UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2014
| ¨ | TRANSITION REPORT UNDER 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)
Maryland |
|
27-2481988 |
(State or other jurisdiction of
incorporation or organization) |
|
(I.R.S. Employer
Identification No.) |
2100 Rexford Road, Suite 414, Charlotte, NC |
|
28211 |
(Address of principal executive offices) |
|
(Zip Code) |
Registrant’s telephone number, including
area code: (704) 496-2500
Securities registered pursuant to Section 12(b)
of the Act:
(Title of Each Class) |
|
(Name of Each Exchange on Which Registered) |
Common Stock, $0.01 par value |
|
New York Stock Exchange |
8% Series A Cumulative Redeemable Preferred Stock, $0.01 par value |
|
New York Stock Exchange |
Securities registered pursuant to Section 12(g)
of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such report(s)), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405
of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to
the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. ¨
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 definitions of "large accelerated
filer," "accelerated filer," and smaller reporting companies in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
x |
Accelerated filer |
¨ |
|
|
|
|
Non-accelerated filer |
¨ |
Smaller reporting company |
¨ |
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
There were 64,659,415 shares of the registrant’s common stock
outstanding with a par value of $0.01 per share as of the close of business on March 26, 2015. The aggregate market value of
voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2014 was approximately $563.1 million.
DOCUMENTS INCORPORATED BY REFERENCE
Part II and III of this report incorporate certain information by
reference to the registrant’s definitive Proxy Statement to be filed with respect to the 2015 annual meeting of stockholders.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2014
TABLE OF CONTENTS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING
STATEMENTS
This report contains certain
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). We intend such forward-looking
statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation
Reform Act of 1995 and include this statement for the purpose of complying with these safe harbor provisions. 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," “would” 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 may cause our actual results, performance or achievements to differ materially from those expressed or implied by
forward-looking statements include, but are not limited to, the following:
| · | the factors discussed in this report, including those set forth under the headings "Business,"
"Risk Factors" and "Management’s Discussion of Financial Condition and Results of Operations"; |
| · | the performance of the student housing industry in general; |
| · | decreased occupancy or rental rates at our properties resulting from competition or other factors; |
| · | the operating performance of our properties; |
| · | the availability of attractive acquisition opportunities in properties that satisfy our investment
criteria and the success of our acquisition activities, including satisfaction of conditions to closing for pending acquisitions
and, in some cases, the negotiation and execution of definitive documents and satisfaction of the conditions therein; |
| · | changes in the admissions or housing policies of the colleges and universities from which we draw
student-tenants; |
| · | changes in our business and growth strategies and in our ability to consummate acquisitions or
dispositions or additional joint venture transactions; |
| · | our ability to manage effectively our growth and expansion into new markets, including international
markets, or to integrate acquisitions successfully, including our acquisition of the CB Portfolio (as defined herein); |
| · | changes in exchange rates for foreign currencies; |
| · | 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, including international markets, whether the result
of market events or otherwise; |
| · | events or circumstances that 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; |
| · | the availability and terms of short-term and long-term financing; |
| · | our ability to extend the maturity of or refinance our existing debt, or comply with the financial
and other covenants of the agreements that govern our existing debt; |
| · | 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, or our inability to attract and retain, 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; |
| · | differences in cultures, including adapting practices and strategies that have been successful
in our domestic business to international markets; |
| · | 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 ("REIT")); 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, 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, including the factors set forth under the headings "Business," "Risk Factors," "Properties"
and "Management’s Discussion and Analysis of Financial Condition and Results of Operations," 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.
PART I
Item 1. Business.
Our Company
Campus Crest Communities,
Inc., together with its subsidiaries, referred to herein as the "Company," "we," "us," "our,"
and "Campus Crest," is a self-managed, self-administered REIT focused on owning and managing a diversified portfolio
of high-quality, residence life student housing properties. We were incorporated in the State of Maryland on March 1, 2010.
On October 19, 2010, we completed an initial public offering (the "Offering") of our common stock. As a result of
the Offering and certain formation transactions entered into in connection therewith (the "Formation Transactions"),
we currently own the sole general partner interest and own limited partner interests in Campus Crest Communities Operating Partnership,
LP (the "Operating Partnership"). We hold substantially all of our assets, and conduct substantially all of our business,
through the Operating Partnership. The Offering and Formation Transactions were designed to (i) continue the operations of
Campus Crest Communities Predecessor (the "Predecessor"), (ii) reduce outstanding mortgage and construction loan
indebtedness, (iii) enable us to acquire additional interests in certain of our student housing properties, (iv) fund
joint venture capital requirements, and (v) establish sufficient working capital for general corporate purposes. The exchange
of entities or interests in the Predecessor for units of limited partnership interests in the Operating Partnership ("OP units")
has been accounted for as a reorganization of entities under common control. As a result, our assets and liabilities have been
reflected at their historical cost basis.
In February 2013, we entered
into purchase and sale agreements to acquire an approximate 48.0% interest in a portfolio of 35 student housing properties, one
undeveloped land parcel and a corporate office building held by the members of Copper Beech Townhome Communities, LLC ("CBTC")
and Copper Beech Townhome Communities (PA), LLC (the “CB Portfolio”), and a fully integrated platform and brand with
management, development and construction teams, for an initial purchase price of approximately $230.2 million, including the repayment
of $106.7 million of debt. The remaining interests in the CB Portfolio are held by certain of the former members of CBTC and CBTC
PA, (the “CB Investors”). In September 2013, we entered into an amendment to the above referenced purchase and sale
agreements for consideration of $4.0 million whereby we will transfer our 48.0% interest in five properties in the Copper Beech
Portfolio back to the CB Investors and defer the acquisition of two development properties as consideration for an additional 19.0%
interest in each of the remaining 30 properties in the Copper Beech Portfolio. See Note 6 to the accompanying consolidated financial
statements. Subsequent to December 31, 2014, we along with certain of our affiliates completed the acquisition of the Copper Beech
Portfolio. See Note 19 to the accompanying consolidated financial statements.
During the third
quarter of 2014, we began to implement a strategic repositioning which includes, among other things:
| (1) | Simplifying the business model by discontinuing all construction and development and focusing on
organic growth; |
| (2) | Reducing the number of joint ventures through planned dispositions of certain assets within our
joint ventures to simplify asset ownership structure and reduce exposure to off-balance sheet obligations; |
| (3) | Disposing of land which was previously held for future development (held in land and property held
for sale as of December 31, 2014, some of which was disposed of subsequent to the year ended December 31, 2014 (see Note 19 to
the accompanying consolidated financial statement) and the rest of which we expect to dispose of during 2015); |
| (4) | Identifying costs savings at our properties and at the corporate office; and |
| (5) | Focusing time and resources on recruiting new members of our management team. |
During the year ended
December 31, 2014, the Company discontinued all construction and development operations (see Note 7 of the accompanying consolidated
financial statements).
We
believe that we are one of the largest owners and managers of high-quality student housing properties in the United States, based
on beds owned and under management. As of December 31, 2014, we owned interests in 47 operating student housing The
Grove® properties containing approximately 9,700 apartment units and 26,300 beds.
