $2.5 million in 2006 to $2.8 million in 2007.  This increase was primarily the result of the commencement of four management contracts in August 2006 and four management contracts in the fourth quarter of 2007, which was offset by the discontinuation of the Texas State University System management contracts in July 2006.

Resident Services

Revenue from resident services increased approximately $0.2 million from $1.4 million in 2006 to $1.6 million in 2007.  This increase was primarily due to additional revenue earned during 2007 from the acquired properties discussed above and the completion of construction and opening of Callaway Villas in August 2006 and University Centre in August 2007.

General and Administrative

General and administrative expenses increased approximately $11.4 million, from $6.3 million in 2006, to $17.7 million in 2007.  This increase was primarily due to a compensation charge of $10.4 million recorded in 2007 related to the Company’s 2004 Outperformance Bonus Plan, which is more fully discussed in Note 12 in the accompanying Notes to Consolidated Financial Statements contained in Item 8 herein.  In addition, we experienced an increase in payroll and other related costs as a result of overall increases in corporate staffing levels due to the recent growth in our wholly-owned property portfolio from the property acquisitions and wholly-owned developments completed in 2007 and 2006.

Depreciation and Amortization

Depreciation and amortization increased approximately $5.5 million from $24.9 million in 2006 to $30.4 million in 2007.  This increase was due to the acquisition of four properties during the first quarter of 2007, the acquisition of the 13-property Royal Portfolio in March 2006, the completion of construction and opening of an owned development project in August 2006 and the completion of construction and opening of another owned development project in August 2007.  In conjunction with the acquisition of the four properties during the first quarter of 2007 and the 13-property Royal Portfolio on March 1, 2006, a valuation was assigned to in-place leases which were amortized over the remaining lease terms of the acquired leases (generally less than one year).  This contributed $1.2 million and $2.3 million of additional depreciation and amortization expense in 2007 and 2006, respectively, a decrease of $1.1 million.

 

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Ground Lease Expense

Ground lease expense increased by $0.8 million, from $0.8 million in 2006 to $1.6 million in 2007.  This increase was primarily the result of the refinancing of the Cullen Oaks loans in February 2007, which reduced debt service expense and therefore increased the amount of cash flow available for distribution.  In addition, we experienced a significant decrease in vacancies at one of our other on-campus participating properties which increased the amount of cash flow available for distribution.

Interest Income

Interest income increased by approximately $0.3 million, from $1.2 million in 2006 to $1.5 million in 2007.  This increase was primarily due to interest earned during 2007 on the remaining proceeds from our September 2006 equity offering and net proceeds from the disposition of an owned off-campus property in December 2006.

Interest Expense

Interest expense increased approximately $2.0 million, from $25.9 million in 2006 to $27.9 million in 2007.  This increase was primarily due to $5.4 million of additional interest incurred in 2007 associated with debt assumed or incurred in connection with the previously mentioned 2007 and 2006 property acquisitions, net of the amortization of debt premiums and discounts recorded to reflect the market value of debt assumed.  This increase was offset by a $2.0 million decrease in interest expense on our revolving credit facility as a result of a decrease in the weighted average balance from $41.1 million to $8.4 million for the years ended December 31, 2006 and 2007, respectively.  In addition, capitalized interest increased by $1.2 million as a result of more owned properties being under development during 2007 as compared to 2006.

Loss from unconsolidated joint venture

We own an equity interest in a joint venture that owns a military housing privatization project with the United States Navy, as discussed in Note 10 in the accompanying Notes to Consolidated Financial Statements contained in Item 8 herein.  In December 2007, the joint venture closed and obtained financing through taxable revenue bonds and our share of the loss from the joint venture is reflected under loss from unconsolidated joint venture in the consolidated statement of operations for the year ended December 31, 2007.

Income Taxes

The income tax provision of $0.8 million in 2007 is primarily the result of the write-off of the Company’s deferred tax asset.  In August 2007, in connection with the vesting of the Company’s Outperformance Bonus Plan discussed in Note 12 in the accompanying Notes to Consolidated Financial Statements contained in Item 8 herein, a portion of the compensation expense associated with the awards was recorded by the TRS.  As a result, it was determined that it was more likely than not that we would not realize the benefit of the deferred tax asset and increased the valuation allowance by a discrete item of $0.5 million.  In addition, the Texas Governor signed into law a Texas margin tax which restructured the state business tax by replacing the taxable capital components of the franchise tax with a "taxable margin" component.  The Texas margin tax became effective in 2007, and as a result, we incurred tax expense of approximately $0.2 million for the year ended December 31, 2007.

Minority Interests

The variance in minority interests is primarily due to the Company’s net loss position for 2007 as compared to the Company’s net income position for 2006.  Minority interests represent external partners in our Operating Partnership as well as certain third-party partners in joint ventures consolidated by us for financial reporting purposes.  Accordingly, these external partners are allocated their share of income/loss during the respective reporting periods

 

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Discontinued Operations

Statement of Financial Accounting Standards (“SFAS”) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, requires, among other items, that the operating results of real estate properties sold or classified as held for sale be included in discontinued operations in the statements of operations for all periods presented.  The Village on University, an owned off-campus property, was sold in December 2006 for $51.0 million and the resulting gain on disposition of $18.6 million is included in discontinued operations for the year ended December 31, 2006.  The net operating income attributable to this property is included in discontinued operations for the year ended December 31, 2006.

 

Please refer to Note 6 in the accompanying Notes to Consolidated Financial Statements contained in Item 8 herein for a table summarizing the results of operations of the properties sold during the year ended December 31, 2006.

Cash Flows

Comparison of Years Ended December 31, 2008 and December 31, 2007

Operating Activities

For the year ended December 31, 2008, net cash provided by operating activities before changes in working capital accounts provided $50.3 million, as compared to $34.5 million for the year ended December 31, 2007, an increase of $15.8 million.  Changes in working capital accounts utilized $17.5 million and $5.5 million for the years ended December 31, 2008 and 2007, respectively, an increase of $12.0 million.  This increase in cash utilized for operating activities was primarily due to increased activity in accounts payable, accrued expenses, and lender escrow accounts resulting from the additional properties acquired from GMH and overall company growth.

Investing Activities

Investing activities utilized $432.4 million and $187.6 million for the years ended December 31, 2008 and 2007, respectively.  The increase in cash utilized in investing activities during the year ended December 31, 2008 related primarily to a $230.7 million increase in the use of cash to acquire 44 properties and land compared to the acquisition of four properties during 2007.  In June 2008, we used approximately $269.4 million of cash to acquire the GMH student housing business, including 42 properties containing 24,939 beds located in various markets throughout the country.  In addition, we acquired two properties during the first quarter of 2008.  We experienced an increase in cash used in 2008 for capital expenditures at our wholly-owned properties as we began renovations at several GMH properties.  Finally, in connection with the acquisition of GMH, we contributed 15 GMH properties to a joint venture in exchange for cash and a 10% minority interest in the joint venture, and assumed GMH’s 10% equity interest in an existing joint venture that owns six properties.  These increases in cash utilized in investing activities were offset by proceeds received from the disposition of two properties in July and August 2008.  For the years ended December 31, 2008, 2007 and 2006, our cash utilized in investing activities was comprised of the following:

		Year Ended December 31,
		2008				2007				2006
Property disposition		$	4,418			$	-			$	50,045
Property and land acquisitions			(283,871	)			(53,205	)			(69,697	)
Capital expenditures for on-campus participating properties			(719	)			(480	)			(483	)
Capital expenditures for wholly-owned properties			(15,346	)			(8,097	)			(6,887	)
Renovation expenditures for wholly owned property			-				-				(1,662	)
Investments in wholly-owned properties under development			(124,224	)			(123,723	)			(73,048	)
Purchase of corporate furniture, fixtures, and equipment			(2,178	)			(486	)			(986	)
Investment in unconsolidated joint venture			(10,610	)			(1,600	)			-
Distributions received from unconsolidated joint ventures			120				-				-
Total		$	(432,410	)		$	(187,591	)		$	(102,718	)

Financing Activities

Cash provided by financing activities totaled $413.1 million and $91.5 million for the years ended December 31, 2008 and 2007, respectively.  The increase in cash provided by financing activities was a result of the following: (i) the April 2008 equity offering which raised $252.2 million, net of offering costs, as compared to $98.8 million, net of offering costs, raised in our October 2007 equity offering; (ii) the pay-off of the University Centre construction loan with $43.9 million of proceeds from our October 2007 equity offering; (iii) the $100 million senior secured term loan which was fully funded on June 11, 2008, the proceeds of which were used to pay a portion of the cash consideration for the acquisition of GMH; (iv) the contribution of 15 GMH student housing properties to a joint venture in which we received $74.4 million in proceeds and retained a 10% equity interest in the joint venture; and (v) the $15.0 million increase in proceeds from construction loans used to fund the construction of Vista del Sol, an owned ACE development property, and Villas at Chestnut Ridge, an owned off-campus development property, which both opened for occupancy in August 2008.  These increases were partially offset by the following: (i) the pay-off of $24.4 million in mortgage loan debt assumed in connection with the acquisition of GMH; (ii) a $17.7 million increase in distributions to stockholders as a result of our October 2007 and April 2008 equity offerings and the issuance of common stock as partial consideration for the acquisition of GMH; (iii) a $12.7 million decrease in our construction accounts payable balance as a result of the completion of Vista del Sol and Villas at Chestnut Ridge in August 2008; (iv) a $4.5 million decrease in proceeds (net of paydowns) received from our revolving credit facility; and (v) a $4.2 million increase in debt issuance and assumption costs associated with mortgage debt assumed in connection with acquisitions of properties and fees paid to obtain the secured term loan in May 2008.

 

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Comparison of Years Ended December 31, 2007 and December 31, 2006

Operating Activities

For the year ended December 31, 2007, net cash provided by operating activities before changes in working capital accounts provided $34.5 million, as compared to $32.3 million for the year ended December 31, 2006, an increase of $2.2 million.  Changes in working capital accounts utilized $5.5 million for the year ended December 31, 2007 while working capital accounts provided $2.9 million for the year ended December 31, 2006, a decrease of $8.4 million.  This decrease was primarily due to the partial payment in 2007 of secured promissory notes and cash retained by us related to the acquisition of the Royal Portfolio in March 2006.  In addition, we experienced an increase in accounts receivable from our third-party development services due to a significant increase in projects awarded during 2007 that are expected to commence during 2008.

 

Investing Activities

Investing activities utilized $187.6 million and $102.7 million for the years ended December 31, 2007 and 2006, respectively.  The increase in cash utilized in investing activities during the year ended December 31, 2007 was partly due to a $50.7 million increase in cash used to fund the construction of our wholly-owned development properties.  During the year ended December 31, 2007, four owned properties were under development, of which one was completed and opened for occupancy in August 2007.  During the year ended December 31, 2006, three owned properties were under development, of which one was completed and opened for occupancy in August 2006.  The increase in cash utilized in investing activities is also related to proceeds received from the sale of our owned off-campus property, The Village on University, in December 2006.  These increases were offset by a $16.5 million decrease in the use of cash to acquire properties.  We acquired the 13-property Royal Portfolio in 2006 as compared to four properties acquired in 2007.

Financing Activities

Cash provided by financing activities totaled $91.5 million and $121.9 million for the years ended December 31, 2007 and 2006, respectively.  The decrease in cash provided by financing activities was partly the result of our equity offering in September 2006 which raised $133.2 million, net of offering costs, as compared to the $98.8 million, net of offering costs, raised in our October 2007 equity offering.  In addition, there was an $8.4 million increase in distributions to common and restricted stockholders and minority partners as a result of the September 2006 and October 2007 equity offerings and the issuance of common and preferred units in the Operating Partnership as partial consideration for the purchase of the Royal Portfolio.  These decreases were offset by a $9.6 million increase in proceeds received from our revolving credit facility, net of paydowns.  In addition, there was a $2.9 million increase in the change of our construction accounts payable balance as a result of an increase in owned development activity financed with construction loans in 2007 as compared to 2006.

Structure of Owned On-campus Properties

We have entered into two 65-year ground/facility leases (each with two ten-year extensions available) with a university system to finance, construct, and manage two student housing facilities, one of which is currently under construction with a scheduled completion date of August 2009.  Under the terms of these ground/facility leases, the university system owns both the land and improvements, and we will make annual minimum rent payments to the university system during the first five years of operation for one property and the first ten years of operation for the other property.  In addition, we will pay the university system variable rent payments based upon the operating performance of the properties.

 

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Structure of On-campus Participating Properties

At our on-campus participating properties, the subject universities own both the land and improvements.  We then have a leasehold interest under a ground/facility lease.  Under the lease, we receive an annual distribution representing 50% of these properties’ net cash available for distribution after payment of operating expenses (which includes our management fees), debt service (which includes repayment of principal) and capital expenditures.  We also manage these properties under multi-year management agreements and are paid a management fee representing 5% of receipts.

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

The following table reflects the amounts related to our on-campus participating properties included in our consolidated financial statements for the years ended December 31, 2008, 2007, and 2006:

		Year Ended December 31,
		2008				2007				2006
Revenues		$	22,042			$	20,966			$	19,960
Direct operating expenses (1)			(10,073	)			(8,701	)			(8,382	)
Amortization			(4,322	)			(4,263	)			(4,131	)
Amortization of deferred financing costs			(185	)			(189	)			(241	)
Ground/facility lease (2)			(1,401	)			(1,622	)			(857	)
Net operating income			6,061				6,191				6,349
Interest income			206				359				330
Interest expense (3)			(6,166	)			(6,225	)			(6,447	)
Net income		$	101			$	325			$	232

(1)	Excludes property management fees of $1.0 million for both the years ended December 31, 2008 and 2007, and $0.9 million for the year ended December 31, 2006.  This expense and the corresponding fee revenue recognized by us have been eliminated in consolidation. Also excludes allocation of expenses related to corporate management and oversight.
(2)	Represents the universities’ 50% share of the properties’ net cash available for distribution after payment of operating expenses, debt service (including payment of principal) and capital expenditures.
(3)	Debt service expenditures for these properties totaled $8.4 million for both the years ended December 31, 2008 and 2007, and $8.7 million for the year ended December 31, 2006.

 

Liquidity and Capital Resources

Cash Balances and Liquidity

As of December 31, 2008, excluding our on-campus participating properties, we had $48.6 million in cash and cash equivalents and restricted cash as compared to $18.4 million in cash and cash equivalents and restricted cash as of December 31, 2007.  Restricted cash primarily consists of escrow accounts held by lenders and resident security deposits, as required by law in certain states.  The increase in restricted cash was primarily a result of balances acquired in the GMH transaction.  Additionally, restricted cash as of December 31, 2008 also included $0.7 million of funds held in escrow in connection with potential development opportunities.

