e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2011
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-34872
CAMPUS CREST COMMUNITIES, INC.
(Exact name of registrant as specified in its charter)
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Maryland
(State or other jurisdiction of
incorporation or organization)
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27-2481988
(I.R.S. Employer
Identification No.) |
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2100 Rexford Road, Suite 414, Charlotte, NC
(Address of principal executive offices)
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28211
(Zip Code) |
(704) 496-2500
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer þ
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date.
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Class
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Outstanding at August 5, 2011 |
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Common Stock, $0.01 par value per share
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30,698,994 shares |
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2011
TABLE OF CONTENTS
i
Item 1. Financial Statements
CAMPUS CREST COMMUNITIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
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June 30, |
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December 31, |
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2011 |
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2010 |
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Assets |
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Investment in real estate, net: |
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Student housing properties |
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$ |
373,502 |
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372,746 |
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Accumulated depreciation |
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(66,943 |
) |
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(57,463 |
) |
Development in process |
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74,105 |
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24,232 |
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Investment in real estate, net |
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380,664 |
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339,515 |
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Investment in unconsolidated entities |
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18,109 |
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13,751 |
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Cash and cash equivalents |
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8,754 |
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2,327 |
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Restricted cash and investments |
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1,826 |
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3,305 |
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Student receivables, net of allowance for doubtful accounts
of $961 and $431 at June 30, 2011 and December 31, 2010,
respectively |
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663 |
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954 |
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Cost in excess of construction billings |
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5,270 |
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1,827 |
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Other assets |
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9,640 |
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9,578 |
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Total assets |
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$ |
424,926 |
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371,257 |
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Liabilities and equity |
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Liabilities: |
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Mortgage and construction loans |
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$ |
72,564 |
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60,840 |
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Lines of credit |
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74,500 |
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42,500 |
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Accounts payable and accrued expenses |
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36,231 |
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14,597 |
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Other liabilities |
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5,790 |
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6,530 |
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Total liabilities |
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189,085 |
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124,467 |
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Equity: |
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Stockholders equity: |
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Common stock, $0.01 par value, 90,000,000 shares
authorized, 30,698,994 and 30,682,215 shares issued and
outstanding at June 30, 2011 and December 31, 2010,
respectively |
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307 |
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307 |
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Additional paid-in capital |
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248,549 |
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248,515 |
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Accumulated deficit and distributions |
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(16,421 |
) |
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(5,491 |
) |
Accumulated other comprehensive loss |
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(392 |
) |
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(172 |
) |
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Total Campus Crest Communities, Inc. stockholders equity |
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232,043 |
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243,159 |
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Noncontrolling interests |
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3,798 |
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3,631 |
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Total equity |
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235,841 |
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246,790 |
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Total liabilities and equity |
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$ |
424,926 |
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371,257 |
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See accompanying notes to condensed consolidated and combined financial statements.
1
CAMPUS CREST COMMUNITIES, INC. AND
CAMPUS CREST COMMUNITIES PREDECESSOR
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2011 |
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2010 |
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2011 |
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2010 |
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Campus Crest |
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Campus Crest |
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Campus Crest |
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Campus Crest |
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Communities, |
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Communities |
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Communities, |
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Communities |
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Inc. |
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Predecessor |
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Inc. |
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Predecessor |
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Revenues: |
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Student housing rental |
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$ |
13,019 |
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12,308 |
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26,171 |
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24,443 |
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Student housing services |
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538 |
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584 |
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976 |
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1,146 |
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Development, construction and management
services |
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11,333 |
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15,081 |
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21,617 |
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30,864 |
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Total revenues |
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24,890 |
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27,973 |
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48,764 |
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56,453 |
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Operating expenses: |
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Student housing operations |
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6,356 |
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6,907 |
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12,824 |
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13,301 |
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Development, construction and management
services |
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10,611 |
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14,029 |
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19,836 |
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28,644 |
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General and administrative |
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1,722 |
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1,234 |
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3,670 |
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2,618 |
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Ground leases |
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52 |
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47 |
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104 |
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94 |
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Depreciation and amortization |
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5,209 |
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4,667 |
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10,366 |
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9,429 |
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Total operating expenses |
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23,950 |
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26,884 |
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46,800 |
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54,086 |
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Equity in loss of unconsolidated entities |
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(340 |
) |
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(114 |
) |
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(635 |
) |
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(194 |
) |
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Operating income |
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600 |
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975 |
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1,329 |
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2,173 |
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Nonoperating income (expense): |
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Interest expense |
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(1,360 |
) |
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(6,217 |
) |
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(2,735 |
) |
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(10,686 |
) |
Change in fair value of interest rate derivatives |
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141 |
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155 |
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337 |
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178 |
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Other income |
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55 |
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12 |
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154 |
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45 |
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Total nonoperating expenses |
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(1,164 |
) |
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(6,050 |
) |
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(2,244 |
) |
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(10,463 |
) |
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Loss before income taxes |
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(564 |
) |
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(5,075 |
) |
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(915 |
) |
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(8,290 |
) |
Income tax expense |
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(77 |
) |
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(200 |
) |
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|
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|
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|
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|
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|
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Net loss |
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(641 |
) |
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|
(5,075 |
) |
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(1,115 |
) |
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(8,290 |
) |
Net loss attributable to noncontrolling interests |
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|
(3 |
) |
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|
(2,913 |
) |
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(5 |
) |
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(5,025 |
) |
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Net loss attributable to Campus Crest Communities,
Inc. and Predecessor |
|
$ |
(638 |
) |
|
|
(2,162 |
) |
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(1,110 |
) |
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|
(3,265 |
) |
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Net loss per share attributable to Campus Crest
Communities, Inc.: |
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Basic and diluted |
|
$ |
(0.02 |
) |
|
|
|
|
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|
(0.04 |
) |
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Weighted-average common shares outstanding: |
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Basic and diluted |
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30,721 |
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30,712 |
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Distributions per common share |
|
$ |
(0.16 |
) |
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(0.32 |
) |
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See accompanying notes to condensed consolidated and combined financial statements. |
2
CAMPUS CREST COMMUNITIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
AND COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
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Total |
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Campus Crest |
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Accumulated |
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Communities, |
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Number of |
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Additional |
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Accumulated |
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Other |
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Inc. |
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Common |
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Common |
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Paid-In |
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Deficit and |
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Comprehensive |
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Stockholders |
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Noncontrolling |
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Total |
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Shares |
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|
Stock |
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|
Capital |
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Distributions |
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|
Loss |
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Equity |
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|
Interests |
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|
Equity |
|
Balance, December 31, 2010 |
|
|
30,682 |
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|
$ |
307 |
|
|
|
248,515 |
|
|
|
(5,491 |
) |
|
|
(172 |
) |
|
|
243,159 |
|
|
|
3,631 |
|
|
|
246,790 |
|
Distributions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,820 |
) |
|
|
|
|
|
|
(9,820 |
) |
|
|
(140 |
) |
|
|
(9,960 |
) |
Issuance of
restricted stock |
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|
17 |
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|
|
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|
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|
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|
|
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|
|
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|
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Amortization of
restricted stock awards and
OP units |
|
|
|
|
|
|
|
|
|
|
168 |
|
|
|
|
|
|
|
|
|
|
|
168 |
|
|
|
312 |
|
|
|
480 |
|
Costs related to initial
public offering |
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|
|
|
|
|
|
|
|
|
(134 |
) |
|
|
|
|
|
|
|
|
|
|
(134 |
) |
|
|
|
|
|
|
(134 |
) |
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of
interest rate derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(220 |
) |
|
|
(220 |
) |
|
|
|
|
|
|
(220 |
) |
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,110 |
) |
|
|
|
|
|
|
(1,110 |
) |
|
|
(5 |
) |
|
|
(1,115 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,335 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
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|
|
|
|
|
|
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|
Balance, June 30, 2011 |
|
|
30,699 |
|
|
$ |
307 |
|
|
|
248,549 |
|
|
|
(16,421 |
) |
|
|
(392 |
) |
|
|
232,043 |
|
|
|
3,798 |
|
|
|
235,841 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
See accompanying notes to condensed consolidated and combined financial statements.
3
CAMPUS CREST COMMUNITIES, INC. AND
CAMPUS CREST COMMUNITIES PREDECESSOR
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
|
Campus Crest |
|
|
Campus Crest |
|
|
|
Communities, |
|
|
Communities |
|
|
|
Inc. |
|
|
Predecessor |
|
Operating activities: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(1,115 |
) |
|
|
(8,290 |
) |
Adjustments to reconcile net loss to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
10,366 |
|
|
|
9,429 |
|
Amortization of deferred financing costs |
|
|
558 |
|
|
|
318 |
|
Accretion of interest expense |
|
|
|
|
|
|
1,376 |
|
Bad debt expense |
|
|
555 |
|
|
|
304 |
|
Change in fair value of interest rate derivatives |
|
|
(337 |
) |
|
|
(2,893 |
) |
Equity in loss of unconsolidated entities |
|
|
635 |
|
|
|
194 |
|
Compensation expense related to share based payments |
|
|
125 |
|
|
|
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Restricted cash and investments |
|
|
1,479 |
|
|
|
(393 |
) |
Student receivables |
|
|
(264 |
) |
|
|
(60 |
) |
Construction billings |
|
|
(4,737 |
) |
|
|
527 |
|
Accounts payable and accrued expenses |
|
|
4,220 |
|
|
|
6,586 |
|
Other |
|
|
(86 |
) |
|
|
(4,359 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
11,399 |
|
|
|
2,739 |
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
Investments in development in process |
|
|
(40,259 |
) |
|
|
(694 |
) |
Investments in student housing properties |
|
|
(756 |
) |
|
|
(1,766 |
) |
Investments in unconsolidated entities |
|
|
(3,115 |
) |
|
|
(202 |
) |
Distributions from unconsolidated entities |
|
|
5,082 |
|
|
|
|
|
Purchase of corporate fixed assets |
|
|
(28 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(39,076 |
) |
|
|
(2,662 |
) |
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
Payment of offering costs |
|
|
(134 |
) |
|
|
|
|
Proceeds from construction loans |
|
|
11,724 |
|
|
|
497 |
|
Proceeds from lines of credit and other debt |
|
|
32,000 |
|
|
|
2,290 |
|
Principal payments on construction loans |
|
|
|
|
|
|
(225 |
) |
Payments on lines of credit and other debt |
|
|
|
|
|
|
(47 |
) |
Debt issuance costs |
|
|
(553 |
) |
|
|
|
|
Contributions from owner of Predecessor |
|
|
|
|
|
|
241 |
|
Contributions from noncontrolling interests of Predecessor |
|
|
|
|
|
|
405 |
|
Distributions to owner of Predecessor |
|
|
|
|
|
|
(1,131 |
) |
Distributions to noncontrolling interests of Predecessor |
|
|
|
|
|
|
(1,955 |
) |
Distributions to stockholders |
|
|
(8,808 |
) |
|
|
|
|
Distributions to noncontrolling interests |
|
|
(125 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
34,104 |
|
|
|
75 |
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents |
|
|
6,427 |
|
|
|
152 |
|
Cash and cash equivalents at beginning of period |
|
|
2,327 |
|
|
|
2,902 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
8,754 |
|
|
|
3,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
2,928 |
|
|
|
7,604 |
|
Income taxes paid |
|
$ |
|
|
|
|
|
|
Non-cash investing and financing activity: |
|
|
|
|
|
|
|
|
Changes in
payables related to distributions to stockholders |
|
$ |
1,012 |
|
|
|
|
|
Changes in
payables related to distributions to noncontrolling interests |
|
$ |
15 |
|
|
|
|
|
Change in payables related to capital expenditures |
|
$ |
16,387 |
|
|
|
661 |
|
Accrued costs related to investments in uncombined entities |
|
$ |
|
|
|
|
225 |
|
Contribution of development in process to unconsolidated entity |
|
$ |
7,666 |
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated and combined financial statements. |
4
CAMPUS CREST COMMUNITIES, INC. AND
CAMPUS CREST COMMUNITIES PREDECESSOR
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
1. Organization and Description of Business
Campus Crest Communities, Inc. (along with its subsidiaries, the Company, we, us or
our) is engaged in the business of developing, constructing, owning and managing high-quality,
purpose-built student housing properties in the United States. The Company was incorporated in the
State of Maryland on March 1, 2010. Campus Crest Communities Predecessor (the Predecessor) is
not a legal entity, but rather a combination of certain vertically integrated operating companies
under common ownership. The Predecessor reflects the historical combination of all facets of the
vertically integrated business operations of the student housing related entities of the Company
prior to its ownership of these entities.
On October 19, 2010, the Company completed an initial public offering (the Offering) of
28,333,333 shares of its common stock. On November 18, 2010, underwriters of the Offering closed on
their option to purchase an additional 2,250,000 shares of common stock to cover the overallotment
option granted by the Company to its underwriters. Total Offering-related proceeds to the Company
as a result of both of these transactions totaled approximately $382.3 million. Total
Offering-related expenses were approximately $31.9 million and consisted of the underwriting
discount and other expenses payable by the Company.
As a result of the Offering and certain formation transactions entered into in connection
therewith (the Formation Transactions), the Company currently owns the sole general partner
interest and limited partner interests in Campus Crest Communities Operating Partnership, LP (the
Operating Partnership). As part of the Formation Transactions, the owner of the Predecessor and
certain third-party investors were granted limited partnership interests in the Operating
Partnership (OP units). The exchange of entities or interests therein for OP units was accounted
for as a reorganization of entities under common control. As a result, the Companys assets and
liabilities are reflected at their historical cost basis.
The Company elected and qualified to be taxed as a real estate investment trust (REIT) for
U.S. federal income tax purposes commencing with its taxable year ended December 31, 2010. As a
REIT, the Company generally is not subject to U.S. federal income tax on taxable income that it
distributes currently to its stockholders.
The following tables illustrate the number of properties in which the Company has interests,
both operating and under construction, at June 30, 2011 and December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
|
|
Properties |
|
|
Properties |
|
|
Effective ownership |
|
|
|
in operation |
|
|
under construction(2) |
|
|
percentage |
|
Consolidated entities |
|
|
21 |
|
|
|
4 |
|
|
|
100 |
% |
Unconsolidated entities (1) |
|
|
6 |
|
|
|
2 |
|
|
|
20 49.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
27 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
|
Properties |
|
|
Properties |
|
|
Effective ownership |
|
|
|
in operation |
|
|
under construction(2) |
|
|
percentage |
|
Consolidated entities (1) |
|
|
21 |
|
|
|
6 |
|
|
|
100 |
% |
Unconsolidated entities |
|
|
6 |
|
|
|
|
|
|
|
49.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
27 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Subsequent to December 31, 2010, two properties under construction
were contributed to an unconsolidated entity. |
|
(2) |
|
The Company expects to complete construction and commence
operations at each of these properties in August 2011. |
5
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated and combined financial statements of the
Company and the Predecessor, respectively, have been prepared in accordance with U.S. generally
accepted accounting principles (U.S. GAAP) and instructions to Form 10-Q. They do not include
all the information and footnotes required by U. S. 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 condensed consolidated and combined financial statements for these
interim periods have been included.
The condensed consolidated financial statements of the Company include the financial position,
results of operations and cash flows of the Company, the Operating Partnership and subsidiaries of
the Operating Partnership. Third-party equity interests in the Operating Partnership are reflected
as noncontrolling interests in the condensed consolidated financial statements. The condensed
combined financial statements of the Predecessor reflect the Predecessor and its subsidiaries,
including ventures in which the Predecessor had a controlling interest. Interests in combined
entities held by an entity other than the Predecessor are reflected as noncontrolling interests in
the condensed combined financial statements. The Company and Predecessor also have ownership
interests in unconsolidated real estate ventures which have ownership in several property owning
entities that are accounted for under the equity method. All significant intercompany balances and
transactions have been eliminated. Certain prior period amounts have been reclassified to conform
to the current period presentation.
The Company, which was incorporated on March 1, 2010, had no operations for the period from
its formation through October 18, 2010, as its primary purpose upon formation was to facilitate
completion of the Offering and, upon completion, continue the operations of the Predecessor. Since
the Predecessors combined results of operations reflect the operations of the Company prior to its
ownership of the entities which conduct these operations, the Predecessors condensed combined
results of operations have been prepared and presented for the three and six months ended June 30,
2010.
The unaudited interim condensed consolidated and combined financial statements should be read
in conjunction with the Companys and the Predecessors audited consolidated and combined financial
statements, respectively, and accompanying notes for the year ended December 31, 2010 included in
the Companys Annual Report on Form 10-K for the year ended December 31, 2010 filed with the
Securities and Exchange Commission (SEC). The results of operations and cash flows for any
interim period are not necessarily indicative of results for other interim periods or the full
year.
Use of Estimates
The preparation of consolidated and combined financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities, disclosures of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the reporting period.
Significant assumptions and estimates are used by management in recognizing construction and
development revenue under the percentage of completion method, useful lives of student housing
properties, valuation of investment in real estate, allocation of purchase price to newly acquired
student housing properties, fair value of financial assets and liabilities, including derivatives,
and allowance for doubtful accounts. It is at least reasonably possible that these estimates could
change in the near term.