Thirty-six of our operating The Grove® properties
are wholly-owned and eleven of our The Grove® properties
are owned through joint ventures with HSRE. As of December 31, 2014, we also owned interests in 36 operating student housing Copper
Beech branded properties containing approximately 6,500 apartment units and 17,300 beds. Our Copper Beech branded properties are
owned by the Company and the CB Investors. As of December 31, 2014, we also owned interests in three operating student housing
evo® properties containing approximately 1,500 units and 3,000 beds and owned one wholly-owned redevelopment
property containing approximately 170 units and 340 beds. As of December 31, 2014, our operating portfolio consisted of the following:
| |
Properties in | | |
| | |
Number | | |
Number | |
| |
Operation | | |
Ownership | | |
of Units | | |
of Beds | |
Wholly-owned Grove properties(1) | |
| 36 | | |
| 100.0 | % | |
| 7,305 | | |
| 19,945 | |
Joint venture Grove properties: | |
| | | |
| | | |
| | | |
| | |
HSRE I | |
| 3 | | |
| 63.9 | %(2) | |
| 544 | | |
| 1,508 | |
HSRE V | |
| 3 | | |
| 10.0 | % | |
| 662 | | |
| 1,856 | |
HSRE VI | |
| 3 | | |
| 20.0 | % | |
| 664 | | |
| 1,784 | |
HSRE X | |
| 2 | | |
| 30.0 | % | |
| 468 | | |
| 1,240 | |
Total Grove properties | |
| 47 | | |
| | | |
| 9,643 | | |
| 26,333 | |
| |
| | | |
| | | |
| | | |
| | |
Joint venture evo properties: | |
| | | |
| | | |
| | | |
| | |
CSH Montreal | |
| 2 | | |
| 47.0 | % | |
| 1,203 | | |
| 2,223 | |
HSRE IX | |
| 1 | | |
| 30.0 | % | |
| 344 | | |
| 850 | |
Total evo properties | |
| 3 | | |
| | | |
| 1,547 | | |
| 3,073 | |
| |
| | | |
| | | |
| | | |
| | |
CB Portfolio | |
| 36 | | |
| 48.0 | %(3) | |
| 6,461 | | |
| 17,283 | |
| |
| | | |
| | | |
| | | |
| | |
Total Portfolio(4) | |
| 86 | | |
| | | |
| 17,651 | | |
| 46,689 | |
| (1) | In 2014, we acquired the remaining ownership interest in The Grove at Denton, Texas. |
| (2) | In 2014, we amended and restated our operating agreement with HSRE resulting in our previously
held preferred interest in The Grove at San Angelo, Texas, and The Grove at Conway, Arkansas, being converted to additional membership
units of HSRE-Campus Crest I, LLC. |
| (3) | As of December 31, 2014, we had an effective interest in the CB Portfolio of 48%. See Note 8 to
the accompanying consolidated financial statements. |
| (4) | The redevelopment of our 100% owned property in Toledo, OH, which was acquired in March 2013, is
excluded. |
As of December 31, 2014,
the average occupancy for our 47 The Grove® properties was approximately 87.2% and the average monthly
total revenue per occupied bed was approximately $527. Our operating properties are located in 23 states, contain modern apartment
units with many resort-style amenities, and had an average age of approximately 4.0 years as of December 31, 2014. As of December
31, 2014, the average occupancy for our 36 Copper Beech branded properties was approximately 91.0%, and the average monthly total
revenue per occupied bed was approximately $487. 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
5,000 to 20,000 students. We believe such markets are underserved and are generally experiencing enrollment growth.
We have developed, built
and managed substantially all of our wholly-owned properties and several of our unconsolidated joint venture properties, which
are based upon a common prototypical residential building design. We believe that our use of this prototypical building design,
which we have built more than 700 times at our student housing properties (approximately 15 of such residential buildings
comprise one student housing property), allows us to efficiently deliver a uniform and proven student housing product in multiple
markets. The majority of our operating properties (other than those in the CB Portfolio, evo® and Toledo)
operate under The Grove® brand, and we believe that our brand and the associated lifestyle are effective
differentiators that create higher visibility and appeal for our properties within their markets both with the students as well
as the universities we serve.
We began building or redeveloping
nine new student housing properties in 2013 that commenced operations in August 2014, one of which is owned by a joint venture
with HSRE and Brandywine Realty Trust (“Brandywine”) in which we own a 30.0% interest and act as the co-developer,
one of which is owned by a joint venture with Beaumont Partners SA (“Beaumont”) in which we owned a 47.0% interest
at December 31, 2014, two of which are owned by a joint venture with HSRE in which we own a 30% interest, one of which is a Copper
Beech branded property in which our ownership interest is commensurate with the remainder of the CB Portfolio, and four of which
are wholly-owned by us. In 2014, we completed the redevelopment of one student housing property which is owned by a joint venture
with Beaumont in which we own a 47.0% interest.
REIT Status and Taxable REIT Subsidiaries
We have made an election
to qualify, and we believe we are operating so as to qualify, as a REIT under Sections 856 through 859 of the Internal Revenue
Code of 1986, as amended (the "Internal Revenue Code"), commencing with our taxable year ended December 31, 2010.
As a REIT, we generally will not be subject to U.S. federal income tax to the extent that we meet the organizational and operational
requirements and our distributions equal or exceed 90% of our REIT taxable income. For all periods subsequent to the REIT election,
we have met the organizational and operational requirements and distributions have exceeded 90% of our REIT taxable income.
We have elected to treat
Campus Crest TRS Holdings, Inc. ("TRS Holdings"), our wholly-owned subsidiary, as a taxable REIT subsidiary ("TRS").
TRS Holdings includes the management companies that provide services to entities in which we do not own 100% of the equity interests.
As a TRS, the operations of TRS Holdings and its subsidiaries are generally subject to federal, state and local income and franchise
taxes.
Property Management and Monitoring
We maintain an on-site
staff at each property, including a General Manager, Sales Manager and Maintenance Supervisor. The on-site staff is responsible
for all aspects of the property’s operations, including marketing, leasing administration, customer service, lifestyle, expense
control, business administration, ongoing property maintenance, capital projects, residence life and student development. In addition,
each property typically has 5 student-tenants that live on-site and work for us on a part-time basis. These individuals act as
Community Assistants, or CA's, and Leasing Consultants, or LC’s, that assist in developing lifestyle programming, building
community, ensuring the needs of all tenants and guests are taken care of, and pursuing and closing all potential leads for continued
leasing efforts. We also have a full time Senior Leasing Consultant that offers support to the Sales Manager and a Maintenance
Tech that offers support to the Maintenance Supervisor. We provide oversight to each property on an area basis, with each "area"
typically comprised of six to eight properties. Each area is staffed with an Area Manager and Area Sales Manager and our area team
is supported by a Regional Manager and Regional Sales Manager respectively. The roles of our various staff members are described
in greater detail below.
General Managers, Sales
Managers and Maintenance Supervisor. The General Manager is responsible for all facets of a property’s operation, including
the development and implementation of student lifestyle programs, expense control, collection of rents, administration of accounts
payable, customer service, implementation of the annual marketing plan, administration of all leasing and marketing functions,
coordination of property maintenance, asset preservation and capital improvement projects. The General Manager also supervises
the residence life program and conducts all hiring, termination, and staff development of on-site personnel. The Sales Manager
supports the General Manager and focuses on the leasing and lifestyle programs at the property. The Maintenance Supervisor is responsible
for coordinating all maintenance activity at the property and serving as a liaison for larger capital projects in concert with
our in-house facilities group.
Community Assistants
and Leasing Consultants. At each property we generally maintain a ratio of 50-70 students per employee living on site. Our
CA’s and LC’s are selected by our management based upon a set of criteria, including interpersonal skills, leadership
capabilities, responsibility, maturity and willingness to meet the challenges and expectations of the position. We use these positions
to interface on a peer basis with our student-tenants and to assist with various duties at the properties. Further, we use this
position as a feeder for us, which allows us to evaluate these part-time employees for potential full-time managerial positions
with us after they graduate. It is a position that fits well with many students’ academic goals while affording them opportunities
for personal growth and leadership development. The CA’s and LC’s perform the duties of their position in exchange
for their room and a stipend. CA’s and LC’s are trained to provide support and assistance to our student-tenants on
a variety of issues. The CA’s and LC’s act as community facilitators by developing an atmosphere that promotes a sense
of belonging, support and affiliation. At all times, our CA’s and LC’s are expected to be role models and maintain
the highest standards of personal conduct. Through observation and interaction with the community, the CA’s and LC’s
help to identify potential problems and make appropriate referrals so that students may overcome obstacles to their academic achievement.
Through their efforts to provide timely, accurate and thorough information in the appropriate format, CA’s and LC’s
contribute to the smooth and effective operations of our properties. We believe that these positions are important to the success
of our properties.
Senior Leasing Consultant.
Senior Leasing Consultants support the leasing efforts driven by the Sales Manager. The Senior Leasing Consultants are responsible
for achieving sales performance goals for their respective site. They are actively engaged in gaining new prospects, following
up with prospects, and closing on sales to meet or exceed set goals. This position also assists in hiring and developing leasing
consultants and community assistant personnel. Much like the CA and LC position, the Senior Leasing Consultant position is one
developed to be a feeder for us to use at Sales Manager openings within our portfolio.
Area Managers and Area
Sales Managers. The Area Manager is responsible for all facets of the operations of properties in his or her area, typically
six to eight properties per area. He or she monitors the performance of the properties and the compliance of each of the General
Managers with our programs and policies to preserve operational standards across all of the properties in his or her area. The
Area Manager is the conduit between centralized planning at our corporate level and decentralized execution at each of the properties.
Similar to the property-level Sales Manager, the Area Sales Manager provides support for leasing and lifestyle programming
at all the properties in his or her area. As the corporate marketing department’s liaison to area and property operations,
the Area Sales Manager monitors the consistency of our brands across the properties and collaborates with the Area Managers and
General Managers to market each property effectively.
Regional Managers and
Regional Sales Managers. The Regional Manager is responsible for all facets of the operations of properties in his or her region,
typically 2 areas accounting for 12-16 properties. He or she monitors the performance of his or her area to ensure compliance of
all operational standards across their region. The Regional Manager is part of the conduit between the centralized planning at
our corporate level and decentralized execution within each of their areas. The Regional Manager is also someone who works on the
training and development of each of their Area Managers to improve the performance metrics for the overall company. The Regional
Sales Manager, much like the Regional Manager, is responsible to support the leasing and lifestyle planning within each of their
respective areas.
