Quarterly Report — Form 10-Q — Sect. 13 / 15(d) – SEA’34 Filing Table of Contents
Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 1.95M
2: EX-31.1 Certification -- §302 - SOA'02 HTML 30K
3: EX-31.2 Certification -- §302 - SOA'02 HTML 30K
4: EX-31.3 Certification -- §302 - SOA'02 HTML 30K
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9: EX-32.4 Certification -- §906 - SOA'02 HTML 26K
16: R1 Cover HTML 85K
17: R2 Consolidated Balance Sheets HTML 145K
18: R3 Consolidated Balance Sheets (Parenthetical) HTML 58K
19: R4 Consolidated Statements of Comprehensive Income HTML 165K
20: R5 Consolidated Statement of Changes in Equity HTML 173K
21: R6 Consolidated Statement of Changes in Equity HTML 26K
(Parenthetical)
22: R7 Consolidated Statements of Cash Flows HTML 190K
23: R8 Organization and Description of Business HTML 33K
24: R9 Summary of Significant Accounting Policies HTML 168K
25: R10 Acquisitions HTML 26K
26: R11 Property Dispositions HTML 31K
27: R12 Investments in Owned Properties HTML 44K
28: R13 Debt HTML 105K
29: R14 Stockholders' Equity / Partners' Capital HTML 30K
30: R15 Noncontrolling Interests HTML 52K
31: R16 Incentive Award Plan HTML 41K
32: R17 Derivative Instruments and Hedging Activities HTML 93K
33: R18 Fair Value Disclosures HTML 112K
34: R19 Leases HTML 82K
35: R20 Commitments and Contingencies HTML 48K
36: R21 Segments HTML 174K
37: R22 Subsequent Events HTML 28K
38: R23 Summary of Significant Accounting Policies HTML 93K
(Policies)
39: R24 Summary of Significant Accounting Policies HTML 144K
(Tables)
40: R25 Investments in Owned Properties (Tables) HTML 41K
41: R26 Debt (Tables) HTML 86K
42: R27 Noncontrolling Interests (Tables) HTML 43K
43: R28 Incentive Award Plan (Tables) HTML 35K
44: R29 Derivative Instruments and Hedging Activities HTML 93K
(Tables)
45: R30 Fair Value Disclosures (Tables) HTML 110K
46: R31 Leases (Tables) HTML 60K
47: R32 Segments (Tables) HTML 175K
48: R33 Organization and Description of Business (Details) HTML 58K
49: R34 Summary of Significant Accounting Policies - HTML 61K
Narrative (Details)
50: R35 Summary of Significant Accounting Policies - HTML 36K
Estimated Useful Lives of Assets (Details)
51: R36 Summary of Significant Accounting Policies - HTML 32K
Potentially Dilutive Securities Not Included in
Calculating Diluted Earnings Per Share (Details)
52: R37 Summary of Significant Accounting Policies - HTML 56K
Summary of Elements Used in Calculating Basic and
Diluted Earnings per Share (Details)
53: R38 Summary of Significant Accounting Policies - HTML 57K
Summary of Elements Used in Calculating Basic and
Diluted Earnings per Unit (Details)
54: R39 Acquisitions (Details) HTML 37K
55: R40 Property Dispositions - Narrative (Details) HTML 60K
56: R41 Investments in Owned Properties (Details) HTML 46K
57: R42 Debt - Summary of Outstanding Consolidated HTML 75K
Indebtedness, Including Unamortized Debt Premiums
and Discounts (Details)
58: R43 Debt - Narrative (Details) HTML 157K
59: R44 Debt - Summary of Senior Unsecured Notes (Details) HTML 55K
60: R45 Stockholders' Equity / Partners' Capital (Details) HTML 43K
61: R46 Noncontrolling Interests - Narrative (Details) HTML 52K
62: R47 Noncontrolling Interests - Summarized Activity of HTML 50K
Redeemable Limited Partners (Details)
63: R48 Incentive Award Plan - Narrative (Details) HTML 44K
64: R49 Incentive Award Plan - Summary of Restricted Stock HTML 42K
Awards (Details)
65: R50 Derivative Instruments and Hedging Activities - HTML 45K
Summary of Outstanding Interest Rate Swap
Contracts (Details)
66: R51 Derivative Instruments and Hedging Activities - HTML 37K
Narrative (Details)
67: R52 Derivative Instruments and Hedging Activities - HTML 38K
Fair Value of Derivative Financial Instruments and
Classification on Consolidated Balance Sheet
(Details)
68: R53 Derivative Instruments and Hedging Activities - HTML 39K
Schedule of Effect of Derivative Financial
Instruments On The Income Statement (Details)
69: R54 Fair Value Disclosures - Financial Instruments HTML 44K
Measured at Fair Value (Details)
70: R55 Fair Value Disclosures - Estimated Fair Value and HTML 52K
Related Carrying Amounts of Mortgage Loans and
Bonds Payable (Details)
71: R56 Leases - Narrative (Details) HTML 53K
72: R57 Leases - Schedule of Future Minimum Commitments of HTML 66K
Operating Leases (Details)
73: R58 Commitments and Contingencies (Details) HTML 104K
74: R59 Segments - Narrative (Details) HTML 24K
75: R60 Segments - Schedule of Segment Information HTML 97K
(Details)
76: R61 Subsequent Events (Details) HTML 45K
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Registrant’s
telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
American
Campus Communities Operating Partnership LP
iYes
☒
No
☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
American
Campus Communities Operating Partnership LP
iYes
☒
No
☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging
growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
American Campus Communities Operating Partnership LP
Large
accelerated filer
☐
Accelerated Filer
☐
iNon-accelerated filer
☒ (Do
not check if a smaller reporting company)
Smaller reporting company
i☐
Emerging growth company
i☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
This report combines the reports on Form 10-Q for the quarterly period ended June 30, 2019 of American Campus Communities, Inc. and American Campus Communities Operating Partnership LP. Unless stated otherwise or the context otherwise requires, references to “ACC” mean American Campus Communities, Inc., a Maryland corporation that has elected to be treated as a real estate investment trust (“REIT”) under the Internal Revenue Code, and references to “ACCOP” mean American Campus Communities Operating Partnership LP, a Maryland limited partnership. References
to the “Company,”“we,”“us” or “our” mean collectively ACC, ACCOP and those entities/subsidiaries owned or controlled by ACC and/or ACCOP. References to the “Operating Partnership” mean collectively ACCOP and those entities/subsidiaries owned or controlled by ACCOP. The following chart illustrates the Company’s and the Operating Partnership’s corporate structure:
The general partner of ACCOP is American Campus Communities Holdings, LLC (“ACC Holdings”), an entity that is wholly-owned by ACC. As of June 30, 2019,
ACC Holdings held an ownership interest in ACCOP of less than 1%. The limited partners of ACCOP are ACC and other limited partners consisting of current and former members of management and nonaffiliated third parties. As of June 30, 2019, ACC owned an approximate 99.5% limited partnership interest in ACCOP. As the sole member of the general partner of ACCOP, ACC has exclusive control of ACCOP’s day-to-day management. Management operates the Company and the Operating Partnership as one business. The management of ACC consists of the same members as the management of ACCOP. The Company is structured as an umbrella partnership REIT (“UPREIT”) and ACC contributes all net proceeds from its various equity offerings to the Operating Partnership. In return for those contributions,
ACC receives a number of units of the Operating Partnership (“OP Units,” see definition below) equal to the number of common shares it has issued in the equity offering. Contributions of properties to the Company can be structured as tax-deferred transactions through the issuance of OP Units in the Operating Partnership. Based on the terms of ACCOP’s partnership agreement, OP Units can be exchanged for ACC’s common shares on a one-for-one basis. The Company maintains a one-for-one relationship between the OP Units of the Operating Partnership issued to ACC and ACC Holdings and the common shares issued to the public. The Company believes that combining the reports on Form 10-Q of ACC and ACCOP into this single report provides the following benefits:
(1)
enhances
investors’ understanding of the Company and the Operating Partnership by enabling investors to view the business as a whole in the same manner as management views and operates the business;
(2)
eliminates duplicative disclosure and provides a more streamlined and readable presentation since a substantial portion of the disclosure applies to both the Company and the Operating Partnership; and
(3)
creates time and cost efficiencies through the preparation of one combined report instead of two separate reports.
ACC
consolidates ACCOP for financial reporting purposes, and ACC essentially has no assets or liabilities other than its investment in ACCOP. Therefore, the assets and liabilities of the Company and the Operating Partnership are the same on their respective financial statements. However, the Company believes it is important to understand the few differences between the Company and the Operating Partnership in the context of how the entities operate as a consolidated company. All of the Company’s property ownership, development and related business operations are conducted through the Operating Partnership. ACC also issues public equity from time to time and guarantees certain debt of ACCOP, as disclosed in this report. ACC does not have any indebtedness, as all debt is incurred by the Operating Partnership. The Operating Partnership holds substantially all of the assets of the Company, including the Company’s ownership interests in its joint ventures. The Operating
Partnership conducts the operations of the business and is structured as a partnership with no publicly traded equity. Except for the net proceeds from ACC’s equity offerings, which are contributed to the capital of ACCOP in exchange for OP Units on a one-for-one common share per OP Unit basis, the Operating Partnership generates all remaining capital required by the Company’s business. These sources include, but are not limited to, the Operating Partnership’s working capital, net cash provided by operating activities, borrowings under its credit facility, the issuance of unsecured notes, and proceeds received from the disposition of certain properties. Noncontrolling interests, stockholders’ equity, and partners’ capital are the main areas of difference between the consolidated financial statements of the Company and those of the Operating Partnership. The noncontrolling interests in the Operating Partnership’s financial statements consist of the interests of unaffiliated
partners in various consolidated joint ventures. The noncontrolling interests in the Company’s financial statements include the same noncontrolling interests at the Operating Partnership level and OP Unit holders of the Operating Partnership. The differences between stockholders’ equity and partners’ capital result from differences in the equity issued at the Company and Operating Partnership levels.
To help investors understand the significant differences between the Company and the Operating Partnership, this report provides separate consolidated financial statements for the Company and the Operating Partnership. A single set of consolidated notes to such financial statements is presented that includes separate discussions for the Company and the Operating Partnership when applicable (for example, noncontrolling interests, stockholders’ equity or partners’ capital, earnings
per share or unit, etc.). A combined Management’s Discussion and Analysis of Financial Condition and Results of Operations section is also included that presents discrete information related to each entity, as applicable. This report also includes separate Part I, Item 4 Controls and Procedures sections and separate Exhibits 31 and 32 certifications for each of the Company and the Operating Partnership in order to establish that the requisite certifications have been made and that the Company and the Operating Partnership are compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934 and 18 U.S.C. §1350.
In order to highlight the differences between the Company and the Operating Partnership, the separate sections in this report for the Company and the Operating Partnership specifically refer to the Company and the Operating Partnership. In the sections
that combine disclosure of the Company and the Operating Partnership, this report refers to actions or holdings as being actions or holdings of the Company. Although the Operating Partnership is generally the entity that directly or indirectly enters into contracts and joint ventures and holds assets and debt, reference to the Company is appropriate because the Company operates its business through the Operating Partnership. The separate discussions of the Company and the Operating Partnership in this report should be read in conjunction with each other to understand the results of the Company on a consolidated basis and how management operates the Company.
Notes
to Consolidated Financial Statements of American Campus Communities, Inc. and Subsidiaries and American Campus Communities Operating Partnership LP and Subsidiaries (unaudited)
Common stock, $0.01 par value, 800,000,000 shares authorized, 137,200,511 and 136,967,286 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively
AMERICAN CAMPUS COMMUNITIES OPERATING PARTNERSHIP LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. iOrganization
and Description of Business
American Campus Communities, Inc. (“ACC”) is a real estate investment trust (“REIT”) that commenced operations effective with the completion of an initial public offering (“IPO”) on August 17, 2004. Through ACC’s controlling interest in American Campus Communities Operating Partnership LP (“ACCOP”), ACC is one of the largest owners, managers and developers of high quality student housing properties in the United States in terms of beds owned and under management. ACC is a fully integrated, self-managed and self-administered equity REIT with expertise in the acquisition, design, financing, development, construction management, leasing and management
of student housing properties. ACC’s common stock is publicly traded on the New York Stock Exchange (“NYSE”) under the ticker symbol “ACC.”
The general partner of ACCOP is American Campus Communities Holdings, LLC (“ACC Holdings”), an entity that is wholly-owned by ACC. As of June 30, 2019, ACC Holdings held an ownership interest in ACCOP of less than i1%.
The limited partners of ACCOP are ACC and other limited partners consisting of current and former members of management and nonaffiliated third parties. As of June 30, 2019, ACC owned an approximate i99.5% limited
partnership interest in ACCOP. As the sole member of the general partner of ACCOP, ACC has exclusive control of ACCOP’s day-to-day management. Management operates ACC and ACCOP as one business. The management of ACC consists of the same members as the management of ACCOP. ACC consolidates ACCOP for financial reporting purposes, and ACC does not have significant assets other than its investment in ACCOP. Therefore, the assets and liabilities of ACC and ACCOP are the same on their respective financial statements. References to the “Company” means collectively ACC, ACCOP and those entities/subsidiaries owned or controlled by ACC and/or ACCOP. References to the “Operating Partnership” mean collectively ACCOP and those entities/subsidiaries owned or controlled by ACCOP. Unless otherwise indicated, the accompanying Notes to the Consolidated Financial Statements apply to both the Company and the Operating Partnership.