Investment in Real Estate
Investment in real estate is recorded at historical cost. Major improvements that extend the
life of an asset are capitalized and depreciated over a period equal to the shorter of the life of
the improvement or 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:
6
|
|
|
|
|
Buildings |
|
40 years |
Improvements |
|
20 years |
Furniture, fixtures and equipment |
|
3-10 years |
The cost of buildings and improvements includes all pre-development, entitlement and project
costs directly associated with the development and construction of a real estate project, which
include interest, property taxes and the amortization of deferred financing costs recognized while
the project is under construction. Additionally, the Company capitalizes certain internal costs
related to the development and construction of its student housing properties. All costs are
capitalized as development in process until the asset is ready for its intended use, which is
typically upon receipt of a certificate of occupancy. Upon completion, costs are transferred into
the applicable asset category and depreciation commences. Interest totaling approximately $0.4
million and $0.1 million was capitalized during the three months ended June 30, 2011 and 2010,
respectively, and approximately $0.8 million and $0.1 million was capitalized during the six months
ended June 30, 2011 and 2010, respectively.
Pre-development costs are capitalized until such time that management believes it is no longer
probable that a contract will be executed for the acquisition of property and/or construction will
commence. Because we frequently incur pre-development expenditures before a financing commitment
and/or required permits and authorizations have been obtained, we bear the risk of loss of these
pre-development expenditures if financing cannot ultimately be arranged on acceptable terms or we
are unable to successfully obtain the required permits and authorizations. As such, management
evaluates the status of projects where we have not yet acquired the target property or where we
have not yet commenced construction on a periodic basis and writes off any pre-development costs
related to projects whose current status indicates the acquisition or commencement of construction
is not probable. Such write-offs are included within operating expenses in the consolidated and
combined statements of operations. As of June 30, 2011 and December 31, 2010, we deferred
approximately $1.9 million and $0.9 million, respectively, in pre-development costs related to
development projects that have not yet been acquired or for which construction has not commenced.
Such costs are included in development in process on the accompanying condensed consolidated
balance sheets. Also included in development in process on the accompanying condensed consolidated
balance sheets as of June 30, 2011 and December 31, 2010 are approximately $72.2 million and $23.3
million, respectively, of costs related to projects for which construction is in process or land
has been acquired.
Management assesses whether there has been impairment in the value of our investment in real
estate whenever events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of investment in real estate is measured by a comparison of
the carrying amount of a student housing property to the estimated future undiscounted cash flows
expected to be generated by the property. Impairment is recognized when estimated future
undiscounted cash flows, including proceeds from disposition, are less than the carrying value of
the property. The estimation of future undiscounted cash flows is inherently uncertain and relies
on assumptions regarding current and future economics and market conditions. If such conditions
change, then an adjustment reducing the carrying value of our long-lived assets could occur in the
future period in which 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 operating earnings.
Fair value is determined based upon the discounted cash flows of the property, quoted market prices
or independent appraisals, as considered necessary.
Property Acquisitions
The Company allocates the purchase price of acquired properties to net tangible and identified
intangible assets based on relative fair values. Fair value estimates are based on information
obtained from independent appraisals, other market data, information obtained during due diligence,
and information related to the marketing and leasing at the specific property. The value of
in-place leases is based on the difference between (i) the property valued with existing in-place
leases adjusted to market rental rates and (ii) the property valued as-if vacant. As lease terms
are typically one year or less, rates on in-place leases generally approximate market rental rates.
Factors considered in the valuation of in-place leases include an estimate of the carrying costs
during the expected lease-up period considering current market conditions, nature of the tenancy
and costs to execute similar leases. Carrying costs include estimates of lost rentals at market
rates during the expected lease-up period, net of variable operating expenses. The value of
in-place leases is amortized on a straight-line basis over the remaining initial term of the
respective leases, generally less than one year. Amortization expense was approximately $0.4
million and $0 for the
7
three months ended June 30, 2011 and 2010, respectively, and approximately $0.8 million and $0
for the six months ended June 30, 2011 and 2010, respectively. The amortization of in-place leases
is included in depreciation and amortization expense in the accompanying condensed consolidated
statements of operations. The purchase price of property acquisitions is not expected to be
allocated to tenant relationships, considering the terms of the leases and the expected levels of
lease renewals.
Deferred Financing Costs
We defer costs incurred in obtaining financing and amortize the costs over the terms of the
related loans using the effective interest method. Upon repayment of or in conjunction with a
material change in the terms of the underlying debt agreement, any unamortized costs are charged to
earnings. Deferred financing costs, net of amortization, are included in other assets on the
accompanying condensed consolidated balance sheets. Amortization of deferred financing costs, which
is included in interest expense in the accompanying condensed consolidated and combined statements
of operations, approximated $0.3 million and $0.2 million for the three months ended June 30, 2011
and 2010, respectively, and approximated $0.6 million and $0.3 million for the six months ended
June 30, 2011 and 2010, respectively.
Noncontrolling Interests
Noncontrolling interests represent the portion of equity in the Companys consolidated
subsidiaries which are not attributable to our stockholders. Accordingly, noncontrolling interests
are reported as a component of equity in the accompanying condensed consolidated balance sheets but
separate from stockholders equity. On the condensed consolidated and combined statements of
operations, operating results are reported at their consolidated and combined amounts, including
both the amount attributable to us and to noncontrolling interests. See note 5.
Real Estate Ventures
We hold interests in all properties, both under development and in operation, through
interests in both consolidated and unconsolidated real estate ventures. The Company assesses its
investments in real estate ventures in accordance with applicable guidance under U.S. GAAP to
determine if a venture is a Variable Interest Entity (VIE). We consolidate entities that are
defined as VIEs and for which we are determined to be the primary beneficiary. In instances where
we are not the primary beneficiary, we do not consolidate the entity for financial reporting
purposes. For entities that are not defined as VIEs, management first considers whether we are the
general partner or a limited partner (or the equivalent in such investments which are not
structured as partnerships). We consolidate entities where: (i) we are the general partner (or the
equivalent); and (ii) the limited partners (or the equivalent) in such investments do not have
rights which would preclude control and, therefore, consolidation for financial reporting purposes.
For entities where we are the general partner (or the equivalent) but do not control the real
estate venture, as the other partners (or the equivalent) hold substantive participating rights, we
use the equity method of accounting. For entities where we are a limited partner (or the
equivalent), management considers factors such as ownership interest, voting control, authority to
make decisions, and contractual and substantive participating rights of the partners (or the
equivalent) to determine if the presumption that the general partner controls the entity is
overcome. In instances where these factors indicate we control the entity, we consolidate the
entity; otherwise, we record our investment using the equity method of accounting.
Under the equity method, investments are initially recognized on the balance sheet at cost and
are subsequently adjusted to reflect our proportionate share of net earnings or losses of the
entity, distributions received, contributions, and certain other adjustments, as appropriate. When
circumstances indicate there may have been a loss in value of an equity method investment, we
evaluate the investment for impairment by estimating our ability to recover the investment from
future expected discounted cash flows. If we determine the loss in value is other than temporary,
we recognize an impairment charge to reflect the investment at fair value.
8
Student Housing Revenue
Students are required to execute lease contracts with payment schedules that vary from annual
to monthly payments. We recognize revenues on a straight-line basis over the term of the lease
contracts. Generally, each executed contract is required to be accompanied by a signed parental
guaranty. Amounts received in advance of the occupancy period are recorded as deferred revenues and
included in other liabilities on the accompanying condensed consolidated balance sheets. Service
revenue is recognized when earned.
Development, Construction and Management Services
Development and construction service revenue is recognized using the percentage of completion
method, as determined by construction costs incurred relative to total estimated construction
costs. Any changes in significant judgments and/or estimates used in determining construction and
development revenue could significantly change the timing or amount of construction and development
service revenue recognized.
Development and construction service revenue is recognized for contracts with entities we do
not consolidate. For projects where the revenue is based on a fixed price, any cost overruns
incurred during construction, as compared to the original budget, will reduce the net profit
ultimately recognized on those projects. Profit derived from these projects is eliminated to the
extent of the Companys ownership interest in the unconsolidated entity. Any incentive fees, net
of the impact of our ownership interest if the entity is unconsolidated, are recognized when the
project is complete and performance has been agreed upon by all parties, or when performance has
been verified by an independent third party. If total development or construction costs at
completion exceed the fixed price set forth within the related contract, such cost overruns are
recorded as additional investment in the unconsolidated entity.
Management fees, net of elimination to the extent of our ownership interest in an
unconsolidated entity, are recognized when earned in accordance with each management contract for
entities we do not consolidate. Incentive management fees are recognized when the incentive
criteria are met.
Allowance for Doubtful Accounts
Allowances for student receivables are established when management determines that collections
of such receivables are doubtful. Balances are considered past due when payment is not received on
the contractual due date. When management has determined that receivables are uncollectible, they
are written off against the allowance for doubtful accounts.
Derivative Instruments and Hedging Activities
In certain instances, interest rate cap agreements and interest rate swap agreements are used
to manage floating interest rate exposure with respect to amounts borrowed, or forecasted to be
borrowed, under credit facilities. These contracts effectively exchange existing or forecasted
obligations to pay interest based on floating rates for obligations to pay interest based on fixed
rates.
All derivative instruments are recognized as either assets or liabilities on the condensed
consolidated balance sheets at their respective fair values. Changes in fair value are recognized
either in earnings or as accumulated other comprehensive income (loss), depending on whether the
derivative has been designated as a fair value or cash flow hedge and whether it qualifies as part
of a hedging relationship, the nature of the exposure being hedged, and how effective the
derivative is at offsetting movements in underlying exposure. The Company discontinues hedge
accounting when: (i) it determines that the derivative is no longer effective in offsetting changes
in the fair value or cash flows of a hedged item; (ii) the derivative expires or is sold,
terminated, or exercised; (iii) it is no longer probable that the forecasted transaction will
occur; or (iv) management determines that designating the derivative as a hedging instrument is no
longer appropriate. In situations in which hedge accounting is not initially designated, or is
discontinued and a derivative remains outstanding, gains and losses related to changes in the fair
value of the derivative instrument are recorded in current period earnings as a component of the
change in fair value of interest rate derivatives line item on the accompanying condensed
consolidated and combined statements of operations. Also included within this line item are any
required monthly settlements on interest rate swaps, as well as all cash settlements paid. The
Companys counterparties are major financial institutions.
9
Fair Value of Financial Instruments
Financial instruments consist primarily of cash, cash equivalents, student receivables,
interest rate caps, interest rate swaps, accounts payable, mortgages, construction notes payable
and lines of credit. The carrying value of cash, cash equivalents, student receivables and accounts
payable are representative of their respective fair values due to the short-term nature of these
instruments. The estimated fair values of mortgages, construction notes payable and lines of credit
are determined by comparing current borrowing rates and risk spreads offered in the market to the
stated interest rates and spreads on our current mortgages and construction notes payable. The fair
values of mortgages, construction notes payable and lines of credit are disclosed in note 9.
The estimated fair values of interest rate caps and swaps are determined using widely accepted
valuation techniques including discounted cash flow analysis on the expected cash flows of the
derivative. This analysis reflects the contractual terms of the derivative, including the period to
maturity, and uses observable market-based inputs, including interest rate curves, implied
volatilities and the creditworthiness of the swap counterparties.
Fair value guidance for financial assets and liabilities which are recognized and disclosed in
the consolidated financial statements on a recurring basis and nonfinancial assets on a
nonrecurring basis establishes a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted
quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the
lowest priority to measurements involving significant unobservable inputs (Level 3 measurements).
The three levels of the fair value hierarchy are as follows:
Level 1Observable inputs, such as quoted prices in active markets at the measurement date
for identical, unrestricted assets or liabilities.
Level 2Other inputs that are observable directly or indirectly, such as quoted prices in
markets that are not active or inputs which are observable, either directly or indirectly, for
substantially the full term of the asset or liability.
Level 3Unobservable inputs for which there is little or no market data and which the Company
makes its own assumptions about how market participants would price the asset or liability.
Fair value is defined as the price that would be received when selling an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement date
(exit price). In instances where inputs used to measure fair value fall into different levels of
the fair value hierarchy, the level in the fair value hierarchy within which the fair value
measurement in its entirety has been determined is based on the lowest level input significant to
the fair value measurement in its entirety. Our assessment of the significance of a particular
input to the fair value measurement in its entirety requires judgment and considers factors
specific to the asset or liability.
Interest rate caps and interest rate swaps measured at fair value at June 30, 2011 and
December 31, 2010 are as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in |
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for |
|
|
Significant Other |
|
|
Significant |
|
|
|
|
|
|
Identical Assets and |
|
|
Observable Inputs |
|
|
Unobservable |
|
|
Balance at |
|
|
|
Liabilities (Level 1) |
|
|
(Level 2) |
|
|
Inputs (Level 3) |
|
|
End of Period |
|
Other assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 Interest rate caps |
|
$ |
|
|
|
|
29 |
|
|
|
|
|
|
|
29 |
|
December 31, 2010 Interest rate
caps |
|
$ |
|
|
|
|
103 |
|
|
|
|
|
|
|
103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 Interest rate swaps |
|
$ |
|
|
|
|
(261 |
) |
|
|
|
|
|
|
(261 |
) |
December 31, 2010 Interest rate
swaps |
|
$ |
|
|
|
|
(452 |
) |
|
|
|
|
|
|
(452 |
) |
10
Commitments and Contingencies
Liabilities for loss contingencies, arising from claims, assessments, litigation, fines,
penalties and other sources, are recorded when it is probable that a liability has been incurred
and the amount of the assessment can be reasonably estimated. Legal costs incurred in connection
with loss contingencies are expensed as incurred.
Income Taxes
The Company elected to be treated as a REIT under Sections 856 through 859 of the Internal
Revenue Code commencing with the Companys taxable year ended on December 31, 2010. The Companys
qualification as a REIT depends upon its ability to meet on a continuing basis, through actual
investment and operating results, various complex requirements under the Internal Revenue Code
relating to, among other things, the sources of the Companys gross income, the composition and
values of its assets, its distribution levels and the diversity of ownership of its stock. The
Company believes that it is organized in conformity with the requirements for qualification and
taxation as a REIT under the Internal Revenue Code and that the Companys intended manner of
operation will enable it to meet the requirements for qualification and taxation as a REIT.
As a REIT, the Company generally will not be subject to U.S. federal and state income tax on
taxable income that it distributes currently to its stockholders. If the Company fails to qualify
as a REIT in any taxable year and does not qualify for certain statutory relief provisions, the
Company will be subject to U.S. federal income tax at regular corporate rates and generally will be
precluded from qualifying as a REIT for the subsequent four taxable years following the year during
which it lost its REIT qualification. Accordingly, our failure to qualify as a REIT could
materially and adversely affect us, including our ability to make distributions to our stockholders
in the future. Even if the Company qualifies as a REIT, we will be subject to some U.S. federal,
state and local taxes on our income or property and the income of our taxable REIT subsidiaries
will be subject to taxation at normal corporate rates.
The Company wholly owns four taxable REIT subsidiary (TRS) entities that manage the
Companys non-REIT activities and each is subject to federal, state and local income and franchise
taxes. Deferred tax assets and liabilities are recognized based on the difference between the
financial statement carrying amounts of existing assets and liabilities and their respective tax
basis. Deferred tax assets and liabilities are measured using enacted tax rates in effect in the
years in which those temporary differences are expected to reverse. For the three and six months
ended June 30, 2011, we recorded a federal and state income tax provision related to our TRS
subsidiaries of approximately $0.1 million and $0.2 million, respectively.
The combined entities of the Predecessor are all limited liability companies or limited
partnerships and elected to be taxed as partnerships for federal income tax purposes. As a result,
no provision for income taxes has been recorded in the accompanying condensed combined financial
statements of the Predecessor as all income and losses of the Predecessor are allocated to the
owners for inclusion in their respective tax returns.
Comprehensive Loss
Comprehensive loss includes net loss and other comprehensive income (loss), which consists of
unrealized gains (losses) on derivative instruments. Comprehensive loss is presented in the
accompanying condensed consolidated statement of changes in equity and comprehensive loss, and
accumulated other comprehensive income (loss) is displayed as a separate component of stockholders
equity.
Share-Based Compensation
The Company awards restricted stock and restricted OP unit awards that vest in equal annual
installments over either a three or five year period. A restricted stock or OP unit award is an
award of the Companys common stock or OP units that are subject to restrictions on transferability
and other restrictions determined by the Companys compensation committee at the date of grant. A
grant date is established for a restricted stock award or restricted OP unit award upon approval
from the Companys compensation committee and board of directors. The restrictions may lapse over
a specified period of employment or the satisfaction of pre-established criteria as the Companys
compensation committee may determine. Except to the extent restricted under the award agreement, a
participant awarded restricted shares or OP units has all the rights of a stockholder or OP unit
holder as to these shares or units,
11
including the right to vote the shares and the right to receive dividends or distributions on
the shares or units. The fair value of the award is determined based on the market value of the
Companys common stock on the grant date and is recognized on a straight-line basis over the
applicable vesting period for the entire award with cost recognized at the end of any period being
at least equal to the shares that were then vested. During the three and six months ended June 30,
2011, approximately $0.3 million and $0.5 million, respectively, of compensation expense was
recognized in the accompanying condensed consolidated financial statements related to the vesting
of restricted stock and restricted OP units. See note 10.