Leasing and Marketing
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-tenant’s liability to his or her own rent without liability for a roommate’s
rent. A parent or guardian is required to execute each lease as a guarantor unless the 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 occupied.
Unlike traditional multi-family
housing, most of our leases commence and terminate on the same dates each year. In the case of our typical 11.5-month lease, these
dates coincide with the commencement of the universities’ fall academic term and typically terminate at the completion of
the last 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, which typically begins each October and ends in September of the following year. Approximately
37.6% and 41.7% of our current tenants renewed their lease as of the start of the fall term for the 2014-2015 and 2013-2014 academic
years, respectively.
Each year we implement
a marketing and leasing plan to re-lease each property. We advertise through various media, including print and internet advertising,
social media, direct mailers, radio advertising, promotional events and public relation campaigns. We typically compete in the
off-campus student housing market on the basis of:
| · | the quality of our facilities, including their proximity to college and university campuses, the
size and layout of units and the types of amenities offered; |
| · | rental terms, including price, which vary based on the market in which the property is located,
and per-bed rental (individual lease liability), which allows individual student-tenants to avoid responsibility for the rental
of an entire apartment unit; |
| · | community environment, including community facilities, amenities and programming, which is overseen
by our staff of CA’s; and |
| · | our relationships with colleges and universities, which may result
in our properties being recommended or listed in recruiting and admissions literature provided to incoming and prospective students. |
Student Programming
We believe that our success
has been driven, in part, by our focus on student lifestyle programming, which enhances the lifestyle of our student-tenants and
helps to create an environment that is conducive to academic and social success. We do not approach our properties as simply a
place for students to live, but rather we seek to assist our student-tenants in building connections with their fellow student-tenants,
their communities and the colleges and universities that they attend. We believe that our focus on student lifestyle programming
differentiates us from our competitors and makes our properties more attractive to prospective student-tenants and their parents.
Business Segments
We define business segments
by their distinct customer base and services provided. We have identified two reportable business segments: (i) student housing
operations and (ii) property management services. All construction and development activities are reported in discontinued operations
at December 31, 2014. We evaluate the performance of our operating segments based on operating income (loss). All inter-segment
sales pricing is based on current market conditions. Unallocated corporate amounts include general expenses associated with managing
our two reportable operating segments. See Note 16 to the accompanying consolidated financial statements.
Competition
Competition from Universities and Colleges
We are subject to competition
for student-tenants from on-campus housing owned by universities and colleges. On-campus student housing has inherent advantages
over off-campus student housing (such as the majority of our properties) in integrating with the academic community, which may
cause student-tenants to prefer on-campus housing to off-campus housing. Additionally, colleges and universities may have financial
advantages that allow them to provide student housing on more attractive terms than we are able to. For example, colleges and universities
can generally avoid real estate taxes and borrow funds at lower interest rates than private, for profit real estate concerns, such
as us. Residence halls owned and operated by the primary colleges and universities in the markets in which we operate typically
charge lower rental rates but offer fewer amenities than those offered at our properties.
Despite the inherent advantages
of on-campus housing, most universities are able to house only a small percentage of their overall enrollment, and are therefore
highly dependent on the off-campus market to provide housing for their students. High-quality and well run off-campus student housing
can therefore be a critical component of an institution’s ability to attract and retain students. Accordingly, universities
and colleges often have an interest in encouraging and facilitating the construction of modern off-campus housing alternatives.
Competition from Private Owners
We also compete with other
regional and national owner-operators of off-campus student housing as well as with smaller local owner-operators. Currently, the
industry is fragmented with no participant holding a dominant market share. There are a number of student housing properties that
are located near or in the same general vicinity of many of our properties and that compete directly with our properties. We believe
that a number of other large national companies with substantial financial and marketing resources may be potential entrants in
the student housing business. The activities of any of these companies could cause an increase in competition for student-tenants
and for the acquisition, development and management of other student housing properties, which could reduce the demand for our
properties.
Insurance
We carry comprehensive
liability, fire, extended coverage, terrorism and rental loss insurance covering all of the properties in our portfolio. Our insurance
includes coverage for earthquake damage to properties located in seismically active areas, windstorm damage to properties exposed
to hurricanes, and terrorism insurance on all of our properties. Our insurance policies are subject to coverage limits and applicable
deductibles, and if we suffer a substantial loss, our coverage may be insufficient. All insurance policies are also subject to
coverage extensions that we believe are typical for our business. We do not carry insurance for generally uninsured losses such
as loss from riots or acts of God.
Regulation
General
Student housing properties
are subject to various laws, ordinances and regulations, including regulations relating to common areas. We believe that each of
our operating properties has the necessary permits and approvals to operate its business. In addition, apartment community properties
are subject to various laws, ordinances and regulations, including regulations relating to recreational facilities, such as swimming
pools, activity centers and other common areas.
Americans With Disabilities Act
Our properties must comply
with Title III of the Americans with Disabilities Act of 1990, as amended, or the ADA, to the extent that such properties
are "public accommodations" as defined by the ADA. The ADA may require removal of structural barriers to access by persons
with disabilities in certain public areas of our properties where such removal is readily achievable.
Fair Housing Act
The Fair Housing Act,
or the FHA, its state law counterparts and the regulations promulgated by the U.S. Department of Housing and Urban Development,
or HUD and various state agencies, prohibit discrimination in housing on the basis of race or color, national origin, religion,
sex, familial status (including children under the age of 18 living with parents or legal custodians, pregnant women and people
securing custody of children under 18) or handicap (disability) and, in some states, on financial capability.
Environmental Matters
Some of our properties
contain, or may have contained, or are adjacent to or near other properties that have contained or currently contain storage tanks
for the storage of petroleum products or other hazardous or toxic substances. These operations create a potential for the release
of petroleum products or other hazardous or toxic substances. Third parties may be permitted by law to seek recovery from owners
or operators for personal injury or property damages arising from releases from such tanks. Additionally, third parties may be
permitted by law to seek recovery from owners or operators for personal injury or property damage associated with exposure to other
contaminants that may be present on, at or under the properties, including, but not limited to, petroleum products and hazardous
or toxic substances. Also, some of the properties include regulated wetlands on undeveloped portions of such properties and mitigated
wetlands on or near our properties. Absent appropriate permits, we can be held responsible for restoring wetlands and be required
to pay fines and penalties.
When excessive moisture
accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered
or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Concern about indoor exposure to
mold has been increasing as exposure to mold may cause a variety of adverse health effects and symptoms, including allergic or
other reactions. Some of our properties may contain microbial matter such as mold and mildew. The presence of significant mold
at any of our properties could require us to undertake a costly remediation program to contain or remove the mold from the affected
property. The presence of significant mold could expose us to liability from student-tenants, employees and others if property
damage or health concerns arise.
If any property in our
portfolio is not properly connected to a water or sewer system, or if the integrity of such systems is breached, microbial matter
or other contamination can develop. If this were to occur, we could incur significant remedial costs and we may also be subject
to private damage claims and awards, which could be material. If we become subject to claims in this regard, it could materially
and adversely affect us and our insurability for such matters in the future.
Employees
As of December 31, 2014,
we had approximately 632 employees. Our employees are not represented by a labor union.
Offices and Website
Our principal executive
offices are located at 2100 Rexford Road, Suite 414, Charlotte, NC 28211. We also have management offices at each of our properties.
Our website is www.campuscrest.com.
We make available free of charge through our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon
as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission
("SEC’). Our website also contains copies of our Corporate Governance Guidelines and Code of Business Conduct and
Ethics, as well as the charters of our Nominating and Corporate Governance, Audit, and Compensation Committees. The information
on our website is not part of this report.
Item 1A. Risk Factors.
Carefully consider the
following risk factors, the occurrence of any of which may materially and adversely affect us. The risks described below are not
the only ones we face. Additional risks not presently known to us or that we may currently deem immaterial also may impair our
financial condition or operations or otherwise harm us.
Risks Related to Our Business and Properties
Adverse economic conditions and dislocation
in the credit markets have had a material and adverse effect on us and may continue to materially and adversely affect us.