As
of June 30, 2019, the Company’s property portfolio contained i169 properties with approximately i108,800
beds. The Company’s property portfolio consisted of i129 owned off-campus student housing properties that are in close proximity to colleges and universities, i34
American Campus Equity (“ACE®”) properties operated under ground/facility leases, and isix on-campus participating properties operated under ground/facility leases with the related university systems. Of the i169
properties, ieight were under development as of June 30, 2019, and when completed will consist of a total of approximately i9,000
beds. 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 one of ACC’s taxable REIT subsidiaries (“TRSs”), the Company also provides construction management and development services, primarily for student housing properties owned by colleges and universities, charitable foundations, and others. As of June 30, 2019, also through one of ACC’s TRSs, the Company provided third-party management and leasing services for i34
properties that represented approximately i24,300 beds. Third-party management and leasing services are typically provided pursuant to management contracts that have initial terms that range from ione
year to ifive years. As of June 30, 2019, the Company’s total owned and third-party managed portfolio included i203
properties with approximately i133,100 beds.
2. iSummary
of Significant Accounting Policies
i
Basis of Presentation and use of Estimates
The accompanying consolidated financial statements, presented in U.S. dollars, are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the date of the financial statements,
and revenue and expenses during the reporting periods. The Company’s actual results could differ from those estimates and assumptions. All material intercompany transactions among consolidated entities have been eliminated. All dollar amounts in the tables herein, except share, per share, unit and per unit amounts, are stated in thousands unless otherwise indicated.
AMERICAN CAMPUS COMMUNITIES OPERATING PARTNERSHIP LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
i
Principles
of Consolidation
The Company’s consolidated financial statements include its accounts and the accounts of other subsidiaries and joint ventures (including partnerships and limited liability companies) over which it has control. Investments acquired or created are evaluated based on the accounting guidance relating to variable interest entities (“VIEs”), which requires the consolidation of VIEs in which the Company is considered to be the primary beneficiary. If the investment is determined not to be a VIE, then the investment is evaluated for consolidation using the voting interest model.
i
Recently
Issued Accounting Pronouncements
i
The Company does not expect the following accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”) to have a material effect on its consolidated financial statements:
Accounting Standards
Update
Effective Date
ASU 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract”
In February 2016, the FASB issued
ASU 2016-02 (“ASU 2016-12”), “Leases (Topic 842): Amendments to the FASB Accounting Standards Codification.” ASU 2016-02 outlines principles for the recognition, measurement, presentation and disclosure of leases. Subsequent to the issuance of ASU 2016-02, the FASB issued additional ASUs clarifying aspects of the new lease accounting standard, which are effective upon adoption of ASU 2016-02. These lease-related ASUs are collectively referred to as the “New Leases Standard.”
The Company adopted the New Leases Standard on January 1, 2019, utilizing the modified retrospective transition approach. Under this approach, the Company elected to apply the new standard to leases that were in place as of January 1, 2019.Results
for reporting periods beginning January 1, 2019 are presented under the New Leases Standard. Upon adoption, the Company did not record an adjustment to beginning retained earnings.
In addition, the Company adopted the following additional practical expedients available for implementation:
•An entity need not reassess whether any existing or expired contracts are or contain leases;
•An entity need not reassess lease classification for any existing or expired leases; and
•An entity need not reassess initial direct costs for any existing leases.
As
Lessee:
•
Under the New Leases Standard, lessees classify leases as either operating or finance leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification determines whether lease expense is recognized on a straight-line basis over the term of the lease (operating lease) or under the effective interest method (finance lease). In addition, the New Leases Standard requires lessees to recognize right-of-use assets and related lease liabilities for leases with a term greater than 12 months regardless of their lease classification.
•
Upon
adoption of the New Leases Standard on January 1, 2019, the Company was a lessee under i28 ground leases and itwo
corporate office headquarters leases for which it recorded $i278.2 million inright of use assets (“ROU Assets”), which are included in other assets on the accompanying consolidated balance sheet, and $i277.5
million of operating lease liabilities.
•
Because the Company’s existing leases under which it is a lessee will continue to be classified as operating leases, the timing and pattern of lease expense recognition (straight-line basis) will remain unchanged. However, for any leases entered into or modified after January 1, 2019 the leases will need to be evaluated under the New Leases Standard and may be classified as finance leases depending on the terms of the transactions.
AMERICAN CAMPUS COMMUNITIES OPERATING PARTNERSHIP LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
As Lessor:
•
Under the New Leases Standard, the accounting for lessors remained largely unchanged from current GAAP; however, ASU 2016-02 required that lessors expense, on an as-incurred basis, certain initial direct costs that are not incremental in negotiating
a lease. Under the prior standard, these costs were capitalizable and therefore the New Leases Standard resulted in certain of these costs being expensed as incurred after adoption. For the Company, these costs include internal leasing payroll costs incurred for owned and presale development projects, as well as certain legal expenses incurred when negotiating commercial leases.
•
The New Leases Standard also requires lessors to evaluate collectability of all operating lease payments in a contract at lease commencement and thereafter. If the operating lease payments are deemed not probable of collection, adjustments are recognized as a reduction to lease income. This resulted in the reclassification of the provision for uncollectible accounts
from operating expenses to revenue. This adjustment is reflected on a prospective basis in the accompanying consolidated statements of comprehensive income, starting on January 1, 2019. The provision for uncollectible accounts for owned properties was $i1.7 million and $i1.8
million for the three months ended June 30, 2019 and 2018, respectively, and was $i2.8 million and $i2.7
million for the six months endedJune 30, 2019 and 2018, respectively. The provision for uncollectible accounts for on-campus participating properties for both the three months ended June 30, 2019 and 2018 was $i0.1
million. The provision for uncollectible accounts for on-campus participating properties was a $i0.7 million benefit and a $i0.2
million expense for the six months endedJune 30, 2019 and 2018, respectively.
•
The New Leases Standard provides a practical expedient that allows lessors to not separate certain lease and non-lease components if certain criteria are met. The Company assessed the criteria and determined that the timing and pattern of transfer for common area maintenance and the related rental revenue is the same. Therefore, the Company elected the practical expedient which resulted in no change
to how revenue is currently recorded.
Other
In addition, on January 1, 2019, the Company adopted the following accounting pronouncements which did not have a material effect on the Company’s consolidated financial statements:
•
ASU 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”
•
ASU
2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities”
The SEC issued the Disclosure Update and Simplification rule in 2018 to remove inconsistencies between US GAAP and SEC
regulations. This rule was effective November 5, 2018 and eliminated Rule 3-15(a)(1) of Regulation S-X, which required REITs to present separately all gains and losses on sales of properties outside of continuing operations on the Statement of Comprehensive Income. The adoption of this rule resulted in the presentation of gains and losses from disposition of real estate within operating income on the Consolidated Statements of Comprehensive Income. Prior year amounts have reclassified to conform to current presentation.
i
Interim
Financial Statements
The accompanying interim financial statements are unaudited but have been prepared in accordance with GAAP for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all disclosures required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting solely of normal recurring matters) necessary for a fair presentation of the financial statements of the Company for these interim periods have been included. Because of the seasonal nature of the Company’s operations, the results of operations and cash flows for any interim period are not necessarily indicative of results for other interim periods or for the full year. These financial statements should be read in conjunction with the financial statements and the notes
thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
AMERICAN CAMPUS COMMUNITIES OPERATING PARTNERSHIP LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
ii
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:
25-34 years (shorter of useful life or respective lease term)
Furniture, fixtures and equipment
3-7 years
Project costs directly associated with the development and construction of an owned real estate project, which include interest, property taxes, and amortization of deferred financing 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 $i3.7 million and $i4.0 million was capitalized during the three months ended June
30, 2019 and 2018, respectively, and interest totaling approximately $i6.4 million and $i7.0
million was capitalized during the six months endedJune 30, 2019 and 2018, 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 undiscounted cash flows are less than the carrying value of the property, or when a property meets the criteria to be classified as held for sale, at which time an impairment charge is recognized for any excess of the carrying value of the property over
the expected net proceeds from the disposal. 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. In the case of any impairment, the valuation would be based on Level 3 inputs. There were ino
impairments of the carrying values of the Company's investments in real estate as of June 30, 2019, other than a $i3.2 million impairment charge recorded on March 31, 2019 concurrent with the classification of ione
owned property as held for sale.
/i
Long-Lived Assets–Held for Sale
Long-lived assets to be disposed of are classified as held for sale in the period in which all of the following criteria are met:
a.
Management,
having the authority to approve the action, commits to a plan to sell the asset.
b.
The asset is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets.
c.
An active program to locate a buyer and other actions required to complete the plan to sell the asset have been initiated.
d.
The
sale of the asset is probable, and transfer of the asset is expected to qualify for recognition as a completed sale, within one year.
e.
The asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value.
f.
Actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
Concurrent with this classification, the asset is recorded at the lower of cost or fair value less estimated selling costs, and depreciation ceases. The Company did not have any properties classified as held for sale as of June 30, 2019.
AMERICAN CAMPUS COMMUNITIES OPERATING PARTNERSHIP LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
i
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 for the Company’s on-campus participating properties. Additionally, restricted cash includes escrow accounts held by lenders and resident security deposits, as required by law in certain states. Restricted cash also consists of escrow deposits made in connection with potential property acquisitions and development opportunities. These escrow deposits are invested in interest-bearing accounts at federally-insured banks. Realized and unrealized gains and losses are not material for the periods presented.
i
Consolidated
VIEs
The Company has investments in various entities that qualify as VIEs for accounting purposes and for which the Company is the primary beneficiary and therefore includes the entities in its consolidated financial statements. These VIEs include the Operating Partnership, isix joint ventures that own a total of i15
operating properties, itwo properties subject to presale arrangements, and isix
properties owned under the on-campus participating property structure. The VIE assets and liabilities consolidated within the Company's assets and liabilities are disclosed at the bottom of the Consolidated Balance Sheets.
Earnings per Share – Company
Basic earnings per share is computed using net income attributable to common stockholders and the weighted average number of shares of the Company’s common stock outstanding during the period. Diluted earnings per share reflects common shares issuable from the assumed conversion of American Campus Communities Operating Partnership Units (“OP Units”) and common share awards granted. Only those items having a dilutive impact on basic earnings per share are included in diluted earnings per share.
i
The
following potentially dilutive securities were outstanding for the three and six months ended June 30, 2019 and 2018, but were not included in the computation of diluted earnings per share because the effects of their inclusion would be anti-dilutive.
AMERICAN CAMPUS COMMUNITIES OPERATING PARTNERSHIP LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
i
Earnings per Unit – Operating Partnership
Basic earnings per OP Unit is computed using net income attributable
to common unitholders and the weighted average number of common units outstanding during the period. Diluted earnings per OP Unit reflects the potential dilution that could occur if securities or other contracts to issue OP Units were exercised or converted into OP Units or resulted in the issuance of OP Units and then shared in the earnings of the Operating Partnership.
i
The following is a summary of the elements used in calculating
basic and diluted earnings per unit:
Net
loss (income) attributable to noncontrolling interests – partially owned properties
i230
i366
(i1,338
)
i252
Series
A preferred unit distributions
(i9
)
(i31
)
(i40
)
(i62
)
Amount
allocated to participating securities
(i458
)
(i377
)
(i1,031
)
(i883
)
Net
income attributable to common unitholders
$
i9,973
$
i45,948
$
i39,169
$
i71,547
Denominator:
Basic
weighted average common units outstanding
i137,863,484
i137,615,938
i137,780,364
i137,547,575
Unvested
restricted stock awards (Note 9)
i974,692
i899,111
i1,012,558
i936,552
Diluted
weighted average common units outstanding
i138,838,176
i138,515,049
i138,792,922
i138,484,127
Earnings per unit:
Net
income attributable to common unitholders - basic and diluted
$
i0.07
$
i0.33
$
i0.28
$
i0.52
/
3. iAcquisitions
Presale Development Projects: During the six months ended June 30, 2018, the Company entered into itwo presale agreements to purchase itwo
properties under development that when completed will contain i783 beds. The Company is obligated to purchase the properties for approximately $i107.3
million, which includes the contractual purchase price and the cost of elected upgrades, as long as the developer meets certain construction completion deadlines and other closing conditions. As part of the presale agreement, the Company provided $i15.6 million of mezzanine financing to one of the projects.
4. iProperty
Dispositions
Property Dispositions:
In May 2019, the Company sold College Club Townhomes, an owned property located near Florida A&M University in Tallahassee, Florida, containing i544 beds
for $i9.5 million, resulting in net proceeds of approximately $i8.9
million. The net loss on this disposition totaled approximately $i0.3 million. Concurrent with the classification of this property as held for sale in March 2019, the Company reduced the property’s carrying amount to its estimated fair value less estimated selling costs and recorded an impairment charge of $i3.2
million.
AMERICAN CAMPUS COMMUNITIES OPERATING PARTNERSHIP LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
In May 2018, the Company sold a portfolio of ithree
owned properties containing i1,338 beds for approximately $i245.0
million, resulting in net proceeds of approximately $i242.3 million. The combined net gain on the portfolio disposition totaled approximately $i42.3
million.