 

40

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As of December 31, 2008, our short-term liquidity needs included, but were not limited to, the following: (i) anticipated distribution payments to our stockholders totaling approximately $57.6 million based on an assumed annual cash distribution of $1.35 per share based on the number of our shares outstanding as of December 31, 2008, (ii) anticipated distribution payments to our Operating Partnership unitholders totaling approximately $1.7 million based on an assumed annual distribution of $1.35 per Common Unit and a cumulative preferential per annum cash distribution rate of 5.99% on our Series A Preferred Units based on the number of units outstanding as of December 31, 2008, (iii) payment of approximately $80.6 million of fixed-rate mortgage debt scheduled to mature in 2009, (iv) remaining development costs for Barrett Honors College over the next 12 months, estimated to be approximately $73.8 million, and (v) funds for capital improvements at acquired properties and other potential development projects.  As of December 31, 2008, we had approximately $124.8 million of outstanding variable rate construction debt and a $14.7 million balance outstanding on our revolving credit facility, all of which is scheduled to mature in 2009.  We expect to extend the maturity dates into 2010 for the construction debt and revolving credit facility by exercising the respective extension options available to us.  We expect to meet our short-term liquidity requirements by (a) potentially disposing of properties, (b) borrowing under our revolving credit facility, and (c) utilizing net cash provided by operations.

We may seek additional funds to undertake initiatives not contemplated by our business plan or obtain additional cushion against possible shortfalls.  We also may pursue additional financing as opportunities arise.  Future financings may include a range of different sizes or types of financing, including the sale of additional debt or equity securities.  These funds may not be available on favorable terms or at all.  Our ability to obtain additional financing depends on several factors, including future market conditions, our success or lack of success in penetrating our markets, our future creditworthiness, and restrictions contained in agreements with our investors or lenders, including the restrictions contained in the agreements governing our revolving credit facility and term loan.   These financings could increase our level of indebtedness or result in dilution to our equity holders.

2008 Equity Offering

On April 23, 2008, we completed an equity offering, consisting of the sale of 9,200,000 shares of our common stock at a price of $28.75 per share, including 1,200,000 shares issued as a result of the exercise of the underwriters’ overallotment option in full at closing.  The offering generated gross proceeds of $264.5 million.  The aggregate proceeds, net of the underwriting discount, structuring fee and expenses of the offering, were approximately $252.1 million.

Revolving Credit Facility

In May 2008, the Operating Partnership amended its $115 million revolving credit facility to increase the size of the facility to $160 million, which may be expanded by up to an additional $65 million upon the satisfaction of certain conditions.  The maturity date of the facility is August 17, 2009 and can be extended 12 months through August 2010.  We continue to guarantee the Operating Partnership’s obligations under the facility.

Availability under the revolving credit facility is limited to an "aggregate borrowing base amount" equal to the lesser of (i) 65% of the value of certain properties, calculated as set forth in the credit facility, and (ii) the adjusted net operating income from these properties divided by a formula amount.  The facility bears interest at a variable rate, at the Company’s option, based upon a base rate or one-, two-, three-, or six-month LIBOR plus, in each case, a spread based upon the Company’s total leverage.  Additionally, we are required to pay an unused commitment fee ranging from 0.15% to 0.20% per annum, depending on the aggregate unused balance.  As of December 31, 2008, the balance outstanding on the revolving credit facility totaled $14.7 million, bearing interest at a weighted average rate of 2.23% per annum, with remaining availability under the facility (subject to the satisfaction of certain financial covenants) totaling approximately $133.8 million.

The terms of the facility include certain restrictions and covenants, which limit, among other items, the incurrence of additional indebtedness, liens, and the disposition of assets.  The facility contains customary affirmative and negative covenants and also contains financial covenants that, among other things, require us to maintain certain minimum ratios of "EBITDA" (earnings before interest, taxes, depreciation and amortization) to fixed charges.  We 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 December 31, 2008, we were in compliance with all such covenants.

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, we 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 December 31, 2008, the balance outstanding on the secured term loan was $100 million, bearing interest at a rate of 2.97% per annum.  The secured term loan includes the same restrictions and covenants as the revolving credit facility, described above.  We guarantee the Operating Partnership’s obligations under the secured term loan.

 

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Distributions

We are required to distribute 90% of our REIT taxable income (excluding capital gains) on an annual basis in order to qualify as a REIT for federal income tax purposes.  Distributions to common stockholders are at the discretion of the Board of Directors. We may be required to use borrowings under the credit facility, if necessary, to meet REIT distribution requirements and maintain our REIT status. The Board of Directors considers market factors and our Company’s performance in addition to REIT requirements in determining distribution levels.

On January 30, 2009, we declared a fourth quarter 2008 distribution per share of $0.3375, which was paid on February 27, 2009, to all common stockholders of record as of February 16, 2009.  At the same time, the Operating Partnership paid 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.

Recurring Capital Expenditures

Our properties require periodic investments of capital for general capital expenditures and improvements.  Our policy is to capitalize costs related to the acquisition, development, rehabilitation, construction, and improvement of properties, including interest and certain internal personnel costs related to the communities under rehabilitation and construction.  Capital improvements are costs that increase the value and extend the useful life of an asset.  Ordinary repair and maintenance costs that do not extend the useful life of the asset are expensed as incurred.  Recurring capital expenditures represent non-incremental building improvements required to maintain current revenues and typically include: appliances, carpeting and flooring, HVAC equipment, kitchen/bath cabinets, new roofs, site improvements and various exterior building improvements.  Non-recurring capital expenditures include expenditures that were taken into consideration when underwriting the purchase of a property which were considered necessary to bring the property up to "operating standard," and incremental improvements that include, among other items: community centers, new windows, and kitchen/bath apartment upgrades.  Additionally, we are required by certain of our lenders to contribute amounts to reserves for capital repairs and improvements at their mortgaged properties.  These annual contributions may exceed the amount of capital expenditures actually incurred in such year at such properties.

Our historical recurring capital expenditures at our wholly-owned properties are set forth below:

		As of and for the Year Ended December 31,
		2008				2007				2006
Average beds			45,069	(1)			19,125				15,995
Total recurring capital expenditures		$	8,032			$	3,390			$	2,758
Average per bed		$	178			$	177			$	172

 

(1)

Average beds includes 23,471 design beds from the GMH acquisition

 

Pre-Development Expenditures

Our third-party and owned development activities have historically required us to fund pre-development expenditures such as architectural fees, permits and deposits.  The closing and/or commencement of construction of these development projects is subject to a number of risks such as our inability to obtain financing on favorable terms and delays or refusals in obtaining necessary zoning, land use, building, and other required governmental permits and authorizations  As such, we cannot always predict accurately the liquidity needs of these activities.  We frequently incur these pre-development expenditures before a financing commitment and/or required permits and authorizations have been obtained.  Accordingly, we bear the risk of the loss of these pre-development expenditures if financing cannot ultimately be arranged on acceptable terms or we are unable to successfully obtain the required permits and authorizations.  Historically, our third-party and owned development projects have been successfully structured and financed; however, these developments have at times been delayed beyond the period initially scheduled, causing revenue to be recognized in later periods.  As of December 31, 2008, we have deferred approximately $5.7 million in pre-development costs related to third-party and owned development projects that have not yet commenced construction.

 

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Indebtedness

As of December 31, 2008, we had approximately $1,281.6 million of outstanding consolidated indebtedness (excluding net unamortized debt discounts and debt premiums of approximately $10.4 million and $5.7 million, respectively), comprised of a $14.7 million balance on our unsecured revolving credit facility, a $100.0 million balance on our secured term loan, $1,080.6 million in mortgage and construction loans secured by our wholly-owned properties, $33.0 million in mortgage loans secured by two phases of an on-campus participating property, and $53.3 million in bond issuances secured by three of our on-campus participating properties.  The weighted average interest rate on our consolidated indebtedness as of December 31, 2008 was 5.31% per annum.  As of December 31, 2008, approximately 18.8% of our total consolidated indebtedness was variable rate debt, comprised of our revolving credit facility, secured term loan, and our Vista del Sol and Villas at Chestnut Ridge construction loans discussed below.

Wholly-Owned Properties

The weighted average interest rate of the $1,080.6 million of wholly-owned mortgage and construction debt was 5.43% per annum as of December 31, 2008.  Each of the mortgage loans is a non-recourse obligation subject to customary exceptions.  Each of these mortgages has a 30-year amortization, and none are cross-defaulted or cross-collateralized to any other indebtedness. The loans generally may not be prepaid prior to maturity; in certain cases prepayment is allowed, subject to prepayment penalties.

In August 2008, we completed the final stages of construction on Vista del Sol, an ACE property.  The development and construction of Vista del Sol was partially financed with a $100.0 million construction loan.  For each borrowing we have the option of choosing the Prime rate or one-, two-, or three-month LIBOR plus 1.45%.  The interest rate may be reduced to LIBOR plus 1.20% once construction of the property is complete and certain operations hurdles are met.  The loan requires payments of interest only during the term of the loan and any accrued interest and outstanding borrowings become due on the maturity date of December 27, 2009.  The term of the loan can be extended through December 2011 through the exercise of two 12-month extension periods.  As of December 31, 2008, the balance outstanding on the construction loan totaled $96.0 million, bearing interest at a weighted average rate of 2.44% per annum.

In August 2008, we completed the final stages of construction on Villas at Chestnut Ridge, an owned off-campus property.  The development and construction of Villas at Chestnut was partially financed with a $31.6 million construction loan.  For each borrowing we have the option of choosing the Prime rate or one-, two-, three-, or six-month LIBOR plus 1.25%.  The loan requires payments of interest only during the term of the loan and any accrued interest and outstanding borrowings become due on the maturity date of June 4, 2009.  The term of the loan can be extended through June 2010 through the exercise of a 12-month extension period.  As of December 31, 2008, the balance outstanding on the construction loan totaled $28.8 million, bearing interest at a weighted average rate of 2.45% per annum.

On-Campus Participating Properties

Three of our on-campus participating properties are 100% financed with $53.3 million of outstanding project-based taxable bonds.  Under the terms of these financings, one of our special purpose subsidiaries publicly issued three series of taxable bonds and loaned the proceeds to three special purpose subsidiaries that each hold a separate leasehold interest.  Although a default in payment by these special purpose subsidiaries could result in a default under one or more series of bonds, the indebtedness of any of these special purpose subsidiaries is not cross-defaulted or cross-collateralized with indebtedness of the Company, the Operating Partnership or other special purpose subsidiaries.  Repayment of principal and interest on these bonds is insured by MBIA, Inc.  The loans encumbering the leasehold interests are non-recourse, subject to customary exceptions.

Cullen Oaks Phase I and Phase II loans are currently encumbered by mortgage loans with balances as of December 31, 2008 of approximately $16.4 million and $16.6 million, respectively.  In February 2007, we extended the maturity date of these loans to February 2014.  The loans bear interest at a rate of LIBOR plus 1.35% and require payments of interest only through May 2008 and monthly payments of principal and interest from May 2008 through the maturity date.  In connection with these loan extensions, we terminated the existing interest rate swap agreement on the Cullen Oaks Phase I loan and entered into a new interest rate swap agreement effective February 15, 2007 through February 15, 2014, that is designated to hedge our exposure to fluctuations on interest payments attributed to changes in interest rates associated with payments on the Cullen Oaks Phase I and Phase II loans.  Under the terms of the interest rate swap agreement, we pay a fixed rate of 6.69% per annum and receive a floating rate of LIBOR plus 1.35%.  Pursuant to the Leases, in the event the leasehold estate does 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.  We have guaranteed payment of this property’s indebtedness.

 

43

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The weighted average interest rate of the indebtedness encumbering our on-campus participating properties was 7.17% per annum at December 31, 2008.

		December 31,
		2008				2007
Assets
Investments in real estate:
Wholly-owned properties, net		$	1,986,833			$	947,062
On-campus participating properties, net			69,302				72,905
Investments in real estate, net			2,056,135				1,019,967
Cash and cash equivalents			25,600				12,073
Restricted cash			32,558				13,855
Student contracts receivable, net			5,185				3,657
Other assets			64,431				26,744
Total assets		$	2,183,909			$	1,076,296
Liabilities and stockholders’ equity
Liabilities:
Secured debt		$	1,162,221			$	533,430
Secured term loan			100,000				-
Unsecured revolving credit facility			14,700				9,600
Accounts payable and accrued expenses			35,440				14,360
Other liabilities			56,052				43,278
Total liabilities			1,368,413				600,668
Minority interests			27,512				31,251
Commitments and contingencies (Note 17)
Stockholders’ equity:
Common shares, $.01 par value, 800,000,000 shares authorized, 42,354,283 and 27,275,491 shares issued and outstanding at December 31, 2008 and 2007, respectively			423				273
Additional paid in capital			904,506				494,160
Accumulated earnings and distributions			(111,828	)			(48,181	)
Accumulated other comprehensive loss			(5,117	)			(1,875	)
Total stockholders’ equity			787,984				444,377
Total liabilities and stockholders’ equity		$	2,183,909			$	1,076,296

 

See accompanying notes to consolidated financial statements.

F-3

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AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

 

		Year Ended December 31,
		2008				2007				2006
Revenues:
Wholly-owned properties		$	196,535			$	116,286			$	89,264
On-campus participating properties			22,042				20,966				19,960
Third-party development services			7,778				5,346				5,634
Third-party development services – on-campus participating properties			144				144				144
Third-party management services			6,578				2,821				2,532
Resident services			2,336				1,572				1,419
Total revenues			235,413				147,135				118,953
Operating expenses:
Wholly-owned properties			102,686				55,155				42,620
On-campus participating properties			10,771				9,379				8,970
Third-party development and management services			11,123				5,708				5,564
General and administrative			11,274				17,660				6,278
Depreciation and amortization			57,555				30,444				24,864
Ground/facility lease			1,778				1,622				857
Total operating expenses			195,187				119,968				89,153
Operating income			40,226				27,167				29,800
Nonoperating income and (expenses):
Interest income			1,131				1,477				1,230
Interest expense			(50,038	)			(27,871	)			(25,937	)
Amortization of deferred financing costs			(2,570	)			(1,340	)			(1,365	)
Loss from unconsolidated joint ventures			(1,619	)			(108	)			-
Other nonoperating income			486				-				-
Total nonoperating expenses			(52,610	)			(27,842	)			(26,072	)
(Loss) income before income taxes, minority interests, and discontinued operations			(12,384	)			(675	)			3,728
Income tax provision			(388	)			(756	)			(28	)
Minority interests			(236	)			(255	)			(2,038	)
(Loss) income from continuing operations			(13,008	)			(1,686	)			1,662
Discontinued operations:
(Loss) income attributable to discontinued operations			(47	)			-				2,287
Gain from disposition of real estate			-				-				18,648
Total discontinued operations			(47	)			-				20,935
Net (loss) income		$	(13,055	)		$	(1,686	)		$	22,597
(Loss) income per share – basic:
(Loss) income from continuing operations per share		$	(0.35	)		$	(0.07	)		$	0.09
Net (loss) income per share		$	(0.35	)		$	(0.07	)		$	1.20
(Loss) income per share – diluted:
(Loss) income from continuing operations per share		$	(0.34	)		$	(0.07	)		$	0.08
Net (loss) income per share		$	(0.34	)		$	(0.07	)		$	1.17
Weighted-average common shares outstanding:
Basic			36,947,656				24,186,213				18,907,061
Diluted			38,316,269				26,099,140				20,967,946
Distributions declared per common share		$	1.35			$	1.35			$	1.35

 

See accompanying notes to consolidated financial statements.