Recent Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board (FASB) issued new accounting guidance
which eliminates the option to report other comprehensive income (loss) and its components in the
statement of changes in equity. Entities will have the option to present the components of net
income (loss) and other comprehensive income (loss) in either a single continuous statement or two
separate but consecutive statements. This guidance requires retrospective application and is
effective for annual periods, and interim periods contained within those annual periods, beginning
after December 31, 2011. We have not yet decided on the format that will be used in future periods.
The standard will not change the recognition or measurement of net income (loss) or comprehensive
income (loss).
In May 2011, the FASB issued new accounting guidance which provides clarification about how
fair value should be applied where it is used or permitted to be used under U.S. GAAP. This
guidance requires prospective application and is effective for interim and annual periods beginning
after December 15, 2011. We are currently evaluating what impact, if any, its adoption will have on
our consolidated financial statements.
In July 2010, the FASB issued new accounting guidance requiring additional disclosure related
to the credit quality of certain receivables and the allowance for losses. It is effective for our
annual reporting period ending December 31, 2011. We are currently evaluating what impact, if any,
its adoption will have on our consolidated financial statements.
In January 2010, the FASB issued new accounting guidance requiring additional disclosure
related to the fair value of financial instruments. Transfers between the three levels within the
fair value hierarchy, as well as changes in an entitys Level 3 fair value instruments, require
additional disclosure. This guidance was effective for us beginning on January 1, 2011. The
adoption did not have a material impact on our consolidated financial statements.
3. Earnings per Share
Basic earnings per share is computed by dividing net loss attributable to the Companys
stockholders by the weighted average number of shares of the Companys common stock outstanding
during the period. All unvested share based payment awards are included in the computation of
basic earnings per share. Diluted earnings per share reflect common shares issuable from the
assumed conversion of OP units and restricted OP units and other potentially dilutive securities.
A reconciliation of the numerators and denominators for basic and diluted earnings per share
computations is not required as the Company reported a net loss for the three and six months ended
June 30, 2011, and therefore the effect of the inclusion of all potentially dilutive securities
would be anti-dilutive when computing diluted earnings per share. Therefore, the computation of
both basic and diluted earnings per share is the same. For the three and six months ended June 30,
2011, 435,593 OP units and restricted OP units were not included in the computation of diluted
earnings per share because the effects of their inclusion would be anti-dilutive.
At June 30, 2011 and December 31, 2010, accrued dividends and OP unit distributions of
approximately $5.0 million and $4.0 million, respectively,
are recorded in accounts payable and accrued expenses on the Companys condensed
consolidated balance sheets.
12
4. Student Housing Properties
Student housing properties, net, consisted of the following (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
Land |
|
$ |
26,369 |
|
|
|
26,369 |
|
Buildings and improvements |
|
|
304,709 |
|
|
|
304,447 |
|
Furniture, fixtures and equipment |
|
|
42,424 |
|
|
|
41,930 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
373,502 |
|
|
|
372,746 |
|
Accumulated depreciation |
|
|
(66,943 |
) |
|
|
(57,463 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
306,559 |
|
|
|
315,283 |
|
|
|
|
|
|
|
|
5. Noncontrolling Interests
Company Noncontrolling Interests Operating Partnership Units
Certain limited partners in the Operating Partnership, which total approximately 1.5% of the
limited partnership interest in the Operating Partnership, hold their ownership units through
entities which are not affiliates or subsidiaries of the Company. OP units are exchangeable into
cash or, at the Companys election, an equal number of shares of the Companys common stock. OP
units have the same economic characteristics as shares of the Companys common stock, as they
effectively participate equally in the net income and distributions of the Operating Partnership.
The holders of OP Units have the right to require the Operating Partnership to redeem part or
all of the OP Units for cash based upon the fair market value of an equivalent number of shares of
the Companys common stock at the time of redemption. However, the Company may, in its sole
discretion, elect to redeem the OP Units in exchange for common stock. Based on this assessment,
which includes the evaluation of terms in the agreements related to redemption provisions, the
Company has classified these noncontrolling interests as a component of permanent equity on the
accompanying condensed consolidated balance sheets. The share of net loss allocated to these OP
units is reported on the accompanying condensed consolidated statements of operations for the three
and six months ended June 30, 2011 as net loss attributable to noncontrolling interests. For the
three and six months ended June 30, 2011, no OP units were redeemed.
Predecessor Noncontrolling Interests Third-Party Venture Partners
Prior to completion of the Offering, the Predecessor combined real estate ventures which
wholly owned 20 operating student housing properties. Each of these real estate ventures had
third-party partners other than the Predecessor or its affiliates. The third-party owners share
of the income or loss of the entities is reported on the accompanying condensed combined statements
of operations for the three and six months ended June 30, 2010 as net loss attributable to
noncontrolling interests.
6. Property Acquisition
On October 19, 2010, we acquired from Harrison Street Real Estate, a real estate private
equity firm (HSRE), the remaining interest in Campus Crest at San Marcos, LLC, which owns The
Grove at San Marcos. Prior to this transaction, The Grove at San Marcos was wholly owned by a real
estate venture, HSRE-Campus Crest I, LLC, in which the Company and HSRE are members and had 10% and
90% member interests, respectively (see note 8). Prior to the acquisition of this interest, the
Company accounted for its ownership interest in The Grove at San Marcos under the equity method of
accounting. Subsequent to its acquisition of this interest, the Company consolidated the results of
operations of The Grove at San Marcos. In connection with the accounting for its purchase of the
remaining interest in the property, the Company recorded a gain of approximately $0.6 million
during the period from October 19, 2010 through December 31, 2010 related to the remeasurement of
its previously held equity interest in The Grove at San Marcos at the acquisition date.
13
7. Sales of Interests in Properties and Real Estate Ventures
In November 2009, we sold 90% of our interest in The Grove at Milledgeville to an affiliate of
HSRE. We received proceeds from the sale of approximately $3.9 million. Concurrent with the
Offering and Formation Transactions, the Company repurchased the 90% interest in The Grove at
Milledgeville, with the result that the Company owned 100% of The Grove at Milledgeville on October
19, 2010. Because of our continuing involvement in this asset and because this transaction had
financing elements, we did not record this transaction as a sale for financial reporting purposes.
The proceeds were recorded as a loan and the Predecessor continued to combine the balance sheet and
results of operations of Campus Crest at Milledgeville, LLC, the entity which owns the property,
through October 18, 2010. The difference between the sale proceeds and contracted repurchase price
was accreted and recorded as interest expense in the Predecessors condensed combined statement of
operations. For the three and six months ended June 30, 2010, interest expense related to this
transaction totaled approximately $0.6 million and $1.0 million, respectively.
In March 2010, we sold 99% of our interest in HSRE-Campus Crest I, LLC, which represented a
9.9% interest in the underlying venture, to an affiliate of HSRE. Total proceeds received were
approximately $2.25 million. Concurrent with the Offering and Formation Transactions, the Company
repurchased the 9.9% interest in HSRE-Campus Crest I, LLC. As a result, the transaction was
accounted for as a financing. The difference between the proceeds received and the contracted
repurchase amount was accreted and recorded as interest expense in the Predecessors condensed
combined statement of operations. For the three and six months ended June 30, 2010, interest
expense related to this transaction totaled approximately $0.3 million and $0.4 million,
respectively.
In September 2010, we sold 99.9% of our interest in The Grove at Carrollton to an affiliate of
HSRE. We received proceeds from the sale of approximately $0.8 million. Concurrent with the
Offering and Formation Transactions, the Company repurchased the 99.9% interest in The Grove at
Carrollton, with the result that the Company owned 100% of The Grove at Carrollton on October 19,
2010. Because of our continuing involvement in this asset and because the transaction had financing
elements, we did not record this transaction as a sale for financial reporting purposes. The
proceeds were recorded as a loan and the Predecessor continued to combine the balance sheet and
results of operations of Campus Crest at Carrollton, LLC, the entity which owns the property,
through October 18, 2010. The difference between the sale proceeds and contracted repurchase price
was accreted and recorded as an interest expense in the Predecessors condensed combined statement
of operations.
8. Investment in Unconsolidated Entities
We have investments in two real estate venture entities with HSRE. The first real estate
venture, HSRE-Campus Crest I, LLC (HSRE I), is not consolidated by the Company. At June 30, 2011
and December 31, 2010, this entity, in which our investment is accounted for under the equity
method, owned six student housing properties. Three of these properties, The Grove at Lawrence, The
Grove at Moscow and The Grove at San Angelo, opened in 2009. The remaining three properties, The
Grove at Huntsville, The Grove at Conway and The Grove at Statesboro opened in 2010. We held a
49.9% noncontrolling interest in this unconsolidated entity at June 30, 2011 and December 31, 2010.
Prior to the Offering and Formation Transactions, we held a 10% noncontrolling interest in this
venture. As discussed in note 6, also prior to the Offering, the HSRE I venture owned an additional
student housing property, The Grove at San Marcos. The Company acquired the remaining ownership
interest in this property, which opened in 2009, concurrent with the Offering and Formation
Transactions.
The second real estate venture, HSRE-Campus Crest IV, LLC (HSRE IV), was entered into on
January 20, 2011. HSRE will contribute up to $50 million to the venture, which will develop and
operate additional purpose-built student housing properties. The Companys investment in this real
estate venture is accounted for under the equity method. We own a 20% noncontrolling interest in
this unconsolidated entity at June 30, 2011. HSRE IV is currently constructing two new student
housing properties with completion targeted for the 2011-2012 academic year, The Grove at Denton
and The Grove at Valdosta. The Company made contributions to HSRE IV of approximately $3.0 million
during the six months ended June 30, 2011, consisting of cash and assigned interests in Campus
Crest at Denton, LP and Campus Crest at Valdosta, LLC.
We recorded equity in loss from these ventures of approximately $(0.3) million and $(0.1)
million for the three months ended June 30, 2011 and 2010, respectively, and approximately $(0.6)
million and $(0.2) million for
14
the six months ended June 30, 2011 and 2010, respectively. In addition to acting as the
operating member for these ventures, the Company and its Predecessor are entitled to receive fees
for providing development and construction services (as applicable) and management services to the
ventures. The Company earned approximately $11.3 million and $15.1 million in fees for the three
months ended June 30, 2011 and 2010, respectively, and approximately $21.6 million and $30.9
million in fees for the six months ended June 30, 2011 and 2010, respectively, for services
provided to the ventures. The development, construction and management service fees from these
unconsolidated entities are reflected in the development, construction and management services line
item in the accompanying condensed consolidated and combined statements of operations.
The Company is the guarantor of the construction debt of these ventures, which totaled
approximately $102.7 million and $83.2 million at June 30, 2011 and December 31, 2010,
respectively. The ventures construction debt matures at various dates between 2011 and 2013.
Condensed combined financial information for these unconsolidated entities as of June 30, 2011
and December 31, 2010 and for the three and six month periods ended June 30, 2011 and 2010 are as
follows (amounts in thousands):
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
June 30, 2011 |
|
|
2010 |
|
Assets: |
|
|
|
|
|
|
|
|
Student housing properties, net |
|
$ |
110,690 |
|
|
|
112,224 |
|
Development in process |
|
|
38,211 |
|
|
|
|
|
Other assets |
|
|
7,231 |
|
|
|
5,444 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
156,132 |
|
|
|
117,668 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and owners equity: |
|
|
|
|
|
|
|
|
Construction debt |
|
$ |
102,717 |
|
|
|
83,222 |
|
Other liabilities |
|
|
9,561 |
|
|
|
5,117 |
|
Owners equity |
|
|
43,854 |
|
|
|
29,329 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and owners equity |
|
$ |
156,132 |
|
|
|
117,668 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share of historical owners equity |
|
$ |
14,952 |
|
|
|
12,479 |
|
|
|
|
|
|
|
|
|
|
Preferred investment (1, 2) |
|
|
6,839 |
|
|
|
4,781 |
|
Net difference in carrying value of investment versus
net book value of underlying net assets (3) |
|
|
(3,682 |
) |
|
|
(3,509 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value of investment in unconsolidated entities |
|
$ |
18,109 |
|
|
|
13,751 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As of June 30, 2011, the Company has a Class B member interest in
The Grove at Valdosta of approximately $1.1 million. This
preferred interest entitles the Company to a 9.0% return on its
investment but otherwise does not change the Companys effective
20% ownership interest in this entity. |
|
(2) |
|
As of June 30, 2011, the Company has a Class B member interest in
both The Grove at San Angelo and The Grove at Moscow of
approximately $2.8 million and $3.0 million, respectively. As of
December 31, 2010, the Company had a Class B member interest in
both The Grove at San Angelo and The Grove at Moscow of
approximately $2.3 million and $2.5 million, respectively. These
preferred interests entitle the Company to a 9.0% return on its
investment but otherwise do not change the Companys effective
49.9% ownership interest in these entities or operating
properties. |
|
(3) |
|
This amount represents the aggregate difference between our
historical cost basis and the basis reflected at the entity (i.e.,
venture) level, which is typically amortized over the life of the
related asset. The basis differential occurs primarily due to the
difference between the allocated value to acquired entity
interests and the ventures basis in those interests, the
capitalization of additional investment in the unconsolidated
entities, and the elimination of profit earned by us from services
provided to these entities to the extent of our percentage
ownership. |
15
Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Revenues |
|
$ |
3,768 |
|
|
|
2,091 |
|
|
|
7,509 |
|
|
|
4,111 |
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
2,139 |
|
|
|
1,369 |
|
|
|
4,121 |
|
|
|
2,672 |
|
Interest expense |
|
|
1,465 |
|
|
|
931 |
|
|
|
2,944 |
|
|
|
1,893 |
|
Depreciation and amortization |
|
|
1,115 |
|
|
|
794 |
|
|
|
2,238 |
|
|
|
1,589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
4,719 |
|
|
|
3,094 |
|
|
|
9,303 |
|
|
|
6,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(951 |
) |
|
|
(1,003 |
) |
|
|
(1,794 |
) |
|
|
(2,043 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Companys and Predecessors share of net loss (1) |
|
$ |
(340 |
) |
|
|
(114 |
) |
|
|
(635 |
) |
|
|
(194 |
) |
|
|
|
(1) |
|
Amount differs from net loss multiplied by the Companys ownership
percentage due to the amortization of the aggregate difference
between our historical cost basis and our basis reflected at the
entity (i.e., venture) level. |
9. Debt
A detail of our mortgage loans, construction loans and lines of credit is presented below
(amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
Fixed-rate mortgage loans |
|
$ |
60,840 |
|
|
|
60,840 |
|
Construction loans |
|
|
11,724 |
|
|
|
|
|
Lines of credit |
|
|
74,500 |
|
|
|
42,500 |
|
|
|
|
|
|
|
|
|
|
$ |
147,064 |
|
|
|
103,340 |
|
|
|
|
|
|
|
|
During the six months ended June 30, 2011 and 2010, the following transactions occurred
(amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
Balance at beginning of period |
|
$ |
103,340 |
|
|
|
343,172 |
|
Additions: |
|
|
|
|
|
|
|
|
Draws on lines of credit |
|
|
32,000 |
|
|
|
40 |
|
Draws under construction loans |
|
|
11,724 |
|
|
|
497 |
|
Proceeds from related party loan (1) |
|
|
|
|
|
|
2,250 |
|
Accretion of interest expense (1) |
|
|
|
|
|
|
1,376 |
|
Deductions: |
|
|
|
|
|
|
|
|
Payments on construction loans |
|
|
|
|
|
|
(225 |
) |
Payments on related party loan |
|
|
|
|
|
|
(47 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
147,064 |
|
|
|
347,063 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Relates to sale of 90% of our interest in Campus Crest at Milledgeville, LLC, and sale of 99% of our interest in HSRE I. See note 7. |
16
The estimated fair value of our fixed rate mortgage loans at June 30, 2011 and December
31, 2010 was approximately $74.3 million and approximately $62.9 million, respectively. Estimated
fair values are determined by comparing current borrowing rates and risk spreads to the stated
interest rates and risk spreads. The estimated fair
value of our revolving line of credit approximates the outstanding balance due to the frequent
market based repricing of the underlying variable rate index.