Joint Venture Activity:
In May 2018, the Company executed an agreement to enter into a joint venture arrangement with Allianz Real Estate (the “ACC / Allianz Joint Venture Transaction”). The transaction included the sale of a partial ownership interest in a portfolio of iseven
owned properties, containing i4,611 beds, through a joint venture arrangement. The joint venture transaction involved the joint venture partner making a cash contribution of approximately $i373.1
million in exchange for a i45% ownership interest. As part of the transaction, the joint venture issued $i330
million of secured mortgage debt.
The joint venture was determined to be a VIE. As the Company retained control of the properties after the joint venture transaction, it was deemed the primary beneficiary. As such, the Company’s contribution of the properties to the joint venture was recorded at net book value, and the joint venture is included in the Company’s consolidated financial statements contained herein. The joint venture partner’s ownership interest in the joint venture is accounted for as noncontrolling interest.
5. iInvestments
in Owned Properties
i
Owned properties, both wholly-owned and those owned through investments in VIEs, consisted of the following:
The
land balance above includes undeveloped land parcels with book values of approximately $i54.4 million and $i54.5 million
as of June 30, 2019 and December 31, 2018, respectively. It also includes land totaling approximately $i10.3 million as of both June 30, 2019 and December 31,
2018 related to properties under development.
Debt
secured by on-campus participating properties:
Mortgage loans payable (2)
i66,924
i67,867
Bonds
payable (2)
i27,030
i27,030
Unamortized
deferred financing costs
(i472
)
(i525
)
i93,482
i94,372
Total
secured mortgage, construction and bond debt
i872,922
i853,084
Unsecured
notes, net of unamortized OID and deferred financing costs (3)
i1,983,895
i1,588,446
Unsecured
term loans, net of unamortized deferred financing costs (4)
i198,945
i198,769
Unsecured
revolving credit facility
i185,600
i387,300
Total
debt, net
$
i3,241,362
$
i3,027,599
(1)
Construction
loans payable relate to construction loans partially financing the development of itwo presale development projects. These properties are owned by entities determined to be VIEs for which the Company is the primary beneficiary. The creditors of these construction loans do not have recourse to the assets of the Company.
(2)
The
creditors of mortgage loans payable and bonds payable related to on-campus participating properties do not have recourse to the assets of the Company.
(3)
Includes net unamortized original issue discount (“OID”) of $i2.6 million
and $i1.6 million at June 30, 2019 and December 31, 2018, respectively, and net unamortized deferred financing costs of $i13.5
million and $i10.0 million at June 30, 2019 and December 31, 2018, respectively.
/
(4)
Includes
net unamortized deferred financing costs of $i1.1 million and $i1.2
million at June 30, 2019 and December 31, 2018, respectively.
Mortgage and Construction Loans Payable
In January 2019, the Company refinanced $i70.0
million of variable rate debt on one wholly-owned property, extending the maturity to January 2024. The Company entered into an interest rate swap contract to hedge the variable rate cash flows associated with interest payments on this LIBOR-based mortgage loan, resulting in a fixed rate of i4.00%. Refer to Note 10 for information related to derivatives.
In May 2017, the
lender of the non-recourse mortgage loan secured by Blanton Common, a property located near Valdosta State University which was included as part of the GMH student housing transaction in 2008, sent a formal notice of default and initiated foreclosure proceedings. The property generated insufficient cash flow to cover the debt service on the mortgage, which had a balance of $i27.4 million at default and a contractual maturity date of August 2017. In May 2017, the lender began receiving the net operating cash flows of the property
each month in lieu of scheduled monthly mortgage payments. In June 2017, the Company recorded an impairment charge for this property of $i15.3 million. In August 2017, the property transferred to receivership and a third-party manager began managing the property on behalf of the lender. In July 2019, the Company transferred the property to the lender in settlement of the property's $i27.4
million mortgage loan.
During the six months ended June 30, 2018, the Company paid off approximately $i55.9 million of fixed rate mortgage debt secured by ithree owned
properties. Additionally, during the six months ended June 30, 2018, the Company paid $i2.7 million in debt defeasance costs associated with the early pay-off of mortgage loans in connection with the sale of ione owned
property and ione owned property included in the ACC / Allianz Joint Venture Transaction (see Note 4). These costs were partially offset by the net
AMERICAN CAMPUS COMMUNITIES OPERATING PARTNERSHIP LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
write-off of $i1.9 million of
premiums and deferred financing costs, resulting in a loss from early extinguishment of debt of $i0.8 million.
Unsecured Notes
In June 2019, the Operating Partnership closed a $i400
million offering of senior unsecured notes under its existing shelf registration. These i7-year notes were issued at i99.704
percent of par value with a coupon of i3.300 percent and a yield of i3.347
percent, and are fully and unconditionally guaranteed by the Company. Net proceeds from the notes totaled approximately $i394.0 million, after deducting the underwriting discount and offering expenses which will be amortized over the term of the unsecured notes. The net proceeds were used to repay borrowings under the Company’s revolving credit facility.
The Company has issued the following senior unsecured notes:
Date Issued
Amount
%
of Par Value
Coupon
Yield
Original Issue Discount
Term (Years)
April 2013
$
i400,000
i99.659
i3.750
%
i3.791
%
$
i1,364
i10
June
2014
i400,000
i99.861
i4.125
%
i4.269
%
(1)
i556
i10
September
2015
i400,000
i99.811
i3.350
%
i3.391
%
i756
i5
October
2017
i400,000
i99.912
i3.625
%
i3.635
%
i352
i10
June
2019
i400,000
i99.704
i3.300
%
i3.680
%
(1)
i1,184
i7
$
i2,000,000
$
i4,212
(1)
The
yield includes the effect of the amortization of interest rate swap terminations (see Note 10).
The notes are fully and unconditionally guaranteed by the Company. Interest on the notes is payable semi-annually. The terms of the unsecured notes include certain financial covenants that require the Operating Partnership to limit the amount of total debt and secured debt as a percentage of total asset value, as defined. In addition, the Operating Partnership must maintain a minimum ratio of unencumbered asset value to unsecured debt, as well as a minimum interest coverage level. As of June 30, 2019, the Company was in compliance with all such covenants.
Unsecured
Revolving Credit Facility
In February 2019, the Company exercised the option under the existing credit agreement to increase the capacity of the unsecured revolving credit facility from $i700 million to $i1
billion. It may be expanded by up to an additional $i200 million upon the satisfaction of certain conditions. The maturity date of the revolving credit facility is March 2022.
The
unsecured revolving credit facility bears interest at a variable rate, at the Company’s option, based upon a base rate of one-, two-, three- or six-month LIBOR, plus, in each case, a spread based upon the Company’s investment grade rating from either Moody’s Investor Services, Inc. or Standard & Poor’s Rating Group. Additionally, the Company is required to pay a facility fee of i0.20%
per annum on the $i1 billion revolving credit facility. As of June 30, 2019, the revolving credit facility bore interest at a weighted average annual rate of i3.60%
(i2.40% + i1.00%
spread + i0.20% facility fee), and availability under the revolving credit facility totaled $i814.4
million.
The terms of the unsecured credit facility include certain restrictions and covenants, which limit, among other items, the incurrence of additional indebtedness and liens. The facility contains customary affirmative and negative covenants and also contains financial covenants that, among other things, require the Company to maintain certain maximum leverage ratios and minimum ratios of “EBITDA” (earnings before interest, taxes, depreciation and amortization) to fixed charges. The financial covenants also include a minimum asset value requirement, a maximum secured debt ratio, and a minimum unsecured debt service coverage ratio. As of June 30, 2019, the Company was in compliance with all such covenants.
Unsecured
Term Loans
In May 2018, the Company repaid the $i300 million unsecured term loan (“Term Loan III Facility”) and the $i150
million unsecured term loan (“Term Loan I Facility”) which were due to mature in September 2018 and March 2021, respectively, using the proceeds from the sale of a partial interest in a portfolio of iseven
owned properties and the portfolio sale of ithree owned properties (see Note
AMERICAN
CAMPUS COMMUNITIES OPERATING PARTNERSHIP LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
4). In connection with the pay-off of the Term Loan III Facility and Term Loan I Facility, the Company accelerated the amortization of $i0.9
million of deferred financing costs.
The Company is currently party to an Unsecured Term Loan Credit Agreement (the “Term Loan II Facility”) totaling $i200 million which matures in June
2022. The agreement has an accordion feature that allows the Company to expand the amount by up to an additional $i100 million, subject to the satisfaction of certain conditions. The weighted average annual rate on the Term Loan II Facility was i3.51%
(i2.41% + i1.10%
spread) at June 30, 2019.
The terms of the term loan facility described above include certain restrictions and covenants consistent with those of the unsecured revolving credit facility discussed above. As of June 30, 2019, the Company was in compliance with all such covenants.
7. iStockholders’
Equity / Partners’ Capital
Stockholders’ Equity - Company
In May 2018, the Company renewed its at-the-market share offering program (the “ATM Equity Program”) through which the Company may issue and sell, from time to time, shares of common stock having an aggregate offering price of up to $i500
million. The shares that may be sold under this program include shares of common stock of the Company with an aggregate offering price of approximately $i233.0 million that were not sold under the Company's previous ATM equity program that expired in May 2018. Actual sales under the program will depend on a variety of factors including, but
not limited to, market conditions, the trading price of the Company’s common stock and determinations of the appropriate sources of funding for the Company.
There was no activity under the Company’s ATM Equity Program during the six months ended June 30, 2019 and 2018. As of June 30, 2019, the Company had approximately $i500.0
million available for issuance under its ATM Equity Program.
In 2015, the Company established a Non-Qualified Deferred Compensation Plan (“Deferred Compensation Plan”) maintained for the benefit of certain employees and members of the Company’s Board of Directors, in which vested share awards (see Note 9), salary and other cash amounts earned may be deposited. Deferred Compensation Plan assets are held in a rabbi trust, which is subject to the claims of the Company’s creditors in the event of bankruptcy or insolvency. The shares held in the Deferred Compensation Plan are classified within stockholders’ equity in a manner similar to the manner in which treasury stock is classified. Subsequent changes in the fair value of the shares are not recognized. During the six months
ended June 30, 2019, i13,277 and i7,345
shares of vested stock were deposited into and withdrawn from the Deferred Compensation Plan, respectively. As of June 30, 2019, i75,535 shares of ACC’s common stock were held in the Deferred Compensation Plan.
AMERICAN CAMPUS COMMUNITIES OPERATING PARTNERSHIP LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
8. iNoncontrolling Interests
Interests
in Consolidated Real Estate Joint Ventures and Presale Arrangements
Noncontrolling interests - partially owned properties: As of June 30, 2019, the Operating Partnership consolidates ifour
joint ventures that own and operate iten owned off-campus properties. Additionally, the Company has entered into itwo
presale agreements to purchase itwo in-process development properties. The portion of net assets attributable to the third-party partners in these arrangements is classified as “noncontrolling interests - partially owned properties” within equity and capital on the accompanying consolidated balance sheets of ACC and the Operating Partnership, respectively.
Redeemable
noncontrolling interests (ACC) / redeemable limited partners (Operating Partnership): In the third quarter of 2017, the Company entered into itwo joint ventures (the “Core Joint Ventures”). The Company is consolidating these joint ventures and the noncontrolling interest holder in each of these consolidated joint ventures has the option to redeem its noncontrolling interest in the
entities through the exercise of put options. The options will be exercisable in the third and fourth quarter of 2019, and the redemption price is based on the fair value of the properties at the time of option exercise. As the exercise of the options is outside of the Company’s control, the portion of net assets attributable to the third-party partner in each of the Core Joint Ventures is classified as “redeemable noncontrolling interests” and “redeemable limited partners” in the mezzanine section of the accompanying consolidated balance sheets of ACC and the Operating Partnership, respectively. The redeemable noncontrolling interests related to the joint venture partners in the Core Transaction are marked to their redemption value at each balance sheet date. The redemption value is based on the fair value of the underlying properties held by the joint ventures. This analysis incorporates information obtained from a number of sources, including the
Company’s analysis of comparable properties in the Company’s portfolio, estimations of net operating results of the properties, capitalization rates, discount rates, and other market data. During the six months ended June 30, 2019, there were no changes in the redemption value of redeemable noncontrolling interest that resulted from a change in the fair value of the net assets held by the Core Joint Ventures.
The third-party partners’ share of the income or loss of the joint ventures described above is calculated based on the partners’ economic interest in the joint ventures, is included in “net income attributable to noncontrolling interests” on the consolidated statements of comprehensive income of ACC, and is reported as “net income attributable to noncontrolling interests
- partially owned properties” on the consolidated statements of comprehensive income of the Operating Partnership.
Operating Partnership Ownership
Also included in redeemable noncontrolling interests (ACC) / redeemable limited partners (Operating Partnership) are OP Units for which the Operating Partnership is required, either by contract or securities law, to deliver registered common shares of ACC to the exchanging OP unit holder, or for which the Operating Partnership has the intent or history of exchanging such units for cash. The units classified as such include Series A Preferred Units (“Preferred OP Units”) as well as Common OP Units. The value of OP Units is reported at the greater of fair value, which is based on the closing market value of the Company’s common
stock at period end, or historical cost at the end of each reporting period. The OP Unitholders’ share of the income or loss of the Company is included in “net income attributable to noncontrolling interests” on the consolidated statements of comprehensive income of ACC.
As of June 30, 2019 and December 31, 2018, approximately i0.5%
of the equity interests of the Operating Partnership were held by owners of Common OP Units and Preferred OP Units not held by ACC or ACC Holdings. During the six months ended June 30, 2019, i42,271 Preferred OP Units were converted into an equal number of shares of ACC’s common stock. During the year ended December 31,
2018, i412,343 Common OP Units were converted into an equal number of shares of ACC’s common stock.