F-4

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AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(in thousands, except share data)

		Preferred Stock				Common Shares				Par Value of Common Shares				Additional Paid in Capital				Accumulated Earnings and Distributions				Accumulated Other Comprehensive Income (Loss)				Total
Stockholders’ equity, December 31, 2005		$	-				17,190,000			$	172			$	233,388			$	(10,817	)		$	484			$	223,227
Net proceeds from sale of common stock			-				5,692,500				57				133,005				-				-				133,062
Issuance of fully vested restricted stock units			-				-				-				150				-				-				150
Record minority interests for common units			-				-				-				15,153				-				-				15,153
Amortization of restricted stock awards			-				-				-				560				-				-				560
Vesting of restricted stock awards			-				9,573				-				(56	)			-				-				(56	)
Distributions to common and restricted stockholders			-				-				-				-				(25,313	)			-				(25,313	)
Conversion of common units to common stock			-				11,000				-				167				-				-				167
Comprehensive income:			-
Change in fair value of interest rate swap			-				-				-				-				-				(73	)			(73	)
Net income			-				-				-				-				22,597				-				22,597
Total comprehensive income			-				-				-				-				-				-				22,524
Stockholders’ equity, December 31, 2006			-				22,903,073				229				382,367				(13,533	)			411				369,474
Net proceeds from sale of common stock			-				3,500,000				35				98,593				-				-				98,628
Issuance of fully vested restricted stock units			-				-				-				160				-				-				160
Record minority interests for common units			-				-				-				(6,477	)			-				-				(6,477	)
Amortization of restricted stock awards			-				-				-				1,095				-				-				1,095
Vesting of restricted stock awards			-				22,102				-				(262	)			-				-				(262	)
Distributions to common and restricted stockholders			-				-				-				-				(32,962	)			-				(32,962	)
Conversion of common units to common stock			-				850,316				9				18,684				-				-				18,693
Amortization of gain on swap termination to earnings			-				-				-				-				-				(211	)			(211	)
Comprehensive loss:
Change in fair value of interest rate swaps			-				-				-				-				-				(2,075	)			(2,075	)
Net loss			-				-				-				-				(1,686	)			-				(1,686	)
Total comprehensive loss			-				-				-				-				-				-				(3,761	)
Stockholders’ equity, December 31, 2007			-				27,275,491				273				494,160				(48,181	)			(1,875	)			444,377
Net proceeds from sale of common stock			-				9,200,000				92				251,994				-				-				252,086
Common stock consideration for GMH			-				5,442,801				54				154,643				-				-				154,697
Issuance of preferred stock			131				-				-				-				-				-				131
Redemption of preferred stock			(131	)			-				-				-				-				-				(131	)
Issuance of fully vested restricted stock units			-				-				-				191				-				-				191
Record minority interests for common units			-				-				-				(5,749	)			-				-				(5,749	)
Amortization of restricted stock awards			-				-				-				1,908				-				-				1,908
Vesting of restricted stock awards			-				44,409				-				(338	)			-				-				(338	)
Distributions to common, preferred and restricted stockholders			-				-				-				-				(50,592	)			-				(50,592	)
Conversion of common units to common stock			-				391,582				4				7,697				-				-				7,701
Amortization of gain on swap termination to earnings			-				-				-				-				-				(211	)			(211	)
Comprehensive loss:
Change in fair value of interest rate swaps			-				-				-				-				-				(3,031	)			(3,031	)
Net loss			-				-				-				-				(13,055	)			-				(13,055	)
Total comprehensive loss			-				-				-				-				-				-				(16,086	)
Stockholders’ equity, December 31, 2008		$	-				42,354,283			$	423			$	904,506			$	(111,828	)		$	(5,117	)		$	787,984

 

See accompanying notes to consolidated financial statement

F-5

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AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

		Year Ended December 31,
		2008				2007				2006
Operating activities
Net (loss) income		$	(13,055	)		$	(1,686	)		$	22,597
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Gain from disposition of real estate			-				-				(18,648	)
Minority interests share of income			236				255				2,038
Depreciation and amortization			57,555				30,444				25,499
Amortization of deferred financing costs and debt premiums / discounts			1,734				(127	)			26
Share-based compensation			2,099				4,962				710
Loss from unconsolidated joint ventures			1,619				108				-
Amortization of gain on interest rate swap termination			(211	)			(211	)			-
Income tax provision			375				756				28
Changes in operating assets and liabilities:
Restricted cash			(4,433	)			(1,946	)			138
Student contracts receivable, net			(34	)			(478	)			(550	)
Other assets			(6,998	)			(5,386	)			(2,402	)
Accounts payable and accrued expenses			(3,177	)			(222	)			4,245
Other liabilities			(2,823	)			2,578				1,556
Net cash provided by operating activities			32,887				29,047				35,237
Investing activities
Net proceeds from disposition of real estate			4,418				-				50,045
Cash paid for GMH acquisition			(269,358	)
Cash paid for property acquisitions			(11,287	)			(42,760	)			(69,697	)
Cash paid for land purchases			(3,226	)			(10,445	)			-
Investments in wholly-owned properties			(139,570	)			(131,820	)			(81,597	)
Investments in on-campus participating properties			(719	)			(480	)			(483	)
Investments in unconsolidated joint ventures			(10,610	)			(1,600	)			-
Purchase of corporate furniture, fixtures and equipment			(2,178	)			(486	)			(986	)
Distributions received from unconsolidated JVs			120				-				-
Net cash used in investing activities			(432,410	)			(187,591	)			(102,718	)
Financing activities
Pay off of construction loan			-				(43,862	)			(20,224	)
Proceeds from sale of common stock			264,500				99,015				140,036
Offering costs			(12,249	)			(243	)			(6,854	)
Proceeds from sale of preferred stock			131				-				-
Redemption of preferred stock			(131	)			-				-
Pay-off of mortgage loans			(24,362	)			-				-
Proceeds from contribution of properties to joint venture			74,368				-				-
Proceeds from secured term loan			100,000				-				-
Revolving credit facility, net			5,100				9,600				-
Proceeds from construction loans			81,167				66,128				42,146
Principal payments on debt			(10,243	)			(7,792	)			(6,527	)
Change in construction accounts payable			(6,591	)			6,077				3,203
Debt issuance and assumption costs			(5,808	)			(1,638	)			(2,418	)
Distributions to common and restricted stockholders			(50,637	)			(32,985	)			(25,287	)
Distributions to minority partners			(2,195	)			(2,790	)			(2,128	)
Net cash provided by financing activities			413,050				91,510				121,947
Net change in cash and cash equivalents			13,527				(67,034	)			54,466
Cash and cash equivalents at beginning of period			12,073				79,107				24,641
Cash and cash equivalents at end of period		$	25,600			$	12,073			$	79,107
Supplemental disclosure of non-cash investing and financing activities
Loans assumed in connection with property acquisitions		$	(615,175	)		$	(88,307	)		$	(123,649	)
Issuance of common stock in connection with acquisition		$	(154,697	)		$	-			$	-
Issuance of Common Units in connection with acquisition		$	(199	)		$	-			$	(49,096	)
Issuance of Preferred Units in connection with acquisitions		$	-			$	-			$	(3,075	)
Financing of equipment through capital lease obligations		$	-			$	1,491			$	1,518
Change in fair value of derivative instruments, net		$	(3,031	)		$	(2,075	)		$	(73	)
Contribution of land from minority partner in development joint venture		$	-			$	2,756			$	-
Supplemental disclosure of cash flow information
Interest paid		$	52,108			$	31,222			$	27,938
Income taxes paid		$	282			$	64			$	9

 

See accompanying notes to consolidated financial statements

F-6

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AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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.

As of December 31, 2008 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 5 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 December 31, 2008, the Company also owned a minority 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 December 31, 2008, the Company provided third-party management and leasing services for 34 properties (five of which the Company served as the third-party developer and construction manager) that represented approximately 24,300 beds in approximately 8,900 units.  Third-party management and leasing services are typically provided pursuant to multi-year management contracts that have initial terms that range from one to five years.  As of December 31, 2008, the Company’s total owned, joint venture and third-party managed portfolio included 141 properties with approximately 89,200 beds in approximately 29,700 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 minority interests in the consolidated financial statements.  The Company also has a non-controlling 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.

New Accounting Pronouncements

Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standard (“SFAS”) No. 157, "Fair Value Measurements" and SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities."  SFAS No. 157 defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements.  SFAS No. 159 permits an entity to elect fair value as the initial and subsequent measurement method for financial assets and liabilities.  The Company has not elected the fair value option for any financial instruments, however does reserve the right to elect to measure future eligible financial assets or liabilities at fair value.  The adoption of SFAS No. 157 and SFAS No. 159 did not have a material impact on the Company’s consolidated financial statements.  See Note 15 herein for a detailed discussion of fair value disclosures.

 

F-7

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AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Pending Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations,” which replaces SFAS No. 141, " Business Combinations."  SFAS No. 141(R) applies to all transactions or events in which an entity obtains control of one or more businesses.  SFAS No. 141(R) requires the acquiring entity in a business combination to recognize the full fair value of assets acquired and liabilities assumed in the transaction (whether a full or partial acquisition); establishes the acquisition date fair value as the measurement objective for all assets acquired and liabilities assumed; requires expensing of most transaction and restructuring costs; and requires the acquirer to disclose to investors and other users all of the information needed to evaluate and understand the nature and financial impact of the business combination.  SFAS No. 141(R) will be effective for the Company for business combinations made on or after January 1, 2009.  We expect the adoption of SFAS No. 141(R) to have a material effect on the Company’s accounting for acquisitions of properties, which may fall under the definition of a business, as most transaction costs associated with such acquisitions will be expensed as opposed to the prior capitalization of such costs.

In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51” (“SFAS No. 160”).  SFAS No. 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary (previously referred to as minority interests).  SFAS No. 160 also requires that a retained noncontrolling interest upon the deconsolidation of a subsidiary be initially measured at its fair value.  Upon adoption of SFAS No. 160, the Company would be required to report any noncontrolling interests as a separate component of stockholders’ equity.  The Company would also be required to present any net income allocable to noncontrolling interests and net income attributable to the stockholders of the Company separately in its consolidated statements of operations.  SFAS No. 160 will be effective for the Company beginning January 1, 2009.  SFAS No. 160 requires retroactive adoption of the presentation and disclosure requirements for existing minority interests.  All other requirements of SFAS No. 160 shall be applied prospectively.  SFAS No. 160 will have an impact on the presentation and disclosure of the noncontrolling interests of any non wholly-owned businesses after the effective date of this pronouncement.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS No. 161”).  SFAS No. 161 requires enhanced disclosures about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for, and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows.  SFAS No. 161 will be effective for the Company beginning January 1, 2009.  The Company does not anticipate the adoption of SFAS No. 161 will have a significant effect on its consolidated financial statements.

In June 2008, the FASB issued FASB Staff Position (“FSP”) 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities.” FSP 03-6-1 affects entities which accrue non-returnable cash dividends on share-based payment awards during the awards’ service period.  The FASB concluded unvested share-based payment awards which are entitled to non-forfeitable cash dividends, whether paid or unpaid, are participating securities and are participants of undistributed earnings.  Because the awards are considered participating securities, the issuer is required to apply the two-class method of computing basic and diluted earnings per share which involves separate computations for common shares and participating securities.  As we do accrue and pay non-forfeitable cash dividends on unvested share-based payment awards, these types of awards are considered participating securities and will be included in our earnings per share calculation in future periods. FSP 03-6-1 will be effective for the Company beginning January 1, 2009 and will require retrospective application.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“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.

 

F-8

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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

The cost of buildings and improvements includes the purchase price of the property, including legal fees and acquisition costs.  Project costs directly associated with the development and construction of an owned real estate project, which include interest, property taxes, and amortization of deferred finance costs, are capitalized as construction in progress.  Upon completion of the project, costs are transferred into the applicable asset category and depreciation commences.  Interest totaling approximately $5.5 million, $5.4 million and $3.2 million was capitalized during the years ended December 31, 2008, 2007 and 2006, respectively.  Amortization of deferred financing costs totaling approximately $0.2 million, $0.4 million and $0.2 million was capitalized during the years ended December 31, 2008, 2007 and 2006, 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 December 31, 2008.

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

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

F-9

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AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

	d.	The sale of the asset is probable, and transfer of the asset is expected to qualify for recognition as a completed sale, within one year
	e.	The asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value
	f.	Actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.

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

Owned On-campus Properties

The Company (“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 is currently under construction with a scheduled completion date of August 2009.  Both leases include the option to extend the lease term for two additional terms of ten years each.  Under the terms of the leases, the lessor has title to the land and any improvements placed thereon.  Pursuant to EITF No. 97-10: The Effect of Lessee Involvement in Asset Construction, 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 no qualify for sale-leaseback accounting based on guidance provided in SFAS No. 98, Accounting for Leases, 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.  Pursuant to EITF No. 97-10: The Effect of Lessee Involvement in Asset Construction, 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.

Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.  The Company maintains cash balances in various banks.  At times the Company’s balances may exceed the amount insured by the FDIC.  As the Company only uses money-centered financial institutions, the Company does not believe it is exposed to any significant credit risk related to its cash and cash equivalents.