We experienced unprecedented
levels of volatility in the capital markets, a reduction in the availability of credit and intense recessionary pressures, which
had an adverse effect on our results of operations and our ability to borrow funds from 2007 through 2010. For example, lenders
were generally imposing more stringent lending standards and applying more conservative valuations to properties. This limited
the amount of indebtedness we were able to obtain and impeded our ability to develop new properties and to replace construction
financing with permanent financing. If these conditions were to develop again in the future, our business and our growth strategy
may be materially and adversely affected. Although our business strategy contemplates access to debt financing (including our revolving
credit facility and term loans) and working capital requirements, there can be no assurance that we will be able to obtain such
financing on favorable terms or at all. As of December 31, 2014, we had approximately $167.5 million outstanding under our
revolving credit facility and $50.0 million outstanding under the related term loan. The amounts outstanding under our revolving
credit facility and term loan will reduce the amount that we may be able to borrow under this facility for other purposes. We have
approximately $50.0 million in borrowing capacity under our revolving credit facility, and amounts borrowed under the facility
will be due at its maturity in January 2017 (subject to a one-year extension which we may exercise at our option, provided we comply
with certain terms and conditions, including the payment of an extension fee). This indebtedness, as well as our mortgage, construction
and other debt of approximately $303.5 million as of December 31, 2014, and the $100.0 million outstanding principal amount of
the Operating Partnership’s 4.75% Exchangeable Senior Notes due 2018, will subject us to risks associated with debt financing
as described below under "Our indebtedness exposes us to a risk of default and reduces our free cash flow, which could materially
and adversely affect us."
A subsequent recession
or challenging economic environment may adversely affect us by, among other things, limiting or eliminating our access to financing,
which would adversely affect our ability to develop and refinance properties and pursue acquisition opportunities. Significantly
more stringent lending standards and higher interest rates may reduce our returns on investment and increase our interest expense,
which could adversely affect our financial performance and liquidity. Additionally, limited availability of financing may reduce
the value of our properties, limit our ability to borrow against such properties and, should we choose to sell a property, impair
our ability to dispose of such property at an attractive price or at all, which could materially and adversely affect our financial
condition and results of operations.
Certain of our properties may be subject
to liens or other claims, which could materially and adversely affect our profitability.
We may be subject to liens
or claims for materials or labor relating to disputes with subcontractors or other parties that are or were involved in the development
and construction process. There can be no assurance that we will not be required to pay amounts greater than currently recorded
liabilities in order to settle these claims.
We rely on our relationships with the
colleges and universities from which our properties draw student-tenants and on the policies and reputations of these schools;
any deterioration in our relationships with such schools or changes in the schools’ admissions or residency policies or reputations
could materially and adversely affect our results of operations.
We rely on our relationships
with colleges and universities for referrals of prospective student-tenants or for mailing lists of prospective student-tenants
and their parents. The failure to maintain good relationships with these schools could therefore have a material adverse effect
on us. Many of these schools own and operate on-campus student housing which competes with our properties for student-tenants,
and if schools refuse to provide us with referrals or to make lists of prospective student-tenants and their parents available
to us or increase the cost of these lists, the lack of such referrals, lists or increased cost could have a material adverse effect
on us.
Changes in admission and
housing policies could adversely affect us. For example, if a school reduces the number of student admissions or requires that
a certain class of students (e.g., freshman) live in on-campus housing, the demand for beds at our properties may be reduced
and our occupancy rates may decline. While we may engage in marketing efforts to compensate for any such policy changes, we may
not be able to effect such marketing efforts prior to the commencement of the annual lease-up period, or our additional marketing
efforts may not be successful, which could reduce the demand for our properties and materially and adversely affect us.
It is also important that
the schools from which our properties draw student-tenants maintain good reputations and are able to attract the desired number
of incoming students. Any degradation in a school’s reputation could inhibit its ability to attract students and reduce the
demand for our properties.
Competition from other student housing
properties, including on-campus housing and traditional multi-family housing located in close proximity to the colleges and universities
from which we draw student-tenants may reduce the demand for our properties, which could materially and adversely affect our cash
flows, financial condition and results of operations.
Our properties compete
with properties owned by universities, colleges, national and regional student housing businesses and local real estate concerns.
On-campus student housing has inherent advantages over off-campus student housing (such as the majority of our properties), due
to its physical location on the campus and integration into the academic community, which may cause student-tenants to prefer on-campus
housing to off-campus housing. Additionally, colleges and universities may have financial advantages that allow them to provide
student housing on terms more attractive than our terms. For example, colleges and universities can generally avoid real estate
taxes and borrow funds at lower interest rates than private, for-profit real estate concerns, such as our company.
There are a number of
student housing properties located near or in the same general vicinity of many of our properties that compete directly with our
properties. Such competing student housing properties may be newer, located closer to campus, charge less rent, possess more attractive
amenities, offer more services or offer shorter lease terms or more flexible lease terms than our properties. Competing properties
could reduce demand for our properties and materially and adversely affect our rental income.
Revenue at a particular
property could also be adversely affected by a number of other factors, including the construction of new on-campus and off-campus
housing, decreases in the general levels of rents for housing at competing properties, decreases in the number of students enrolled
at one or more of the colleges or universities from which the property draws student-tenants and other general economic conditions.
Although we believe no
participant in the student housing industry holds a dominant market share, we compete with larger national companies, colleges
and universities with greater resources and superior access to capital. Furthermore, a number of other large national companies
with substantial financial and marketing resources may enter the student housing business. The activities of any of these companies,
colleges or universities could cause an increase in competition for student-tenants and for the acquisition, development and management
of other student housing properties, which could reduce the demand for our properties.
Our results of operations are subject
to risks inherent in the student housing industry, such as an annual leasing cycle and limited leasing period, which could materially
and adversely affect us.
We generally lease our
properties for 11.5-month terms, and the related leases provide for 12 equal monthly payments of rent. Therefore, our properties
must be entirely re-leased each year, exposing us to more leasing risk than property lessors that lease their properties for longer
terms. Student housing properties are also typically leased during a limited leasing period that generally begins each October
and ends in September of the following year. We are therefore highly dependent on the effectiveness of our marketing and leasing
efforts and personnel during this leasing period. We will be subject to heightened leasing risk at properties we may acquire in
the future due to our lack of experience leasing such properties. Any significant difficulty in leasing our properties would adversely
affect our results of operations, financial condition and ability to pay distributions on our securities and would likely have
a negative impact on the trading price of our securities. As of the start of the fall term for the 2014-2015 and 2013-2014 academic
years, we had approximately 37.6% and 41.7%, respectively, of our current tenants renew their previous lease for the upcoming term.
Additionally, student-tenants
may be more likely to default on their lease obligations during the summer months, which could further reduce our revenues during
this period. Although we typically require a student-tenant’s lease obligations to be guaranteed by a parent, we may have
to spend considerable effort and expense in pursuing payment upon a defaulted lease, and our efforts may not be successful.
Our future success is substantially dependent
on our ability to attract and retain key management executives.
Our future success depends
in large part upon our ability to attract and retain key management executives and other key employees. In the last year, as part
of our strategic repositioning, several members of our senior management team have departed, including our former chief executive
officer, our former chief financial officer and other former senior members of our executive management team, and we are actively
searching to fill several key roles. Aaron S. Halfacre, our chief investment officer, was recently elevated to the additional role
as President, and Scott R. Rochon, chief accounting officer, is serving as our acting chief financial officer. The continued turnover
of senior management and the loss of key members of our executive team could have a negative impact on our ability to manage and
grow our business effectively. Turnover of executives and senior management can adversely impact our stock price, our results of
operations and our client relationships and may make recruiting for future management positions more difficult or may require us
to offer more generous executive compensation packages to attract top executives. In addition, we must successfully integrate any
newly hired management personnel within our organization in order to achieve our operating objectives. The key initiatives directed
by these executives may take time to implement and yield positive results, if at all. If our new executives do not perform up to
expectations, we may experience declines in our financial performance or delays in our long-term growth strategy.
The current economic environment could
reduce enrollments and limit the demand for our properties, which could materially and adversely affect our cash flows, profitability
and results of operations.
A continuation of ongoing
economic conditions that adversely affect household disposable income, such as high unemployment levels, weak business conditions,
reduced access to credit, increasing tax rates and high fuel and energy costs, could reduce overall student leasing or cause student-tenants
to shift their leasing practices as students may determine to forego college or live at home and commute to college.
As a result of general
economic weakness, many students may be unable to obtain student loans on favorable terms. In addition, despite the recent economic
weakness, tuition and other costs associated with attending college have continued to rise. If student loans are not available
or their costs are prohibitively high, enrollment numbers for schools from which we draw student-tenants may decrease, resulting
in a decrease in the demand for, and consequently the occupancy rates at and rental revenue from, our properties. Accordingly,
the continuation or deterioration of current economic conditions could materially and adversely affect our cash flows, profitability
and results of operations.
In the past, we have experienced significant
net losses; if this trend continues, we could be materially and adversely affected.
For the years ended December
31, 2014, 2013, 2010 and 2009, we incurred significant net losses. These results have had a negative impact on our financial condition.
While we experienced net income for the years ended December 31, 2012 and 2011, and believe that we are adequately capitalized
and able to continue to operate our business, there can be no assurance that our business will be profitable in the future and
additional losses will not be incurred. If the trend of incurring significant net losses continues in the future, our financial
performance, liquidity and our ability to operate our business as a going concern could be materially and adversely affected.
If we are unable to acquire properties
on favorable terms, our future growth could be materially and adversely affected.