Mortgage and construction loans are collateralized by properties and their related revenue
streams. Mortgage and construction loans at June 30, 2011 and December 31, 2010 consisted of the
following (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal |
|
|
Principal |
|
|
Stated |
|
|
Interest |
|
|
Interest |
|
|
|
|
|
|
|
|
|
Face |
|
|
Outstanding at |
|
|
Outstanding |
|
|
Interest |
|
|
Rate At |
|
|
Rate at |
|
|
Maturity |
|
|
|
|
|
|
Amount |
|
|
June 30, 2011 |
|
|
December 31, 2010 |
|
|
Rate |
|
|
June 30, 2011 |
|
|
December 31, 2010 |
|
|
Date |
|
|
Amortization |
|
Mortgage loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Grove at Asheville |
|
$ |
14,800 |
|
|
|
14,800 |
|
|
|
14,800 |
|
|
|
5.77 |
% |
|
|
5.77 |
% |
|
|
5.77 |
% |
|
|
4/11/17 |
|
|
30 years |
The Grove at Carrollton |
|
|
14,650 |
|
|
|
14,650 |
|
|
|
14,650 |
|
|
|
6.13 |
% |
|
|
6.13 |
% |
|
|
6.13 |
% |
|
|
10/11/16 |
|
|
30 years |
The Grove at Las Cruces |
|
|
15,140 |
|
|
|
15,140 |
|
|
|
15,140 |
|
|
|
6.13 |
% |
|
|
6.13 |
% |
|
|
6.13 |
% |
|
|
10/11/16 |
|
|
30 years |
The Grove at Milledgeville |
|
|
16,250 |
|
|
|
16,250 |
|
|
|
16,250 |
|
|
|
6.12 |
% |
|
|
6.12 |
% |
|
|
6.12 |
% |
|
|
10/1/16 |
|
|
30 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction loan
(three properties) (1) |
|
|
52,751 |
|
|
|
7,332 |
|
|
|
|
|
|
LIBOR + 4.75% |
|
|
4.94 |
% |
|
|
N/A |
|
|
|
11/19/13 |
|
|
Interest only through 11/2012 |
The Grove at Columbia |
|
|
17,046 |
|
|
|
4,392 |
|
|
|
|
|
|
Greater of LIBOR + 3.00% or 4.50% |
|
|
4.50 |
% |
|
|
N/A |
|
|
|
3/4/14 |
|
|
Interest only through 4/2013 |
The Grove at Orono |
|
|
15,206 |
|
|
|
|
|
|
|
|
|
|
LIBOR + 2.75% |
|
|
N/A |
|
|
|
N/A |
|
|
|
6/30/14 |
|
|
Interest only |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
145,843 |
|
|
|
72,564 |
|
|
|
60,840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Secured by The Grove at Ames, The Grove Clarksville and The Grove
at Fort Wayne. At June 30, 2011, approximately $3.1 million of the
loan balance was hedged with a floating to fixed interest rate
swap, which when taken together with the loan interest, fixed this
portion of the loans interest rate at 6.14%. |
Mortgage Loans
The loans for The Grove at Asheville, The Grove at Carrollton, The Grove at Las Cruces and The
Grove at Milledgeville generally require interest only payments, plus certain reserves and escrows,
that are payable monthly for a period of five years. Monthly payments of principal and interest,
plus certain reserve and escrow amounts, are due thereafter until maturity when all principal is
due. Each of these loans has a 30-year amortization and is a non-recourse obligation subject to
customary exceptions. None of these loans are cross-defaulted or cross-collateralized with any
other indebtedness. The loans generally may not be prepaid prior to maturity; in certain cases,
prepayment is allowed, subject to prepayment penalties.
During the three and six months ended June 30, 2010, the Predecessor was party to an
additional mortgage loan which was outstanding. This loan had a principal amount of approximately
$104.0 million, was secured by six properties, had a fixed interest rate of 6.40% and had interest
only payments with a balloon maturity date of February 28, 2013. This mortgage loan was repaid in
full on October 19, 2010, upon completion of the Offering.
17
Construction Loans
On July 22, 2011, Campus Crest at Auburn, LLC, a subsidiary of the Company, entered into a
Construction Loan Agreement with Compass Bank pursuant to which Compass Bank agreed to provide
Campus Crest at Auburn, LLC a construction loan with a total borrowing capacity of approximately
$16.3 million. The construction loan will
be used to finance the development of a student housing property in Auburn, Alabama. The
construction loan matures on July 22, 2014, but can be extended until October 22, 2015, subject to
certain conditions. The interest rate on the construction loan is LIBOR plus 2.95%. The
construction loan agreement contains representations, warranties, covenants (including financial
covenants upon commencement of operations) and other terms that are customary for construction
financing.
On June 30, 2011, Campus Crest at Orono, LLC, a subsidiary of the Company, entered into a
Construction Loan Agreement with TD Bank, N.A. pursuant to which TD Bank agreed to provide Campus
Crest at Orono, LLC a construction loan with a total borrowing capacity of approximately $15.2
million. The construction loan will be used to finance the development of a student housing
property in Orono, Maine. The construction loan matures on June 30, 2014, but can be extended until
December 31, 2015, subject to certain conditions. The interest rate on the construction loan is
LIBOR plus 2.75%. The construction loan agreement contains representations, warranties, covenants
(including financial covenants upon commencement of operations) and other terms that are customary
for construction financing. At June 30, 2011, no amounts were outstanding under this loan.
On March 4, 2011, Campus Crest at Columbia, LLC, a subsidiary of the Company, entered into a
Construction Loan Agreement with BOKF, NA (d/b/a Bank of Oklahoma), pursuant to which Bank of
Oklahoma agreed to provide Campus Crest at Columbia, LLC a construction loan with a total borrowing
capacity of approximately $17.0 million. The construction loan will be used to finance the
development of a student housing property in Columbia, Missouri. The construction loan matures on
March 4, 2014, but can be extended until March 4, 2015, subject to certain conditions. The interest
rate on the construction loan is the greater of (i) LIBOR plus 3.0%, or (ii) 4.5%. Loan payments
are interest only through April 2013. The construction loan agreement contains representations,
warranties, covenants (including financial covenants upon commencement of operations) and other
terms that are customary for construction financing. At June 30, 2011, approximately $4.4 million
was outstanding under this loan.
On November 19, 2010, the Company entered into a construction loan with The PrivateBank and
Trust Company of approximately $52.8 million. The construction loan will be used to finance the
development of student housing properties in each of Ames, Iowa, Clarksville, Tennessee, Fort
Collins, Colorado and Fort Wayne, Indiana. The construction loan initially matures on November 19,
2013, but can be extended until November 19, 2014, subject to certain conditions. The interest rate
is LIBOR plus 4.75% and the construction loan agreement contains representations, warranties,
covenants (including financial covenants upon commencement of operations) and other terms that are
customary for construction financing. Loan payments are interest only through November 2012. At
June 30, 2011 and December 31, 2010, approximately $7.3 million and $0 were outstanding under this
loan, respectively.
During the three and six months ended June 30, 2010, the Predecessor was a party to two
construction loans which were outstanding. The first construction loan had an outstanding
principal amount of approximately $148.9 million, was secured by nine properties, had an interest
rate of interest LIBOR plus 1.80% (when taken together with an interest rate swap, fixed the loans
rate at 6.0%) and had interest only payments with a balloon maturity date of October 31, 2010. The
second construction loan had an outstanding principal amount of approximately $15.8 million, was
secured by one property, had an interest rate equal to the greater of LIBOR plus 3.0% or 5.5% and
had a maturity date of October 31, 2010. Both construction loans were repaid in full on October 19,
2010 upon completion of the Offering.
Lines of Credit
On October 19, 2010, the Company closed a credit agreement (our revolving credit facility)
with Citibank, N.A. and certain other parties thereto relating to a three-year, $125 million senior
secured revolving credit facility. This facility is secured by 12 of our wholly owned properties.
As of June 30, 2011 and December 31, 2010, approximately $74.5 million and $42.5 million was
outstanding under our revolving credit facility, respectively. At June 30, 2011, the Company had
approximately $14.4 million of borrowing capacity under this facility. Borrowings under our
revolving credit facility were used to repay indebtedness which existed prior to the Offering or
were used
18
to finance our required equity contribution for projects expected to be built and open
for the 2011-2012 academic year or future academic years.
The amount available for us to borrow under this credit facility is based on a percentage of
the appraisal value of our properties that form the borrowing base of the facility. We intend to
pursue alternative, longer-term financing for some or all of the properties, which, prior to the
completion of the Offering, secured our $104.0 million mortgage loan since they were released from
the lien of that mortgage upon its repayment in full in connection with the Offering. For eligible
properties, this may include debt financing provided by Freddie Mac or Fannie Mae.
Our revolving credit facility has an accordion feature that allows us to request an increase
in the total commitments of an additional $75 million up to a total commitment of $200 million.
Amounts outstanding under our revolving credit facility bear interest at a floating rate equal to,
at our election, the Eurodollar Rate or the Base Rate (each as defined in the revolving credit
facility) plus a spread. The spread depends upon our leverage ratio and ranges from 2.75% to 3.50%
for Eurodollar Rate based borrowings and from 1.75% to 2.50% for Base Rate based borrowings. At
June 30, 2011, the effective interest rate on the revolving credit facility was 2.95%.
Our ability to borrow under our revolving credit facility is subject to our ongoing compliance
with a number of customary financial covenants, including:
|
|
|
a maximum leverage ratio of 0.60 : 1.00; |
|
|
|
|
a minimum fixed charge coverage ratio of 1.50 : 1.00; |
|
|
|
|
a minimum ratio of fixed rate debt and debt subject to hedge agreements to total debt of
66.67%; |
|
|
|
|
a maximum secured recourse debt ratio of 20%; and |
|
|
|
|
a minimum tangible net worth of the sum of 75% of our tangible net worth plus an amount equal
to 75% of the net proceeds of any additional equity issuances. |
Under our revolving credit facility, for any three month period ending on or after December
31, 2011, our distributions may not exceed the greater of (i) 90.0% of our Funds From Operations
(FFO) or (ii) the amount required for us to qualify and maintain our status as a REIT. For the
three month period ending September 30, 2011, our distributions may not exceed the greater of (i)
95.0% of our Funds From Operations (FFO) or (ii) the amount required for us to qualify and
maintain our status as a REIT. For any three month period in 2011 ending on or prior to June 30,
2011, our distributions may not exceed the greater of (i) 100.0% of our FFO or (ii) the amount
required for us to qualify and maintain our status as a REIT. If a default or event of default
occurs and is continuing, we may be precluded from making certain distributions (other than those
required to allow us to qualify and maintain our status as a REIT).
We and certain of our subsidiaries guarantee the obligations under our revolving credit
facility and we and certain of our subsidiaries have pledged specified assets (including real
property), stock and other interests as collateral for our revolving credit facility obligations.
At June 30, 2011 and December 31, 2010, we were in compliance with the above financial covenants
with respect to our revolving credit facility.
10. Incentive Plans
The Company has adopted the 2010 Equity Incentive Compensation Plan (the Plan). The Plan
permits the grant of incentive awards to executive officers, employees, consultants and
non-employee directors of the Company. The aggregate number of awards approved under the Plan is
2,500,000. As of June 30, 2011 and December 31, 2010, 1,968,678 shares and 2,002,236 shares,
respectively, were available for issuance under the plan.
Restricted Stock Awards
Awards to executive officers and employees of the Company vest over a three year period and
are subject to restriction based upon employment in good standing with the Company. Awards to
non-employee directors of the Company vest over a five year period and are subject to restriction
based upon continued service on the Board of Directors of the Company.
At June 30, 2011, unearned compensation totaled approximately $1.1 million, and will be
recorded as expense over the applicable vesting period of three to five years. During the three and
six months ended June 30, 2011, stock
19
compensation
expense of approximately $0.1 million and $0.2
million, respectively, was recognized as general and
administrative expense in the accompanying condensed consolidated financial statements related
to the vesting of restricted stock.
Restricted OP Units
At June 30, 2011, unearned compensation totaled approximately $1.4 million, and will be
recorded over the applicable vesting period of three years. During the three and six months ended
June 30, 2011, approximately $0.2 million and $0.3 million, respectively, of compensation cost was
recognized in the accompanying condensed consolidated financial statements relating to the vesting
of restricted OP units.
A summary of incentive plan activity as of and for the six months ended June 30, 2011 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
Restricted |
|
|
|
|
|
|
Weighted Average |
|
|
|
Restricted OP |
|
|
Common |
|
|
|
|
|
|
Grant Date Fair |
|
|
|
Units |
|
|
Shares |
|
|
Total |
|
|
Value |
|
Nonvested balances at December 31, 2010 |
|
|
150,000 |
|
|
|
98,882 |
|
|
|
248,882 |
|
|
$ |
12.50 |
|
Granted |
|
|
|
|
|
|
18,192 |
|
|
|
18,192 |
|
|
$ |
10.61 |
|
Forfeited |
|
|
|
|
|
|
(1,413 |
) |
|
|
(1,413 |
) |
|
$ |
12.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested balances at June 30, 2011 |
|
|
150,000 |
|
|
|
115,661 |
|
|
|
265,661 |
|
|
$ |
12.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11. Derivative Instruments and Hedging Activities
We use, and expect to continue to use, significant variable rate debt to finance our
construction of student housing properties. These debt obligations expose us to variability in cash
flows due to fluctuations in interest rates. Management enters into derivative contracts to limit
variability for a portion of our interest payments and to manage exposure to interest rate risk. We
use derivative financial instruments, specifically interest rate caps and interest rate swaps, for
non-trading purposes.
As of June 30, 2011 and December 31, 2010, the fair value of derivative contracts is recorded
within other assets and other liabilities in the accompanying condensed consolidated balance
sheets. The effective portion of changes in fair value of derivatives designated and that qualify
as cash flow hedges is recorded in accumulated other comprehensive income (loss) and is
subsequently reclassified to earnings in the period that the hedged forecasted transaction affects
earnings. The ineffective portion of changes in fair value of derivatives designated and that
qualify as cash flow hedges is recorded in earnings. If a derivative is either not designated as a
hedge or if hedge accounting is discontinued, all changes in fair value of the derivative are
recorded in earnings.
The fair value of interest rate swaps is determined using the market standard methodology of
netting the discounted future fixed cash receipts (or payments) and the discounted expected
variable cash payments (or receipts). The variable cash payments (or receipts) are based on an
expectation of future interest rates (forward curves) derived from observable market interest rate
curves. We incorporate credit valuation adjustments to appropriately reflect our own nonperformance
risk and the respective counterpartys nonperformance risk in the fair value measurements. In
adjusting the fair value of derivative contracts for the effect of nonperformance risk, we consider
the impact of netting and any applicable credit enhancements, such as collateral postings,
thresholds and guarantees. We consider such nonperformance risk insignificant to the overall
determination of fair value.
The following table is a summary of the terms, estimated fair values and classification on the
condensed consolidated balance sheets as of June 30, 2011 and December 31, 2010 of the interest
rate derivative contracts we were a party to at June 30, 2011 and December 31, 2010 (dollar amounts
in thousands):
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair |
|
|
|
|
Derivative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value at June 30, |
|
|
Estimated Fair Value at |
|
Instrument |
|
Hedged Item |
|
|
Notional Amount |
|
|
Fixed Interest Rate |
|
|
Maturity Date |
|
|
2011 |
|
|
December 31, 2010 |
|
Cap (1) |
|
30-day LIBOR |
|
$ |
44,000 |
|
|
|
2.50 |
% |
|
January 2011 |
|
$ |
N/A |
|
|
|
|
|
Swap (2) |
|
30-day LIBOR |
|
$ |
25,488 |
|
|
|
3.44 |
% |
|
May 2011 |
|
|
N/A |
|
|
|
(337 |
) |
Cap (1) |
|
30-day LIBOR |
|
$ |
60,500 |
|
|
|
2.50 |
% |
|
July 2011 |
|
|
|
|
|
|
N/A |
|
Cap (1) |
|
30-day LIBOR |
|
$ |
3,126 |
(3) |
|
|
1.25 |
% |
|
April 2013 |
|
|
29 |
|
|
|
103 |
|
Swap (1) |
|
30-day LIBOR |
|
$ |
3,126 |
(3) |
|
|
1.39 |
% |
|
April 2013 |
|
|
(261 |
) |
|
|
(115 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(232 |
) |
|
|
(349 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Designated as a cash flow hedge. |
|
(2) |
|
Not designated as a hedging instrument. |
|
(3) |
|
Notional amount increases to $18,701 over the life of the derivative contract. |
The table below reflects the effect of interest rate derivative instruments on the
condensed consolidated and combined statements of operations for the three and six months ended
June 30, 2011 and 2010 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of Gain (Loss) |
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
Recognized on Statements |
|
|
June 30, |
|
|
June 30, |
|
Derivatives not Designated as Hedging Instruments |
|
of Operations |
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Interest rate swaps (receive
float/pay fixed): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Monthly net settlements cash settled |
|
Change in fair value of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
derivatives |
|
$ |
|
|
|
|
(1,359 |
) |
|
|
|
|
|
|
(2,715 |
) |
Mark to market adjustments non-cash |
|
Change in fair value of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
rate derivatives |
|
|
141 |
|
|
|
1,514 |
|
|
|
337 |
|
|
|
2,893 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total effect of derivative
instruments on the combined statements
of operations |
|
|
|
|
|
$ |
141 |
|
|
|
155 |
|
|
|
337 |
|
|
|
178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and six months ended June 30, 2011, approximately $0.2 million was
recognized in other comprehensive loss related to the effective portion of the change in fair value
of interest rate derivatives designated as cash flow hedges.
12. Segments
The operating segments in which management assesses performance and allocates resources are
student housing operations and development, construction and management services. Our segments
reflect managements resource allocation and performance assessment in making decisions regarding
the Company. Our student housing rental and student housing services revenues are aggregated within
the student housing operations segment and our third-party services of development, construction
and management are aggregated within the development, construction and management services segment.