Restricted Cash

Restricted cash consists of funds held in trust and invested in low risk investments, generally consisting of government backed securities, as permitted by the indentures of trusts, which were established in connection with three bond issues.  Additionally, restricted cash includes escrow accounts held by lenders and resident security deposits, as required by law in certain states.  Certain funds held by a trustee in a required escrow account are being invested under a forward delivery agreement in government backed securities that have a remaining maturity when purchased of six months.  Restricted cash also consists of escrow deposits made in connection with potential property acquisitions and development opportunities.  These escrow deposits are invested in an interest-bearing account at a federally-insured bank.  Realized and unrealized gains and losses are not material for the periods presented.

 

F-10

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AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Intangible Assets

In connection with property acquisitions completed in 2008 and 2007, as discussed in Note 5, the Company capitalized approximately $19.0 million and $1.2 million, respectively, related to management’s estimate of the fair value of the in-place leases assumed.  These intangible assets are amortized on a straight-line basis over the average remaining term of the underlying leases.  Amortization expense was approximately $9.1 million, $1.2 million and $2.3 million for the years ended December 31, 2008, 2007 and 2006, 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 was approximately $0.3 million for the year ended December 31, 2008.  The amortization is included in depreciation and amortization expense in the accompanying consolidated statements of operations.  See Note 5 herein for a detailed discussion of the property acquisitions completed during 2008, 2007 and 2006.

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, approximated $2.5 million, $1.3 million and $1.4 million for the years ended December 31, 2008, 2007 and 2006, respectively.  Accumulated amortization at December 31, 2008 and 2007 approximated $8.9 million and $6.2 million, respectively.  Deferred financing costs, net of amortization, are included in other assets on the accompanying consolidated balance sheets.

Joint Ventures

The Company holds interests in both consolidated and unconsolidated joint ventures. The Company determines consolidation based on standards set forth in FASB Interpretation No. 46R, Consolidation of Variable Interest Entities (“FIN 46(R)”) and Emerging Issues Task Force (EITF) No. 04-5,  Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights.  For joint ventures that are variable interest entities as defined under FIN 46 where the Company is not the primary beneficiary, it does not consolidate the joint venture for financial reporting purposes. Based on the guidance set forth in EITF 04-5, the Company consolidates certain joint venture investments because it exercises significant control over major operating decisions, such as approval of budgets, property management, investment activity and changes in financing.  For joint ventures under EITF 04-5, where the Company does not exercise significant control over major operating and management decisions, but where it exercises significant influence, the Company uses the equity method of accounting and does not consolidate the joint venture for financial reporting purposes.

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 December 31, 2008 and December 31, 2007, net unamortized debt premiums were $5.7 million and $5.0 million, respectively, and net unamortized debt discounts were $10.4 million and $0.7 million, respectively.  Debt premiums and discounts are included in secured debt on the accompanying consolidated balance sheets.

Rental Revenues and Related Receivables

Students are required to execute lease contracts with payment schedules that vary from single to monthly payments. Receivables are recorded when billed, revenues and related lease incentives are recognized on a straight-line basis over the term of the contracts, and balances are considered past due when payment is not received on the contractual due date. Generally, the Company requires each executed contract to be accompanied by a refundable security deposit and a signed parental guaranty. Security deposits are refundable, net of any outstanding charges, upon expiration of the underlying contract.

 

F-11

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AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Allowances for receivables are established when management determines that collection of such receivables are doubtful. When management has determined receivables to be uncollectible, they are removed as an asset with a corresponding reduction in the allowance for doubtful accounts.

The allowance for doubtful accounts is summarized as follows:

		Balance, Beginning of Period				Charged to Expense				Write-Offs				Balance, End of Period
Year ended December 31, 2006		$	1,159			$	1,409			$	(410	)		$	2,158
Year ended December 31, 2007		$	2,158			$	1,919			$	(1,077	)		$	3,000
Year ended December 31, 2008		$	3,000			$	2,955			$	(2,106	)		$	3,849

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 December 31, 2008, the Company has deferred approximately $5.7 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.

Third-Party Management Services Revenue

Management fees are recognized when earned in accordance with each management contract.  Incentive management fees are recognized when the incentive criteria are anticipated to be met.

Advertising Costs

Advertising costs are expensed during the period incurred.  The Company uses no direct response advertising.  Advertising expense approximated $5.2 million, $2.6 million and $2.0 million in 2008, 2007 and 2006, respectively.

Derivative Instruments and Hedging Activities

Derivative financial instruments are reported 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.

 

F-12

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AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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 under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended.  The interest differential to be paid or received is accrued as interest expense. The Company’s counter-parties are major financial institutions.

Common Stock Issuances and Costs

In accordance with the Securities and Exchange Commission’s Staff Accounting Bulletin No. 5, specific incremental costs directly attributable to the Company’s equity offerings were deferred and charged against the gross proceeds of the offering.  As such, underwriting commissions and other common stock issuance costs are reflected as a reduction of additional paid in capital.

On April 23, 2008, the Company completed an equity offering, consisting of the sale of 9,200,000 shares of the Company’s common stock at a price of $28.75 per share, including the exercise of 1,200,000 shares issued as a result of the exercise of the underwriters’ overallotment option in full at closing.  The offering generated gross proceeds of $264.5 million.  The aggregate proceeds to the Company, net of the underwriting discount, structuring fee and expenses of the offering, was approximately $252.1 million.

On October 10, 2007, the Company completed an equity offering, consisting of the sale of 3,500,000 shares of the Company’s common stock at a price of $28.29 per share, resulting in gross proceeds of approximately $99.0 million.  The company received approximately $98.7 million in net proceeds after deducting estimated expenses of approximately $0.3 million.

On September 15, 2006, the Company completed an equity offering, consisting of the sale of 5,692,500 shares of the Company’s common stock at a price per share of $24.60, including the exercise of 742,500 shares issued as a result of the exercise of the underwriters’ overallotment option in full at closing.  The offering generated gross proceeds of approximately $140.0 million.  The aggregate proceeds to the Company, net of the underwriter’s discount and offering costs, were approximately $133.2 million.

Comprehensive Income (Loss)

Comprehensive income (loss) includes net income (loss) and other comprehensive income (loss), consisting of unrealized gains (losses) on derivative instruments.  Comprehensive income (loss) is presented in the accompanying consolidated statements of changes in stockholders’ equity, and accumulated other comprehensive loss is displayed as a separate component of stockholders’ equity.

Stock-Based Compensation

The Company accounts for equity based awards in accordance with SFAS No. 123 (R), Share-Based Payment, which the Company adopted in the first quarter of 2005.  Accordingly, the Company has recognized compensation expense related to certain restricted stock awards (see Note 12) over the underlying vesting periods, which amounted to approximately $2.1 million, $1.3 million and $0.7 million for the years ended December 31, 2008, 2007 and 2006, respectively.

The Company’s Outperformance Bonus Plan vested on August 17, 2007 and the Compensation Committee of the Board of Directors elected to pay a portion of the awards to selected recipients in the form of profits interest units (“PIUs”), which are discussed in more detail in Note 12.  Approximately $3.7 million of the compensation charge recorded during the year ended December 31, 2007 reflects the settlement of the Outperformance Bonus Plan through the issuance of PIUs.

 

F-13

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AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Income Taxes

The Company and GMH have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”).  To qualify as a REIT, these entities must meet a number of organizational and operational requirements, including a requirement that they currently distribute at least 90% of their adjusted taxable income to its stockholders.  As REITs, these entities will generally not be subject to corporate level federal income tax on taxable income they currently distribute to their stockholders. If these entities fail to qualify as a REIT in any taxable year, they 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 these entities qualify for taxation as a REIT, they may be subject to certain state and local income and excise taxes on their 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 are subject to federal, state and local income taxes.

Other Nonoperating Income

Other nonoperating income of $0.5 million was recognized for the year ended December 31, 2008 related to tax incentive amounts received in cash during the period related to a property we acquired in February 2007 located in Ypsilanti, Michigan.  Upon acquisition of this property, any future potential benefit of such tax incentive was assumed from the seller.

Financial Instruments

The Company does not hold or issue financial instruments for trading purposes. The fair value of financial instruments was estimated based on the following methods and assumptions:

Cash and Cash Equivalents, Restricted Cash, Student Contracts Receivable, Other Assets, Accounts Payable and Accrued Expenses and Other Liabilities:  the carrying amount approximates fair value, due to the short maturity 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.  As of December 31, 2008, the Company estimated the fair value of its fixed-rate mortgage loans to be approximately $1,000.1 million.

Construction Loans: the fair value of the Company’s construction loans approximates carrying value due to the variable interest rate feature of these instruments.

Bonds Payable: the fair value of bonds payable is based on market quotes for bonds outstanding.  As of December 31, 2008, the Company estimated the fair value of its bonds payable to be approximately $52.8 million.

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.

F-14

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AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

3.	Earnings per Share

Basic earnings per share is computed using net (loss) income and the weighted average number of shares of the Company’s common stock outstanding during the period, including restricted stock units (“RSUs”) issued to outside directors.  RSUs are included in both basic and diluted weighted average common shares outstanding because they were fully vested on the date of grant and all conditions required in order for the recipients to earn the RSUs have been satisfied.  Diluted earnings per share reflects weighted average common shares issuable from the assumed 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 9 for a discussion of PIUs, Common Units and Series A Preferred Units and Note 12 for a discussion of RSUs and RSAs.

The following is a summary of the elements used in calculating basic and diluted earnings per share:

		Year Ended December 31,
		2008				2007				2006
Basic earnings per share calculation:
(Loss) income from continuing operations		$	(13,008	)		$	(1,686	)		$	1,662
Discontinued operations			(47	)			-				20,935
Net (loss) income		$	(13,055	)		$	(1,686	)		$	22,597
(Loss) income from continuing operations – per share		$	(0.35	)		$	(0.07	)		$	0.09
Income from discontinued operations – per share		$	-			$	-			$	1.11
Net (loss) income – per share		$	(0.35	)		$	(0.07	)		$	1.20
Basic weighted average common shares outstanding			36,947,656				24,186,213				18,907,061
Diluted earnings per share calculation:
(Loss) income from continuing operations		$	(13,008	)		$	(1,686	)		$	1,662
Series A Preferred Unit distributions			184				184				154
(Loss) income from continuing operations allocated to Common Units			(214	)			(233	)			(61	)
(Loss) income from continuing operations, as adjusted			(13,038	)			(1,735	)			1,755
(Loss) income from discontinued operations			(47	)			-				20,935
(Loss) income from discontinued operations allocated to    Common Units			(1	)			-				1,802
(Loss) income from discontinued operations, as adjusted			(48	)			-				22,737
Net (loss) income, as adjusted		$	(13,086	)		$	(1,735	)		$	24,492
(Loss) income from continuing operations – per share		$	(0.34	)		$	(0.07	)		$	0.08
Income from discontinued operations – per share		$	-			$	-			$	1.09
Net (loss) income – per share		$	(0.34	)		$	(0.07	)		$	1.17
Basic weighted average common shares outstanding			36,947,656				24,186,213				18,907,061
Common Units			1,253,650				1,797,964				1,866,183
Series A Preferred Units			114,963				114,963				96,380
Restricted Stock Awards (1)			-				-				98,322
Diluted weighted average common shares outstanding			38,316,269				26,099,140				20,967,946

(1)

278,961 and 167,696 weighted average RSAs are excluded from diluted weighted average common shares outstanding for the years ended December 31, 2008 and 2007, respectively, because they would be anti-dilutive due to the Company’s loss position for these periods.

F-15

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AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

4.     Income Taxes

Deferred income taxes result from temporary differences between the carrying amounts of assets and liabilities of the TRSs for financial reporting purposes and the amounts used for income tax purposes.  Significant components of the deferred tax assets and liabilities are as follows:

			December 31,
			2008				2007
Deferred tax assets:
Fixed and intangible assets			$	7,674			$	8,999
Net operating loss carryforwards				3,961				2,251
Prepaid and deferred rent				2,212				1,134
Bad debt reserves				365				284
Accrued expenses and other				92				91
Stock compensation				340				233
Total deferred tax assets				14,644				12,992
Valuation allowance for deferred tax assets				(14,103	)			(12,405	)
Deferred tax assets, net of valuation allowance				541				587
Deferred tax liability:
Deferred financing costs				541				587
Net deferred tax liabilities			$	-			$	-

Significant components of the income tax provision are as follows:

		Year Ended December 31,
		2008				2007				2006
Current:
Federal		$	-			$	-			$	(1	)
State			(23	)			(18	)			(1	)
Deferred:
Federal			-				(493	)			6
State			-				(23	)			(32	)
Total provision --  continuing operations		$	(23	)		$	(534	)		$	(28	)

 

TRS earnings subject to tax consisted of an approximate $2.0 million, $4.0 million and $1.0 million loss for the years ended December 31, 2008, 2007, and 2006, respectively.  The reconciliation of income tax attributable to continuing operations computed at the U.S. statutory rate to income tax provision is as follows:

		Year Ended December 31,
		2008				2007				2006
Tax benefit at U.S. statutory rates on TRS income subject to tax		$	673			$	1,361			$	228
State income tax, net of federal income tax benefit			(8	)			(144	)			8
Change in the state statutory rate			-				-				(683	)
Effect of permanent differences and other			(23	)			(8	)			(25	)
Decrease (increase) in valuation allowance			(665	)			(1,743	)			444
Income tax provision		$	(23	)		$	(534	)		$	(28	)

 

Upon formation, each TRS became subject to federal and state income taxation and, accordingly, established deferred tax assets and liabilities.  The valuation allowance increased by approximately $1.7 million during both years ended December 31, 2008 and 2007.

 

F-16

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AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

At December 31, 2008, the Company had net operating loss carryforwards (“NOLs”) of approximately $10.7 million for income tax purposes that begin to expire in 2025 ($0.8 million in one TRS and the remainder in the other TRS).  These NOLs may be used to offset future taxable income generated by each of the respective TRSs.

 

In May 2006, the Texas Governor signed into law a Texas margin tax which restructures the state business tax by replacing the taxable capital components of the current franchise tax with a “taxable margin” component.  The Texas margin tax became effective in 2007.  The TRS’s portion of the tax liability for the years ended December 31, 2008 and 2007 was $23,000 and $18,000, respectively, and is reflected in current state tax in the above schedule.  The non-TRS portion of the Texas margin tax for the years ended December 31, 2008 and 2007 was $0.3 million and $0.2 million, respectively, and is included in the Operating Partnership.

 

The Company adopted FASB Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes”, on January 1, 2007.  As a result of the adoption of FIN 48, the Company recognized no changes related to deferred taxes.

 

5.     Property Acquisitions

2008 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 (see Note 6).

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.