Our future growth will
depend, in part, upon our ability to acquire new properties on favorable terms. Acquisition opportunities may not be available
to us on terms that we deem acceptable, and we may be unsuccessful in consummating acquisition opportunities. Our ability to acquire
properties on favorable terms and successfully operate them may be adversely affected by:
| · | an inability to obtain financing on attractive terms or at all; |
| · | increased purchase prices and decreased expected yields due to competition
from other potential acquirers and real estate investors; |
| · | the need to make significant and unexpected capital expenditures
to improve or renovate acquired properties; |
| · | an inability to quickly and efficiently integrate acquisitions, particularly
any acquisitions of portfolios of properties, into our existing operations; |
| · | market conditions resulting in higher than expected vacancy rates
and lower than expected rental rates at acquired properties; and |
| · | acquisition of properties subject to liabilities but without any
recourse, or with only limited recourse, to the sellers, or with liabilities that are unknown to us, such as liabilities for clean-up
of undisclosed environmental contamination, claims by tenants, vendors or other persons dealing with the former owners of our properties.
|
Our failure to identify
and consummate property acquisitions on attractive terms or the failure of any acquired properties to meet our expectations could
materially and adversely affect our future growth.
Our strategy of investing in properties
located in medium-sized college and university markets may not be successful, which could materially and adversely affect us.
Our business strategy
involves investing in properties located in medium-sized college and university markets, which are smaller than larger educational
markets. Larger educational markets, such as Boston, Massachusetts or Washington, D.C., often have multiple colleges and universities
that have larger enrollments than schools located in medium-sized college and university markets and attract students nationally
and internationally. The colleges and universities that our properties draw student-tenants from typically have smaller enrollments
than schools in larger educational markets and tend to attract students from within the region in which the school is located.
If the schools in our markets experience reduced enrollment, for example due to adverse economic conditions or rising tuition costs,
or are unable to attract sufficient students to achieve a desired class size, the pool of prospective student-tenants for our properties
will be reduced. This could have the result of reducing our occupancy and lowering the revenue from our properties, which could
materially and adversely affect our financial performance and liquidity.
Our indebtedness exposes us to a risk
of default and reduces our free cash flow, which could materially and adversely affect us.
As of December 31, 2014,
our total consolidated indebtedness was approximately $618.4 million. Our debt service obligations expose us to the risk of default
and reduced cash available to invest in our business or pay distributions that are necessary to qualify and remain qualified as
a REIT. Our ability to meet the ongoing payment obligations of our indebtedness depends on our ability to generate significant
cash flow in the future. Our ability to generate cash flow, to some extent, is subject to general economic, financial, competitive,
legislative and regulatory factors, as well as other factors that are beyond our control. We cannot assure you that our business
will generate cash flow from operations, or that capital will be available to us, in amounts sufficient to enable us to meet our
payment obligations under our exchangeable senior notes, our credit agreements and our outstanding preferred stock and to fund
our other liquidity needs. If we are not able to generate sufficient cash flow to service these obligations, we may need to refinance
or restructure our debt, sell assets (which we may be limited in doing in light of the relatively illiquid nature of our properties),
reduce or delay capital investments, or seek to raise additional capital. If we are unable to implement one or more of these alternatives,
we may not be able to meet these payment obligations, which could materially and adversely affect our liquidity.
Our charter does not contain
any limitation on the amount of indebtedness that we may incur. In the future, we may incur substantial indebtedness in connection
with the development or acquisition of additional properties and for other working capital needs, or to fund the payment of distributions
to our stockholders.
In addition, a tax protection
agreement to which we are a party requires us to maintain a minimum level of indebtedness of $56.0 million throughout a 10-year
tax protection period, which ends in October 2020, in order to allow a sufficient amount of debt to be allocable to MXT Capital,
LLC, a Delaware limited liability company ("MXT Capital"), which is wholly-owned and controlled by Ted Rollins, our former
chief executive officer, and Michael S. Hartnett, our former vice chairman of special projects, and certain members of their families,
to avoid certain adverse tax consequences. If we fail to maintain such minimum indebtedness throughout the 10-year tax protection
period, we will be required to make indemnifying payments to MXT Capital, in an amount equal to the federal, state and local taxes,
if any, imposed on its members as a result of any income or gain recognized by them by reason of such failure. The amount of such
taxes will be computed based on the highest applicable federal, state and local marginal tax rates, as well as any "grossed
up" taxes imposed on such payments. This requirement may restrict our ability to reduce leverage when we otherwise might wish
to do so and generally reduce our flexibility in managing our capital structure.
Our indebtedness and the
limitations imposed on us by our indebtedness could have significant adverse consequences, including the following:
| · | we may be unable to borrow additional funds as needed or on favorable terms; |
| · | we may be unable to renew, repay or refinance our indebtedness at maturity or the renewal or refinancing
terms may be less favorable than the terms of the indebtedness being renewed or refinanced; |
| · | we may be forced to dispose of certain of our properties, possibly on disadvantageous terms; |
| · | we may default on our payment or other obligations as a result of insufficient cash flow or otherwise,
which may result in a cross-default on our other obligations, and the lenders or mortgagees may foreclose on our properties that
secure their loans and receive an assignment of rents and leases; |
| · | to the extent that we incur unhedged floating rate debt, we will have exposure to interest rate
risk; and |
| · | foreclosures could create taxable income without accompanying cash proceeds, a circumstance which
could hinder our ability to meet the distribution requirements necessary to enable us to qualify and remain qualified for taxation
as a REIT. |
Compliance with the provisions
of our debt agreements, including financial and other covenants, such as the maintenance of specified financial ratios, could limit
our flexibility, and a default under these agreements could result in a requirement that we repay indebtedness, which could severely
affect our liquidity and increase our financing costs, which could materially and adversely affect our business, financial condition
and results of operations.
In addition to our consolidated
indebtedness, we are guarantor on construction and mortgage debt of our ventures with Harrison Street Real Estate Capital (“HSRE”)
and Beaumont Partners SA (“Beaumont”), as described below in Management’s Discussion and Analysis of Financial
Condition and Results of Operations – Liquidity and Capital Resources – Off-Balance Sheet Arrangements.
Our failure to comply with the financial and other covenants
of the agreements that govern our existing debt could have a material adverse effect on our financial condition.
The documents that govern
our outstanding indebtedness contain customary negative covenants and other financial and operating covenants that, among other
things:
| · | restrict our ability to incur certain additional indebtedness; |
| · | restrict our ability to make certain investments; |
| · | restrict our ability to effect certain mergers; |
| · | restrict our ability to make distributions to stockholders; and |
| · | require us to maintain certain financial coverage ratios. |
Pursuant to the terms
of our credit facility, we may not pay distributions that exceed the greater of (i) 95.0% of our funds from operations, or (ii)
the minimum 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 also may be precluded from making certain distributions (other than those required to allow the Company to qualify
and maintain its status as a REIT). These limitations restrict our ability to engage in some business activities, which could adversely
affect our financial condition, results of operations, cash flow and the per share trading price of our securities. In addition,
if we fail to comply with any of these covenants, including the financial coverage ratios, this could result in our having to seek
an amendment or waiver from our lenders to avoid an event of default and/or the acceleration of some or all of our indebtedness,
which would have a material adverse effect on us. From time to time, we have sought and received waivers of certain of these provisions,
but there can be no guarantee that we will be able to obtain waivers of these provisions in future periods.
In April 2013, as a result
of the CB Portfolio Acquisition, we received a waiver from our lender group allowing for increased distributions of our funds from
operations for the remainder of 2013. In February 2013, we amended our amended credit facility to provide for certain exclusions
related to our investments in joint ventures as well as the treatment of certain other investments within the compliance calculation
of our secured debt ratio and certain negative covenants. In June 2013, in connection with our investment in a joint venture with
Beaumont to acquire a property in Montreal, Quebec, Canada, we received a waiver from our lender group allowing us to guarantee
debt incurred by our subsidiary, Campus Crest at Montreal I, LLC, to fund such investment. On September 30, 2014, we received a
waiver with respect to the distribution payout ratio for each distribution payout date through the end of 2015. The waiver was
expressly conditioned on the following: (i) no default or event of default shall have occurred and be continuing and (ii) as of
each test date during 2015, the payout ratio shall be equal to or less than (A) 105% or (B) such greater amount as may be required
by applicable law for us to maintain our status as a REIT. On February 25, 2015, we received a waiver under our amended credit
facility that provides relief from certain financial covenants during a relief period that runs from December 31, 2014 until and
including September 30, 2015. During the relief period the following new measurements will apply to covenant tests: Maximum Leverage
Ratio of not greater than 0.65:1.00; Maximum Secured Debt Ratio of not greater than 47.5%; Minimum Fixed Charge Ratio of not less
than 1.30:1.00; and a Dividend Payout Ratio of not more than 105.0% calculated on a pro forma basis that applies the current quarterly
dividend of $0.090 on a trailing twelve month basis.