The following tables set forth our segment information as of and for the three and six months
ended June 30, 2011 and 2010 (amounts in thousands):
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Student Housing Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
13,557 |
|
|
|
12,892 |
|
|
|
27,147 |
|
|
|
25,589 |
|
Operating expenses |
|
|
11,441 |
|
|
|
12,110 |
|
|
|
23,174 |
|
|
|
23,738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
2,116 |
|
|
|
782 |
|
|
|
3,973 |
|
|
|
1,851 |
|
Nonoperating expenses |
|
|
(640 |
) |
|
|
(3,897 |
) |
|
|
(1,540 |
) |
|
|
(7,718 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
1,476 |
|
|
|
(3,115 |
) |
|
|
2,433 |
|
|
|
(5,867 |
) |
Net income (loss) attributable to noncontrolling interests |
|
|
14 |
|
|
|
(2,273 |
) |
|
|
24 |
|
|
|
(4,385 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to stockholders and owner |
|
$ |
1,462 |
|
|
|
(842 |
) |
|
|
2,409 |
|
|
|
(1,482 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
$ |
5,148 |
|
|
|
4,592 |
|
|
|
10,245 |
|
|
|
9,280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment assets at end of period |
|
$ |
408,661 |
|
|
|
|
|
|
|
408,661 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Development, Construction and Management Services: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
11,333 |
|
|
$ |
15,081 |
|
|
$ |
21,617 |
|
|
$ |
30,864 |
|
Intersegment revenues |
|
|
35,348 |
|
|
|
2,371 |
|
|
|
51,915 |
|
|
|
4,647 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
46,681 |
|
|
|
17,452 |
|
|
|
73,532 |
|
|
|
35,511 |
|
Operating expenses |
|
|
42,738 |
|
|
|
15,815 |
|
|
|
68,078 |
|
|
|
32,090 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
3,943 |
|
|
|
1,637 |
|
|
|
5,454 |
|
|
|
3,421 |
|
Nonoperating expenses |
|
|
(223 |
) |
|
|
(10 |
) |
|
|
(235 |
) |
|
|
(31 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
3,720 |
|
|
|
1,627 |
|
|
|
5,219 |
|
|
|
3,390 |
|
Net income attributable to noncontrolling interests |
|
|
37 |
|
|
|
|
|
|
|
52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to stockholders and owner |
|
$ |
3,683 |
|
|
|
1,627 |
|
|
|
5,167 |
|
|
|
3,390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
$ |
22 |
|
|
|
23 |
|
|
|
46 |
|
|
|
46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment assets at end of period |
|
$ |
13,140 |
|
|
|
|
|
|
|
13,140 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment revenues |
|
$ |
60,238 |
|
|
$ |
30,344 |
|
|
|
100,679 |
|
|
$ |
61,100 |
|
Elimination of intersegment revenues |
|
|
(35,348 |
) |
|
|
(2,371 |
) |
|
|
(51,915 |
) |
|
|
(4,647 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total combined revenues |
|
$ |
24,890 |
|
|
$ |
27,973 |
|
|
|
48,764 |
|
|
$ |
56,453 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income |
|
$ |
6,059 |
|
|
|
2,419 |
|
|
|
9,427 |
|
|
|
5,272 |
|
Interest expense |
|
|
(1,360 |
) |
|
|
(6,217 |
) |
|
|
(2,735 |
) |
|
|
(10,686 |
) |
Change in fair value of interest rate derivatives |
|
|
141 |
|
|
|
155 |
|
|
|
337 |
|
|
|
178 |
|
Net unallocated expenses and eliminations |
|
|
(5,119 |
) |
|
|
(1,330 |
) |
|
|
(7,463 |
) |
|
|
(2,905 |
) |
Equity in loss of unconsolidated entities |
|
|
(340 |
) |
|
|
(114 |
) |
|
|
(635 |
) |
|
|
(194 |
) |
Other income |
|
|
55 |
|
|
|
12 |
|
|
|
154 |
|
|
|
45 |
|
Income tax provision |
|
|
(77 |
) |
|
|
|
|
|
|
(200 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(641 |
) |
|
|
(5,075 |
) |
|
|
(1,115 |
) |
|
|
(8,290 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment assets |
|
$ |
421,801 |
|
|
|
|
|
|
|
421,801 |
|
|
|
|
|
Unallocated corporate assets and eliminations |
|
|
3,125 |
|
|
|
|
|
|
|
3,125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
424,926 |
|
|
|
|
|
|
|
424,926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13. Commitments and Contingencies
Commitments
In the normal course of business, we enter into various development and construction related
purchase commitments with parties that provide development and construction related goods and
services. In the event we were to terminate development or construction services prior to the
completion of projects, we could potentially be committed to satisfy outstanding or uncompleted
purchase orders with such parties. At June 30, 2011, management does not anticipate any material
deviations from schedule or budget related to development projects currently in progress.
In the ordinary course of business, certain liens related to the construction of student
housing real estate property may be attached to the assets of the Company by contractors or
suppliers. We are responsible as the general contractor for resolving these liens. There can be no
assurance that we will not be required to pay amounts greater than currently recorded liabilities
to settle these claims.
22
Contingencies
In the normal course of business, we are subject to claims, lawsuits and legal proceedings.
While it is not possible to ascertain the ultimate outcome of all 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
consolidated results of operations of the Company. We are not involved in any material litigation
nor, to managements knowledge, is any material litigation currently threatened against us or our
properties or subsidiaries, other than routine litigation arising in the ordinary course of
business.
We are not aware of any environmental liability with respect to the properties that could have
a material adverse effect on our 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 our results of operations and cash
flows.
23
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
As used herein, references to the Company, we, us and our with respect to the period
before consummation of the initial public offering of Campus Crest Communities, Inc. on October 19,
2010, refer to the business of Campus Crest Communities, Inc.s predecessor entities through which
Campus Crest Group, LLC carried out the development, construction, ownership and management of the
properties that Campus Crest Communities, Inc. acquired upon completion of our Offering and the
Formation Transactions.
Forward-looking Statements
This report contains certain forward-looking statements that are subject to risks and
uncertainties. Forward-looking statements are generally identifiable by use of forward-looking
terminology such as may, will, should, potential, intend, expect, seek, anticipate,
estimate, approximately, believe, could, project, predict, continue, plan or other
similar words or expressions. Forward-looking statements are based on certain assumptions, discuss
future expectations, describe future plans and strategies, contain financial and operating
projections or state other forward-looking information. Our ability to predict results or the
actual effect of future events, actions, plans or strategies is inherently uncertain. Although we
believe that the expectations reflected in such forward-looking statements are based on reasonable
assumptions, our actual results and performance could differ materially from those set forth in, or
implied by, the forward-looking statements. Factors that could materially and adversely affect us
include but are not limited to:
|
|
|
the factors discussed in our Annual Report on Form 10-K/A, as amended, for the
year ended December 31, 2010, including those set forth under Risk Factors in Item
1A; |
|
|
|
|
the performance of the student housing industry in general; |
|
|
|
|
decreased occupancy or rental rates at our properties resulting from competition
or otherwise; |
|
|
|
|
the operating performance of our properties; |
|
|
|
|
the success of our development and construction activities; |
|
|
|
|
changes on the admissions or housing policies of the colleges and universities
from which we draw student-tenants; |
|
|
|
|
the availability of and our ability to attract and retain qualified personnel; |
|
|
|
|
changes in our business and growth strategies and in our ability to consummate
additional joint venture transactions; |
|
|
|
|
our capitalization and leverage level; |
|
|
|
|
our capital expenditures; |
|
|
|
|
the degree and nature of our competition, in terms of developing properties,
consummating acquisitions and in obtaining student-tenants to fill our properties; |
|
|
|
|
volatility in the real estate industry, interest rates and spreads, the debt or
equity markets, the economy generally or the local markets in which our properties
are located, whether the result of market events or otherwise; |
|
|
|
|
events or circumstances which undermine confidence in the financial markets or
otherwise have a broad impact on financial markets, such as the sudden instability or
collapse of large financial institutions or other significant corporations, terrorist
attacks, natural or man-made disasters or threatened or actual armed conflicts; |
24
|
|
|
the availability and terms of short-term and long-term financing, including
financing for development and construction activities; |
|
|
|
|
the availability of attractive development and/or acquisition opportunities in
properties that satisfy our investment criteria, including our ability to identify
and consummate successful property developments and property acquisitions; |
|
|
|
|
the credit quality of our student-tenants and parental guarantors; |
|
|
|
|
changes in personnel, including the departure of key members of our senior
management, and lack of availability of qualified personnel; |
|
|
|
|
unanticipated increases in financing and other costs, including a rise in interest
rates; |
|
|
|
|
estimates relating to our ability to make distributions to our stockholders in the
future and our expectations as to the form of any such distributions; |
|
|
|
|
environmental costs, uncertainties and risks, especially those related to natural
disasters; |
|
|
|
|
changes in governmental regulations, accounting treatment, tax rates and similar
matters; |
|
|
|
|
legislative and regulatory changes (including changes to laws governing the
taxation of real estate investments trusts (REITs); and |
|
|
|
|
limitations imposed on our business and our ability to satisfy complex rules in
order for us to qualify as a REIT for U.S. federal income tax purposes and the
ability of certain of our subsidiaries to qualify as taxable REIT subsidiaries for
U.S. federal income tax purposes, and our ability and the ability of our subsidiaries
to operate effectively within the limitations imposed by these rules. |
When considering forward-looking statements, you should keep in mind the risk factors and
other cautionary statements in this report. Readers are cautioned not to place undue reliance on
any of these forward-looking statements, which reflect our views as of the date of this report. The
matters summarized in this report could cause our actual results and performance to differ
materially from those set forth in, or implied by, our forward-looking statements. Accordingly, we
cannot guarantee future results or performance. Furthermore, except as required by law, we are
under no duty to, and we do not intend to, update any of our forward-looking statements after the
date of this report, whether as a result of new information, future events or otherwise.
Our Company
We are a self-managed, self-administered and vertically-integrated developer, builder, owner
and manager of high-quality, purpose-built student housing. We believe that we are one of the
largest vertically-integrated developers, builders, owners and managers of high-quality,
purpose-built student housing properties in the United States based on beds owned and under
management.
We were formed as a Maryland corporation on March 1, 2010 and Campus Crest Communities
Operating Partnership, LP (the Operating Partnership), of which we, through our wholly owned
subsidiary, Campus Crest Communities GP, LLC, are the sole general partner, was formed as a
Delaware limited partnership on March 4, 2010. Through October 18, 2010, we had a single
stockholder. We completed the Offering on October 19, 2010. Upon completion of the Offering and our
Formation Transactions, we owned a 98.5% limited partnership interest in the Operating Partnership.
As of June 30, 2011, we owned interests in 27 operating student housing properties containing
approximately 5,048 apartment units and 13,580 beds. All of our properties are recently built, with
an average age of approximately 2.5 years as of June 30, 2011. We wholly own 21 properties,
containing approximately 3,920 apartment units and
25
10,528 beds, and own six properties, containing approximately 1,128 apartment units and 3,052
beds, through a joint venture with Harrison Street Real Estate (HSRE), in which we own a 49.9%
interest. Within the last 12 months, we completed construction of three of these joint venture
properties, which commenced operations in August 2010. We expect to complete construction and
commence operations at four wholly owned properties and two joint venture properties in August
2011. All of our communities contain modern apartment units with many resort-style amenities.
We derive substantially all of our revenue from student housing rental, student housing
services, construction and development services and management services. As of June 30, 2011, the
average occupancy for our 27 properties was approximately 90%. The average monthly total revenue
(including rental and service revenue) per occupied bed (RevPOB) was approximately $477 and $476
for the three and six months ended June 30, 2011, respectively. Our properties are primarily
located in medium-sized college and university markets, which we define as markets located outside
of major U.S. cities that have nearby schools generally with overall enrollment of approximately
8,000 to 20,000 students. We believe such markets are underserved and are generally experiencing
enrollment growth.
We intend to pay regular quarterly distributions to our common stockholders in amounts that
meet or exceed the requirements for our qualification as a REIT. Although we currently anticipate
making distributions to our common stockholders in cash to the extent cash is available for such
purpose, we may, in the sole discretion of our board of directors, make a distribution of capital
or of assets or a taxable distribution of our stock (as part of a distribution in which
stockholders may elect to receive stock or, subject to a limit measured as a percentage of the
total distribution, cash). On July 13, 2011, we paid a dividend for the second quarter of 2011 of
$0.16 per share of common stock to our stockholders of record as of June 29, 2011.
Our Business Segments
Management evaluates operating performance through the analysis of results of operations of
two distinct business segments: (i) student housing operations, and (ii) development, construction
and management services. Management evaluates each segments performance by net operating income,
which we define as operating income before depreciation and amortization. The accounting policies
of our reportable business segments are described in more detail in the summary of significant
accounting policies note (note 2) to our unaudited condensed consolidated and combined financial
statements. Intercompany fees are reflected at the contractually stipulated amounts, as adjusted to
reflect our proportionate ownership of unconsolidated entities.
Student Housing Operations
Our student housing operations are comprised of rental and other service revenues, such as
application fees, pet fees and late payment fees. We opened our first student housing property in
Asheville, North Carolina in 2005 for the 2005-2006 academic year. We subsequently opened three
additional properties in 2006 for the 2006-2007 academic year, six additional properties in 2007
for the 2007-2008 academic year and nine additional properties in 2008 for the 2008-2009 academic
year. In 2009, we opened one additional property that was consolidated by the Predecessor and four
additional properties that are owned by a real estate venture in which we have a noncontrolling
interest. In August 2010, we opened three additional properties for the 2010-2011 academic year
that are owned by a real estate venture in which we have a noncontrolling interest. Concurrent with
the Offering and Formation Transactions in October 2010, we purchased the remaining interest in one
of the properties owned by this real estate venture. Due to the continuous opening of new
properties in consecutive years and annual lease terms that do not coincide with our reported
fiscal (calendar) years, the comparison of our consolidated financial results from period to period
may not provide a meaningful measure of our operating performance. For this reason, we divide the
results of operations in our student housing operations segment between new property operations and
same-store operations, which we believe provides a more meaningful indicator of comparative
historical performance.
Development, Construction and Management Services
Development and Construction Services. In addition to our wholly owned properties, all of
which were developed and built by us, we also provide development and construction services to
unconsolidated joint ventures in which we have an ownership interest. We act as a general
contractor on all of our construction projects. When building properties for our own account (i.e.,
for entities that are consolidated in our financial statements),
26
construction revenues and expenses are eliminated for accounting purposes and construction
costs are ultimately reflected as capital additions. Thus, building properties for our own account
does not typically generate any revenues or expenses in our development, construction and
management services segment on a consolidated basis.
Alternatively, when performing these services for unconsolidated joint ventures, we recognize
construction revenues based on the costs that have been contractually agreed to with the joint
venture for the construction of the property and expenses based on the actual costs incurred.
Construction revenues are recognized using the percentage of completion method, as determined by
construction costs incurred relative to total estimated construction costs, as adjusted to
eliminate our proportionate ownership of each entity. Actual construction costs are expensed as
incurred and are likewise adjusted to eliminate our proportionate ownership of each entity.
Operating income generated by our development and construction activities generally reflects the
development fee and construction fee income that is realized by providing these services to
unconsolidated real estate ventures (i.e., the spread between the contractual cost of
construction and the actual cost of construction).
Management Services. In addition to our wholly owned properties, all of which are managed by
us, we also provide management services to unconsolidated real estate ventures in which we have an
ownership interest. We recognize management fees from these entities as earned in accordance with
the property management agreement with these entities, as adjusted to eliminate our proportionate
ownership of each entity.
Our Relationship With HSRE
At June 30, 2011, we were party to two joint venture arrangements with HSRE, a real estate
private equity firm founded in 2005 that has significant real estate asset holdings, including
student housing properties, senior housing/assisted living units, self-storage units, boat storage
facilities and medical office space. We have developed, or are currently developing, nine
properties in partnership with HSRE with total aggregate cost of approximately $176.5 million.
HSRE I. HSRE-Campus Crest I, LLC (HSRE I) indirectly owns 100% interests in the following
six properties at June 30, 2011: The Grove at Conway, The Grove at Huntsville, The Grove at
Lawrence, The Grove at Moscow, The Grove at San Angelo and The Grove at Statesboro. At June 30,
2011, the Company owned a 49.9% interest in HSRE I and HSRE owned the remaining 50.1%.
In general, the Company is responsible for the day-to-day management of HSRE Is business and
affairs, provided that major decisions (including budgeting) must be approved by the Company and
HSRE. In addition to distributions to which the Company is entitled as an investor in HSRE I, the
Company receives or has in the past received fees for providing services to the properties held by
HSRE I pursuant to development and construction agreements and property management agreements. We
granted to an entity related to HSRE I a right of first opportunity with respect to certain
development or acquisition opportunities identified by us. This right of first opportunity was to
terminate at such time as HSRE had funded at least $40 million of equity to HSRE I and/or certain
related ventures. As of December 31, 2010, HSRE had funded approximately $35 million of the $40
million right of first opportunity. This right of first opportunity was amended in conjunction with
the formation of HSRE-Campus Crest IV, LLC as discussed below. HSRE I will dissolve upon the
disposition of substantially all of its assets or the occurrence of certain events specified in the
agreement between us and HSRE.