The following summarizes our allocation of total consideration to the assets and liabilities acquired from GMH, excluding the 15 properties contributed to the joint venture with Fidelity:

Land		$	130,164
Buildings			799,667
Furniture, fixtures and equipment			32,160
In-place leases and other intangible assets			20,283
Investments in unconsolidated joint ventures			10,610
Debt discounts, net of debt premiums			9,464
Undeveloped land parcels			5,000
Deferred financing costs			4,126
Working capital assets, net of liabilities			7,270
Total consideration		$	1,018,744

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.

 

F-17

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AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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.

2007 Acquisitions

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

In February 2007, the Company acquired a three property portfolio (the “Edwards Portfolio”) for a purchase price of $102.0 million, which excludes $3.7 million of transaction costs, initial integration expenses and capital expenditures necessary to bring these properties up to the Company’s operating standards.  As part of the transaction, the Company assumed $70.7 million in fixed-rate mortgage debt with a weighted average annual interest rate of 5.7% and an average remaining term to maturity of 8.5 years.  In August 2007, construction was completed on an additional phase at one of these properties.  As contemplated in the original transaction, concurrent with the completion of construction in August 2007, the Company purchased this additional phase consisting of 24 units and 84 beds, for approximately $4.6 million.

The Edwards Portfolio consists of one property in Lexington, Kentucky located near the campus of the University of Kentucky, one property in Toledo, Ohio located near the campus of the University of Toledo and one property in Ypsilanti, Michigan located near the campus of Eastern Michigan University.  Including the purchase of the additional phase discussed above, these three properties contain 764 units and 1,971 beds.

2006 Acquisitions

On March 1, 2006, the Company completed the acquisition of a portfolio of 13 student housing properties (the “Royal Portfolio”) pursuant to a contribution and sale agreement with contributors affiliated with Royal Properties for a contribution value of $244.3 million, which was paid as follows: (i) the issuance to certain partners of the contributors of approximately 2.1 million Common Units valued at $23.50 per unit and approximately 0.1 million Series A Preferred Units valued at $26.75 per unit (See Note 9); (ii) the assumption of $123.6 million of fixed-rate mortgage debt (see Note 11); and (iii) the remainder in cash and promissory notes.  The Company also incurred an additional $4.9 million in closing costs and other external acquisition costs related to this acquisition.

The Company retained approximately $6.9 million of the contribution value in order to satisfy indemnification obligations during a one-year survival period.  Subsequent to the expiration of such one-year survival period on March 1, 2007, the Company has released approximately $6.4 million of the contribution value to the contributors.  As of December 31, 2008, the Company is holding $0.5 million of the retained amount which is composed primarily of secured promissory notes and accrued interest.

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

 

F-18

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AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The acquired properties’ results of operations have been included in the accompanying consolidated statements of operations since their respective acquisition closing dates.  The following pro forma information for the years ended December 31, 2008, 2007 and 2006, present consolidated financial information for the Company as if the property acquisitions discussed above, and the April 2008, October 2007 and September 2006 equity offerings had occurred at the beginning of the earliest period presented.  The unaudited pro forma information is provided for informational purposes only and is not indicative of results that would have occurred or which may occur in the future:

		Year Ended December 31,
		2008				2007				2006
Total revenues		$	291,269			$	275,359			$	240,012
Net (loss) income		$	(2,643	)		$	2,202			$	(1,260	)
Net (loss) income per share – basic		$	(0.06	)		$	0.05			$	(0.03	)
Net (loss) income per share – diluted		$	(0.06	)		$	0.06			$	(0.03	)

6.     Property Disposition and Discontinued Operations

As part of the acquisition of GMH on June 11, 2008, the Company acquired two properties (The Courtyards and The Verge) that were under contract to be sold as of such date.  The Courtyards was sold in July 2008 for approximately $17.4 million, resulting in net cash proceeds of approximately $0.4 million, and The Verge was sold in August 2008 for approximately $36.4 million, resulting in net proceeds of approximately $3.6 million.  There was no gain or loss recorded on these dispositions for book purposes.

In December 2006, the Company sold The Village on University off-campus student housing property for a purchase price of $51.0 million, resulting in net proceeds of approximately $50.0 million.  The resulting gain on disposition of approximately $18.6 million is included in discontinued operations in the accompanying consolidated statement of operations for the year ended December 31, 2006.  Accordingly, net income for The Village on University is included in discontinued operations for the year ended December 31, 2006.

The related net (loss) income for the afore-mentioned properties is reflected in the accompanying consolidated statements of operations as discontinued operations for the periods presented in accordance with SFAS No. 144.  Below is a summary of the results of operations for the properties sold through their respective disposition dates:

		Year Ended December 31,
		2008				2007				2006
Total revenues		$	895			$	-			$	4,692
Total operating expenses			576				-				2,412
Operating income			319				-				2,280
Total nonoperating income (expenses)			(366	)			-				7
Net (loss) income		$	(47	)		$	-			$	2,287

7.     Investments in Wholly-Owned Properties

Wholly-owned properties consisted of the following:

		December 31,
		2008				2007
Land		$	242,653			$	102,109
Buildings and improvements			1,706,184				768,551
Furniture, fixtures and equipment			87,633				42,225
Construction in progress			63,715				104,540
			2,100,185				1,017,425
Less accumulated depreciation			(113,352	)			(70,363	)
Wholly-owned properties, net		$	1,986,833			$	947,062

The Company completed the acquisition of GMH on June 11, 2008 and the acquired properties are included in the wholly-owned properties, net balance as of December 31, 2008.

 

F-19

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AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

8.     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 – December 31,
Lessor/University			Lease Commencement			Required Debt Repayment (1)			2008				2007
Texas A&M University System / Prairie View A&M University (2)			2/1/96			9/1/23			$	38,732			$	38,499
Texas A&M University System / Texas A&M International			2/1/96			9/1/23				6,163				6,039
Texas A&M University System / Prairie View A&M University (3)			10/1/99			8/31/25  /  8/31/28				24,191				24,037
University of Houston System / University of Houston – (4)			9/27/00			8/31/35				34,899				34,691
										103,985				103,266
Less accumulated amortization										(34,683	)			(30,361	)
On-campus participating properties, net									$	69,302			$	72,905

	(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.

 

F-20

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AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

9.     Minority Interests

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

Equity interests in the Operating Partnership not owned by the Company are held in the form of Common Units and Series A Preferred Units.  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.

Income or loss allocated to minority interests on the Company’s consolidated statements of operations includes the Series A Preferred Unit distributions as well as the pro rata share of the Operating Partnership’s net income or loss allocated to Common Units.  The Common Unitholders’ minority interest in the Operating Partnership is reported at an amount equal to their ownership percentage of the net equity of the Operating Partnership at the end of each reporting period.  Common Units and Series A Preferred Units issued in connection with the 2006 acquisition of the Royal Portfolio became exchangeable into an equal number of shares of the Company’s common stock on March 1, 2007.  Common Units issued in connection with the GMH acquisition become exchangeable into an equal number of shares of the Company’s common stock on June 11, 2009. Additionally, as partial consideration for the vesting of the Outperformance Bonus Plan, which occurred on August 17, 2007, 132,400 PIUs were issued to certain employees (see Note 12).  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.  During the years ended December 31, 2008 and 2007, 391,582 and 850,316 Common Units, respectively, were converted into shares of the Company’s common stock.  As of December 31, 2008 and December 31, 2007, approximately 3% and 6%, respectively, of the equity interests of the Operating Partnership was held by persons affiliated with Royal Properties and certain current and former members of management in the form of Common Units and Series A Preferred Units.

Minority interests also include the equity interests of unaffiliated joint venture partners in four joint ventures.  These joint ventures own and operate the Company’s Callaway House, University Village at Sweet Home, University Centre and Villas at Chestnut Ridge owned-off campus properties.

10.  Investment in Unconsolidated Joint Ventures

As of December 31, 2008, the Company’s investments in unconsolidated joint ventures accounted for utilizing the equity method consisted of three joint ventures.  The Company’s TRS entities provide property management services to the joint ventures and also provide development management services for one of the joint ventures owning a property currently under development.  As discussed in Note 2 herein, investments in joint ventures are evaluated based on FIN 46(R) to determine whether or not the investment qualifies as a variable interest entity (“VIE”).  If the investment is determined to fall under the scope of FIN 46(R), management then determines whether the Company is the primary beneficiary of the VIE by performing a combination of qualitative and quantitative measures, as appropriate, including evaluating factors such as the voting rights and decision-making abilities of each variable interest holder.  If the investment is determined not to fall under the scope for 46(R), the Company evaluates the investment in accordance with other guidance such as EITF 04-5.

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”).

 

F-21

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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 $342.6 million.  The Operating Partnership serves as guarantor of this debt, which means the Company 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.    Additionally, in lieu of depositing required debt service escrow funds with the lender of the one of the joint venture’s mortgage notes, the Company has provided an irrevocable standby commercial letter of credit in the amount of $0.3 million.  The letter of credit was issued at inception of the joint venture and expires one year subsequent to issuance, or earlier should the property reach a debt service coverage ratio, as defined, of at least 1.20:1 for a period of twelve consecutive months on a trailing basis.  The term of the letter of credit will be automatically extended for one year periods thereafter until such time the debt service coverage ratio reaches 1.20:1 or the related mortgage note is repaid or refinanced.

Management has determined that the Fidelity Joint Ventures meet the criteria to be classified as VIEs, although the Company is not the primary beneficiary.  The Company’s $9.4 million investment in these two joint ventures at December 31, 2008 is included in other assets in the accompanying consolidated balance sheets, and the Company’s $1.1 million share in the loss from these two joint ventures for the year ended December 31, 2008 is included in loss from unconsolidated joint ventures in the accompanying consolidated statements of operations.   For the year ended December 31, 2008, the Company earned $1.3 million 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 minority 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.

Management has determined that the Company’s investment in this joint venture does not fall under the scope of FIN 46(R) and therefore accounts for its investment using the equity method in accordance with other guidance, including EITF 04-5.  The Company’s $1.0 million and $1.5 million investment in this joint venture at December 31, 2008 and 2007, respectively, is included in other assets in the accompanying consolidated balance sheets, and the Company’s $0.5 million and $0.1 million share in the loss from this joint venture for the years ended December 31, 2008 and 2007, respectively, is included in loss from unconsolidated joint ventures in the accompanying consolidated statements of operations.    For the year ended December 31, 2008, the Company earned $0.3 million in development management fees from this joint venture.

F-22

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AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

11.   Debt

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

		December 31,
		2008				2007
Debt secured by wholly-owned properties:
Mortgage loans payable		$	955,847			$	397,270
Construction loans payable			124,819				43,652
			1,080,666				440,922
Debt secured by on-campus participating properties:
Mortgage loan payable			32,991				33,156
Bonds payable			53,275				55,030
			86,266				88,186
Secured term loan			100,000				-
Revolving credit facility			14,700				9,600
Unamortized debt premiums			5,682				4,988
Unamortized debt discounts			(10,393	)			(666	)
Total debt		$	1,276,921			$	543,030

During the twelve months ended December 31, 2008, the following transactions occurred:

		Year Ended December 31, 2008
Balance, beginning of period		$	543,030
Additions:
Draws on revolving credit facility			45,800
Draws under advancing construction loans			81,167
Draw under secured term loan			100,000
Assumption of debt upon acquisition of properties (including a debt discount, net of premiums of approximately $9.2 million)			606,008
Deductions:
Pay down of revolving credit facility			(40,700	)
Pay off of mortgage loans in connection with property dispositions			(47,399	)
Scheduled repayments of principal			(10,243	)
Amortization of debt premiums and discounts			(742	)
		$	1,276,921

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 5), 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 5), 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.

In connection with the January 2007 acquisition of Village on Sixth (see Note 5), a wholly-owned property, the Company assumed approximately $17.6 million of fixed-rate mortgage debt, which is comprised of one $16.2 million mortgage loan with an annual interest rate of 5.5% and May 2014 maturity date, and a second mortgage loan for $1.4 million with an annual interest rate of 6.6% and October 2016 maturity date.  Upon assumption of this debt, the Company recorded a debt discount of approximately $0.3 million on the $16.2 million mortgage loan and a debt premium of approximately $0.1 million on the $1.4 million mortgage loan, in each case to reflect the estimated fair value of the debt assumed.  These mortgage loans are secured by liens on the related properties.

 

F-23

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AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

In connection with the February 2007 acquisition of the Edwards Portfolio (see Note 5), the Company assumed approximately $70.7 million in fixed-rate mortgage debt.  At the time of assumption, the debt had a weighted average annual interest rate of 5.7% and an average remaining term to maturity of 8.3 years.  Upon assumption of these three loans, the Company recorded debt premiums of approximately $0.1 million to reflect the estimated fair value of the debt assumed.  These three mortgage loans are secured by liens on the related properties.

In connection with the March 1, 2006 acquisition of the Royal Portfolio (see Note 5), the Company assumed approximately $123.6 million of fixed-rate mortgage debt.  At the time of assumption, the debt had a weighted average annual interest rate of 5.95% and an average term to maturity of 6.3 years.  Upon assumption of this debt, the Company recorded debt premiums of approximately $2.9 million, net of discounts, to reflect the estimated fair value of the debt assumed.  These mortgage loans are secured by the related properties.

Revolving Credit Facility

In May 2008, the Operating Partnership amended its $115 million revolving credit facility to increase the size of the facility to $160 million, which may be expanded by up to an additional $65 million upon the satisfaction of certain conditions.  The maturity date of the facility is August 17, 2009 and can be extended 12 months through August 2010.  The Company guarantees the Operating Partnership’s obligations under the facility.

 

Availability under the revolving credit facility is limited to an "aggregate borrowing base amount" equal to the lesser of (i) 65% of the value of certain properties, calculated as set forth in the credit facility, and (ii) the adjusted net operating income from these properties divided by a formula amount.  The facility bears interest at a variable rate, at the Company’s option, based upon a base rate or one-, two-, three-, or six-month LIBOR plus, in each case, a spread based upon the Company’s total leverage.  Additionally, the Company is required to pay an unused commitment fee ranging from 0.15% to 0.20% per annum, depending on the aggregate unused balance.  As of December 31, 2008, the balance outstanding on the revolving credit facility totaled $14.7 million, bearing interest at a weighted average annual rate of 2.23%, with remaining availability under the facility (subject to the satisfaction of certain financial covenants) totaling approximately $133.8 million.

The terms of the facility include certain restrictions and covenants, which limit, among other items, the incurrence of additional indebtedness, liens, and the disposition of assets. The facility contains customary affirmative and negative covenants and also contains financial covenants that, among other things, require the Company to maintain certain minimum ratios of "EBITDA" (earnings before interest, taxes, depreciation and amortization) to fixed charges.  The Company may not pay distributions that exceed 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 December 31, 2008, the Company was in compliance with all such covenants.