AMERICAN CAMPUS COMMUNITIES OPERATING PARTNERSHIP LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
i
Below is a table summarizing the activity of redeemable noncontrolling interests (ACC) / redeemable limited partners (Operating Partnership) for the three months ended March 31,2019 and 2018 and June 30, 2019 and 2018, which includes both the redeemable joint venture partners and OP Units discussed above:
In May 2018, the Company’s stockholders approved the American Campus Communities, Inc. 2018 Incentive Award Plan (the “2018 Plan”). The 2018 Plan replaced the Company’s 2010 Incentive Award Plan (the “2010 Plan”). The 2018 Plan provides for the grant of various stock-based incentive awards to selected employees and directors of the Company and the Company’s affiliates. The types of awards that may be granted under the 2018 Plan include incentive stock options, nonqualified stock options, restricted stock awards (“RSAs”), restricted stock units (“RSUs”), profits interest units (“PIUs”) and other stock-based awards. The Company has reserved a total i3.5
million shares of the Company’s common stock for issuance pursuant to the 2018 Plan, subject to certain adjustments for changes in the Company’s capital structure, as defined in the 2018 Plan. Upon approval of the 2018 Plan, all remaining authorized shares that were not granted under the 2010 Plan were forfeited and are no longer available for issuance as new awards.
Restricted Stock Units (“RSUs”)
Upon reelection to the Board of Directors in May 2019, all members of the Company’s Board of Directors were granted RSUs in accordance with the 2018 Plan. These RSUs were valued at $i162,500
for the Chairman of the Board of Directors and at $i117,500 for all other members. The number of RSUs was determined based on the fair market value of the Company’s stock on the date of grant, as defined in the 2018 Plan. All awards vested and settled immediately on the date of grant, and the Company delivered shares of common stock, as determined by the Compensation Committee of the Board
of Directors. A compensation charge of approximately $i0.8 million was recorded during the six months ended June 30, 2019 related to these awards.
(1) Includes
shares withheld to satisfy tax obligations upon vesting.
The fair value of RSAs is calculated based on the closing market value of ACC’s common stock on the date of grant. The fair value of these awards is amortized to expense over the vesting periods. Amortization expense for the three months ended June 30, 2019 and 2018 amounted to approximately $i2.9
million and $i2.8 million, respectively, and $i6.7
million and $i6.1 million for the six months ended June 30, 2019 and 2018, respectively.
10. iDerivative
Instruments and Hedging Activities
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount,
timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s investments and borrowings.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps and forward starting swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Forward starting
swaps are used to protect the Company against adverse fluctuations in interest rates by reducing its exposure to variability in cash flows relating to interest payments on a forecasted issuance of debt. As disclosed in Note 2, the adoption of ASU 2017-12 did not have a material effect on the Company’s consolidated financial statements. The change in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in other comprehensive income (“OCI”) (outside of earnings) and subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings within the same income statement line item as the earnings effect of the hedged transaction.
AMERICAN CAMPUS COMMUNITIES OPERATING PARTNERSHIP LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
i
The following table summarizes the Company’s outstanding interest rate swap contracts which are included in other liabilities on the accompanying consolidated balance sheets as of June 30,
2019:
Hedged Debt Instrument
Effective Date
Maturity Date
Pay
Fixed Rate
Receive Floating
Rate Index
Current Notional Amount
Fair Value
Cullen Oaks mortgage loan
iFeb
18, 2014
iFeb 15, 2021
i2.2750%
iLIBOR
- 1 month
$
i12,878
$
(i114
)
Cullen
Oaks mortgage loan
iFeb 18, 2014
iFeb
15, 2021
i2.2750%
iLIBOR
- 1 month
i13,010
(i115
)
Park
Point mortgage loan
iFeb 1, 2019
iJan
16, 2024
i2.7475%
iLIBOR
- 1 month
i70,000
(i3,448
)
Total
$
i95,888
$
(i3,677
)
/
In
December 2018, the Company entered into ithree forward starting interest rate swap contracts with notional amounts totaling $i200
million designated to hedge the Company's exposure to increasing interest rates related to interest payments on an anticipated issuance of unsecured notes. In connection with the issuance of unsecured notes in June 2019, as discussed in Note 6, the Company terminated the swap contracts resulting in payments to counterparties totaling approximately $i13.2 million, which
were recorded in accumulated other comprehensive loss and will be amortized to interest expense over the term of the swap contracts based on the June 2019 issuance and expected additional issuances. Amortization of the loss for these ithree swaps totaled approximately $i0.1
million for both the three and six months ended June 30, 2019.
i
The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the consolidated balance sheets as of June 30,
2019 and December 31, 2018:
Asset Derivatives
Liability
Derivatives
Fair Value as of
Fair Value as of
Description
Balance Sheet Location
6/30/2019
12/31/2018
Balance
Sheet Location
6/30/2019
12/31/2018
Interest
rate swap contracts
Other assets
$
i—
$
i101
Other
liabilities
$
i3,677
$
i—
Forward
starting swap contracts
Other assets
i—
i—
Other
liabilities
i—
i2,287
Total
derivatives designated as hedging instruments
$
i—
$
i101
$
i3,677
$
i2,287
/
i
The
table below presents the effect of the Company’s derivative financial instruments on the accompanying consolidated statements of comprehensive income for the three and six months ended June 30, 2019 and 2018.
Three
Months Ended June 30,
Six Months Ended June 30,
Description
2019
2018
2019
2018
Change in fair value of derivatives recognized in OCI
$
i4,400
$
i78
$
(i1,496
)
$
i441
Termination
of interest rate swap payment recognized in OCI
$
(i13,159
)
$
i—
$
(i13,159
)
$
i—
Amortization
of interest rate swap terminations (1)
$
i166
$
i102
$
i268
$
i204
Interest
expense presented in the Consolidated Statements of Operations in which the effects of cash flow hedges are recorded
$
i27,068
$
i23,338
$
i54,129
$
i47,022
(1)
Represents
amortization from OCI into interest expense.
/
Credit-risk-related Contingent Features
The Company has agreements with some of its derivative counterparties that contain a provision such that if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations. Similarly, the Company has agreements with some of its derivative counterparties that contain a provision such that the Company could be declared in default on its derivative obligations
if repayment of the underlying indebtedness is accelerated by the lender due to the Company's default on the indebtedness.
AMERICAN CAMPUS COMMUNITIES OPERATING PARTNERSHIP LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
11. iFair
Value Disclosures
There have been no significant changes in the Company’s policies and valuation techniques utilized to determine fair value from what was disclosed in the Annual Report on Form 10-K for the year ended December 31, 2018.
Financial Instruments Carried at Fair Value
i
The
following table presents information about the Company’s financial instruments measured at fair value on a recurring basis as of June 30, 2019 and December 31, 2018, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value. There were no Level 1 measurements for the periods presented, and the Company had no transfers between Levels 1, 2 or 3 during the periods presented.
Valued
using discounted cash flow analyses with observable market-based inputs of interest rate curves and option volatility, as well as credit valuation adjustments to reflect nonperformance risk.
(2)
Represents the OP Unit component of redeemable noncontrolling interests which is based on the fair value of the Company’s common stock at the balance sheet date. Represents a quoted price for a similar asset in an active market. Refer to Note 8.
/
(3)
Represents
the Core Joint Ventures component of redeemable noncontrolling interests which is valued using primarily unobservable inputs, including the Company’s analysis of comparable properties in the Company’s portfolio, estimations of net operating results of the properties, capitalization rates, discount rates, and other market data. Refer to Note 8.
Financial Instruments Not Carried at Fair Value
As of June 30, 2019 and December 31, 2018, the carrying values for the following instruments represent fair values due to the short maturity of the instruments:
Cash and Cash Equivalents, Restricted Cash, Student Contracts Receivable, certain items in Other Assets (including receivables, deposits, and prepaid expenses), Accounts Payable, Accrued Expenses, and Other Liabilities.
As of June 30, 2019 and December 31, 2018, the carrying values for the following instruments represent fair values due the variable interest rate feature of the instruments: Construction Loans Payable, Unsecured Revolving Credit Facility, Mortgage Loans Payable (variable rate), and Unsecured Term Loans.
AMERICAN CAMPUS COMMUNITIES OPERATING PARTNERSHIP LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
i
The table below contains the estimated fair value and related carrying amounts for the Company’s other financial instruments as of June 30,
2019 and December 31, 2018. There were no Level 1 measurements for the periods presented.
Valued
using a discounted cash flow analysis with inputs of scheduled cash flows and discount rates that a willing buyer and seller might use.
(2)
Carrying amounts disclosed include any applicable net unamortized OID, net unamortized deferred financing costs, and net unamortized debt premiums and discounts (see Note 6).
(3)
Valued using interest rate and spread assumptions that reflect current creditworthiness and market conditions
available for the issuance of unsecured notes with similar terms and remaining maturities.
(4)
Does not include ione variable rate mortgage
loan with a principal balance of $i41.0 million as of June 30, 2019.
(5)
Valued
using the present value of the cash flows at current market interest rates through maturity that primarily fall within the Level 2 category.
(6)
Does not include itwo
variable rate mortgage loans with a combined principal balance of $i111.4 million as of December 31, 2018.
/
(7)
Valued
using quoted prices in markets that are not active due to the unique characteristics of these financial instruments.
12. iiLeases/
Refer to Note 2 for information on the impact of the adoption of the New Leases Standard.
As Lessee
The Company, as lessee, has entered into i50
ground/facility and office space lease agreements, which qualify as operating leases under the New Leases Standard. These leases include leases entered into under the ACE program with university systems and Walt Disney World® Resort, leases with local and regional land owners for owned off-campus properties, leases for corporate office space, and leases under the on-campus participating properties (“OCPPs”) structure. Under such leases, the lessors receive annual minimum (base) rent, variable rent based upon the operating performance of the property, or a combination thereof. The leases have original terms (excluding extension options) ranging from iseven
years to i102 years. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The Company records base rent expense under the straight-line method over the term of the lease, and variable rent expense is recorded when the achievement of the target is considered probable. Straight-line rent is capitalized during the construction period and expensed upon the commencement of operations. In
the accompanying consolidated statements of comprehensive income, rent expense for ACE properties and OCPPs is included in ground/facility lease expense, and rent expense for owned off-campus properties is included in owned properties operating expenses. Total straight-line rent expense, variable rent expense, and capitalized rent costs for the three months ended June 30, 2019 was $i2.4 million, $i1.3
million, and $i2.6 million, respectively, and $i4.9 million, $i3.9
million, and $i5.1 million for the six months ended June 30, 2019, respectively.
As of June 30, 2019, ROU Assets, which are included in other assets on the accompanying consolidated balance sheet, were approximately $i279.3
million. For purposes of calculating the ROU Asset and lease liability for such leases, extension options are not included in the lease term unless it is reasonably certain that the Company will exercise the option, or the lessor has the sole ability to exercise the option. As most of the Company’s leases do not contain an implicit rate, the Company uses its incremental borrowing rate to determine the present value of the lease payments. This involves determining a secured interest rate for each lease based on the term of the respective lease. The weighted average incremental borrowing rate was i6.04%
as of June 30, 2019. The weighted average remaining lease term of leases with a lease liability as of June 30, 2019 is i58.1 years (excluding extension options).
AMERICAN CAMPUS COMMUNITIES OPERATING PARTNERSHIP LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
ii
There
were no finance lease obligations outstanding as of June 30, 2019. Future minimum commitments over the life of all operating leases, which exclude variable rent payments, are as follows:
The Company’s primary business involves leasing properties to students under agreements that are classified as operating leases, and which have terms of 12 months or less. These student leases do not provide for variable rent payments. The Company is also a lessor under
commercial leases at certain owned properties, some of which provide for variable lease payments based upon tenant performance such as a percentage of sales. The Company recognizes the base lease payments provided for under the leases on a straight-line basis over the lease term, and variable payments are recognized in the period in which the changes in facts and circumstances on which the variable payments are based occur. Lease income under both student and commercial leases is included in owned property revenues in the accompanying consolidated statements of comprehensive income. Lease income under student leases totaled $i194.3
million and $i179.4 million for the three months ended June 30, 2019 and 2018, respectively; and $i416.0
million and $i381.1 million for the six months endedJune 30, 2019 and 2018, respectively. Lease income under commercial leases totaled $i3.2
million for both the three months ended June 30, 2019 and 2018, respectively; and $i6.6 million and $i6.5
million for the six months endedJune 30, 2019 and 2018, respectively.
13. iCommitments
and Contingencies
Commitments
Construction Contracts: As of June 30, 2019, excluding itwo properties under construction and subject to presale arrangements
which are being funded by construction loans, the Company estimates additional costs to complete isix owned development projects under construction to be approximately $i346.0
million.
Joint Ventures: As part of the Core Transaction, the Company entered into itwo joint ventures during
the third quarter of 2017. As part of this transaction, the Company is obligated to increase its investment in the joint ventures over a two year period. As of June 30, 2019, the remaining funding commitment was approximately $i154.0 million.