HSRE IV. On January 20, 2011, we entered into another joint venture with HSRE, HSRE-Campus
Crest IV, LLC (HSRE IV) to which HSRE will contribute up to $50 million, that will develop and
operate additional purpose-built student housing properties. We own a 20% interest in this venture
and affiliates of HSRE own the remaining 80%.
HSRE IV is currently building two new student housing properties with completion targeted for
the 2011-2012 academic year. The properties, located in Denton, Texas and Valdosta, Georgia, will
contain an aggregate of approximately 1,168 beds and will have an estimated cost of approximately
$46.1 million.
In general, we are responsible for the day-to-day management of HSRE IVs business and
affairs, provided that major decisions (including deciding to pursue a particular development
opportunity and budgeting) must be approved by us and HSRE. In addition to distributions to which
we would be entitled as an investor in HSRE IV, we
27
receive fees for providing services to HSRE IV pursuant to development and construction
agreements and property management agreements. Generally, we earn development fees equal to
approximately 4% of the total cost of each property developed by HSRE IV (excluding the cost of
land and financing costs), construction fees equal to approximately 5% of the construction costs of
each property developed by HSRE IV and management fees equal to approximately 3% of the gross
revenues and 3% of the net operating income of operating properties held by HSRE IV. In addition,
we receive a reimbursement of a portion of our overhead relating to each development project at a
negotiated rate. Under certain circumstances, we will be responsible for funding the amount by
which actual development costs for a project pursued by HSRE IV exceed the budgeted development
costs of such project (without any increase in our interest in the project), which could materially
and adversely affect the fee income realized from any such project. In connection with HSRE IV, we
amended HSREs right of first opportunity, originally granted with respect to HSRE I. HSRE now has
the right to develop all future student housing development opportunities identified by us that are
funded in part with equity investments by parties unaffiliated with us, until such time as
affiliates of HSRE have invested $50 million in HSRE IV or caused HSRE IV to decline three
development opportunities in any calendar year. As of August 5, 2011, HSRE had funded
approximately $11.3 million of the $50 million right of first opportunity. The terms of the HSRE
IV venture do not prohibit us from developing a wholly owned student housing property for our own
account.
Factors That Affect Our Operating Results
Unique Leasing Characteristics
Student housing properties are typically leased by the bed on an individual lease liability
basis, unlike multi-family housing where leasing is by the unit. Individual lease liability limits
each student-tenants liability to his or her own rent without liability for a roommates rent. A
parent or guardian is required to execute each lease as a guarantor unless the student-tenant
provides adequate proof of income. The number of lease contracts that we administer is therefore
equivalent to the number of beds occupied rather than the number of units.
Due to our predominantly private bedroom accommodations, the high level of student-oriented
amenities offered at our properties and the individual lease liability for our student-tenants and
their parents, we believe that we typically command higher per-unit and per-square foot rental
rates than many multi-family properties located in the markets in which we operate. We are also
typically able to charge higher rental rates than on-campus student housing, which generally offers
fewer amenities.
Unlike traditional multi-family housing, most of our leases commence and terminate on the same
date. In the case of our typical 11.5-month leases (which provide for 12 equal monthly payments),
this date coincides with the commencement of the fall academic term and typically terminate at the
completion of the last subsequent summer school session. As such, we must re-lease each property in
its entirety each year, resulting in significant turnover in our tenant population from year to
year. As a result, we are highly dependent upon the effectiveness of our marketing and leasing
efforts during the annual leasing season that typically begins in January and ends in August of
each year. Our properties occupancy rates are therefore typically relatively stable during the
August to July academic year, but are susceptible to fluctuation at the commencement of each new
academic year, which may be greater than the fluctuation in occupancy rates experienced by
traditional multi-family properties. For most of our properties, the primary leasing season
concludes by the end of August (our properties located in Ellensburg, Washington and Cheney,
Washington are exceptions, where the primary leasing season typically extends into September, as
the academic year for the primary university served by each of these properties typically starts in
late September).
Development, Construction and Management Services
The amount and timing of revenues from development, construction and management services will
typically be contingent upon the number and size of development projects that we are able to
successfully structure and finance in our current and future unconsolidated joint ventures. HSRE
IV, in which we have a 20% interest, is currently building two student housing properties with
completion targeted for the 2011-2012 academic year. We receive fees for providing development and
construction services to HSRE IV. Similarly, we will receive management fees for managing
properties owned by HSRE IV once they are placed in service. No assurance can be
28
given that HSRE IV will be successful in developing student housing properties as currently
contemplated or those currently under construction.
Results of Operations
From our formation through October 18, 2010, we did not have material or significant corporate
activity, other than the issuance of one share of common stock to the Predecessors parent entity
in connection with our initial capitalization and other activities in preparation for the Offering.
Accordingly, we believe that a discussion of our results of operations for the three and six months
ended June 30, 2010 would not be meaningful, and we have therefore set forth a discussion comparing
the consolidated operating results of our operations for the three and six months ended June 30,
2011, and the Predecessors historical combined results of operations for the three and six months
ended June 30, 2010. The historical results of operations presented below should be reviewed in
conjunction with the notes to the condensed consolidated and combined financial statements included
elsewhere in this report.
Comparison of the Three Months Ended June 30, 2011 and June 30, 2010
As of June 30, 2011, our property portfolio consisted of 21 consolidated operating properties,
containing approximately 3,920 apartment units and 10,528 beds, and six operating properties held
in an unconsolidated joint venture, containing approximately 1,128 apartment units and 3,052 beds.
In October 2010, we acquired from HSRE the remaining interest in Campus Crest at San Marcos,
LLC, which owns The Grove at San Marcos. Prior to this transaction, The Grove at San Marcos was
wholly owned by a real estate venture in which the Company and HSRE are members and we accounted
for our ownership interest in The Grove at San Marcos under the equity method of accounting.
Subsequent to our acquisition of this interest, we consolidated the results of operations of The
Grove at San Marcos.
In March 2010, we sold 99% of our interest in HSRE I, which represented a 9.9% interest in the
venture, to HSRE. Upon completion of the Offering, we repurchased this 9.9% interest in HSRE I. As
a result, we did not account for this transaction as a sale for financial reporting purposes.
Accordingly, our investment in HSRE I, accounted for under the equity method, is reflective of a
10% (i.e., pre-sale) net ownership interest through the completion of the Offering. Upon and
subsequent to completion of the Offering and Formation Transactions, we owned 49.9% of HSRE I.
In November 2009, we sold The Grove at Milledgeville to an affiliate of HSRE and we retained
an indirect ownership interest of 5%. Since we had the contractual obligation to, and did,
repurchase this ownership interest in The Grove at Milledgeville upon completion of the Offering,
we did not account for this transaction as a sale for financial reporting purposes. Accordingly,
the operations of The Grove at Milledgeville have been combined for the three months ended June 30,
2010.
29
The following table presents our results of operations for the three months ended June 30,
2011 and 2010, including the amount and percentage change in these results between the periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Three Months |
|
|
|
|
|
|
|
|
|
Ended |
|
|
Ended |
|
|
|
|
|
|
|
|
|
June 30, |
|
|
June 30, |
|
|
Change |
|
|
Change |
|
|
|
2011 |
|
|
2010 |
|
|
($) |
|
|
(%) |
|
|
|
|
|
|
|
(unaudited and in thousands) |
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student housing rental |
|
$ |
13,019 |
|
|
|
12,308 |
|
|
|
711 |
|
|
|
5.8 |
% |
Student housing services |
|
|
538 |
|
|
|
584 |
|
|
|
(46 |
) |
|
|
(7.9 |
)% |
Development, construction and management services |
|
|
11,333 |
|
|
|
15,081 |
|
|
|
(3,748 |
) |
|
|
(24.9 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
24,890 |
|
|
|
27,973 |
|
|
|
(3,083 |
) |
|
|
(11.0 |
)% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student housing operations |
|
|
6,356 |
|
|
|
6,907 |
|
|
|
(551 |
) |
|
|
(8.0 |
)% |
Development, construction and management services |
|
|
10,611 |
|
|
|
14,029 |
|
|
|
(3,418 |
) |
|
|
(24.4 |
)% |
General and administrative |
|
|
1,722 |
|
|
|
1,234 |
|
|
|
488 |
|
|
|
39.5 |
% |
Ground leases |
|
|
52 |
|
|
|
47 |
|
|
|
5 |
|
|
|
10.6 |
% |
Depreciation and amortization |
|
|
5,209 |
|
|
|
4,667 |
|
|
|
542 |
|
|
|
11.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
23,950 |
|
|
|
26,884 |
|
|
|
(2,934 |
) |
|
|
(10.9 |
)% |
Equity in loss of unconsolidated entities |
|
|
(340 |
) |
|
|
(114 |
) |
|
|
(226 |
) |
|
|
198.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
600 |
|
|
|
975 |
|
|
|
(375 |
) |
|
|
(38.5 |
)% |
Nonoperating income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(1,360 |
) |
|
|
(6,217 |
) |
|
|
4,857 |
|
|
|
(78.1 |
)% |
Change in fair value of interest rate derivatives |
|
|
141 |
|
|
|
155 |
|
|
|
(14 |
) |
|
|
(9.0 |
)% |
Other income (expense) |
|
|
55 |
|
|
|
12 |
|
|
|
43 |
|
|
|
358.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonoperating expenses |
|
|
(1,164 |
) |
|
|
(6,050 |
) |
|
|
4,886 |
|
|
|
(80.8 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(564 |
) |
|
|
(5,075 |
) |
|
|
4,511 |
|
|
|
(88.9 |
)% |
Income tax expense |
|
|
(77 |
) |
|
|
|
|
|
|
(77 |
) |
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(641 |
) |
|
|
(5,075 |
) |
|
|
4,434 |
|
|
|
(87.4 |
)% |
Net loss attributable to noncontrolling interest |
|
|
(3 |
) |
|
|
(2,913 |
) |
|
|
2,910 |
|
|
|
(99.9 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Campus Crest Communities,
Inc. and Predecessor |
|
$ |
(638 |
) |
|
|
(2,162 |
) |
|
|
1,524 |
|
|
|
(70.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student Housing Operations
Revenues (which include student housing rental and student housing service revenues) in the
student housing operations segment increased by approximately $0.7 million, while operating
expenses decreased by approximately $0.6 million, for the three months ended June 30, 2011 as
compared to 2010. The increase in revenues was primarily due to the inclusion of operating results
from The Grove at San Marcos, which subsequent to the Offering became a consolidated property.
RevPOB for consolidated properties remained flat at $482 for the three months ended June 30, 2011
and 2010. Operating expenses decreased due to reductions in marketing and repairs and maintenance
expenses, offset by an increase due to the consolidation of the operating results of The Grove at
San Marcos in the three month period ended June 30, 2011.
New Property Operations. In October 2010, we acquired from HSRE the remaining interest in The
Grove at San Marcos. Prior to the acquisition of this interest, the Company accounted for its
ownership interest in this property under the equity method. Subsequent to our acquisition of this
interest, we consolidated the results of operations of The Grove at San Marcos. The Grove at San
Marcos contributed approximately $0.8 million of revenues and approximately $0.4 million of
operating expenses for the three months ended June 30, 2011. For the three months ended June 30,
2010, our share of the contribution from The Grove at San Marcos was included as equity in loss
from unconsolidated entities. In August 2010, we opened three new properties that were developed by
us, each of which is owned by an unconsolidated joint venture. The three properties that opened in
2010 are discussed below under the heading Equity in Loss of Unconsolidated Entities.
30
Same-Store Property Operations. We had 20 properties that were operating for both the three
months ended June 30, 2011 and 2010. These properties contributed approximately $12.7 million of
revenues and approximately $6.0 million of operating expenses for the three months ended June 30,
2011 as compared to approximately $12.9 million of revenues and approximately $6.9 million of
operating expenses for the three months ended June 30, 2010. Average occupancy at our same-store
properties slightly decreased to approximately 88% for the three months ended June 30, 2011 as
compared to approximately 89% for the three months ended June 30, 2010 and RevPOB decreased to
approximately $478 for the three months ended June 30, 2011 as compared to approximately $482 for
the three months ended June 30, 2010 as a result of lower student housing services revenue.
Development, Construction and Management Services
Revenues and operating expenses in the development, construction and management services
segment decreased by approximately $3.7 million and approximately $3.4 million, respectively, for
the three months ended June 30, 2011 as compared to the three months ended June 30, 2010. Our
development, construction and management services segment recognizes revenues and operating
expenses for development, construction and management services provided to unconsolidated joint
ventures in which we have an ownership interest. We eliminate revenue and related expenses on such
transactions with our unconsolidated entities to the extent of our ownership interest. The
decreases in development, construction and management services revenues and operating expenses were
primarily due to a decrease in the number of unconsolidated joint venture properties under
construction, which totaled three for the three months ended June 30, 2010 as compared to two
unconsolidated joint venture properties for the three months ended June 30, 2011. Additionally, a
larger ownership percentage in these unconsolidated joint venture properties resulted in the
elimination of a greater percentage of revenues and operating expenses upon consolidation.
Our ability to generate revenues and expenses related to future development and construction
projects will depend upon our ability to enter into and provide services to existing ventures or
new joint ventures, as well as our proportionate ownership of any such joint ventures. We commenced
building four student housing properties for our own account for the 2011-2012 academic year, which
are included in our consolidated financial statements and do not generate development, construction
and management services revenues and operating expenses for us on a consolidated basis. We expect
to complete construction of these four student housing properties and commence operations in August
2011.
General and Administrative
General and administrative expenses increased from approximately $1.2 million for the three
months ended June 30, 2010 to approximately $1.7 million for the three months ended June 30, 2011.
This increase was due to an increase in non-cash employee compensation expense related to share
based incentive compensation, as well as increases in professional fees related to legal and
accounting services.
Depreciation and Amortization
Depreciation and amortization expense increased from approximately $4.7 million for the three
months ended June 30, 2010 to approximately $5.2 million for the three months ended June 30, 2011.
This increase was primarily due to the consolidation of the operating results of The Grove at San
Marcos during the three month period ended June 30, 2011.
Equity in Loss of Unconsolidated Entities
Equity in loss of unconsolidated entities, which represents our share of the net loss from
unconsolidated entities in which we have a noncontrolling interest, increased from a loss of $0.1
million for the three months ended June 30, 2010 to a loss of $0.3 million for the three months
ended June 30, 2011. This increase was due to an increase in our ownership interest in HSRE I from
10% for the three months ended June 30, 2010 as compared to 49.9% for the three months ended June
30, 2011, as well as the opening of three new student housing properties in the HSRE I venture in
the fall of 2010. Due to depreciation expense, each of these new properties generated a net loss
which we participated in at our ownership percentage.
31
Nonoperating Income (Expenses)
Interest Expense. Interest expense decreased from approximately $6.2 million for the three
months ended June 30, 2010 to approximately $1.4 million for the three months ended June 30, 2011.
This decrease was primarily due to lower outstanding indebtedness during the three months ended
June 30, 2011 as compared to June 30, 2010 due to the change in the Companys capital structure as
a result of the Offering and Formation Transactions. Additionally, outstanding indebtedness for the
three months ended June 30, 2011 had a lower effective borrowing rate than outstanding indebtedness
for the three months ended June 30, 2010.
Change in Fair Value of Interest Rate Derivatives. Change in fair value of interest rate
derivatives decreased from a gain of approximately $0.2 million for the three months ended June 30,
2010 to a gain of approximately $0.1 million for the three months ended June 30, 2011. This change
was due to a decrease of approximately $1.3 million related to cash settlements on interest rate
swaps, offset by a decrease in non-cash mark to market adjustments on interest rate swaps of
approximately $1.4 million.
Other Income (Expense). Other income increased from approximately $0 for the three months
ended June 30, 2010 to approximately $0.1 million for the three months ended June 30, 2011. This
change was due to an increase in preferred interest income from unconsolidated entities.
Income Tax Expense
Provision for income taxes increased from $0 for the three months ended June 30, 2010 to
approximately $0.1 million for the three months ended June 30, 2011. This increase was due to
federal and state income tax related to our taxable REIT subsidiaries. Prior to October 2010, no
provision for income tax was recorded as all income and losses of the Predecessor were allocated to
partners or members of Predecessor owned entities.
Comparison of the Six Months Ended June 30, 2011 and June 30, 2010
As of June 30, 2011, our property portfolio consisted of 21 consolidated operating properties,
containing approximately 3,920 apartment units and 10,528 beds, and six operating properties held
in an unconsolidated joint venture, containing approximately 1,128 apartment units and 3,052 beds.
In October 2010, we acquired from HSRE the remaining interest in Campus Crest at San Marcos,
LLC, which owns The Grove at San Marcos. Prior to this transaction, The Grove at San Marcos was
wholly owned by a real estate venture in which the Company and HSRE are members and we accounted
for our ownership interest in The Grove at San Marcos under the equity method of accounting.