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 December 31, 2008, the balance outstanding on the secured term loan was $100 million, bearing interest at an annual rate of 2.97%.  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.

Construction Loans and Mortgage Notes Payable

Construction loans and mortgage notes payable at December 31, 2008, excluding debt premiums and discounts, consisted of 75 loans secured by wholly-owned properties and on-campus participating properties consisting of:

 

F-24

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AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Property		Principal Outstanding (1)				Interest Rate at December 31, 2008					Maturity Date			Amortization
Cullen Oaks – Phase I (2)		$	16,411				6.69	%(3)			February 2014			30 years
Cullen Oaks – Phase II (2)			16,580				6.69	%(3)			February 2014			30 years
University Village at Boulder Creek			15,519				5.71	%			November 2012			30 years
River Club Apartments			17,673				8.18	%			August 2010			30 years
River Walk Townhomes			7,282				8.00	%			September 2009			30 years
The Village at Alafaya Club			19,528				8.16	%			August 2010(4)			30 years
Northgate Lakes			10,443				7.00	%			July 2009			30 years
University Club Tallahassee			13,032				7.99	%			October 2010			30 years
The Grove at University Club Tallahassee			4,143				5.75	%			March 2013			30 years
College Club Tallahassee			8,461				6.74	%			December 2011			30 years
Royal Oaks Tallahassee			2,799				7.13	%			July 2009			30 years
Royal Pavilion Tallahassee			2,335				6.92	%			July 2009			30 years
Royal Village Tallahassee			3,139				6.83	%			July 2009			30 years
University Club Gainesville			8,037				7.88	%			November 2009			30 years
The Estates			36,847				5.20	%			June 2015			30 years
Royal Village Gainesville			5,718				6.87	%			July 2009			30 years
The Village at Blacksburg			20,257				7.50	%			January 2011			30 years
Royal Lexington			4,480				6.86	%			July 2009			30 years
The Woods at Greenland			5,932				5.69	%			October 2012			30 years
Raiders Crossing			6,359				6.18	%			December 2012			30 years
Villas on Apache			7,225				7.66	%			June 2009			30 years
Entrada Real			9,323				5.61	%			November 2012			30 years
The Outpost San Marcos			13,212				5.74	%			October 2013			30 years
The Outpost San Antonio			23,318				4.99	%			October 2014			30 years
City Parc at Fry Street			11,147				5.96	%			September 2014			30 years
Raiders Pass  - Phase I			15,115				5.91	%			October 2012			30 years
Raiders Pass – Phase II			3,715				5.66	%			October 2012			30 years
The Callaway House			18,658				7.10	%			April 2011			30 years
Aggie Station			11,177				5.96	%			October 2012			30 years
Village on Sixth – Phase I			15,719				5.48	%			May 2014			30 years
Village on Sixth – Annex			1,392				6.63	%			October 2016			30 years
Newtown Crossing			31,582				5.65	%			June 2015			30 years
Olde Town University Square			20,470				5.65	%			June 2015			30 years
Peninsular Place			16,818				5.65	%			June 2015			30 years
Vista del Sol			96,046	(5)			2.44	%			December 2009			n/a
Villas at Chestnut Ridge			28,773	(6)			2.45	%			June 2009			n/a
Pirate’s Place			6,762				7.15	%			January 2023			30 years
Jacob Heights I			3,850				5.54	%			February 2016			Interest only
Jacob Heights III			2,948				6.19	%			August 2016			Interest only
The Summit			23,825				5.60	%			March 2017			Interest only
GrandMarc – Seven Corners			18,314				5.19	%			June 2014			30 years
University Village – Sacramento			14,740				5.32	%			February 2016			Interest only
Aztec Corner			28,600				5.97	%			August 2016			30 years
University Crossings			33,776				5.42	%			November 2013			30 years
University Crossings - Annex			8,218				5.90	%			November 2013			30 years
Campus Corner			22,266				5.84	%			November 2016			Interest only
Tower at 3rd			14,491				4.96	%			September 2015			Interest only
University Mills			8,965				4.92	%			August 2014			30 years
Pirates Cove			19,978				4.55	%			February 2009			30 years
University Manor			14,492				4.92	%			August 2014			30 years
Brookstone Village			4,141				5.38	%			February 2016			Interest only
Campus Walk – Wilmington			6,700				5.00	%			September 2015			Interest only
Riverside Estates			16,200				5.84	%			November 2016			Interest only
Cambridge at Southern			18,388				5.78	%			December 2016			Interest only
Campus Club – Statesboro			18,811				4.24	%			March 2010			Interest only
University Pines			11,200				6.95	%			June 2013			30 years
Lakeside			14,100				5.84	%			November 2016			Interest only
The Club			9,922				4.41	%			April 2009			30 years
Pegasus Connection			29,914				5.22	%			January 2011			Interest only
Southview			18,918				4.56	%			June 2015			Interest only

 

F-25

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AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Property		Principal Outstanding (1)					Interest Rate at December 31, 2008				Maturity Date			Amortization
Stonegate		$	14,264					4.56	%		June 2015			Interest only
The Commons			5,811					5.60	%		April 2024			30 years
University Gables			14,131					6.95	%		June 2013			30 years
The Enclave I			9,939					4.92	%		August 2014			30 years
Hawks Landing			15,600					5.84	%		November 2016			Interest only
Willowtree Apartments			13,665					7.09	%		October 2011			30 years
Willowtree Towers			6,686					7.09	%		October 2011			30 years
Abbott Place			17,850					5.84	%		November 2016			Interest only
University Centre – Kalamazoo			19,875					5.60	%		March 2017			Interest only
University Meadows			9,633					4.92	%		October 2015			Interest only
Campus Way			15,375					5.84	%		November 2016			Interest only
Campus Walk – Oxford			8,133					4.70	%		March 2012			Interest only
Campus Trails			7,486					5.84	%		November 2016			Interest only
University Pointe			21,300					5.28	%		October 2015			Interest only
University Trails			15,725					4.24	%		March 2010			Interest only
Total		$	1,113,657		Wtd Avg Rate			5.46	%

	(1)	For federal income tax purposes, the aggregate cost of the loans is equal to the carrying amount.
	(2)	In February 2007, the Company extended the maturity date of the Cullen Oaks Phase I and Phase II loans to February 15, 2014, in which the terms of the loans were modified to require payments of interest only through May 2008 and monthly payments of principal and interest from May 2008 through the maturity date.  Both loans bear interest at a rate of LIBOR plus 1.35%.
	(3)	The floating rate on both loans was swapped to a fixed rate of 6.69%.  This interest rate swap terminates in February 2014, at which time the interest rate will revert back to a variable rate.  The TRS has guaranteed payment of the indebtedness of the Phase I loan and the indebtedness of the Phase II loan, up to a limit of $4.0 million of construction loan principal plus interest and litigation fees potentially incurred by the lender.  This guaranty will remain in effect until the balance on the loan is paid in full.
	(4)	Represents the Anticipated Repayment Date, as defined in the loan agreement.  If the loan is not repaid on the Anticipated Repayment Date, then certain monthly payments including excess cash flow, as defined, become due through the maturity date of August 2030.
	(5)	For each borrowing on the construction loan, the Company has the option of choosing Prime rate or one-, two-, or three-month LIBOR plus 1.45%.  The loan has an initial term of 36 months and can be extended through December 2011 through the exercise of two 12-month extension periods.
	(6)	For each borrowing on the construction loan, the Company has the option of choosing Prime rate or one-, two-, three-, or six-month LIBOR plus 1.25%.  The loan has an initial term of 24 months and can be extended through June 2010 through the exercise of a 12-month extension period.

 

F-26

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AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Bonds Payable

Bonds payable consist of three issues secured by student housing ground/facility leases, with interest and principal paid semi-annually and annually, respectively, through maturity. Covenants include, among other items, budgeted and actual debt service coverage ratios. The bonds are nonrecourse to the Company. Payment of regularly scheduled principal payments is guaranteed by MBIA Insurance Corporation. Bonds payable at December 31, 2008 consisted of the following:

										Principal				Weighted								Required
Series			Mortgaged Facilities Subject to Leases			Original				December 31, 2008				Average Rate					Maturity Through			Monthly Debt Service
1999			University Village-PVAMU/TAMIU			$	39,270			$	31,545				7.69	%			September 2023			$	302
2001			University College–PVAMU				20,995				17,895				7.42	%			August 2025				158
2003			University College–PVAMU				4,325				3,835				5.95	%			August 2028				28
			Total/weighted average rate			$	64,590			$	53,275				7.47	%						$	488

Schedule of Debt Maturities

Scheduled debt maturities (reflecting automatic extensions where applicable) for each of the five years subsequent to December 31, 2008 and thereafter, are as follows:

		Scheduled Principal				Due at Maturity				Total
2009		$	11,325			$	220,137			$	231,462
2010			10,964				83,576				94,540
2011			10,420				194,875				205,295
2012			10,380				70,242				80,622
2013			9,226				77,509				86,735
Thereafter			56,931				526,047				582,978
		$	109,246			$	1,172,386			$	1,281,632

The $220.1 million of debt scheduled to mature in 2009 is comprised of a $96.0 million construction loan which can be extended through December 2011 through the exercise of two 12-month extensions, a $28.8 million construction loan which can be extended through June 2010 through the exercise of a 12-month extension period and a $14.7 million balance on our revolving credit facility which can be extended through August 2010.  The remaining $80.6 million of debt scheduled to mature in 2009 is comprised of fixed-rate mortgage debt that we expect to pay-off on or before their respective maturity dates.

Payment of principal and interest were current at December 31, 2008.  Mortgage notes and bonds payable are subject to prepayment penalties.

12.  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, 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 December 31, 2008, 586,711 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 was three years from the date of grant, the Company delivered 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.

 

F-27

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AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Commencing in 2008, all RSUs vested and settled on the date of grant.  Upon reelection to the Board of Directors in May 2008, the Chairman of the Board of Directors was granted RSUs valued at $42,500 and the remaining outside members were each granted RSUs valued at $32,500.  In connection with the GMH acquisition on June 11, 2008, the Company appointed a new member to the Board of Directors and granted RSUs to him valued at $32,500.  The number of RSUs was determined based on the fair market value of the Company’s stock on the date of grant.  A summary of the Company’s RSUs under the Plan for the three years ended December 31, 2008 and changes during the two years ended December 31, 2008, are presented below:

		Number of RSUs				Weighted-Average Grant Date Fair Value Per RSU
Outstanding at December 31, 2006			20,555			$	20.69
Granted			5,376				29.77
Settled in common shares			(4,029	)			17.50
Settled in cash			(3,116	)			17.50
Outstanding at December 31, 2007			18,786				24.50
Granted			7,831				30.34
Settled in common shares			(11,897	)			25.82
Settled in cash			(3,164	)			25.43
Outstanding at December 31, 2008			11,556			$	26.83

The RSUs are fully vested on the date of grant.  Accordingly, the Company recognized expense of approximately $0.2 million for each of the years ended December 31, 2008, 2007, and 2006, respectively, reflecting the fair value of the RSUs issued on the date of grant.  The weighted-average grant-date fair value for each RSU granted during the year ended December 31, 2006 was $24.28.

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.  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.  A summary of the Company’s RSAs under the Plan for the three years ended December 31, 2008 and changes during the two years ended December 31, 2008, are presented below:

		Number of RSAs				Weighted-Average Grant Date Fair Value Per RSA
Nonvested balance at December 31, 2006			100,047			$	23.72
Granted			110,890				30.21
Vested			(18,073	)			23.27
Forfeited			(13,943	)			25.68
Nonvested balance at December 31, 2007			178,921				27.64
Granted			151,492				27.62
Vested			(32,353	)			26.54
Forfeited			(15,652	)			26.97
Nonvested balance at December 31, 2008			282,408			$	27.79

The weighted-average grant date fair value for each RSA granted and forfeited during the year ended December 31, 2006 was $24.80 and $23.12, respectively.  In accordance with SFAS No. 123(R), the Company recognizes the value of these awards as an expense over the vesting periods, which amounted to approximately $1.9 million, $1.1 million and $0.6 million for the years ended December 31, 2008, 2007 and 2006, respectively.

The total fair value of RSAs vested during the year ended December 31, 2008, was approximately $0.8 million.  Additionally, as of December 31, 2008, the Company had approximately $6.1 million of total unrecognized compensation cost related to these RSAs, which is expected to be recognized over a remaining weighted-average period of 3.5 years.

 

F-28

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AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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 OP 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 in the amount of $6.7 million.  During the year ended December 31, 2007, the Company recorded a compensation charge of approximately $10.4 million to reflect the value of such awards.  As a result of the October 2007 equity offering discussed in Note 2, 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.

13.   Preferred Stock

As part of the Company’s acquisition of GMH’s student housing business, the Company acquired the GMH REIT, an entity that elected to be taxed as a REIT under the Code.  In order to ensure that the entity met certain organizational requirements, on the Merger date the entity issued 131 shares of 15% Series A Cumulative Non-voting Preferred Stock.  Holders of Series A Preferred Stock were entitled to receive, when and as authorized by the Company’s Board of Directors, cumulative preferential cash dividends at the rate of 15% per annum of the total of $1,000 per share plus all accumulated and unpaid dividends thereon.  On December 31, 2008, as contemplated as part of the merger transactions, the Company converted the GMH REIT into a Delaware limited liability company, at which time the preferred shares were redeemed at a redemption price of $1,200 per share, including a redemption premium of $200 per share.

14.   Interest Rate Hedges

In February 2007, the Company extended the maturity date of the Cullen Oaks Phase I and Phase II loans to February 2014.  The extended loans bear interest at a rate of LIBOR plus 1.35% and required payments of interest only through May 2008 and monthly payments of principal and interest from May 2008 through the maturity date.  In connection with these loan extensions, the Company terminated the existing interest rate swap agreement and received a termination payment from the lender of approximately $0.4 million.  In accordance with SFAS No. 133, the $0.4 million gain was amortized from accumulated other comprehensive income to earnings over the remaining term of the terminated interest rate swap agreement (through November 2008).

In addition, the Company entered into an interest rate swap agreement effective February 15, 2007 through February 15, 2014, that is designated to hedge its exposure to fluctuations in interest payments attributed to changes in interest rates associated with payments on the Cullen Oaks Phase I and Phase II loans.  Under the terms of the interest rate swap agreement, the Company pays a fixed rate of 6.69% and receives a floating rate of LIBOR plus 1.35%.  The interest rate swap had an estimated negative fair value of approximately $5.1 million and $2.1 million at December 31, 2008 and 2007, respectively, and is reflected in other liabilities in the accompanying consolidated balance sheets.  Ineffectiveness resulting from the Company’s hedges is not material.