The cost of our obtaining
an amendment or waiver in the future could be significant, and further, there can be no assurance that we would be able to obtain
an amendment or waiver if necessary in the future. If our lenders were unwilling to enter into an amendment or provide a waiver,
all amounts outstanding under our credit facility could become immediately due and payable. Furthermore, the documents that govern
our outstanding indebtedness contain certain cross-default provisions with respect to specified other indebtedness, giving the
lenders the right to declare a default if we are in default under other loans in some circumstances.
We may be unable to satisfy our debt
obligations upon a change of control of us.
Under the documents that
govern our indebtedness, if we experience a change of control, we could be required to repay the entire principal balance of our
outstanding indebtedness. Under our Exchangeable Senior Notes indenture, if we experience a fundamental change, as defined in the
indenture, we must offer to purchase the notes at 100% of their principal amount, plus accrued interest. As defined in the indentures,
fundamental change includes, among other things, the acquisition of more than 50% of our voting securities by any person or group,
or the failure of a majority of the members of our board of directors to be continuing directors whose nomination or election were
approved by the majority of the board. Under the credit agreement that governs our revolving credit facility, if we experience
a change of control, as defined in the credit agreement, the lenders may declare an event of default and accelerate payment of
the entire principal balance of the facility. As defined in the credit agreement, a change of control includes, among other things,
the acquisition of more than 35% of our voting securities by any person or group, or a change in the majority of the members of
our board of directors unless the new members were elected or nominated for election by a majority of the board. We might not have
sufficient funds to repay the amounts due under the revolving credit facility or pay the required price for the notes following
a change of control.
Variable rate debt is subject to interest
rate risk.
As of December 31, 2014,
approximately $354.8 million of our aggregate indebtedness (approximately 57.4% of total indebtedness) was subject to variable
interest rates. In addition, we may incur additional variable rate debt in the future. While we have entered into arrangements
that hedge the risk of rising interest rates, there can be no assurance that such arrangements will adequately protect against
rising interest rates or that we will be able to enter into interest rate hedging arrangements in the future. If we are unable
to enter into arrangements that hedge the risk of rising interest rates, increases in interest rates on variable rate debt would
increase our interest expense, which would adversely affect net income and cash available for payment of our debt obligations and
distributions to stockholders.
Joint venture investments could be materially
and adversely affected by our lack of decision-making authority, our reliance on our co-venturers’ financial condition and
disputes between our co-venturers and us.
Our properties located
in Lawrence, Kansas, San Angelo, Texas, and Conway, Arkansas, comprising approximately 3.2% of our beds, are held in a joint venture
with HSRE, in which we own a 63.9% interest. Our properties located in Fayetteville, Arkansas, Laramie, Wyoming and Stillwater,
Oklahoma, comprising approximately 4.0% of our beds, are held in a joint venture with HSRE, in which we own a 10.0% interest. Our
properties located in Indiana, Pennsylvania, State College, Pennsylvania and Norman, Oklahoma, comprising approximately 3.8% of
our beds, are held in a joint venture with HSRE, in which we own a 20.0% interest. Our properties located in Louisville, Kentucky
and Greensboro, North Carolina, comprising approximately 2.7% of our beds, are held in a joint venture with HSRE, in which we own
a 30.0% interest. Our property located in Philadelphia, Pennsylvania, comprising 1.8% of our beds, is held in a joint venture with
HSRE and Brandywine, in which we own a 30.0% interest with completion targeted for the 2014-2015 academic year. Our properties
located in Montreal, Quebec, comprising 4.8% of our beds, are held in a joint venture with Beaumont Partners, in which we own a
47.0% interest as a limited partner. In addition, at December 31, 2014, we held an effective 48.0% investment in the CB Portfolio,
comprising 37.0% of our beds, and, pursuant to the terms of the agreements governing this investment, share decision making authority
with the CB Investors, though as of January 30, 2015, we increased our ownership to 100% for many of the properties in the CB Portfolio.
We may not have a controlling
interest in a joint venture and may share responsibility with our co-venturer for managing the property held by the joint venture.
Under such circumstances, we may not have sole decision-making authority regarding the joint venture’s property. With
regard to our joint venture in Canada with Beaumont Partners, we are a limited partner with no general partner representation and
limited control rights. Investments in joint ventures, under certain circumstances, involve risks not present when we invest in
a property without the involvement of a third party. For example, our co-venturer may have economic or other business interests
or goals that are inconsistent with our business interests or goals, and may be in a position to take actions contrary to our preferences,
policies or objectives. Additionally, it is possible that our co-venturer might become bankrupt, fail to fund its share of required
capital contributions or block or delay decisions that we believe are necessary. With regard to our joint venture in Canada with
Beaumont Partners, our co-venturer may take, or fail to take, actions that could result in a loan default, which may further result
in a cross-default of our other indebtedness. Joint venture investments may also have the potential risk of impasses on decisions,
such as sales, because neither we nor our co-venturers may have full control over the joint venture. Disputes between us and our
co-venturer may result in litigation or arbitration that would increase our expenses and divert the attention of our officers and
directors from other aspects of our business. Consequently, actions by or disputes with our co-venturers might result in subjecting
properties owned by the joint venture to additional risk. In addition, we may in certain circumstances be liable for the actions
of our third-party co-venturers. Any of the foregoing factors could materially and adversely affect the financial condition and
results of operations of our joint-venture investments.
In addition, our operating
agreements with our co-venturers contain provisions that upon the occurrence of various triggering events could allow our co-venturers
to remove us from management control of the properties held by the venture, sell those properties without our consent at prices
determined by our co-venturer, and acquire our interest in the venture at values that could be disadvantageous to us. These triggering
events could include, among other things, a material breach of the terms of the operating agreement or other venture agreements,
or change in control of the Company (in the case of certain of our ventures with HSRE) or of the Operating Partnership or of our
various subsidiaries which are involved with such ventures. The agreements governing the ventures also contain various mutual covenants
as to competition within a prescribed territory near the properties operated by the venture. We are guarantor on construction and
mortgage debt of our ventures with HSRE, as described below in Management’s Discussion and Analysis of Financial Condition
and Results of Operations – Liquidity and Capital Resources – Off-Balance Sheet Arrangements, and those guarantees
would continue in effect under most circumstances even if we are removed from management of the venture. As guarantor, if a property
realizes proceeds upon sale that are insufficient to pay off the underlying debt, we could be obligated to pay off the remaining
balance. For the reasons described in this paragraph, the removal of the Company from management or ownership of an interest in
any venture, or the sale of any venture property at disadvantageous prices, could thus have a material adverse effect on us if
it impacts any material number of properties which we currently manage. The terms of our operating agreements and the complexities
of our venture arrangements may impact any potential third party acquisition proposal for us or delay, defer or prevent a change
in control.
We could be negatively impacted by the
condition of Fannie Mae or Freddie Mac.
Fannie Mae and Freddie
Mac are a major source of secured financing to the student housing industry and we have used Freddie Mac for a portion of our financing
needs. In February 2011, the U.S. Treasury along with the U.S. Department of Housing and Urban Development released a report calling
for the winding down of the role that Fannie Mae and Freddie Mac play in the mortgage market. In February 2012, the Federal Housing
Finance Agency delivered a strategic plan to Congress to wind down Fannie Mae and Freddie Mac over the next several years. This
proposal includes building a new infrastructure for the secondary mortgage market, continuing to shrink Fannie Mae’s and
Freddie Mac’s operations by eliminating the direct funding of mortgages and shifting mortgage credit risk to private investors.
In addition, in August 2012, the U.S. Treasury announced further steps to expedite the winding down of Fannie Mae and Freddie Mac
by accelerating the rate at which Fannie Mae’s and Freddie Mac’s investment portfolios will be reduced to target levels
agreed to with the U.S. Treasury. Pursuant to these steps, Fannie Mae’s and Freddie Mac’s investment portfolios must
be reduced to the agreed target four years earlier than previously scheduled. A final decision by the government to eliminate Fannie
Mae or Freddie Mac or reduce their acquisitions or guarantees of student housing property loans may adversely affect interest rates,
capital availability, and the value of student housing properties. If we are unable to react effectively and quickly to changes
in the mortgage industry, our business could be harmed.
We have a limited operating history as
a REIT and as a publicly traded company and may not be able to successfully operate as a REIT or a publicly traded company.
We have a limited operating
history as a REIT and as a publicly traded company. We cannot assure you that the past experience of our senior management team
will be sufficient to successfully operate our company as a REIT or a publicly traded company, including the requirements to timely
meet disclosure requirements of the SEC and comply with the Sarbanes-Oxley Act of 2002. Since our initial public offering, we have
been subject to various requirements related to REITs and publicly traded companies, including requirements to develop and implement
control systems and procedures in order to qualify and maintain our qualification as a REIT and satisfy our periodic and current
reporting requirements under applicable SEC regulations and comply with New York Stock Exchange ("NYSE") listing standards.