Subsequent to our acquisition of this interest, we consolidated the results of operations of The
Grove at San Marcos.
In March 2010, we sold 99% of our interest in HSRE I, which represented a 9.9% interest in the
venture, to HSRE. Upon completion of the Offering, we repurchased this 9.9% interest in HSRE I. As
a result, we did not account for this transaction as a sale for financial reporting purposes.
Accordingly, our investment in HSRE I, accounted for under the equity method, is reflective of a
10% (i.e., pre-sale) net ownership interest through the completion of the Offering. Upon and
subsequent to completion of the Offering and Formation Transactions, we owned 49.9% of HSRE I.
In November 2009, we sold The Grove at Milledgeville to an affiliate of HSRE and we retained
an indirect ownership interest of 5%. Since we had the contractual obligation to, and did,
repurchase this ownership interest in The Grove at Milledgeville upon completion of the Offering,
we did not account for this transaction as a sale for financial reporting purposes. Accordingly,
the operations of The Grove at Milledgeville have been combined for the six months ended June 30,
2010.
32
The following table presents our results of operations for the six months ended June 30, 2011
and 2010, including the amount and percentage change in these results between the periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months |
|
|
Six Months |
|
|
|
|
|
|
|
|
|
Ended |
|
|
Ended |
|
|
|
|
|
|
|
|
|
June 30, |
|
|
June 30, |
|
|
Change |
|
|
Change |
|
|
|
2011 |
|
|
2010 |
|
|
($) |
|
|
(%) |
|
|
|
|
|
|
|
(unaudited and in thousands) |
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student housing rental |
|
$ |
26,171 |
|
|
|
24,443 |
|
|
|
1,728 |
|
|
|
7.1 |
% |
Student housing services |
|
|
976 |
|
|
|
1,146 |
|
|
|
(170 |
) |
|
|
(14.8 |
)% |
Development, construction and management services |
|
|
21,617 |
|
|
|
30,864 |
|
|
|
(9,247 |
) |
|
|
(30.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
48,764 |
|
|
|
56,453 |
|
|
|
(7,689 |
) |
|
|
(13.6 |
)% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student housing operations |
|
|
12,824 |
|
|
|
13,301 |
|
|
|
(477 |
) |
|
|
(3.6 |
)% |
Development, construction and management services |
|
|
19,836 |
|
|
|
28,644 |
|
|
|
(8,808 |
) |
|
|
(30.7 |
)% |
General and administrative |
|
|
3,670 |
|
|
|
2,618 |
|
|
|
1,052 |
|
|
|
40.2 |
% |
Ground leases |
|
|
104 |
|
|
|
94 |
|
|
|
10 |
|
|
|
10.6 |
% |
Depreciation and amortization |
|
|
10,366 |
|
|
|
9,429 |
|
|
|
937 |
|
|
|
9.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
46,800 |
|
|
|
54,086 |
|
|
|
(7,286 |
) |
|
|
(13.5 |
)% |
Equity in loss of unconsolidated entities |
|
|
(635 |
) |
|
|
(194 |
) |
|
|
(441 |
) |
|
|
227.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
1,329 |
|
|
|
2,173 |
|
|
|
(844 |
) |
|
|
(38.8 |
)% |
Nonoperating income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(2,735 |
) |
|
|
(10,686 |
) |
|
|
7,951 |
|
|
|
(74.4 |
)% |
Change in fair value of interest rate derivatives |
|
|
337 |
|
|
|
178 |
|
|
|
159 |
|
|
|
89.3 |
% |
Other income (expense) |
|
|
154 |
|
|
|
45 |
|
|
|
109 |
|
|
|
242.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonoperating expenses |
|
|
(2,244 |
) |
|
|
(10,463 |
) |
|
|
8,219 |
|
|
|
(78.6 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(915 |
) |
|
|
(8,290 |
) |
|
|
7,375 |
|
|
|
(89.0 |
)% |
Income tax expense |
|
|
(200 |
) |
|
|
|
|
|
|
(200 |
) |
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(1,115 |
) |
|
|
(8,290 |
) |
|
|
7,175 |
|
|
|
(86.6 |
)% |
Net loss attributable to noncontrolling interest |
|
|
(5 |
) |
|
|
(5,025 |
) |
|
|
5,020 |
|
|
|
(99.9 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Campus Crest Communities,
Inc. and Predecessor |
|
$ |
(1,110 |
) |
|
|
(3,265 |
) |
|
|
2,155 |
|
|
|
(66.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student Housing Operations
Revenues (which include student housing rental and student housing service revenues) in the
student housing operations segment increased by approximately $1.6 million, while operating
expenses decreased by approximately $0.5 million, for the six months ended June 30, 2011 as
compared to 2010. The increase in revenues was primarily due to the inclusion of operating results
from The Grove at San Marcos, which subsequent to the Offering became a consolidated property.
RevPOB for consolidated properties increased to $483 for the six
months ended June 30, 2011 as compared to $482 for the six months ended June 30, 2010. Operating expenses decreased due to reductions in marketing, repairs and maintenance and
property-related professional fees, offset by an increase due to the consolidation of the operating
results of The Grove at San Marcos in the six month period ended June 30, 2011.
New Property Operations. In October 2010, we acquired from HSRE the remaining interest in The
Grove at San Marcos. Prior to the acquisition of this interest, the Company accounted for its
ownership interest in this property under the equity method. Subsequent to our acquisition of this
interest, we consolidated the results of operations of The Grove at San Marcos. The Grove at San
Marcos contributed approximately $1.7 million of revenues and approximately $0.7 million of
operating expenses for the six months ended June 30, 2011. For the six months ended June 30, 2010,
our share of the contribution from The Grove at San Marcos was included as equity in loss from
unconsolidated entities. In August 2010, we opened three new properties that were developed by us,
each of which is owned by an unconsolidated joint venture. The three properties that opened in 2010
are discussed below under the heading Equity in Loss of Unconsolidated Entities.
33
Same-Store Property Operations. We had 20 properties that were operating for both the six
months ended June 30, 2011 and 2010. These properties contributed approximately $25.4 million of
revenues and approximately $12.1 million of operating expenses for the six months ended June 30,
2011 as compared to approximately $25.6 million of revenues and approximately $13.3 million of
operating expenses for the six months ended June 30, 2010. Average occupancy at our same-store
properties remained flat at approximately 88% for the six months ended June 30, 2011 and 2010.
RevPOB decreased to approximately $478 for the six months ended June 30, 2011 as compared to
approximately $482 for the six months ended June 30, 2010 as a result of lower student housing
services revenue.
Development, Construction and Management Services
Revenues and operating expenses in the development, construction and management services
segment decreased by approximately $9.2 million and approximately $8.8 million, respectively, for
the six months ended June 30, 2011 as compared to the six months ended June 30, 2010. Our
development, construction and management services segment recognizes revenues and operating
expenses for development, construction and management services provided to unconsolidated joint
ventures in which we have an ownership interest. We eliminate revenue and related expenses on such
transactions with our unconsolidated entities to the extent of our ownership interest. The
decreases in development, construction and management services revenues and operating expenses were
primarily due to a decrease in the number of unconsolidated joint venture properties under
construction, which totaled three for the six months ended June 30, 2010 as compared to two
unconsolidated joint venture properties for the six months ended June 30, 2011. Additionally, a
larger ownership percentage in these unconsolidated joint venture properties resulted in the
elimination of a greater percentage of revenues and operating expenses upon consolidation.
Our ability to generate revenues and expenses related to future development and construction
projects will depend upon our ability to enter into and provide services to existing ventures or
new joint ventures, as well as our proportionate ownership of any such joint ventures. We commenced
building four student housing properties for our own account for the 2011-2012 academic year, which
are included in our consolidated financial statements and do not generate development, construction
and management services revenues and operating expenses for us on a consolidated basis. We expect
to complete construction of these four student housing properties and commence operations in August
2011.
General and Administrative
General and administrative expenses increased from approximately $2.6 million for the six
months ended June 30, 2010 to approximately $3.7 million for the six months ended June 30, 2011.
This increase was due to an increase in non-cash employee compensation expense related to share
based incentive compensation, as well as increases in professional fees related to legal and
accounting services.
Depreciation and Amortization
Depreciation and amortization expense increased from approximately $9.4 million for the six
months ended June 30, 2010 to approximately $10.4 million for the six months ended June 30, 2011.
This increase was primarily due to the consolidation of the operating results of The Grove at San
Marcos during the six month period ended June 30, 2011.
Equity in Loss of Unconsolidated Entities
Equity in loss of unconsolidated entities, which represents our share of the net loss from
unconsolidated entities in which we have a noncontrolling interest, increased from a loss of $0.2
million for the six months ended June 30, 2010 to a loss of $0.6 million for the six months ended
June 30, 2011. This increase was due to an increase in our ownership interest in HSRE I from 10%
for the six months ended June 30, 2010 as compared to 49.9% for the six months ended June 30, 2011,
as well as the opening of three new student housing properties in the HSRE I venture in the fall of
2010. Due to depreciation expense, each of these new properties generated a net loss which we
participated in at our ownership percentage.
34
Nonoperating Income (Expenses)
Interest Expense. Interest expense decreased from approximately $10.7 million for the six
months ended June 30, 2010 to approximately $2.7 million for the six months ended June 30, 2011.
This decrease was primarily due to lower outstanding indebtedness during the six months ended June
30, 2011 as compared to June 30, 2010 due to the change in the Companys capital structure as a
result of the Offering and Formation Transactions. Additionally, outstanding indebtedness for the
six months ended June 30, 2011 had a lower effective borrowing rate than outstanding indebtedness
for the six months ended June 30, 2010.
Change in Fair Value of Interest Rate Derivatives. Change in fair value of interest rate
derivatives increased from a gain of approximately $0.2 million for the six months ended June 30,
2010 to a gain of approximately $0.3 million for the six months ended June 30, 2011. This change
was due to a decrease of approximately $2.7 million related to cash settlements on interest rate
swaps, offset by a decrease in non-cash mark to market adjustments on interest rate swaps of
approximately $2.6 million.
Other Income (Expense). Other income increased from approximately $0 for the six months ended
June 30, 2010 to approximately $0.2 million for the six months ended June 30, 2011. This change was
due to an increase in preferred interest income from unconsolidated entities.
Income Tax Expense
Provision for income taxes increased from $0 for the six months ended June 30, 2010 to
approximately $0.2 million for the six months ended June 30, 2011. This increase was due to federal
and state income tax related to our taxable REIT subsidiaries. Prior to October 2010, no provision
for income tax was recorded as all income and losses of the Predecessor were allocated to partners
or members of Predecessor owned entities.
Cash Flows
Comparison of Six Months Ended June 30, 2011 and June 30, 2010
Operating Activities
Net cash provided by operating activities was approximately $11.4 million for the six months
ended June 30, 2011 as compared to approximately $2.7 million for the six months ended June 30,
2010, an increase of approximately $8.7 million. Working capital accounts provided approximately
$0.6 million for the six months ended June 30, 2011 while approximately $2.3 million was provided
by working capital accounts for the six months ended June 30, 2010, representing a decrease in cash
provided of approximately $1.7 million. This change was driven by the timing of third-party
construction billings and cash collections during the six months ended June 30, 2011.
Investing Activities
Net cash used in investing activities totaled approximately $39.1 million for the six months
ended June 30, 2011 as compared to approximately $2.7 million for the six months ended June 30,
2010, an increase of approximately $36.4 million. This increase was due to significantly increased
development and construction activity related to consolidated properties in the six month period
ended June 30, 2011 as compared to the six month period ended June 30, 2010, offset by cash
received from HSRE related to the contribution of ownership interests in The Grove at Denton and
The Grove at Valdosta to HSRE IV.
Financing Activities
Net cash provided by financing activities totaled approximately $34.1 million for the six
months ended June 30, 2011 as compared to approximately $0.1 million for the six months ended June
30, 2010, an increase of approximately $34.0 million. This increase was due to draws on our
revolving credit facility and secured, project-specific construction loans to fund increased
development and construction activity for wholly owned student housing properties and to fund
investments in HSRE IV, partially offset by distributions paid to stockholders and noncontrolling
interests.
35
Liquidity and Capital Resources
As a REIT, we generally must distribute annually at least 90% of our REIT taxable income,
excluding any net capital gain, in order for corporate income tax not to apply to earnings that we
distribute. To the extent that we satisfy this distribution requirement, but distribute less than
100% of our REIT taxable income, we will be subject to U.S. federal corporate income tax on our
undistributed taxable income. In addition, we will be subject to a 4% nondeductible excise tax if
the actual amount that we distribute to our stockholders in a calendar year is less than a minimum
amount specified under U.S. federal income tax laws. We intend to make distributions to our
stockholders to comply with the requirements of the Internal Revenue Code and to avoid paying
corporate tax on undistributed income. Additionally, we intend to make distributions that exceed
these requirements. We may need to obtain financing to meet our distribution requirements because:
|
|
|
our income may not be matched by our related expenses at the time the income is
considered received for purposes of determining taxable income; and |
|
|
|
|
non-deductible capital expenditures, creation of reserves or debt service
requirements may reduce available cash but not taxable income. |
In these circumstances, we may be forced to obtain third-party financing on terms we might
otherwise find unfavorable, and we cannot assure you that we will be able to obtain such financing.
Alternatively, if we are unable or unwilling to obtain third-party financing on the available
terms, we could choose to pay a portion of our distributions in stock instead of cash, or we may
fund distributions through asset sales.
Principal Capital Resources
On October 19, 2010, we closed a credit agreement (our revolving credit facility) with
Citibank, N.A. and certain other parties thereto relating to a three-year, $125 million senior
secured revolving credit facility. This facility is secured by 12 of our wholly owned properties.
Affiliates of Citigroup Global Markets Inc. act as administrative agent, collateral agent, lead
arranger and book running manager, and affiliates of Raymond James & Associates, Inc., Citigroup
Global Markets Inc., Goldman, Sachs & Co., Barclays Capital Inc. and RBC Capital Markets
Corporation (together with other financial institutions) act as lenders under our revolving credit
facility. As of June 30, 2011, approximately $74.5 million was outstanding under our revolving
credit facility and approximately $14.4 million of borrowing capacity was available under this
facility.
The amount available for us to borrow under this credit facility is based on a percentage of
the appraisal value of our properties that form the borrowing base of the facility. We intend to
pursue alternative, longer-term financing for some or all of the properties, which, prior to the
completion of the Offering, secured our $104.0 million mortgage loan with Silverton Bank since they
were released from the lien of that mortgage upon its repayment in full in connection with our
Offering and Formation Transactions. For eligible properties, this may include debt financing
provided by Freddie Mac or Fannie Mae.
Additionally, our revolving credit facility has an accordion feature that allows us to request
an increase in the total commitments of up to $75 million to $200 million. Amounts outstanding
under our revolving credit facility bear interest at a floating rate equal to, at our election, the
Eurodollar Rate or the Base Rate (each as defined in our revolving credit facility) plus a spread.
The spread depends upon our leverage ratio and ranges from 2.75% to 3.50% for Eurodollar Rate based
borrowings and from 1.75% to 2.50% for Base Rate based borrowings.
Our ability to borrow under our revolving credit facility is subject to our ongoing compliance
with a number of customary financial covenants, including:
|
|
|
a maximum leverage ratio of 0.60 : 1.00; |
|
|
|
|
a minimum fixed charge coverage ratio of 1.50 : 1.00; |
|
|
|
|
a minimum ratio of fixed rate debt and debt subject to hedge agreements to total debt
of 66.67%;
|
36
|
|
|
a maximum secured recourse debt ratio of 20%; and |
|
|
|
|
a minimum tangible net worth of the sum of 75% of our tangible net worth plus an
amount equal to 75% of the net proceeds of any additional equity issuances. |
Under our revolving credit facility, for any three month period ending on or after December
31, 2011, our distributions may not exceed the greater of (i) 90.0% of our Funds From Operations
(FFO) or (ii) the amount required for us to qualify and maintain our status as a REIT. For the
three month period ending September 30, 2011, our distributions may not exceed the greater of (i)
95.0% of our Funds From Operations (FFO) or (ii) the amount required for us to qualify and
maintain our status as a REIT. For any three month period in 2011 ending on or prior to June 30,
2011, our distributions may not exceed the greater of (i) 100.0% of our FFO or (ii) the amount
required for us to qualify and maintain our status as a REIT. If a default or event of default
occurs and is continuing, we may be precluded from making certain distributions (other than those
required to allow us to qualify and maintain our status as a REIT).
We and certain of our subsidiaries will guarantee the obligations under our revolving credit
facility and we and certain of our subsidiaries have pledged specified assets (including real
property), stock and other interests as collateral for our revolving credit facility obligations.
The foregoing is only a summary of the material terms of our revolving credit facility. For
more information, see the credit agreement, which is filed as Exhibit 10.22 to our Annual Report on
Form 10-K for the year ended December 31, 2010.