15.   Fair Value Disclosures

On January 1, 2008, the Company adopted SFAS No. 157, which defines fair value, establishes a framework for measuring fair value and also expands disclosures about fair value measurements.  SFAS No. 157 applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements; accordingly, the standard does not require any new fair value measurements of reported balances.  The following table presents information about our liability measured at fair value on a recurring basis as of December 31, 2008, and indicates the fair value hierarchy of the valuation techniques utilized by us to determine such fair value.

 

F-29

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AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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:

Liability Measured at Fair Value on a Recurring Basis at December 31, 2008

		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 December 31, 2008
Liability:
Derivative financial instrument		$	-			$	5,119			$	-			$	5,119

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 December 31, 2008, 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.

To comply with the provisions of SFAS No. 157, 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 December 31, 2008, the Company has assessed the significance of the impact of the credit valuation adjustment on the overall valuation of its derivative position and has determined that the credit valuation adjustment is not significant to the overall valuation of the Company’s derivative.  As a result, the Company has determined its derivative valuation in its entirety is classified in Level 2 of the fair value hierarchy.

16.   Lease Commitments

The Company is a party to a sublease for corporate office space beginning August 15, 2002, and expiring December 31, 2010. The Company is also party to a lease for corporate office space beginning June 19, 2008, and expiring July 31, 2013. The terms of the sublease and lease provide for a period of free rent and scheduled rental rate increases and common area maintenance charges upon expiration of the free rent period.

The Company entered into a ground lease agreement on October 2, 2003 for the purpose of constructing a student housing facility near the campus of Temple University in Philadelphia, Pennsylvania.  The agreement terminates June 30, 2079 and has four six year extensions available.  Under the terms of the ground lease, the lessor receives annual minimum rents of $0.1 million and contingent rental payments which are based upon the operating performance of the property.  The contingent rental payment was approximately $0.1 million for 2008, 2007 and 2006.

 

F-30

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AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The Company entered into a 95-year ground lease agreement on August 3, 2005 for the purpose of constructing University Centre, a student housing facility near the campuses of Rutgers University and the New Jersey Institute of Technology in Newark, New Jersey.  The agreement terminates July 2102 with no extensions or renewals available.  Under the terms of the ground lease, the lessor receives escalating annual rents ranging from $0.1 million to $0.4 million and contingent rental payments based upon the operating performance of the property.  Straight-lined rental amounts were capitalized during the construction period and expensed upon the commencement of operations in August 2007.  Rent expense under the ground lease agreement was approximately $0.3 million and $0.1 million for the years ended December 31, 2008 and 2007, respectively.

The Company entered into a 65-year ground/facility lease agreement on December 22, 2006 for the purpose of constructing Vista del Sol, a student housing facility on the campus of Arizona State University in Tempe, Arizona.  The agreement will terminate on the 65th anniversary date of the opening date (August 2073) and has two ten year extensions available.  During the first five years, under the terms of the ground lease, the lessor will receive annual minimum rents of approximately $0.7 million and variable rent payments based upon the operating performance of the property.  For the remaining years of the lease, the lessor will receive variable rent payments based upon the operating performance of the property.  Straight-lined rental amounts were capitalized during the construction period and expensed upon the commencement of operations in August 2008.  Rent expense under this agreement was approximately $0.4 million for the year ended December 31, 2008.

The Company entered into a 65-year ground/facility lease agreement on October 30, 2007 for the purpose of constructing Barrett Honors College, a student housing facility on the campus of Arizona State University in Tempe, Arizona.  The agreement will terminate on the 65th anniversary date of the opening date (August 2074) and has two ten year extensions available.  During the first ten years, under the terms of the ground lease, the lessor will receive annual minimum rents of approximately $0.3 million.  For the remaining years of the lease, the lessor will receive variable rent payments based upon the operating performance of the property.  Straight-lined rental amounts are capitalized during the construction period and will be expensed once the property commences operations.  This project has an anticipated completion date of August 2009.

The Company also has various operating and capital leases for furniture, office and technology equipment, which expire through 2013.  Rental expense under the operating lease agreements approximated $1.4 million, $0.8 million and $0.6 million for the years ended December 31, 2008, 2007 and 2006, respectively.

Wholly-owned properties, net at December 31, 2008 included approximately $2.9 million related to capital leases of furniture, net of approximately $1.2 million of accumulated amortization.  Other assets at December 31, 2008 included approximately $0.2 million related to corporate assets under capital leases, net of approximately $0.1 million of accumulated amortization.

Future minimum commitments over the life of all leases subsequent to December 31, 2008, are as follows:

		Operating				Capital
2009		$	1,795			$	1,029
2010			1,804				851
2011			1,437				678
2012			1,459				292
2013			733				-
Thereafter			39,494				-
Total minimum lease payments			46,722				2,850
Amount representing interest			-				(295	)
Balance of minimum lease payments		$	46,722			$	2,555

The capital lease obligations are reflected in other liabilities in the accompanying consolidated balance sheets.  Amortization of assets recorded under capital leases is included in depreciation expense and was approximately $0.7 million, $0.6 million and $0.5 million for the years ended December 31, 2008, 2007 and 2006, respectively.

 

F-31

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AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

17.   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.

On one completed project, the Company has guaranteed losses up to $3.0 million in excess of the development fee if the loss is due to any failure of the Company to maintain, or cause its professionals to maintain, required insurance for a period of five years after completion of the project (August 2009).

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 December 31, 2008, management does 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 10, the Fidelity Joint Ventures are funded in part with secured third party debt in the amount of $342.6 million.  The Operating Partnership serves as guarantor of this debt, which means the Company 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.  Additionally, in lieu of depositing required debt service escrow funds with the lender of the one of the Fidelity joint venture’s mortgage notes, the Company has provided an irrevocable standby commercial letter of credit in the amount of $0.3 million.  The letter of credit was issued at inception of the joint venture and expires one year subsequent to issuance, or earlier should the property reach a debt service coverage ratio, as defined, of at least 1.20:1 for a period of twelve consecutive months on a trailing basis.  The term of the letter of credit will be automatically extended for one year periods thereafter until such time the debt service coverage ratio reaches 1.20:1 or the related mortgage note is repaid or refinanced.

The Company has estimated the fair value of guarantees entered into or modified after December 31, 2002, the effective date of FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, to be immaterial.  The Company’s estimated maximum exposure amount under the above guarantees is approximately $358.6 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.

 

F-32

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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.

18.   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, minority interests and allocation of corporate overhead.  Intercompany fees are reflected at the contractually stipulated amounts.

 

F-33

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AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		Year Ended December 31,
		2008				2007				2006
Wholly-Owned Properties
Rental revenues		$	198,871			$	117,858			$	90,683
Interest and other income			113				324				203
Total revenues from external customers			198,984				118,182				90,886
Operating expenses before depreciation, amortization, ground/facility lease, and allocation of corporate overhead			102,128				54,411				42,341
Ground/facility leases			376				-				-
Interest expense			44,282				24,226				18,744
Other nonoperating income			486				-				-
Operating income before depreciation, amortization, minority interests and allocation of corporate overhead		$	52,684			$	39,545			$	29,801
Depreciation and amortization		$	52,260			$	25,648			$	20,216
Capital expenditures		$	142,796			$	142,265			$	81,597
Total segment assets at December 31,		$	2,060,591			$	978,275			$	718,428
On-Campus Participating Properties
Rental revenues		$	22,042			$	20,966			$	19,960
Interest and other income			206				359				330
Total revenues from external customers			22,248				21,325				20,290
Operating expenses before depreciation, amortization, ground/facility lease, and allocation of corporate overhead			10,073				8,701				8,382
Ground/facility lease			1,402				1,622				857
Interest expense			6,166				6,226				6,447
Operating income before depreciation, amortization, minority interests and allocation of corporate overhead		$	4,607			$	4,776			$	4,604
Depreciation and amortization		$	4,322			$	4,263			$	4,131
Capital expenditures		$	719			$	480			$	483
Total segment assets at December 31,		$	83,946			$	85,708			$	88,814
Development Services
Development and construction management fees from external customers		$	7,922			$	5,490			$	5,778
Intersegment revenues			2,502				-				-
Total revenues			10,424				5,490				5,778
Operating expenses			9,471				5,588				4,566
Operating income before depreciation, amortization, minority interests and allocation of corporate overhead		$	953			$	(98	)		$	1,212
Total segment assets at December 31,		$	7,196			$	7,624			$	2,513
Property Management Services
Property management fees from external customers		$	6,578			$	2,821			$	2,532
Intersegment revenues			7,532				4,289				3,627
Total revenues			14,110				7,110				6,159
Operating expenses			6,485				3,102				2,501
Operating income before depreciation, amortization, minority interests and allocation of corporate overhead		$	7,625			$	4,008			$	3,658
Total segment assets at December 31,		$	7,258			$	2,220			$	1,639
Reconciliations
Total segment revenues		$	245,766			$	152,107			$	123,113
Unallocated interest income earned on corporate cash			812				794				697
Elimination of intersegment revenues			(10,034	)			(4,289	)			(3,627	)
Total consolidated revenues, including interest income		$	236,544			$	148,612			$	120,183
Segment operating income before depreciation, amortization, minority interests and allocation of corporate overhead		$	65,869			$	48,231			$	39,275
Depreciation and amortization			(60,125	)			(31,784	)			(26,229	)
Net unallocated expenses relating to corporate overhead			(16,509	)			(17,014	)			(9,318	)
Loss from unconsolidated joint ventures			(1,619	)			(108	)			-
Income tax provision			(388	)			(756	)			(28	)
Minority interests			(236	)			(255	)			(2,038	)
(Loss) income from continuing operations		$	(13,008	)		$	(1,686	)		$	1,662
Total segment assets		$	2,158,991			$	1,073,827			$	811,394
Unallocated corporate assets and assets held for sale			24,918				2,469				72,987
Total assets		$	2,183,909			$	1,076,296			$	884,381

 

F-34

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AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

19.  Quarterly Financial Information (Unaudited)

The information presented below represents the consolidated financial results of the Company for the years ended December 31, 2008 and 2007.

		2008
		1PstP Quarter				2PndP Quarter				3PrdP Quarter				4PthP Quarter				Total
Total revenues		$	41,441			$	43,889			$	72,688			$	78,290			$	236,308	(1)
Net income (loss)		$	4,909			$	(1,450	)		$	(13,094	)		$	(3,420	)		$	(13,055	)
Net income (loss) per share-basic		$	0.18			$	(0.04	)		$	(0.31	)		$	(0.08	)		$	(0.35	)
Net income (loss) per share-Diluted		$	0.18			$	(0.04	)		$	(0.31	)		$	(0.08	)		$	(0.34	)

		2007
		1PstP Quarter				2PndP Quarter				3PrdP Quarter				4PthP Quarter				Total
Total revenues		$	34,950			$	33,366			$	36,518			$	42,301			$	147,135
Net (loss) income		$	(4,678	)		$	(785	)		$	(2,369	)		$	6,146			$	(1,686	)
Net (loss) income per share-basic		$	(0.20	)		$	(0.03	)		$	(0.10	)		$	0.23			$	(0.07	)
Net (loss) income per share-Diluted		$	(0.20	)		$	(0.03	)		$	(0.10	)		$	0.23			$	(0.07	)

(1)	Includes revenues from discontinued operations of $0.9 million for the year ended December 31, 2008.

20.  Subsequent Events

Pay-off of Mortgage Debt:  In January 2009, the Company borrowed approximately $20.0 million from the revolving credit facility to pay off fixed-rate mortgage debt secured by one of our wholly-owned properties (Pirate’s Cove).  The mortgage debt was scheduled to mature in February 2009.

Interest Rate Swaps:  On February 23, 2009, the Company entered into two $50.0 million interest rate swap agreements effective March 20, 2009 through February 20, 2012.  The counter-parties are major financial institutions and the swaps will be 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% plus a spread based upon the Company’s total leverage and receives a floating rate of LIBOR plus the same spread.  In the event that the swaps at any time have a negative fair value below a certain threshold level, the Company could be required to post cash into a collateral account pledged to the interest rate swap providers.  These instruments are designated as cash flow hedges under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended.