Presale
Development Projects: The Company has entered into itwo presale agreements to purchase properties which will be completed in Fall 2019. Total estimated development costs of approximately $i107.3
million include the purchase price and elected upgrades, of which $i85.4 million remains to be funded as of June 30, 2019. The Company is obligated to purchase the properties as long as the developer meets certain construction completion deadlines and other closing conditions. As
a part of the presale agreements, the Company has the option to elect not to purchase the asset, which would result in the Company paying a significant penalty. The Company is responsible for leasing, management, and initial operations of the project while the third-party developer retains development risk during the construction period. See Note 8 for further discussion.
The Company expects to fund the commitments mentioned above through a combination of proceeds from cash flows generated from operations, anticipated property dispositions, joint venture activity, and a combination of debt and equity transactions, which may include net proceeds from the ATM Equity Program discussed in Note 7, borrowings under the Company’s existing unsecured credit facilities, and accessing the unsecured
bond market.
AMERICAN CAMPUS COMMUNITIES OPERATING PARTNERSHIP LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Contingencies
Development-related Guarantees: For certain of its third-party development projects, 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 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. These guarantees typically expire at the later of ifive days after completion
of the project or once the Company has moved all students from the substitute living quarters into the project.
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 in certain cases secured with payment and performance bonds. Project cost guarantees expire upon completion of certain developer obligations, which are normally satisfied within ione
year after completion of the project. The Company’s estimated maximum exposure amount under the above guarantees is approximately $i15.8 million as of June 30, 2019. As of June 30, 2019, management
did not anticipate any material deviations from schedule or budget related to third-party development projects currently in progress.
For one of its third-party development projects that is currently under construction, the Company’s obligation to pay alternate housing costs and excess project costs are unlimited in amount. However, if the Company’s payment obligation arises from force majeure or is caused by the owner, the owner agrees to reimburse the Company from future cash flow of the project, with such reimbursement being subordinate to any financing on the property but paid prior to the University receiving any cash flow from the property. If the Company’s obligation is a result of the general contractor and/or design professionals’ negligence, the owner agrees to assign its right to recover from such party to the Company. Additionally, for this project, the Company’s
exposure to such costs resulting from owner-caused delays, as defined, is limited to $i1.0 million. As of June 30, 2019, management did not anticipate any material deviations from schedule or budget related to this project.
In
the normal course of business, the Company enters into various development-related purchase commitments with parties that provide development-related goods and services. In the event that the Company was to terminate development services prior to the completion of projects under construction, the Company could potentially be committed to satisfy outstanding purchase orders with such parties.
As a part of the development agreement with Walt Disney World® Resort, the Company has guaranteed the completion of construction of a $i614.6
million project to be delivered in phases from 2020 to 2023. In addition, the Company is subject to a development guarantee in the event that the substantial completion of a project phase is delayed beyond its respective targeted delivery date, except in circumstances resulting in unavoidable delays. The agreement dictates that the Company shall pay damages of $i20
per bed for each day of delay for any Disney College Internship Program participant who was either scheduled to live in the delayed phase as well as any participant who was not able to participate in the program due to the lack of available housing and would have otherwise been housed in the delayed phase. Under the agreement, the maximum exposure related to the Disney project assuming all beds are not delivered on their respective delivery date is approximately $i0.2
million per day.
Conveyance to University: In August 2013, the Company entered into an agreement to convey fee interest in a parcel of land, on which one of the Company’s student housing properties resides (University Crossings), to Drexel University (the “University”). Concurrent with the land conveyance, the Company as lessee entered into a ground lease agreement with the University as lessor for an initial term of i40 years, with ithreei10-year extensions, at the Company’s option. The Company also agreed to convey the building and improvements to the University at an undetermined date in the future and to pay real estate transfer taxes not to exceed $i2.4
million. The Company paid approximately $i0.6 million in real estate transfer taxes upon the conveyance of land to the University, leaving approximately $i1.8
million to be paid by the Company upon the transfer of the building and improvements.
Pre-development expenditures: The Company incurs pre-development expenditures such as architectural fees, permits, and deposits associated with the pursuit of third-party and owned development projects. The Company bears the risk of loss of these pre-development expenditures if financing cannot be arranged or the Company is unable to obtain the required permits and authorizations for the project. As such, management periodically evaluates the status of third-party and owned projects that have not yet commenced construction 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. As
of June 30, 2019, the Company has deferred approximately $i8.2 million in pre-development costs related to third-party and owned development
AMERICAN
CAMPUS COMMUNITIES OPERATING PARTNERSHIP LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
projects that have not yet commenced construction. Such costs are included in other assets on the accompanying consolidated balance sheets.
Other Guarantees: As part of the purchase of an undeveloped land parcel, the Company entered into an agreement to construct a commercial retail space within a project under development that will be conveyed back to the seller upon construction completion. If the construction of the retail space is not completed in accordance with the agreement, the Company is required to pay liquidated damages of $i2.1
million. As of June 30, 2019, the Company has delivered the retail space and was in the process of executing the acknowledgment of performance with the seller. In July 2019, the Company received the acknowledgment of performance from the seller indicating that the Company’s obligation has been fulfilled.
In June 2019, the Company entered into a purchase and sale agreement to buy a land parcel initially scheduled to close on or before June 30, 2021, with potential extensions at the Company’s option to June 1, 2022 or June 1, 2023. In connection with the execution of the agreement, the Company made an earnest
money deposit of $i2.1 million which is included in restricted cash on the accompanying consolidated balance sheet. As a part of the agreement, within i60
days of certain conditions not being met, the seller of the property can either terminate the agreement or exercise an option to require the Company to purchase the undeveloped land, with the Company retaining all rights to fully own, develop, and utilize the land. If the option is exercised, the Company must pay the agreed upon purchase price of $i28.7 million and a commission calculated as a percentage of
the sales price, and also reimburse the seller for demolition costs.
Litigation: The Company is subject to various claims, lawsuits and legal proceedings, as well as other matters that have not been fully resolved and that have arisen in the ordinary course of business. 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. However, the outcome of claims, lawsuits and legal proceedings brought against the Company is subject to significant uncertainty. Therefore, although management considers the likelihood of such an outcome to be remote, the ultimate results of these matters cannot be
predicted with certainty.
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 (except with regard to exclusivity and confidentiality), 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 acquirer will have the ability to terminate the contracts without penalty or forfeiture
of any material 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. Once the due diligence period expires, the Company is then at risk under a real property acquisition contract, but only to the extent of any non-refundable earnest money deposits associated with the contract and subject to normal closing conditions being met.
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.
AMERICAN CAMPUS COMMUNITIES OPERATING PARTNERSHIP LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
14. iSegments
The Company defines business segments by their distinct customer base and service provided. The Company has identified ifour reportable segments: 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 and minority interests.
Unallocated
interest income earned on investments and corporate cash
i780
i819
i1,546
i1,640
Total
consolidated revenues, including interest income
$
i218,340
$
i202,302
$
i461,397
$
i423,934
Segment
operating income before depreciation and amortization
$
i109,917
$
i102,311
$
i242,281
$
i221,715
Depreciation
and amortization
(i70,033
)
(i65,751
)
(i139,920
)
(i131,944
)
Net
unallocated expenses relating to corporate interest and overhead
(i29,078
)
(i32,663
)
(i56,622
)
(i59,343
)
(Loss)
gain from disposition of real estate
(i282
)
i42,314
(i282
)
i42,314
Other
operating income
i—
i2,648
i—
i2,648
Loss
from early extinguishment of debt
i—
(i784
)
i—
(i784
)
Provision
for real estate impairment
i—
i—
(i3,201
)
i—
Income
tax provision
(i314
)
(i2,085
)
(i678
)
(i2,366
)
Net
income
$
i10,210
$
i45,990
$
i41,578
$
i72,240
(1)
Net
of capitalized interest and amortization of debt premiums.
15. iSubsequent Events
Distributions: On July 31, 2019,
the Board of Directors of the Company declared a distribution per share of $i0.47, which will be paid on August 23, 2019 to all common stockholders of record as of August 12, 2019. At
the same time, the Operating Partnership will pay an equivalent amount per unit to holders of Common OP Units, as well as the quarterly cumulative preferential distribution to holders of Preferred OP Units (see Note 8).
Property Disposition: On July 2, 2019, the Company completed a transfer to the lender of Blanton Common, a property near Valdosta State University, in satisfaction of the property’s $i27.4
million mortgage loan.
Property Acquisition: On August 1, 2019, the Company acquired The Flex at Stadium Centre, a i340-bed off-campus development property subject to a presale agreement for $i36.7
million, including $i8.5 million related to the purchase of the land on which the property is built. As the property was consolidated by the Company from the time of execution of the presale agreement with the developer, the closing of the transaction will be accounted
for as an increase in ownership of a consolidated subsidiary.
34
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-looking Statements
This report contains forward-looking statements within the meaning of the federal securities laws. We caution investors that any forward-looking
statements presented in this report, or which management may make orally or in writing from time to time, are based on management’s beliefs and assumptions made by, and information currently available to, management. When used, the words “anticipate,”“believe,”“expect,”“intend,”“may,”“might,”“plan,”“estimate,”“project,”“should,”“will,”“result” and similar expressions, do not relate solely to historical matters and are intended to identify forward-looking statements. Such statements are subject to risks, uncertainties and assumptions and may be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. We caution you that forward-looking
statements are not guarantees of future performance and will be impacted by actual events when they occur after we make such statements. We expressly disclaim any responsibility to update forward-looking statements, whether as a result of new information, future events or otherwise. Accordingly, investors should use caution in relying on past forward-looking statements, which are based on results and trends at the time they were made, to anticipate future results or trends.
Some of the risks and uncertainties that may cause our actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements include, among others, the following: general risks affecting the real estate industry; risks associated with changes in University admission or housing policies; risks associated with the availability and terms of financing and the
use of debt to fund acquisitions and developments; failure to manage effectively our growth and expansion into new markets or to integrate acquisitions successfully; risks and uncertainties affecting property development and construction; risks associated with downturns in the national and local economies, volatility in capital and credit markets, increases in interest rates, and volatility in the securities markets; costs of compliance with the Americans with Disabilities Act and other similar laws; potential liability for uninsured losses and environmental contamination; risks associated with our Company’s potential failure to qualify as a REIT under the Internal Revenue Code of 1986 (the “Code”), as amended, and possible adverse changes in tax and environmental laws; and the other factors discussed in the “Risk Factors” contained in Item 1A of our Form 10-K for the year ended December 31,
2018.
Our Company and Our Business
Overview
American Campus Communities, Inc. (“ACC”) is a real estate investment trust (“REIT”) that commenced operations effective with the completion of an initial public offering (“IPO”) on August 17, 2004. Through ACC’s controlling interest in American Campus Communities Operating Partnership LP (“ACCOP”), ACC is one of the largest owners, managers and developers of high quality student housing properties in the United States in terms of beds owned and under management. ACC
is a fully integrated, self-managed and self-administered equity REIT with expertise in the acquisition, design, financing, development, construction management, leasing and management of student housing properties. ACC’s common stock is publicly traded on the New York Stock Exchange (“NYSE”) under the ticker symbol “ACC.” References to the “Company,”“we,”“us” or “our” mean collectively ACC, ACCOP and those entities/subsidiaries owned or controlled by ACC and/or ACCOP. References to the “Operating Partnership” mean collectively ACCOP and those entities/subsidiaries owned or controlled by ACCOP. Unless otherwise indicated, the accompanying discussion applies to both the Company and the Operating Partnership.
Property Portfolio
As of June 30,
2019, our total owned property portfolio contained 169 properties, consisting of owned off-campus student housing properties that are in close proximity to colleges and universities, American Campus Equity (“ACE®”) properties operated under ground/facility leases with university systems, and on-campus participating properties operated under ground/facility leases with the related university systems. Of the 169 properties, eight were under development as of June 30, 2019. Our communities contain modern housing units and are supported by a resident assistant system and other student-oriented programming, with many offering resort-style amenities.
As
of June 30, 2019, through ACC’s taxable REIT subsidiary (“TRS”) entities, we provided third-party management and leasing services for 34 properties, bringing our total owned and third-party managed portfolio to 203 properties. Third-party management and leasing services are typically provided pursuant to management contracts that have initial terms that range from one to five years.
35
Below is a summary of our property portfolio as of June 30, 2019:
Property
portfolio:
Properties
Beds
Owned operating properties:
Off-campus properties
126
71,312
On-campus
ACE (1) (2)
29
23,250
Subtotal – operating properties
155
94,562
Owned
properties under development:
Off-campus properties
3
1,278
On-campus
ACE (2)
5
7,733
Subtotal – properties under development
8
9,011
Total
owned properties
163
103,573
On-campus participating properties
6
5,230
Total
owned property portfolio
169
108,803
Managed properties
34
24,343
Total
property portfolio
203
133,146
(1)
Includes
two properties at Prairie View A&M University that we ultimately expect to be refinanced under the existing on-campus participating structure.
(2)
Includes 33 properties operated under ground/facility leases with 16 university systems and one property operated under a ground/facility lease with Walt Disney World® Resort.
Leasing Results
Our financial results for the year ended December 31, 2019
are significantly impacted by the results of our annual leasing process for the 2018/2019 and 2019/2020 academic years. As of September 30, 2018, the beginning of the 2018/2019 academic year, occupancy at our 2019 same store properties was 97.0% with a rental rate increase of 2.0% compared to the prior academic year, and occupancy at our total owned property portfolio was also 97.0%.