Our continued compliance with these requirements could place a significant strain on our management systems, infrastructure and
other resources. Failure to operate successfully as a public company or qualify and maintain our qualification as a REIT would
have an adverse effect on our financial condition, results of operations, cash flow and the per share trading price of our securities.
The material weakness in our internal
control over financial reporting may adversely impact our business and financial results.
Effective internal and
disclosure controls are necessary for us to provide reliable financial reports and effectively prevent fraud and to operate successfully
as a public company. If we cannot provide reliable financial reports or prevent fraud, our reputation and operating results would
be harmed. As part of our ongoing monitoring of internal controls we may discover material weaknesses or significant deficiencies
in our internal controls. As a result of weaknesses that may be identified in our internal controls, we may also identify certain
deficiencies in some of our disclosure controls and procedures that we believe require remediation. If we discover weaknesses,
we will make efforts to improve our internal and disclosure controls. However, there is no assurance that we will be successful.
In connection
with management’s evaluation of the effectiveness of the Company’s internal control over financial
reporting, management identified a material weakness in the Company’s internal control over financial reporting as of
December 31, 2014, which related to our control environment, risk assessment process, information and communication
components and process-level controls. See “Part II—Item 9A—Controls and Procedures” for a discussion of our
internal control over financial reporting, including a discussion of the material weakness. If the new controls being
implemented to address the material weakness and to strengthen the overall internal control over financial reporting are not
designed or do not operate effectively, if we are unsuccessful in implementing or following these new processes or are
otherwise unable to remediate this material weakness, this may result in untimely or inaccurate reporting of our financial
condition or results of operations.
Any failure to maintain
effective controls or timely effect any necessary improvement of our internal and disclosure controls could harm operating results
or cause us to fail to meet our reporting obligations, which could affect the eligibility of our stock to remain listed on the
NYSE. Ineffective internal and disclosure controls could also cause investors to lose confidence in our reported financial information,
which would likely have a negative effect on the per share trading price of our securities.
Breaches of our data security could materially
harm our business and reputation.
We collect and retain
certain personal information provided by our student-tenants and employees. While we have implemented a variety of security measures
to protect the confidentiality of this information and periodically review and improve our security measures, there can be no assurance
that we will be able to prevent unauthorized access to this information. Any breach of our data security measures and loss of this
information may result in legal liability and costs (including damages and penalties), as well as damage to our reputation, that
could materially and adversely affect our business and financial performance.
Our investment in properties subject
to ground leases with unaffiliated third parties exposes us to the potential loss of such properties upon the expiration or termination
of the ground leases, and the realization of such loss could materially and adversely affect us. Our properties at the University
of South Alabama and Colorado State University are also subject to a right of first refusal that may inhibit our ability to sell
them.
Our properties located
near the campuses of the University of South Alabama and Colorado State University are subject to ground leases with unaffiliated
third parties. In addition, we may invest in additional properties that are subject to ground leases with unaffiliated third parties.
As the lessee under a ground lease with an unaffiliated third party, we are exposed to the possibility of losing our leasehold
interest in the land on which our buildings are located. A ground lease may not be renewed upon the expiration of its current term
or may be terminated by the lessor pursuant to the terms of the lease if we do not meet our obligations thereunder.
In the event of an unsecured
default under any of our existing ground leases, the lessor may terminate our leasehold interest in the land on which our buildings
are located. Any termination of our existing ground leases with unaffiliated third parties, unless in conjunction with the exercise
of a purchase option, would also result in termination of our management agreement relating to the property. If we lose the leasehold
interest in any of our properties, we could be materially and adversely affected.
Our properties located
at the University of South Alabama and Colorado State University are also subject to a right of first refusal pursuant to which
the ground lessor entity related to the land has a right to purchase our leasehold interest in the relevant property in the event
we decide to accept an offer to sell either property to a third party. This may inhibit our ability to sell these properties. Further,
our right to transfer one of the on-campus properties is subject to the consent of the ground lessor, which consent may not be
unreasonably withheld.
We may incur losses on hedging arrangements,
which could materially and adversely affect our financial condition and results of operations.
We currently use, and
may in the future enter into, hedging agreements. Although these agreements may partially protect against rising interest rates,
they also may reduce the benefits to us if interest rates decline. If an arrangement is not indexed to the same rate as the indebtedness
that is hedged, we may be exposed to losses to the extent the rate governing the indebtedness and the rate governing the hedging
arrangement change independently of each other. Finally, nonperformance by the other party to the arrangement may subject us to
increased credit risks. The occurrence of any of the foregoing could materially and adversely affect our financial condition and
results of operations.
Our inability to pass-through increases
in taxes or other real estate costs to our student-tenants could materially and adversely affect our financial performance and
liquidity.
Each of our properties
is subject to real and personal property taxes. These taxes may increase as tax rates change and as the properties are assessed
or reassessed by taxing authorities. We generally are not able to pass through to our student-tenants under existing leases any
increases in taxes, including real estate and income taxes, or other real estate related costs, such as insurance or maintenance.
Consequently, unless we are able to off-set any such increases with sufficient revenues, we may be materially and adversely affected
by any such increases.
The prior performance of our properties
may not be indicative of our future performance.
All of our properties
have been acquired or developed by us and/or our predecessor entities within the past ten years and have limited operating histories.
Consequently, the historical operating results of our properties and the financial data we have disclosed may not be indicative
of our future performance. The operating performance of the properties may decline and we could be materially and adversely affected.
Reporting of on-campus crime statistics
required of colleges and universities may negatively impact our properties.
Federal and state laws
require colleges and universities to publish and distribute reports of on-campus crime statistics, which may result in negative
publicity and media coverage associated with crimes occurring in the vicinity of, or on the premises of, our on-campus properties.
Reports of crime or other negative publicity regarding the safety of the students residing on, or near, our properties may have
an adverse effect on both our on-campus and off-campus properties.
We may be subject to liabilities from
litigation, which could materially and adversely affect our financial condition or results of operations.
We have been involved
in legal proceedings in connection with our business, and may become involved in additional legal proceedings, including consumer,
employment, tort or commercial litigation that, if decided adversely to or settled by us and not adequately covered by insurance,
could result in liabilities that could materially and adversely affect our financial condition or results of operations.
We face risks associated with land holdings.
We hold land for future
development and may in the future acquire additional land holdings. The risks inherent in owning or purchasing and developing land
increase as demand for student housing, or rental rates, decrease. As a result, we hold certain land and may in the future acquire
additional land in our development pipeline at a cost we may not be able to recover fully or on which we cannot build and develop
into a profitable student housing project. In addition, real estate markets are highly uncertain and, as a result, the value of
undeveloped land has fluctuated significantly and may continue to increase as a result of changing market conditions. Further,
carrying costs associated with land holdings can be significant and can result in losses or reduced margins in a poorly performing
project. Under current market conditions, we may have impairments of our land held for sale.
Our issuance of common stock under our
At-The-Market offering program may be dilutive, and there may be future dilution of our common stock.
After giving effect to
the issuance of common stock under our At-The-Market offering program and the receipt of the expected net proceeds and the use
of those proceeds, there may be a dilutive effect on our estimated earnings per share and funds from operations per share in years
during which an offering is ongoing. The actual amount of potential dilution cannot be determined at this time and will be based
on numerous factors. Additionally, we are not restricted by our organizational documents, contractual arrangements or otherwise
from issuing additional common stock or preferred stock, including any securities that are convertible into or exchangeable or
exercisable for, or that represent the right to receive, common stock or preferred stock or any substantially similar securities
in the future. The market price of our common stock could decline as a result of issuances of a large number of shares of our common
stock after this offering or the perception that such issuances could occur.
Our management will have broad discretion
with respect to the use of the proceeds resulting from the issuance of common stock under our At-The-Market offering program.
Our management has significant
flexibility in applying the net proceeds we expect to receive from the issuance of common stock under the Equity Distribution Agreements.
We intend to use the net proceeds from this offering for general corporate purposes, which may include repaying debt, including
our revolving credit facility. However, because the net proceeds are not required to be allocated to any specific investment or
transaction, investors cannot determine at the time of issuance the value or propriety of our application of the net proceeds,
and investors may not agree with our decisions. In addition, our use of the net proceeds from the offering may not yield a significant
return or any return at all. The failure by our management to apply these funds effectively could have an adverse effect on our
financial condition, results of operations or the trading price of our common stock.
Our Canadian exposure may subject us
to different or greater risk from those associated with our domestic operations, and we may recognize additional asset impairment
charges with respect to our Canadian real estate assets in the future.