 

F-35

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AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

21. Schedule of Real Estate and Accumulated Depreciation

 

										Initial Cost								Basis Step-Up												Total Costs
		Units				Beds				Land				Buildings and Improvements and Furniture, Fixtures and Equipment				Land				Buildings and Improvements and Furniture, Fixtures and Equipment				Costs Capitalized Subsequent to Acquisition				Land				Buildings and Improvements and Furniture, Fixtures and Equipment				Total (1)				Accumulated Depreciation (2)				Encumbrances (3)				Year Built
Wholly Owned Properties
Villas on   Apache			111				288			$	1,465			$	8,071			$	-			$	-			$	3,097			$	1,465			$	11,168			$	12,633			$	3,901			$	7,225			1987
The Village at   Blacksburg			288				1,056				3,826				22,155				-				-				2,982				3,826				25,137				28,963				6,320				20,257			1990/ 1998
River Club   Apartments			266				792				3,478				19,655				-				-				1,538				3,478				21,193				24,671				5,771				17,673			1996
River Walk   Townhomes			100				336				1,442				8,194				-				-				578				1,442				8,772				10,214				2,380				7,282			1998
The Callaway   House			173				538				5,080				20,500				-				-				1,229				5,080				21,729				26,809				5,647				18,658			1999
The Village at   Alafaya Club			228				839				3,788				21,851				-				-				1,314				3,788				23,165				26,953				5,669				19,528			1999
The Village at   Science Drive			192				732				4,673				19,021				-				-				784				4,673				19,805				24,478				4,003				-			2000
University   Village at   Boulder Creek			82				309				939				14,887				96				1,506				767				1,035				17,160				18,195				3,517				15,519			2002
University   Village at   Fresno			105				406				900				15,070				29				483				193				929				15,746				16,675				2,367				-			2004
University   Village at TU			220				749				-				38,739				-				2,380				406				-				41,525				41,525				5,533				-			2004
University   Village at   Sweet Home			269				828				2,473				34,626				-				-				200				2,473				34,826				37,299				3,945				-			2005
University Club Tallahassee (4)			152				608				4,065				17,368				-				-				2,231				4,065				19,599				23,664				3,363				13,032			2000
The Grove at   University   Club (4)			64				128				600				5,735				-				-				433				600				6,168				6,768				748				4,143			2002
College Club   Tallahassee (5)			96				384				1,498				11,156				-				-				1,186				1,498				12,342				13,840				1,920				8,461			2001
The Greens at   College   Club (5)			40				160				601				4,893				-				-				494				601				5,387				5,988				775				-			2004

 

F-36

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AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

										Initial Cost								Basis Step-Up												Total Costs
		Units				Beds				Land				Buildings and Improvements and Furniture, Fixtures and Equipment				Land				Buildings and Improvements and Furniture, Fixtures and Equipment				Costs Capitalized Subsequent to Acquisition				Land				Buildings and Improvements and Furniture, Fixtures and Equipment				Total (1)				Accumulated Depreciation (2)				Encumbrances (3)				Year Built
University Club Gainesville			94				376			$	1,416			$	11,848			$	-			$	-			$	433			$	1,416			$	12,281			$	13,697			$	1,560			$	8,037			1999
The Estates			396				1,044				4,254				43,164				-				-				1,239				4,254				44,403				48,657				4,988				36,847			2002
City Parc at Fry   Street			136				418				1,902				17,678				-				-				649				1,902				18,327				20,229				2,254				11,147			2004
Entrada Real			98				363				1,475				15,859				-				-				434				1,475				16,293				17,768				1,368				9,323			2000
Royal Oaks (6)			82				224				1,346				8,153				-				-				376				1,346				8,529				9,875				738				2,799			1990
Royal   Pavilion (6)			60				204				1,212				7,304				-				-				342				1,212				7,646				8,858				672				2,335			1991
Royal Village   Tallahassee (6)			75				288				1,764				10,768				-				-				483				1,764				11,251				13,015				948				3,139			1992
Royal Village   Gainesville			118				448				2,484				15,153				-				-				706				2,484				15,859				18,343				1,468				5,718			1996
Northgate Lakes			194				710				4,807				27,284				-				-				859				4,807				28,143				32,950				2,470				10,443			1997/ 1998
Royal Lexington			94				364				2,848				12,783				-				-				640				2,848				13,423				16,271				1,228				4,480			1994
The Woods at   Greenland			78				276				1,050				7,286				-				-				432				1,050				7,718				8,768				713				5,932			2001
Raider’s   Crossing			96				276				1,089				8,404				-				-				455				1,089				8,859				9,948				796				6,359			2002
Raider’s Pass			264				828				3,877				32,445				-				-				1,042				3,877				33,487				37,364				2,870				18,830			2002/ 2003
Aggie Station			156				450				1,634				18,821				-				-				417				1,634				19,238				20,872				1,592				11,177			2003
The Outpost San Marcos			162				486				1,987				18,973				-				-				339				1,987				19,312				21,299				1,571				13,212			2003/ 2004
The Outpost San Antonio			276				828				3,262				36,252												342				3,262				36,594				39,856				2,936				23,318			2005
Callaway Villas			236				704				3,903				32,287				-				-				173				3,903				32,460				36,363				2,580				-			2006
Village on Sixth			248				752				2,763				22,480				-				-				1,954				2,763				24,434				27,197				1,478				17,111			2000/ 2006
Newtown   Crossing			356				942				6,763				53,597				-				-				641				6,763				54,238				61,001				3,194				31,582			2005/ 2007
Olde Town   University   Square			224				550				2,277				24,614				-				-				566				2,277				25,180				27,457				1,600				20,470			2005

 

F-37

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AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

										Initial Cost								Basis Step-Up												Total Costs
		Units				Beds				Land				Buildings and Improvements and Furniture, Fixtures and Equipment				Land				Buildings and Improvements and Furniture, Fixtures and Equipment				Costs Capitalized Subsequent to Acquisition				Land				Buildings and Improvements and Furniture, Fixtures and Equipment				Total (1)				Accumulated Depreciation (2)				Encumbrances (3)				Year Built
Peninsular Place			183				478			$	2,306			$	16,559			$	-			$	-			$	294			$	2,306			$	16,853			$	19,159			$	1,153			$	16,818			2005
University Centre			234				838				-				77,378				-				-				678				-				78,056				78,056				3,091				-			2007
Sunnyside Commons			68				161				6,933				768				-				-				2				6,933				770				7,703				22				-			1925-2001
Pirate’s Place			144				528				1,159				9,652				-				-				286				1,159				9,938				11,097				260				6,762			1996
University Highlands			216				732				4,821				24,822				-				-				259				4,821				25,081				29,902				442				-			2004
Jacob Heights I (7)			42				162				407				5,888				-				-				36				407				5,924				6,331				103				3,850			2004
Jacob Heights III (7)			24				96				233				3,637				-				-				21				233				3,658				3,891				61				2,948			2006
The Summit (7)			192				672				1,678				26,939				-				-				150				1,678				27,089				28,767				430				23,825			2003
GrandMarc –Seven Corners			186				440				4,491				28,807				-				-				130				4,491				28,937				33,428				451				18,314			2000
University Village – Sacramento			250				394				7,275				12,639				-				-				90				7,275				12,729				20,004				228				14,740			1979
Aztec Corner			180				606				17,460				32,209				-				-				207				17,460				32,416				49,876				529				28,600			1995
University Crossings			260				1,016				20,622				47,830				-				-				1,133				20,622				48,963				69,585				794				41,994			1926/ 2003
Campus Corner			254				796				1,591				20,928				-				-				90				1,591				21,018				22,609				384				22,266			1997
Tower at 3rd			147				295				1,145				19,128				-				-				319				1,145				19,447				20,592				331				14,491			1973
University Mills			121				481				524				12,334				-				-				213				524				12,547				13,071				223				8,965			2002
Pirates Cove			264				1,056				2,173				26,704				-				-				772				2,173				27,476				29,649				512				19,978			2000
University Manor			168				600				1,387				14,889				-				-				324				1,387				15,213				16,600				271				14,492			2002
Brookstone Village			124				238				1,203				7,024				-				-				83				1,203				7,107				8,310				107				4,141			1993
Campus Walk – Wilmington			289				290				2,794				11,718				-				-				80				2,794				11,798				14,592				174				6,700			1989
Riverside Estates			205				700				1,998				25,281				-				-				96				1,998				25,377				27,375				429				16,200			1994
Cambridge at Southern			228				564				3,317				20,301				-				-				80				3,317				20,381				23,698				379				18,388			2006

 

F-38

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AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

										Initial Cost								Basis Step-Up												Total Costs
		Units				Beds				Land				Buildings and Improvements and Furniture, Fixtures and Equipment				Land				Buildings and Improvements and Furniture, Fixtures and Equipment				Costs Capitalized Subsequent to Acquisition				Land				Buildings and Improvements and Furniture, Fixtures and Equipment				Total (1)				Accumulated Depreciation (2)				Encumbrances (3)			Year Built
Campus Club – Statesboro			276				984			$	3,075			$	31,100			$	-			$	-			$	715			$	3,075			$	31,815			$	34,890			$	546			$	18,811		2003
University Pines			144				552				1,707				17,527				-				-				156				1,707				17,683				19,390				288				11,200		2001
Lakeside			244				776				2,347				22,999				-				-				318				2,347				23,317				25,664				412				14,100		1991
The Club			120				480				1,164				11,979				-				-				210				1,164				12,189				13,353				220				9,922		1989
Pegasus Connection			306				930				6,053				37,802				-				-				271				6,053				38,073				44,126				649				29,914		1999
University Place			144				528				2,794				15,639				-				-				96				2,794				15,735				18,529				277				-		2003
Southview			240				960				3,492				41,760				-				-				195				3,492				41,955				45,447				725				18,918		1998
Stonegate			168				672				2,929				28,164				-				-				95				2,929				28,259				31,188				494				14,264		2000
The Commons			132				528				2,173				17,786				-				-				260				2,173				18,046				20,219				314				5,811		1991
University Gables			168				648				1,309				13,148				-				-				317				1,309				13,465				14,774				257				14,131		2001
Campus Ridge			132				528				960				12,831				-				-				64				960				12,895				13,855				236				-		2003
The Enclave I			120				480				582				9,205				-				-				53				582				9,258				9,840				164				9,939		2002
Hawks Landing			122				484				1,445				13,735				-				-				774				1,445				14,509				15,954				237				15,600		1994
Willowtree Apartments (8)			310				568				6,014				15,135				-				-				103				6,014				15,238				21,252				273				13,665		1968
Willowtree Towers (8)			163				283				3,793				6,745				-				-				51				3,793				6,796				10,589				136				6,686		1974
Abbott Place			222				654				1,833				18,313				-				-				660				1,833				18,973				20,806				346				17,850		1999
University Centre – Kalamazoo			232				700				1,804				19,395				-				-				252				1,804				19,647				21,451				366				19,875		2004
University Meadows			184				616				1,426				14,870				-				-				322				1,426				15,192				16,618				278				9,633		2001
Campus Way			196				684				1,581				21,845				-				-				146				1,581				21,991				23,572				383				15,375		1993
Campus Walk – Oxford			108				432				1,096				11,271				-				-				173				1,096				11,444				12,540				224				8,133		2001
Campus Trails			156				480				1,358				11,291				-				-				119				1,358				11,410				12,768				213				7,486		1991
University Pointe			204				682				989				27,576				-				-				96				989				27,672				28,661				462				21,300		2004
University Trails			240				684				1,183				25,173				-				-				177				1,183				25,350				26,533				430				15,725		2003

 

F-39

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AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

										Initial Cost								Basis Step-Up												Total Costs
		Units				Beds				Land				Buildings and Improvements and Furniture, Fixtures and Equipment				Land				Buildings and Improvements and Furniture, Fixtures and Equipment				Costs Capitalized Subsequent to Acquisition				Land				Buildings and Improvements and Furniture, Fixtures and Equipment				Total (1)				Accumulated Depreciation (2)				Encumbrances (3)				Year Built
Vista del Sol			613				1,866			$	-			$	136,986			$	-			$	-			$	232			$	-			$	137,218			$	137,218			$	1,710			$	96,046			2008
Villas at Chestnut Ridge			196				552				2,756				33,517				-				-				9				2,756				33,526				36,282				455				28,773			2008
Barrett Honors College (9)			601				1,720				-				63,701				-				-				-				-				63,701				63,701				-				-			2009
Subtotal			15,349				48,298			$	224,321			$	1,812,002			$	125			$	4,369			$	41,161			$	224,446			$	1,857,532			$	2,081,978			$	113,352			$	1,080,666
On-Campus Participating Properties
University Village  – PVAMU			612				1,920			$	-			$	36,506			$	-			$	-			$	2,226			$	-			$	38,732			$	38,732			$	17,133			$	27,360		1996/ 97/98
University College – PVAMU			756				1,470				-				22,650				-				-				1,541				-				24,191				24,191				8,028				21,730			2000/ 2003
University Village – TAMIU			84				250				-				5,844				-				-				319				-				6,163				6,163				2,674				4,185			1997
Cullen Oaks Phase I and II			411				879				-				33,910				-				-				989				-				34,899				34,899				6,848				32,991			2001/ 2005
Subtotal			1,863				4,519				-				98,910				-				-				5,075				-				103,985				103,985				34,683				86,266
Total-all properties			17,212				52,817			$	224,321			$	1,910,912			$	125			$	4,369			$	46,236			$	224,446			$	1,961,517			$	2,185,963			$	148,035			$	1,166,932

	(1)	Total aggregate costs for Federal income tax purposes is $2,096 million.
	(2)	The depreciable lives for buildings and improvements and furniture, fixtures and equipment range from three to forty years.
	(3)	Total encumbrances exclude net unamortized debt premiums of $5.7 million and net unamortized debt discounts of $10.4 million as of December 31, 2008.
	(4)	For lease administration purposes, University Club Tallahassee and The Grove at University Club are reported combined.  As a result, costs capitalized subsequent to acquisition and accumulated depreciation are allocated to the respective properties based on relative bed count.
	(5)	For lease administration purposes, College Club Tallahassee and The Greens at College Club are reported combined.   As a result, costs capitalized subsequent to acquisition and accumulated depreciation are allocated to the respective properties based on relative bed count.
	(6)	For lease administration purposes, Royal Oaks, Royal Pavilion, and Royal Village Tallahassee are reported combined.  As a result, costs capitalized subsequent to acquisition and accumulated depreciation are allocated to the respective properties based on relative bed count.
	(7)	For lease administration purposes, Jacob Heights I, Jacob Heights III and The Summit are reported combined.  As a result, costs capitalized subsequent to acquisition and accumulated depreciation are allocated to the respective properties based on relative bed count.
	(8)	For lease administration purposes, Willowtree Apartments and Willowtree Towers are reported combined.  As a result, costs capitalized subsequent to acquisition and accumulated depreciation are allocated to the respective properties based on relative bed count.
	(9)	Barrett Honors College commenced construction in November 2007.  Initial costs represent construction costs associated with the development of this property.  Year built represents the scheduled completion date.

 

F-40

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AMERICAN CAMPUS COMMUNITIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The changes in the Company’s investments in real estate and related accumulated depreciation for each of the years ended December 31, 2008, 2007, and 2006 are as follows:

		For the Year Ended December 31,
		2008								2007								2006
		Wholly- Owned (1)				On-Campus (2)				Wholly- Owned (1)				On-Campus (2)				Wholly- Owned (1)				On-Campus (2)
Investments in Real Estate:
Balance, beginning of year		$	1,017,425			$	103,266			$	740,238			$	102,786			$	451,033			$	102,337
Acquisition of land for development			8,226				-				10,022				-				-				-
Acquisition of properties			980,504				-				131,319				-				248,321				-
Improvements and development expenditures			145,011				719				133,090				480				79,100				449
Contribution of land from minority partner in development joint venture			-				-				2,756				-				-				-
Disposition of properties			(50,981	)			-				-				-				(38,216	)			-
Balance, end of year		$	2,100,185			$	103,985			$	1,017,425			$	103,266			$	740,238			$	102,786
Accumulated Depreciation:
Balance, beginning of year		$	(70,363	)		$	(30,361	)		$	(46,041	)		$	(26,098	)		$	(33,935	)		$	(21,967	)
Depreciation for the year			(42,989	)			(4,322	)			(24,322	)			(4,263	)			(18,462	)			(4,131	)
Disposition of properties			-				-				-				-				6,356				-
Balance, end of year		$	(113,352	)		$	(34,683	)		$	(70,363	)		$	(30,361	)		$	(46,041	)		$	(26,098	)

 

	(1)	Owned off-campus properties and owned on-campus properties
	(2)	On-campus participating properties