Development
At June 30, 2019, we were in the process of constructing five on-campus ACE properties and one owned off-campus property. These properties are summarized in
the table below:
Owned Development Projects Under Construction:
Project
Location
Primary
University Served
Project Type
Beds
Estimated Project Cost
Total Costs Incurred
Scheduled Occupancy
191
College
Auburn, AL
Auburn University
Off-campus
495
$
59,300
$
56,062
August
2019
LightView
Boston, MA
Northeastern University
ACE
825
153,400
141,811
August
2019
University of Arizona Honors College
Tucson, AZ
University of Arizona
ACE
1,056
84,700
75,333
August
2019
SUBTOTAL - 2019 DELIVERIES
2,376
$
297,400
$
273,206
Disney
College Program Phases I-II (1)
Orlando, FL
Walt Disney World® Resort
ACE
1,627
$
108,500
$
49,158
May
& Aug 2020
Currie Hall Phase II
Los Angeles, CA
Univ. of Southern California
ACE
272
42,000
9,411
August
2020
Holloway Residences
San Francisco, CA
San Francisco State Univ.
ACE
584
129,200
44,551
August
2020
SUBTOTAL - 2020 DELIVERIES
2,483
$
279,700
$
103,120
Disney
College Program Phases III-V (1)
Orlando, FL
Walt Disney World® Resort
ACE
3,369
$
190,400
$
45,217
Jan,
May & Aug 2021
SUBTOTAL - 2021 DELIVERIES
3,369
$
190,400
$
45,217
(1)
The Disney College Program project will be delivered in multiple phases over several years with initial deliveries expected to occur in 2020. Including project phases that are not yet under construction, full development completion is anticipated for 2023. All phases are counted as one property.
Presale Development Projects:
Under the terms of a presale transaction, the Company is obligated to purchase the property as long as certain construction completion deadlines and other closing conditions are met. The Company is responsible for leasing, management, and initial operations of the project while the third-party developer retains development risk during the construction period. In accordance
with accounting
36
guidance, the Company includes presale properties in its consolidated financial statements upon execution of the presale agreement with the developer.
Presale Development Projects Under Construction:
The Company is currently party to presale agreements to purchase two owned properties. Refer to Note 3 in the accompanying Notes to Consolidated Financial Statements contained in Item 1 for a more detailed discussion of our recent presale development activity. As of June 30, 2019,
our presale development pipeline consisted of the following properties:
As part of the presale agreement, the Company provided $15.6 million of mezzanine financing to the project.
Dispositions
During the three months ended June 30, 2019, the Company sold one owned property for approximately $9.5 million. Refer to Note 4 in the accompanying Notes to Consolidated Financial Statements contained in Item 1 for a more detailed discussion of our recent disposition activity.
Third-Party Development
Services
Through ACC’s TRS entities, we provide development and construction management services for student housing properties owned by colleges and universities, charitable foundations and others. During the three months ended June 30, 2019, we closed on bond financing and commenced construction on our ninth project at Prairie View A&M University in Prairie View, Texas, which contributed approximately $1.5 million in revenue during the quarter. The project has an anticipated completion date of August 2020 and total fees of $2.5 million. As of June 30, 2019, we were under contract on seven third-party development projects that are currently
under construction and whose fees total $25.2 million. As of June 30, 2019, fees of approximately $4.5 million remained to be earned by the Company with respect to these projects, which have scheduled completion dates in 2019 and 2020.
Critical Accounting Policies
With the exception of the adoption of ASC Topic 842, Leases (“ASC 842”), there have been no material changes to the Company’s critical accounting policies disclosed in the Company’s Form 10-K for the year ended December 31, 2018. Refer to Note 2 in the accompanying Notes to Consolidated Financial statements contained in Item 1 for information regarding recently adopted accounting
standards, including ASC 842.
The
following table presents our results of operations for the three months ended June 30, 2019 and 2018, including the amount and percentage change in these results between the two periods.
Net income attributable to ACC, Inc.
and Subsidiaries common stockholders
$
10,386
$
46,009
$
(35,623
)
(77.4
)%
Same
Store and New Property Operations
We define our same store property portfolio as owned properties that were owned and operating for both of the full years ended December 31, 2019 and December 31, 2018, which are not conducting or planning to conduct substantial development, redevelopment, or repositioning activities, and are not classified as held for sale as of June 30, 2019.
Same store revenues are defined as revenues generated from our same store portfolio and consist of rental revenue earned from student
leases as well as other income items such as utility income, damages, parking income, summer conference rent, application
38
and administration fees, income from retail tenants, the provision for uncollectible accounts, and income earned by one of our TRS entities from ancillary activities such as the provision of food services.
Same store operating expenses are defined as operating expenses generated from our same store portfolio and include usual and customary expenses incurred to operate a property such as payroll, maintenance, utilities, marketing, general and administrative costs, insurance, and property taxes. Same store operating expenses also include an allocation of payroll and other administrative costs related to
corporate management and oversight.
A reconciliation of our same store, new property and sold/other property operations to our consolidated statements of comprehensive income is set forth below:
Includes
recurring professional fees related to the formation and operation of the ACC / Allianz Joint Venture. Does not include the allocation of payroll and other administrative costs related to corporate management and oversight.
(2)
Includes one property that was transferred to the lender in settlement of the property’s $27.4 million mortgage loan in July 2019, and one property consisting of two phases sold in May 2019.
(3)
Includes
the properties described above in note 2, as well as properties sold in 2018 and one property converted to the OCPP structure in January 2019.
(4)
Includes revenues which are reflected as resident services revenue on the accompanying consolidated statements of comprehensive income.
(5)
The Company adopted new lease accounting guidance on January 1, 2019 which required the
reclassification of the provision for uncollectible accounts from operating expenses to revenue. For purposes of calculating same store and new property results of operations, the reclassification is reflected for all periods presented to ensure comparability between periods. The provision for uncollectible accounts for all owned properties was $1.7 million and $1.8 million for the three months ended June 30, 2019 and 2018, respectively.
Same Store Properties: The increase in revenue from our same store properties was primarily due to an increase
in average rental rates for the 2018/2019 academic year, as well as an increase in weighted average occupancy from 88.4% during the three months ended June 30, 2018 to 90.6% during the three months ended June 30, 2019. Future revenues will be dependent on our ability to maintain our current leases in effect for the 2018/2019 academic year and our ability to achieve appropriate rental rates and desired occupancy levels for the 2019/2020 academic year at our various properties.
The increase in operating expenses for our same store properties was primarily due to increases in payroll, marketing, repairs
and maintenance and property taxes. This increase was partially offset by a decrease in utilities expense, which was primarily due to renegotiated cable and internet agreements, lower electricity costs from favorable weather patterns, and decreased usage at properties that have recently undergone LED replacements. We anticipate that total operating expenses for our same store property portfolio for 2019 will increase as compared to 2018 due to increases in property taxes, payroll, marketing and general inflation.
39
New Property Operations: Our new properties for the three and six months ended June 30, 2019
include development properties that completed construction and opened for operations in Fall 2018. These properties are summarized in the table below:
Property
Location
Primary University Served
Beds
Opening
Date
Gladding Residence Center (ACE)
Richmond, VA
Virginia Commonwealth University
1,524
August 2018
Irvington House (ACE)
Indianapolis, IN
Butler
University
648
August 2018
Greek Leadership Village (ACE)
Tempe, AZ
Arizona State University
957
August 2018
David
Blackwell Hall (ACE)
Berkeley, CA
University of California, Berkeley
780
August 2018
NAU Honors College (ACE)
Flagstaff, AZ
Northern Arizona
University
636
August 2018
U Club Townhomes at Oxford (ACE)
Oxford, MS
University of Mississippi
528
August 2018
The
Edge - Stadium Centre
Tallahassee, FL
Florida State University
413
August 2018
Hub Ann Arbor
Ann Arbor, MI
University of Michigan
310
August
2018
Hub Flagstaff
Flagstaff, AZ
Northern Arizona University
591
August 2018
Campus Edge on Pierce
West Lafayette, IN
Purdue
University
598
August 2018
6,985
Third-Party
Development Services Revenue
Third-party development services revenue increased by approximately $1.4 million, from $2.2 million during the three months ended June 30, 2018, to $3.6 million for the three months ended June 30, 2019. The increase is primarily due to an increase in the number of third-party development projects under construction during the current year as compared to the prior year. During the three months ended June 30, 2019,
we had seven projects under construction with an average contractual fee of $3.6 million, as compared to four projects under construction during the three months ended June 30, 2018 with an average contractual fee of $4.0 million.
Development services revenues are dependent on our ability to successfully be awarded such projects, the amount of the contractual fee related to the project and the timing and completion of the development and construction of the project. In addition, to the extent projects are completed under budget, we may be entitled to a portion of such savings, which are recognized as revenue when performance has been agreed upon by all parties, or when performance has been verified by an independent third-party. We anticipate that third-party development services
revenue will increase in 2019 as compared to 2018 due to an increase in the volume and timing of third-party development projects anticipated to close and commence construction in 2019.
Third-Party Management Services Revenue
Third-party management services revenue increased by approximately $1.0 million, from $2.5 million during the three months ended June 30, 2018, to $3.5 million for the three months ended June 30, 2019. The
increase is primarily due to reimbursed payroll costs from the Disney College Program management contract which began in April 2019. As the project'sfacilities manager, the Company is responsible for the operations and maintenance of the project. Because of the company’s role in funding payroll costs for on-site personnel at the properties, accounting guidance requires the management fee for this project to be recorded on a gross basis in the company’s consolidated financial statements. Accordingly, both management services revenue and third-party management services expenses for the three months ended June 30, 2019 include approximately $1.1 million in reimbursed payroll costs. We anticipate third-party management services revenue will increase in 2019 as compared to 2018 due to the recognition of reimbursed payroll costs
for the Disney College Program management contract, as discussed above.
Third-Party Development and Management Services Expenses
Third-party development and management services expenses increased by approximately $1.0 million, from $3.5 million during the three months ended June 30, 2018, to $4.5 million for the three months ended June 30, 2019. The increase is primarily due to $1.1 million of payroll costs from the
Disney College Program management contract described above. We anticipate this expense item will increase in 2019 as compared to 2018 due to the recognition of reimbursed payroll costs for the Disney College Program management contract, as well as an overall increase in pursuit activity for third-party development projects during 2019.
General and Administrative
General and administrative expenses decreased approximately $5.1 million, from $13.2 million during three months ended June 30, 2018, to $8.1 million
for the three months ended June 30, 2019. Excluding $5.8 million of transaction costs incurred in connection with the closing of the ACC / Allianz joint venture transaction in May 2018, general and administrative expenses
40
increased $0.7 million, primarily due to additional expenses incurred in connection with enhancements to our operating systems platform, additional payroll expenses, and other general inflationary factors. We anticipate general and administrative expenses will decrease in 2019 as compared to 2018 due to transaction costs incurred in 2018 related to the formation of the ACC / Allianz Joint Venture Transaction, offset by an increase in payroll costs and an increase in expenses incurred in connection
with enhancements to our operating systems platform.
Depreciation and Amortization
Depreciation and amortization increased by approximately $5.3 million, from $63.5 million during the three months ended June 30, 2018, to $68.8 million for the three months ended June 30, 2019. The increase was primarily due to a $5.6 million increase related to the completion of construction and
opening of ten owned development properties in Fall 2018, partially offset by a $0.7 million decrease related to properties sold in 2018 and 2019. We anticipate depreciation and amortization expense will increase in 2019 as compared to 2018 due to the completion of owned development projects in Fall 2018 and Fall 2019, offset by property dispositions completed during 2018 and 2019.
Ground/Facility Leases
Ground/facility leases expense increased by approximately $0.5 million, from $2.7 million during the three months ended June 30, 2018, to $3.2
million for the three months ended June 30, 2019. The increase was primarily due to ACE development projects that completed construction and opened for operations in Fall 2018. We anticipate ground/facility leases expense will increase in 2019 as compared to 2018, primarily as a result of the timing of new ACE projects being placed into service, and the conversion of one owned property to the OCPP structure in January 2019.
Loss (Gain) from Disposition of Real Estate
During the three months ended June 30, 2019, we sold one owned
property containing 544 beds, resulting in a net loss from disposition of real estate of approximately $0.3 million. During the three months ended June 30, 2018, we sold a portfolio of three owned properties containing 1,338 beds, resulting in a net gain from disposition of real estate of approximately $42.3 million. Refer to Note 4 in the accompanying Notes to the Consolidated Financial Statements contained in Item 1.
Other Operating Income
During the three months ended June
30, 2018, we recorded a $2.6 million gain related to cash proceeds received from a litigation settlement.
Interest Expense
Interest expense increased by approximately $3.8 million, from $23.3 million during the three months ended June 30, 2018, to $27.1 million for the three months ended June 30, 2019. The increase was primarily due to $2.9 million
of additional interest expense due to the timing of borrowings under our unsecured revolving credit facility during the respective three month periods, $2.2 million in additional interest expense incurred in the current year related to the issuance of $330 million in mortgage debt as part of the ACC / Allianz Joint Venture Transaction which closed in May 2018, and a $0.4 million increase in interest expense related to our $400 million offering of unsecured notes in June 2019. These increases were offset by a $1.8 million decrease in term loan interest expense due to the pay-off of $450 million of term loans in 2018. We anticipate interest expense will increase in 2019 as compared to 2018 due to increased interest rates on a higher average outstanding balance under our revolving credit facility throughout 2019, additional interest incurred from $330 million in mortgage debt as part of the ACC / Allianz Joint Venture Transaction, and additional interest incurred from
the issuance of unsecured notes issued in June 2019.