On July 22, 2011, Campus Crest at Auburn, LLC, a subsidiary of the Company, entered into a
Construction Loan Agreement with Compass Bank pursuant to which Compass Bank agreed to provide
Campus Crest at Auburn, LLC a construction loan with a total borrowing capacity of approximately
$16.3 million. The construction loan will be used to finance the development of a student housing
property in Auburn, Alabama. The construction loan matures on July 22, 2014, but can be extended
until October 22, 2015, subject to certain conditions. The interest rate on the construction loan
is LIBOR plus 2.95%. The construction loan agreement contains representations, warranties,
covenants (including financial covenants upon commencement of operations) and other terms that are
customary for construction financing.
On June 30, 2011, Campus Crest at Orono, LLC, a subsidiary of the Company, entered into a
Construction Loan Agreement with TD Bank, N.A. pursuant to which TD Bank agreed to provide Campus
Crest at Orono, LLC a construction loan with a total borrowing capacity of approximately $15.2
million. The construction loan will be used to finance the development of a student housing
property in Orono, Maine. The construction loan matures on June 30, 2014, but can be extended until
December 31, 2015, subject to certain conditions. The interest rate on the construction loan is
LIBOR plus 2.75%. The construction loan agreement contains representations, warranties, covenants
(including financial covenants upon commencement of operations) and other terms that are customary
for construction financing. At June 30, 2011, no amounts were outstanding under this loan.
On March 4, 2011, Campus Crest at Columbia, LLC, a subsidiary of the Company, entered into a
Construction Loan Agreement with BOKF, NA (d/b/a Bank of Oklahoma), pursuant to which Bank of
Oklahoma agreed to provide Campus Crest at Columbia, LLC a construction loan with a total borrowing
capacity of approximately $17.0 million. The construction loan will be used to finance the
development of a student housing property in Columbia, Missouri. The construction loan matures on
March 4, 2014, but can be extended until March 4, 2015, subject to certain conditions. The interest
rate on the construction loan is the greater of (i) LIBOR plus 3.0%, or (ii) 4.5%. Loan payments
are interest only through April 2013. The construction loan agreement contains representations,
warranties, covenants (including financial covenants upon commencement of operations) and other
terms that are customary for construction financing. At June 30, 2011, approximately $4.4 million
was outstanding under this loan.
On November 19, 2010, the Company entered into a construction loan with The PrivateBank and
Trust Company of approximately $52.8 million. The construction loan will be used to finance the
development of student housing properties in each of Ames, Iowa, Clarksville, Tennessee, Fort
Collins, Colorado and Fort Wayne, Indiana. The construction loan initially matures on November 19,
2013, but can be extended until November 19, 2014,
37
subject to certain conditions. The interest rate is LIBOR plus 4.75% and the construction loan
agreement contains representations, warranties, covenants (including financial covenants upon
commencement of operations) and other terms that are customary for construction financing. Loan
payments are interest only through November 2012. At June 30, 2011 and December 31, 2010,
approximately $7.3 million and $0, respectively, were outstanding under this loan.
In addition to borrowings under our revolving credit facility, we may also use non-recourse
mortgage financing to make acquisitions or refinance short-term borrowings under our revolving
credit facility. We may also seek to raise additional capital through the issuance of our common
stock, preferred stock, OP units and debt or other securities or through property dispositions or
joint venture transactions. Any debt incurred or issued by us may be secured or unsecured,
long-term or short-term, fixed or variable interest rate and may be subject to such other terms as
we deem prudent. Our ability to access the lending and capital markets will be dependent on a
number of factors, including general market conditions for REITs, our historical and anticipated
financial condition, liquidity, results of operations, FFO and market perceptions about us and our
competitors.
Short-Term Liquidity Needs
The nature of our business, coupled with the requirement imposed by REIT rules that we
distribute a substantial majority of our REIT taxable income on an annual basis in order for us to
qualify as a REIT, will cause us to have substantial liquidity needs. Our short-term liquidity
needs consist primarily of funds necessary to pay operating expenses associated with our
properties, recurring capital expenditures, development and construction costs, interest expense,
scheduled debt service payments and expected distribution payments (including distributions to
persons who hold OP units). We expect to meet our short-term liquidity needs through cash flow from
operations and, to the extent necessary, borrowings under our revolving credit facility. We expect
that cash flow from operations and borrowings under our revolving credit facility will be
sufficient to meet our liquidity requirements for at least the next 12 months.
One of our unconsolidated entities has approximately $24.8 million of construction debt that
matures on November 15, 2011. We expect that the unconsolidated entity will close on a mortgage
loan, or acquire other, longer-term financing, prior to the loans maturity date or execute a
modification to the terms of the construction loan which will extend the loans maturity date. As
discussed in note 8 to the accompanying condensed consolidated and combined financial statements
contained in Part I herein, the Company is the guarantor of this construction loan.
Development Expenditures
Our development activities have historically required us to fund pre-development expenditures
such as architectural fees, engineering fees and earnest deposits. Because the closing of a
development projects financing is often subject to various delays, we cannot always predict
accurately the liquidity needs of these activities. We frequently incur these pre-development
expenditures before a financing commitment has been obtained and, accordingly, bear the risk of the
loss of these pre-development expenditures if financing cannot ultimately be arranged on acceptable
terms.
We are currently building six new student housing properties, four of which are wholly owned
by us and two of which are owned by a joint venture with HSRE in which we own a 20% interest. We
expect to complete construction and commence operations at each of these properties in August 2011,
for the 2011-2012 academic year. For each of these projects, we commenced construction subsequent
to significant pre-development activities. We estimate that the cost to complete all four wholly
owned properties will be approximately $87.5 million. Additionally, we will be obligated to fund
our pro rata portion of the development costs of our joint venture with HSRE, and we estimate that
the cost to complete the two joint venture properties will be approximately $46.1 million and our
pro rata share will be approximately $3.9 million. No assurance can be given that we will complete
construction of these properties in accordance with our current expectations (including the
estimated cost thereof). We have financed the construction of these six properties through
borrowings under our revolving credit facility, project-specific construction indebtedness
(including the project-specific indebtedness described in note 9 to the condensed consolidated and
combined financial statements) and contributions from HSRE.
38
We have identified over 200 markets and approximately 80 specific sites within these markets
as potential future development opportunities, and our current business plan contemplates the
development of approximately five to seven new student housing properties per year. No assurance
can be given that we will not adjust our business plan as it relates to development, or that any
particular development opportunity will be undertaken or completed in accordance with our current
expectations.
Long-Term Liquidity Needs
Our long-term liquidity needs consist primarily of funds necessary to pay for long-term
development activities, non-recurring capital expenditures, potential acquisitions of properties
and payments of debt at maturity. Long-term liquidity needs may also include the payment of
unexpected contingencies, such as remediation of unknown environmental conditions at our properties
or at additional properties that we develop or acquire, or renovations necessary to comply with the
Americans with Disabilities Act of 1990 or other regulatory requirements. We do not expect that we
will have sufficient funds on hand to cover all of our long-term liquidity needs. We will therefore
seek to satisfy these needs through cash flow from operations, additional long-term secured and
unsecured debt, including borrowings under our revolving credit facility, the issuance of debt
securities, the issuance of equity securities and equity-related securities (including OP units),
property dispositions and joint venture transactions. We believe that we will have access to these
sources of capital to fund our long-term liquidity requirements, but we cannot make any assurance
that this will be the case, especially in difficult market conditions.
Commitments
The following table summarizes our contractual commitments as of June 30, 2011 (including
future interest payments) (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligations |
|
Total |
|
|
2011 |
|
|
2012-2013 |
|
|
2014-2015 |
|
|
Thereafter |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt obligations (1) |
|
$ |
147,064 |
|
|
|
82 |
|
|
|
83,191 |
|
|
|
6,003 |
|
|
|
57,788 |
|
Interest payments on outstanding debt obligations |
|
|
23,519 |
|
|
|
3,265 |
|
|
|
9,690 |
|
|
|
7,219 |
|
|
|
3,345 |
|
Operating lease obligations |
|
|
22,767 |
|
|
|
328 |
|
|
|
1,549 |
|
|
|
1,253 |
|
|
|
19,637 |
|
Purchase obligations (2) |
|
|
26,406 |
|
|
|
26,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities |
|
|
261 |
|
|
|
|
|
|
|
261 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
220,017 |
|
|
|
30,081 |
|
|
|
94,691 |
|
|
|
14,475 |
|
|
|
80,770 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Obligations do not include debt maturities related to
unconsolidated entities. Unconsolidated entities have long-term
debt obligations of approximately $102.7 million, which mature at
various dates through 2013. The Company is the guarantor of these
loans. |
|
(2) |
|
Obligations relate to subcontracts executed by Campus Crest
Construction, LLC, to complete projects under construction at June
30, 2011. |
Off-Balance Sheet Arrangements
HSRE Joint Venture
We use joint venture arrangements to finance certain of our properties. As discussed above, at
June 30, 2011, we were party to two joint venture arrangements with HSRE. The first venture, in
which we own a 49.9% interest and account for under the equity method, owns 100% interests in six
operating properties. The second venture, in which we own a 20% interest and account for under the
equity method, owns 100% interests in two properties currently under construction, with completion
targeted for the 2011-2012 academic year. At June 30, 2011,
these ventures had a total of approximately $102.7 million of
outstanding construction debt. As discussed in note 8 to the accompanying condensed
consolidated and combined financial statements contained in
Part I herein, the Company is the guarantor of the debt held in
these
unconsolidated entities.
Funds From Operations (FFO)
FFO is used by industry analysts and investors as a supplemental operating performance measure
for REITs. We calculate FFO in accordance with the definition that was adopted by the Board of
Governors of the National
39
Association of Real Estate Investment Trusts (NAREIT). FFO, as defined by NAREIT, represents
net income (loss) determined in accordance with U.S. GAAP, excluding extraordinary items as defined
under U.S. GAAP and gains or losses from sales of previously depreciated operating real estate
assets, plus specified non-cash items, such as real estate asset depreciation and amortization, and
after adjustments for unconsolidated partnerships and joint ventures.
We use FFO as a supplemental performance measure because, in excluding real estate-related
depreciation and amortization and gains and losses from property dispositions, it provides a
performance measure that, when compared year over year, captures trends in occupancy rates, rental
rates and operating expenses. We also believe that, as a widely recognized measure of the
performance of equity REITs, FFO will be used by investors as a basis to compare our operating
performance with that of other REITs. However, because FFO excludes depreciation and amortization
and captures neither the changes in the value of our properties that result from use or market
conditions nor the level of capital expenditures necessary to maintain the operating performance of
our properties, all of which have real economic effects and could materially and adversely impact
our results of operations, the utility of FFO as a measure of our performance is limited.
While FFO is a relevant and widely used measure of operating performance of equity REITs,
other equity REITs may use different methodologies for calculating FFO and, accordingly, FFO as
disclosed by such other REITs may not be comparable to FFO published herein. Therefore, we believe
that in order to facilitate a clear understanding of our historical operating results, FFO should
be examined in conjunction with net loss as presented in the condensed consolidated and combined
financial statements included elsewhere in this report. FFO should not be considered as an
alternative to net income (loss) (computed in accordance with U.S. GAAP) as an indicator of our
properties financial performance or to cash flow from operating activities (computed in accordance
with U.S. GAAP) as an indicator of our liquidity, nor is it indicative of funds available to fund
our cash needs, including our ability to pay dividends or make distributions.
The following table presents a reconciliation of our FFO to our net loss for the three and six
months ended June 30, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Net loss |
|
$ |
(641 |
) |
|
|
(5,075 |
) |
|
|
(1,115 |
) |
|
|
(8,290 |
) |
Real estate related depreciation and amortization |
|
|
5,148 |
|
|
|
4,592 |
|
|
|
10,245 |
|
|
|
9,280 |
|
Real estate related depreciation and
amortization unconsolidated entities |
|
|
637 |
|
|
|
100 |
|
|
|
1,159 |
|
|
|
157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds from operations (FFO) |
|
$ |
5,144 |
|
|
|
(383 |
) |
|
|
10,289 |
|
|
|
1,147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition to FFO, we believe it is also a meaningful measure of our performance to
adjust FFO to exclude the change in fair value of interest rate derivatives. Excluding the change
in fair value of interest rate derivatives adjusts FFO to be more reflective of operating results
prior to capital replacement or expansion, debt service obligations or other commitments and
contingencies. This measure is referred to herein as FFOA.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
FFO |
|
$ |
5,144 |
|
|
|
(383 |
) |
|
|
10,289 |
|
|
|
1,147 |
|
Elimination of change in fair value of
interest rate derivatives |
|
|
(141 |
) |
|
|
(1,514 |
) |
|
|
(337 |
) |
|
|
(2,893 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds from operations adjusted (FFOA) |
|
$ |
5,003 |
|
|
|
(1,897 |
) |
|
|
9,952 |
|
|
|
(1,746 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Inflation
Our student housing leases 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, our ability to raise rental rates
40
may be limited by a weak economic environment, increased competition from new student housing
in our primary markets and/or a reduction in student enrollment at our principal colleges and
universities.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk from changes in interest rates. We seek to limit the impact of
interest rate changes on earnings and cash flows and to lower the overall borrowing costs by
closely monitoring our variable rate debt and converting such debt to fixed rates when we deem such
conversion advantageous. As of June 30, 2011, approximately $86.2 million of our aggregate
indebtedness (approximately 59% of total indebtedness) was subject to variable interest rates.
If market rates of interest on our variable rate long-term debt fluctuate by 1.0%, interest
expense would increase or decrease, depending on rate movement, future earnings and cash flows by
approximately $0.9 million annually. This assumes that the amount outstanding under our variable
rate debt remains at $86.2 million, the balance as of June 30, 2011.
We may in the future use derivative financial instruments to manage, or hedge, interest rate
risk related to variable rate borrowings outstanding under our revolving credit facility. We do
not, and do not expect to, use derivatives for trading or speculative purposes, and we expect to
enter into contracts only with major financial institutions.
Item 4. Controls and Procedures
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
periods covered by this report were effective to ensure that information required to be disclosed
by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time periods specified in SEC rules and
forms and is accumulated and communicated to our management, including our Chief Executive Officer
and Chief Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.
41
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are not presently involved in any material litigation nor, to our knowledge, is any
material litigation threatened against us or our properties. We are involved in routine litigation
arising in the ordinary course of business, none of which we believe to be material.
Item 1A. Risk Factors
For a discussion of our potential risks and uncertainties, see the section entitled Risk
Factors beginning on page 9 of our Annual Report on Form 10-K, as amended, for the year ended
December 31, 2010. There have been no material changes to the risk factors disclosed in the Annual
Report on Form 10-K for the year ended December 31, 2010.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. [Removed and Reserved]
Item 5. Other Information
None.
Item 6. Exhibits
|
|
|
Exhibit |
|
|
Number |
|
Description of Document |
31.1 *
|
|
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2 *
|
|
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1 *
|
|
Certification of Chief Executive Officer and 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 *
|
|
The following materials from Campus Crest Communities, Inc.s Quarterly Report on Form 10-Q for
the quarter ended June 30, 2011 formatted in XBRL (eXtensible Business Reporting Language): (i)
the Condensed Consolidated Balance Sheets of Campus Crest Communities, Inc., (ii) the Condensed
Consolidated and Combined Statements of Operations of Campus Crest Communities, Inc. and Campus
Crest Communities Predecessor, (iii) the Condensed Consolidated Statement of Changes in Equity and
Comprehensive Loss of Campus Crest Communities, Inc., (iv) the Condensed Consolidated and Combined
Statements of Cash Flows of Campus Crest Communities, Inc. and Campus Crest Communities
Predecessor, and (v) related notes to the Condensed Consolidated and Combined Financial Statements
of Campus Crest Communities, Inc. and Campus Crest Communities Predecessor, tagged as blocks of
text. |
|
|
|
|
|
As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for
purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities
Exchange Act of 1934. |
42
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.
Dated: August 5, 2011
|
|
|
|
|
|
CAMPUS CREST COMMUNITIES, INC.
|
|
|
By: |
/s/ Donald L. Bobbitt, Jr.
|
|
|
|
Donald L. Bobbitt, Jr. |
|
|
|
Executive Vice President and
Chief Financial Officer (Principal
Financial Officer and Principal
Accounting Officer) |
|
|
43
Exhibit Index
|
|
|
Exhibit |
|
|
Number |
|
Description of Document |
31.1 *
|
|
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2 *
|
|
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1 *
|
|
Certification of Chief Executive Officer and 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 *
|
|
The following materials from Campus Crest Communities, Inc.s Quarterly Report on Form 10-Q for
the quarter ended June 30, 2011 formatted in XBRL (eXtensible Business Reporting Language): (i)
the Condensed Consolidated Balance Sheets of Campus Crest Communities, Inc., (ii) the Condensed
Consolidated and Combined Statements of Operations of Campus Crest Communities, Inc. and Campus
Crest Communities Predecessor, (iii) the Condensed Consolidated Statement of Changes in Equity and
Comprehensive Loss of Campus Crest Communities, Inc., (iv) the Condensed Consolidated and Combined
Statements of Cash Flows of Campus Crest Communities, Inc. and Campus Crest Communities
Predecessor, and (v) related notes to the Condensed Consolidated and Combined Financial Statements
of Campus Crest Communities, Inc. and Campus Crest Communities Predecessor, tagged as blocks of
text. |
|
|
|
|
|
As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for
purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities
Exchange Act of 1934. |