Amortization of Deferred Financing Costs
Amortization of deferred financing costs decreased by approximately $1.0 million, from $2.2 million during the three months ended June 30, 2018 to $1.2 million for the three months ended June 30, 2019. The decrease was primarily due to $0.9 million of accelerated amortization
recorded in the prior year related to the pay-off of $450 million of term loan debt in May 2018. We anticipate amortization of deferred finance costs will decrease in 2019, as increases related to offerings of unsecured debt in 2019 will be more than offset by the 2018 accelerated amortization related to the pay-off of term loan debt.
41
Loss from Early Extinguishment of Debt
During the three months ended June 30, 2018, we incurred approximately $0.8 million of losses associated with the early pay-off of mortgage loans in connection
with the sale of one owned property and one owned property included in the ACC / Allianz Joint Venture Transaction.
Income Tax Provision
Income tax provision decreased by approximately $1.8 million, from $2.1 million during the three months ended June 30, 2018 to $0.3 million for the three months ended June 30, 2019. The decrease was primarily due to estimated state income
tax recorded in the prior year related to a taxable gain resulting from the ACC / Allianz Joint Venture Transaction.
The following table presents our results of operations for the six months ended June 30, 2019
and 2018, including the amount and percentage change in these results between the two periods.
Net
income attributable to noncontrolling interests
(1,552
)
(304
)
(1,248
)
410.5
%
Net income attributable to ACC, Inc.
and
Subsidiaries commonstockholders
$
40,026
$
71,936
$
(31,910
)
(44.4
)%
43
Same
Store and New Property Operations
A reconciliation of our same store, new property and sold/other property operations to our consolidated statements of comprehensive income is set forth below:
Includes
recurring professional fees related to the formation and operation of the ACC / Allianz Joint Venture. Does not include the allocation of payroll and other administrative costs related to corporate management and oversight.
(2)
Includes one property that was transferred to the lender in settlement of the property’s $27.4 million mortgage loan in July 2019, and one property consisting of two phases sold in May 2019.
(3)
Includes the
properties described above in note 2, as well as properties sold in 2018 and one property converted to the OCPP structure in January 2019.
(4)
Includes revenues which are reflected as resident services revenue on the accompanying consolidated statements of comprehensive income.
(5)
The Company adopted new lease accounting guidance on January 1, 2019 which required the reclassification
of the provision for uncollectible accounts from operating expenses to revenue. For purposes of calculating same store and new property results of operations, the reclassification is reflected for all periods presented to ensure comparability between periods. The provision for uncollectible accounts for all owned properties was $2.8 million and $2.7 million for the six months ended June 30, 2019 and 2018, respectively.
Same Store Properties: The increase in revenue from our same store properties was primarily due to an increase in average rental rates for
the 2018/2019 academic years as well as an increase in weighted average occupancy from 91.1%during the six months ended June 30, 2018, to 93.8% for the six months ended June 30, 2019.
The increase in operating expenses from our same store properties was due to the same factors that contributed to the increase for the three months ended June 30, 2019, and general inflation.
New Property Operations: Our new properties for the six
months ended June 30, 2019 are summarized in the table of new properties contained in the discussion of our results of operations for the three months ended June 30, 2019 and 2018.
As of June 30, 2019, we had six OCPPs containing 5,230 beds. In January 2019, one owned property located at Prairie View A&M University was converted to the OCPP structure and is now included
in our OCPP portfolio, contributing to the increase in both revenues and expenses for the six months ended June 30, 2019 as compared to the six months ended June 30, 2018. In addition, the Company adopted new lease accounting guidance on January 1, 2019 which required the reclassification of the provision for uncollectible accounts from operating expenses to revenue. The reclassification is reflected on a prospective basis in the Consolidated Statements of Comprehensive Income contained in Item 1 herein starting in the first quarter 2019. The amount reclassified from operating expenses to revenue was a $0.7 million benefit and a $0.2 million
expense for the six months ended June 30, 2019 and 2018, respectively. We anticipate that revenues from these properties for 2019 will increase due to the factors described above. In addition, future revenues will be dependent on our ability to maintain our current leases in effect for the 2018/2019 academic year and our ability to obtain appropriate rental rates and desired occupancy for the 2019/2020 academic year. We anticipate that operating expenses for these properties for 2019 will increase as compared to 2018 due to the conversion of one property to the OCPP structure in January 2019 and general inflation.
44
Third-Party
Development Services Revenue
Third-party development services revenue increased by approximately $3.8 million, from $3.0 million during the six months ended June 30, 2018, to $6.8 million for the six months ended June 30, 2019. The increase was primarily due to the closing of bond financing and commencement of construction of the Calhoun Hall project at Drexel University and the ninth phase at Prairie View A&M University in March and April 2019, respectively,
which contributed $3.0 million in revenue during the six months ended June 30, 2019, as compared to the closing of bond financing and commencement of construction of the Delaware State University project in May 2018, which contributed $1.5 million in revenue during the six months ended June 30, 2018. In addition, during the six months ended June 30, 2019, we also continued development services for five projects that commenced construction in 2018, for which we earned fees of approximately $3.7 million, as compared to three projects that commenced construction in 2017, for which we earned fees of approximately $1.4 million during the six months ended June
30, 2018.
Third-Party Management Services Revenue
Third-party management services revenue increased by approximately $0.6 million, from $5.2 million during the six months ended June 30, 2018, to $5.8 million for the six months ended June 30, 2019. The increase was due to the same factors that contributed to the increase in third-party management services revenue for the three
months ended June 30, 2019, as discussed above. The increase was partially offset by discontinued third-party management contracts in 2018 and 2019.
Third-Party Development and Management Services Expenses
Third-party development and management services expenses increased by approximately $1.0 million, from $7.7 million during the six months ended June 30, 2018, to $8.7 million for the six months ended June
30, 2019. The increase was due to the same factors that contributed to the increase in third-party development and management services expenses for the three months ended June 30, 2019, as discussed above. The increase was partially offset by discontinued third-party management contracts in 2018 and 2019.
General and Administrative
General and administrative expenses decreased by approximately $4.5 million from $19.9 million during the six months ended June
30, 2018, to $15.4 million for the six months ended June 30, 2019. Excluding $5.8 million in transaction costs incurred in connection with the closing of the ACC / Allianz Joint Venture Transaction in May 2018, general and administrative expense increased by $1.3 million. This increase was primarily due to the same factors that contributed to the increase in general and administrative expenses for the three months ended June 30, 2019, as discussed above.
Depreciation and Amortization
Depreciation and amortization increased
by approximately $9.3 million, from $128.3 million during the six months ended June 30, 2018, to $137.6 million for the six months ended June 30, 2019. The increase was primarily due to an $11.3 million increase related to the completion of construction and opening of ten development properties in August 2018. This increase was partially offset by a $2.4 million decrease in depreciation and amortization expense related to properties sold in 2018 and 2019.
Ground/Facility Leases
Ground/facility
leases expense increased by approximately $1.2 million, from $5.6 million during the six months ended June 30, 2018, to $6.8 million for the six months ended June 30, 2019. The increase was due to the same factors that contributed to the increase in ground/facility lease expenses for the three months ended June 30, 2019, as discussed above.
Loss (Gain) from Disposition of Real Estate
During
the six months ended June 30, 2019, we sold one owned property containing 544 beds, resulting in a net loss from disposition of real estate of approximately $0.3 million. During the six months ended June 30, 2018, we sold a portfolio of three owned properties containing 1,338 beds, resulting in a net gain from disposition of real estate of approximately $42.3 million. Refer to Note 4 in the accompanying Notes to the Consolidated Financial Statements contained in Item 1.
Provision for Real Estate Impairment
During
the six months ended June 30, 2019, we recorded an impairment charge of $3.2 million for one owned property serving students attending Florida A&M University, which was classified as held for sale as of March 31, 2019 and sold in May 2019.
45
Other Operating Income
During the six months ended June 30, 2018, we recorded a $2.6 million gain related to cash proceeds received from a litigation
settlement.
Interest Income
Interest income decreased by approximately $0.6 million, from $2.5 million during the six months ended June 30, 2018, to $1.9 million for the six months ended June 30, 2019. The decrease was primarily due to the planned forgiveness of loans receivable resulting from the unwinding of a New Market Tax Credit ("NMTC") structure at one of the Company's owned properties.
Interest
Expense
Interest expense increased by approximately $7.1 million, from $47.0 million during the six months ended June 30, 2018, to $54.1 million for the six months ended June 30, 2019. The increase was primarily due to $5.7 million of additional interest expense due to the timing of borrowings under our unsecured revolving credit facility during the respective six month periods, $5.5 million in additional interest expense incurred in the current year related to the issuance of $330 million in mortgage debt
as part of the ACC / Allianz Joint Venture Transaction which closed in May 2018, a $0.6 million decrease in capitalized interest, and a $0.4 million increase in interest expense related to our $400 million offering of unsecured notes in June 2019. These increases were offset by a $4.4 million decrease in term loan interest expense due to the pay-off of $450 million of term loans in 2018 and a $0.7 million decrease due to the unwinding of an NMTC structure at one of the Company’s owned properties.
Amortization of Deferred Financing Costs
Amortization of deferred financing costs decreased by approximately $1.2 million, from $3.6 million during the six
months ended June 30, 2018 to $2.4 million for the six months ended June 30, 2019. The decrease was due to the same factors that contributed to the decrease for the three months ended June 30, 2019, as discussed above.
Loss from Early Extinguishment of Debt
During the six months ended June 30, 2018, we incurred approximately $0.8
million of losses associated with the early pay-off of mortgage loans in connection with the sale of one owned property and one owned property included in the ACC / Allianz Joint Venture Transaction.
Income Tax Provision
Income tax provision decreased by approximately $1.7 million from $2.4 million during the six months ended June 30, 2018, to $0.7 million for the six months ended June 30, 2019. The
decrease was primarily due to estimated state income tax recorded in the prior year related to a taxable gain resulting from the ACC / Allianz Joint Venture Transaction.
Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests represents consolidated joint venture partners’ share of net income, as well as net income allocable to holders of Operating Partnership units. The increase in this item as compared to the prior year is primarily due to the closing of the ACC / Allianz Joint Venture Transaction in May 2018.
Liquidity
and Capital Resources
Cash Balances and Cash Flows
As of June 30, 2019, we had $88.7 million in cash and cash equivalents and restricted cash as compared to $106.5 million in cash and cash equivalents and restricted cash as of December 31, 2018. Restricted cash primarily consists of escrow accounts held by lenders, resident security deposits as required by law in certain states, and funds held in escrow in connection with potential acquisition and development opportunities. The following discussion relates to changes
in cash due to operating, investing and financing activities, which are presented in our consolidated statements of cash flows included in Item 1.
46
Operating Activities: For the six months ended June 30, 2019, net cash provided by operating activities was approximately $148.4 million, as compared to approximately $169.5 million for the six months ended June 30, 2018, a decrease of $21.1 million. This
decrease in cash flows was primarily due to the timing of property tax payments for owned properties, the sale of three properties in 2018, and a $13.2 million interest rate swap termination payment made in June 2019. This decrease was partially offset by operating cash flows from the completion of construction and opening of six owned development properties and four presale developments in August 2018, and an increase in operating results for same store properties.
Investing Activities: Investing activities utilized approximately $239.6 million and $44.4 million for the six months ended June 30, 2019
and 2018, respectively. The $195.2 millionincrease in cash utilized in investing activities was primarily a result of a $233.4 million decrease in proceeds from disposition of a three property portfolio in 2018 as compared to one property in 2019. This decrease was partially offset by a $32.4 million decrease in cash used to fund the construction of our owned development properties, related to the timing of construction commencement and completion of our owned development pipeline, and a $6.2 million decrease in cash used to fund capital expenditures at our owned and on-campus participating properties.
Financing
Activities: For the six months ended June 30, 2019, net cash provided by financing activities totaled approximately $73.4 million as compared to net cash utilized by financing activities of $102.6 million for the six months ended June 30, 2018. The $176.0 million increase in cash provided by financing activities was primarily a result of the following: (i) $398.8 million in proceeds from unsecured notes; (ii) a $450.0 million decrease in the pay-off of unsecured term loans; (iii) a $144.9 million
decrease in distributions to noncontrolling interests as a result of the closing of the mortgage loans associated with the Allianz Joint Venture in May 2018; and (iv) a $58.6 million decrease in cash used to pay off mortgage and construction debt including defeasance costs. These increases were partially offset by: (i) a $373.7 million decrease in proceeds from noncontrolling interests as a result of the Allianz Joint Venture in May 2018; (ii) a $330.0 million decrease in proceeds from mortgage loans; (iii) a $125.4 million decrease in net proceeds on our revolving credit facility; (iv) a $35.5 million decrease in proceeds from construction loans; (v) a $4.8 million increase in distributions to
common and restricted stockholders; and (vi) a $5.9 million increase in payments of debt issuance costs.
Liquidity Needs, Sources and Uses of Capital
As of June 30, 2019, our short-term liquidity needs included, but were not limited to, the following: (i) anticipated distribution payments to our common and restricted stockholders totaling approximately $259.9 million based on an assumed annual cash distribution of $1.88 per share and the number of our shares outstanding as of June 30, 2019;
(ii) anticipated distribution payments to our Operating Partnership unitholders totaling approximately $1.2 million based on an assumed annual distribution of $1.88 per common unit and a cumulative preferential per annum cash distribution rate of 5.99% on our Preferred OP Units based on the number of units outstanding as of June 30, 2019; (iii) estimated development costs over the next 12 months totaling approximately $274.4 million for our owned properties currently under construction; (iv) an $85.4 million obligation to purchase two properties subject to presale arrangements (see Note 13 in the accompanying
Notes to the Consolidated Financial Statements contained in Item 1); (v) an obligation to increase our investment in two joint ventures, resulting in a funding commitment of approximately $154.0 million (see Note 13 in the accompanying Notes to the Consolidated Financial Statements contained in Item 1); (vi) the pay-off of approximately $34.8 million of outstanding fixed rate mortgage debt scheduled to mature during the next 12 months;
(vii) funds for other development projects scheduled to commence construction during the next 12 months; and (viii) potential future property or land acquisitions, including mezzanine financed developments.
We expect to meet our short-term liquidity requirements by: (i) borrowing under our existing revolving credit
facility; (ii) accessing the unsecured bond market; (iii) exercising debt extension options to the extent they are available; (iv) issuing securities, including common stock, under our ATM Equity Program discussed more fully in Note 7 in the accompanying Notes to Consolidated Financial Statements contained in Item 1, or otherwise; (v) potentially disposing of properties and/or entering into joint venture arrangements, depending on market conditions; and (vi) utilizing current cash on hand and net cash provided by operations. Our ability to obtain additional financing will depend on a variety of factors such as market conditions, the general availability of credit, the overall availability of credit to the real estate industry, our credit ratings and credit capacity, as well as the perception of lenders regarding our long or short-term financial prospects.
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 incurrence of additional secured debt and 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
47
agreements governing our unsecured credit facility
and unsecured notes. These financings could increase our level of indebtedness or result in dilution to our equity holders.
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 use borrowings under our unsecured revolving credit facility to fund distributions. The Board of Directors considers a number of factors when determining distribution levels, including market factors and our Company’s performance in addition to REIT requirements.
On July 31,
2019, our Board of Directors declared a distribution per share of $0.47, which will be paid on August 23, 2019 to all common stockholders of record as of August 12, 2019. At the same time, the Operating Partnership will pay an equivalent amount per unit to holders of Common OP Units, as well as the quarterly cumulative preferential distribution to holders of Preferred OP Units.
Indebtedness
The amounts below exclude net unamortized debt premiums and discounts related to mortgage loans assumed in connection with property acquisitions,
original issue discounts (“OID”s), and deferred financing costs (see Note 6 in the accompanying Notes to the Consolidated Financial Statements contained in Item 1). A summary of our consolidated indebtedness as of June 30, 2019 is as follows:
Amount
%
of Total
Weighted Average Rates (1)
Weighted Average Maturities
Secured
$
866,303
26.6
%
4.7
%
6.1
Years
Unsecured
2,385,600
73.4
%
3.6
%
4.7 Years
Total consolidated debt
$
3,251,903
100.0
%
3.9
%
5.1
Years
Fixed rate debt
Secured
Project-based
taxable bonds
$
27,030
0.8
%
7.6
%
5.3 Years
Mortgage
749,979
23.1
%
4.6
%
5.5
Years
Unsecured
April 2013 Notes
400,000
12.3
%
3.8
%
3.8
Years
June 2014 Notes
400,000
12.3
%
4.1
%
5.0 Years
September 2015 Notes
400,000
12.3
%
3.4
%
1.3
Years
October 2017 Notes
400,000
12.3
%
3.6
%
8.4 Years
June 2019 Notes
400,000
12.3
%
3.3
%
7.0
Years
Total - fixed rate debt
2,777,009
85.4
%
3.9
%
5.2 Years
Variable
rate debt:
Secured
Mortgage
and construction
89,294
2.7
%
5.1
%
12.1 Years
Unsecured
Term
loans
200,000
6.2
%
3.5
%
3.0 Years
Unsecured revolving credit facility
185,600
5.7
%
3.6
%
2.7
Years
Total - variable rate debt
474,894
14.6
%
3.9
%
4.6 Years
Total consolidated debt
$
3,251,903
100.0
%
3.9
%
5.1
Years
(1)
Represents stated interest rate and does not include the effect of the amortization
of deferred financing costs, debt premiums and discounts, OIDs, and interest rate swap terminations.
48
Funds From Operations (“FFO”)
The National Association of Real Estate Investment Trusts (“NAREIT”) currently defines FFO as net income or loss attributable to common shares computed in accordance with generally accepted accounting principles (“GAAP”), excluding gains or losses from depreciable operating property sales, impairment charges and real estate depreciation and amortization, and after adjustments for unconsolidated
partnerships and joint ventures. We present FFO because we consider it an important supplemental measure of our operating performance and believe it is frequently used by securities analysts, investors and other interested parties in the evaluation of REITs, many of which present FFO when reporting their results. FFO excludes GAAP historical cost depreciation and amortization of real estate and related assets, which assumes that the value of real estate diminishes ratably over time. Historically, however, real estate values have risen or fallen with market conditions. We therefore believe that FFO provides a performance measure that, when compared year over year, reflects the impact to operations from trends in occupancy rates, rental rates, operating costs, and interest costs, among other items, providing perspective not immediately apparent from net income. We compute FFO in accordance with standards established by the Board of Governors of NAREIT in its December
2018 White Paper, which may differ from the methodology for calculating FFO utilized by other equity REITs and, accordingly, may not be comparable to such other REITs.
We also believe it is meaningful to present a measure we refer to as FFO-Modified, or FFOM, which reflects certain adjustments related to the economic performance of our on-campus participating properties, the elimination of transaction costs, and other items, as we determine in good faith. Under our participating ground leases, we and the participating university systems each receive 50% of the properties’ net cash available for distribution after payment of operating expenses, debt service (which includes significant amounts towards repayment of principal) and capital expenditures. A substantial portion of our revenues attributable to these properties is reflective of cash that is required to be used for capital
expenditures and for the amortization of applicable property indebtedness. These amounts do not increase our economic interest in these properties or otherwise benefit us since our interest in the properties terminates upon the repayment of the applicable property indebtedness. Therefore, unlike the ownership of our owned properties, the unique features of our ownership interest in our on-campus participating properties cause the value of these properties to diminish over time. For example, since the ground/facility leases under which we operate the participating properties require the reinvestment from operations of specified amounts for capital expenditures and for the repayment of debt while our interest in these properties terminates upon the repayment of the debt, such capital expenditures do not increase the value of the property to us and mortgage debt amortization only increases the equity of the ground lessor. Accordingly, we believe it is meaningful to
modify FFO to exclude the operations of our on-campus participating properties and to consider their impact on our performance by including only that portion of our revenues from those properties that are reflective of our share of net cash flow and the management fees that we receive, both of which increase and decrease with the operating performance of the properties. This narrower measure of performance measures our profitability for these properties in a manner that is similar to the measure of our profitability from our third-party services business where we similarly incur no initial or ongoing capital investment in a property and derive only consequential benefits from capital expenditures and debt amortization. We believe, however, that this narrower measure of performance is inappropriate in traditional real estate ownership structures where debt amortization and capital expenditures enhance the property owner’s long-term profitability from its investment.
Our
FFOM may have limitations as an analytical tool because it reflects the contractual calculation of net cash flow from our on-campus participating properties, which is unique to us and is different from that of our owned off-campus properties. Companies that are considered to be in our industry may not have similar ownership structures; and therefore those companies may not calculate FFOM in the same manner that we do, or at all, limiting its usefulness as a comparative measure. We compensate for these limitations by relying primarily on our GAAP and FFO results and using FFOM only supplementally. Further, FFO and FFOM do not represent amounts available for management’s discretionary use because of needed capital replacement or expansion, debt service obligations or other commitments and uncertainties. FFO and FFOM should not be considered as alternatives to net income or loss computed in accordance with GAAP as an indicator of our financial performance, or to cash
flow from operating activities computed in accordance with GAAP as an indicator of our liquidity, nor are these measures indicative of funds available to fund our cash needs, including our ability to pay dividends or make distributions.
49
The following table presents a reconciliation of our net income attributable to common stockholders to FFO and FFOM:
Elimination of provision
for real estate impairment
—
—
3,201
—
Real estate related depreciation and
amortization (2)
65,458
61,571
130,834
125,149
Funds
from operations (“FFO”) attributable to
common stockholders and OP unitholders
76,180
65,719
174,557
155,546
Elimination
of operations of on-campus participating properties:
Net loss (income)
from on-campus participating properties
1,130
1,218
(2,562
)
(2,151
)
Amortization
of investment in on-campus participating properties
(2,016
)
(1,952
)
(4,045
)
(3,894
)
75,294
64,985
167,950
149,501
Modifications
to reflect operational performance of on-campus participating properties:
Our
share of net cash flow (3)
828
793
1,710
1,588
Management
fees and other
408
279
1,228
756
Contribution from on-campus participating properties
1,236
1,072
2,938
2,344
Transaction
costs (4)
—
7,818
—
7,818
Elimination
of loss from early extinguishment of debt (5)
—
784
—
784
Elimination
of gain from litigation settlement (6)
—
(2,648
)
—
(2,648
)
Elimination
of FFO from property in receivership (7)
839
606
1,808
1,195
Funds
from operations – modified (“FFOM”) attributable to common stockholders and OP unitholders
$
77,369
$
72,617
$
172,696
$
158,994
FFO
per share – diluted
$
0.55
$
0.47
$
1.26
$
1.12
FFOM
per share – diluted
$
0.56
$
0.52
$
1.24
$
1.15
Weighted-average
common shares outstanding – diluted
138,873,418
138,592,562
138,842,644
138,561,640
(1)
The
difference from the amount presented in the company’s consolidated statements of comprehensive income represents consolidated joint venture partners’ share of net income.
(2)
The difference from the amount presented in the company’s consolidated statements of comprehensive income represents corporate depreciation and consolidated joint venture partners’ share of depreciation. Corporate depreciation and the joint venture partners' share of depreciation for the three months ended June 30, 2019 was $1.2 million and $2.2 million, respectively. Corporate
depreciation and the joint venture partners' share of depreciation for the six months ended June 30, 2019 was $2.4 million and $4.3 million, respectively.
(3)
50% of the properties’ net cash available for distribution after payment of operating expenses, debt service (including repayment of principal) and capital expenditures which is included in ground/facility leases expense in the consolidated statements of comprehensive income (refer to page S-3).
(4)
Represents
transaction costs incurred in connection with the closing of a real estate joint venture transaction in May 2018, whereby a 45% noncontrolling interest in seven properties was sold to a joint venture partner.
(5)
Represents losses associated with the early extinguishment of mortgage loans due to real estate disposition transactions, including the sale of partial ownership interests in properties. Such costs are excluded from gains from disposition of real estate reported in accordance with GAAP.
(6)
Represents a
gain related to cash proceeds received from a litigation settlement.
(7)
Represents FFO for an owned property that was transferred to the lender in July 2019 in settlement of the property's $27.4 million mortgage loan.
Inflation
Our student leases do not typically provide for rent escalations. However, they typically do not have terms that extend beyond 12 months. Accordingly, although on a short term basis we would be required to bear the impact of rising costs
resulting from inflation, we have the opportunity to raise rental rates at least annually to offset such rising costs. However, a weak economic environment or declining student enrollment at our principal universities may limit our ability to raise rental rates.
50
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk of loss from adverse changes in market prices and interest rates. Our future earnings and cash flows are dependent upon prevailing market rates. Accordingly, we manage our market risk by matching projected cash inflows from operating, investing, and financing
activities with projected cash outflows for debt service, acquisitions, capital expenditures, distributions to stockholders and unitholders, and other cash requirements. The majority of our outstanding debt has fixed interest rates, which minimizes the risk of fluctuating interest rates. Our exposure to market risk includes interest rate fluctuations in connection with our revolving credit facilities and variable rate construction loans and our ability to incur more debt without stockholder approval, thereby increasing our debt service obligations, which could adversely affect our cash flows. No material changes have occurred in relation to market risk since our Annual Report on Form 10-K for the year ended December 31, 2018.
As required by SEC Rule 13a-15(b), we have carried out an evaluation, under the supervision of and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end
of the period covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures for the quarter covered by this report were effective at the reasonable assurance level.
(b)
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
American
Campus Communities Operating Partnership LP
(a)
Evaluation of Disclosure Controls and Procedures
As required by SEC Rule 13a-15(b), we have carried out an evaluation, under the supervision of and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures for the quarter covered by this report
were effective at the reasonable assurance level.
(b)
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
51
PART
II OTHER INFORMATION
Item 1. Legal Proceedings
We are subject to various claims, lawsuits and legal proceedings that arise in the ordinary course of business. 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 our consolidated financial position or our results of operations.
Item
1A. Risk Factors
There have been no material changes to the risk factors that were discussed in Part 1, Item 1A of the Company’s and the Operating Partnership’s Annual Report on Form 10-K for the year ended December 31, 2018.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
American
Campus Communities Operating Partnership LP - Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
American Campus Communities Operating Partnership LP - Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
American
Campus Communities, Inc. - Certification of Chief Executive Officer Pursuant to 18 U. S. C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
American Campus Communities, Inc. - Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
American Campus Communities Operating Partnership LP - Certification of Chief Executive Officer Pursuant to 18 U. S. C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
American
Campus Communities Operating Partnership LP - Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Kim K. Voss Executive Vice President, Chief Accounting Officer, and Assistant Secretary
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