We hold interests in two
joint venture properties that operate in Canada. International development and ownership activities carry risks that are different
from those we face with our domestic properties and operations. These risks include:
| · | adverse effects of changes in exchange rates for foreign currencies; |
| · | changes in foreign political and economic environments, regionally,
nationally, and locally; |
| · | costs associated with complying with a wide variety of foreign laws
including corporate governance, operations, taxes, and litigation; |
| · | difficulties in managing international operations, including difficulties that arise from ambiguities
in contracts written in foreign languages and difficulties that arise in enforcing such contracts; |
| · | differing lending practices; |
| · | uncertainties in estimating potential tax liabilities; |
| · | differing employment and labor issues; |
| · | changes in applicable laws and regulations in the United States that
affect foreign operations; |
| · | obstacles to the repatriation of earnings and cash; |
| · | obstacles to hiring appropriately trained staff; and |
| · | differences in cultures including adapting practices and strategies
that have been successful in the U.S. student housing business to retail needs and expectations
in new markets. |
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. The estimation of expected future undiscounted cash flows is inherently uncertain and
relies on assumptions regarding current and future economics and market conditions. During the year ended December 31, 2014, we
recorded an impairment of $26.5 million related to our investment in CSH Montreal LP (“CSH Montreal”), as discussed
in Note 11 of the accompanying consolidated financial statements. As a result of the uncertainty in the valuation, and in the stability
of, the cash flows, discount rates and other factors related to such assets, we may be required to recognize additional asset impairment
charges in the future.
Although our international activities currently
are a relatively small portion of our business, these risks could increase in significance which in turn could adversely affect
our results of operations and financial condition.
A currently threatened proxy contest and any other actions
of activist stockholders could have a negative effect on our business.
On March 5, 2015, a shareholder
that currently holds approximately 1.4% of our common stock filed a preliminary proxy statement with the SEC to nominate four
alternative director nominees for election to our board of directors at the Company's 2015 annual meeting of shareholders. Our
board of directors has not endorsed such shareholder’s director nominees. If a proxy contest or any other dissident stockholder
activity ensues, then our business could be adversely affected because responding to proxy contests, litigation and other actions
by dissident stockholders can be costly and time-consuming, disrupt our operations and divert the attention of management and our
employees. In addition, perceived uncertainties as to our future direction may result in the loss of potential business opportunities
and harm our ability to attract new investors, employees and clients. If the Company’s current directors cease to constitute
a majority of our board of directors due to the currently threatened proxy contest or otherwise, it may adversely affect our ability
to effectively and timely implement our current initiatives, retain and attract experienced executives and employees, and execute
on our long-term strategy, and, under certain circumstances, could require us to repay our outstanding indebtedness prior to maturity.
See the Risk Factor entitled “We may be unable to satisfy our debt obligations upon a change of control of us.” Also,
we may experience a significant increase in legal fees, administrative and associated costs incurred in connection with responding
to a proxy contest or related action. These actions could also cause our stock price to experience periods of volatility or stagnation.
We may not make distributions to our stockholders or be able
to maintain our current distribution rate, and we may be required to fund the minimum distribution necessary to qualify for taxation
as a REIT from sources that could reduce our cash flows.
Our ability to fund any distributions will depend,
in part, upon continued successful leasing of our existing portfolio and successful management services. To the extent these sources
are insufficient, we may use our working capital or borrowings under our revolving credit facility to fund distributions, if and
to the extent then permitted under the terms of our credit facility. If we need to fund future distributions with borrowings under
our revolving credit facility or from working capital, or if we reduce our distribution rate, our stock price may be adversely
affected. In addition, to the extent that we fund any distributions with borrowings under our revolving credit facility or from
working capital, our cash available for investment in our business, including for property development and acquisition purposes,
will decrease.
In addition, in order to qualify for taxation
as a REIT, among other requirements, we must make distributions to stockholders aggregating annually to at least 90% of our REIT
taxable income, excluding net capital gains. To the extent that, in respect of any calendar year, cash available for distribution
to our stockholders is less than our REIT taxable income, we would be required to fund the minimum distribution necessary to qualify
for taxation as a REIT from other sources, which could include asset sales or borrowings. Funding a distribution through asset
sales or borrowings could reduce our cash flow from operations, increase our interest expense and decrease our cash available for
investment in our business. We may also choose to meet this distribution requirement by distributing a combination of cash and
shares of our common stock. See "Federal Income Tax Risk Factors—We may pay taxable dividends of our common stock and
cash, in which case stockholders may sell shares of our common stock to pay tax on such dividends, placing downward pressure on
the market price of our common stock."
Any distributions in excess of our current and
accumulated earnings and profits will not be taxable to a holder to the extent that they do not exceed the holder’s adjusted
basis in the shares of stock in respect of which the distributions were made, but rather, will reduce the adjusted basis of these
shares. To the extent that such distributions exceed the adjusted basis of a stockholder’s shares, they will generally be
included in income as capital gains.
We have the right to accumulate and not pay
dividends on the Series A Preferred Stock. If dividends on the Series A Preferred Stock are not paid, holders of our Common Stock
will not receive any dividend distributions. If we have REIT taxable income during 2015, and we do not distribute at least 90%
of our REIT taxable income, excluding net capital gains, then we will not be taxed as a REIT during calendar year 2015, which
could have a material adverse effect on us and on the value of our securities.
Risks Related to the Real Estate Industry
Our performance and the value of our
properties are subject to risks associated with real estate and with the real estate industry, which could materially and adversely
affect our cash flows, financial condition and results of operations.
Our ability to make distributions
to our stockholders depends on our ability to generate cash revenues in excess of our expenses, including expenses associated with
our development activities, indebtedness and capital expenditure requirements. The occurrence of certain events and conditions
that are generally applicable to owners and operators of real estate, many of which are beyond our control, could materially and
adversely affect us. These events and conditions include:
| · | adverse national, regional and local economic conditions; |
| · | oversupply of student housing in our markets, increased competition
for student-tenants or reduction in demand for student housing; |
| · | inability to collect rent from student-tenants; |
| · | vacancies at our properties or an inability to lease our properties on favorable terms; |
| · | inability to finance property development and acquisitions on favorable
terms; |
| · | increased operating costs, including insurance premiums, utilities
and real estate taxes; |
| · | the need for capital expenditures at our properties; |
| · | costs of complying with changes in governmental regulations; |
| · | the relative illiquidity of real estate investments; and |
| · | civil unrest, acts of God, including earthquakes, floods, hurricanes
and other natural disasters, which may result in uninsured losses, and acts of war or terrorism. |
In addition, periods of
economic slowdown or recession, such as the one the global economy experienced from 2007 through 2011, rising interest rates or
declining demand for real estate, or the public perception that any of these events may occur, could result in a general decline
in occupancy rates and rental revenue or an increased incidence of defaults under our existing leases, which could impair the value
of our properties or reduce our cash flow.
Illiquidity of real estate investments
could significantly impede our ability to sell our properties or otherwise respond to adverse changes in the performance of our
properties, which could materially and adversely affect us.
From time to time, we
may determine that it is in our best interest to sell one or more of our properties. However, because real estate investments are
relatively illiquid, we may encounter difficulty in finding a buyer in a timely manner should we desire to sell one of our properties,
especially if market conditions are poor at such time. Selling real estate has been difficult recently, since the availability
of credit has become more limited, and as lending standards have become more stringent. As a result, potential buyers have experienced
difficulty in obtaining financing necessary to purchase a property. In addition, our properties are specifically designed for use
as student housing, which could limit their marketability or affect their values for alternative uses. Consequently, should we
desire to sell one or more of our properties, our ability to do so promptly or on terms that we deem to be acceptable may be limited,
which could materially and adversely affect our cash flows, financial condition, results of operations and ability to pay distributions
on our securities and would likely have a negative impact on the trading price of our securities.
We also may be required
to expend funds to correct defects or to make improvements before a property can be sold. We cannot assure you that we will have
funds available to correct any such defects or to make any such improvements. In connection with any future property acquisitions,
we may agree to provisions that materially restrict our ability to sell the property for a period of time or impose other restrictions,
such as a limitation on the amount of debt that can be secured by or repaid with respect to such property.
In addition, our ability
to sell properties may be limited by our need to avoid the 100% prohibited transactions tax that is imposed on gain recognized
by a REIT from the sale of property characterized as dealer property. Any such limitation may cause us to incur losses, thereby
reducing our cash flows. See "Federal Income Tax Risk Factors—The tax imposed on REITs engaging in ‘prohibited
transactions’ may limit our ability to engage in transactions which would be treated as sales for federal income tax purposes."
These factors and any others that would impede our ability to respond to adverse changes in the performance of any of our properties
or a need for liquidity could materially and adversely affect our cash flows, financial condition, results of operations and ability
to pay distributions on our securities and would likely have a negative impact on the trading price of our securities.
We could incur significant costs related
to government regulation and private litigation over environmental matters, which could materially and adversely affect our financial
condition and results of operations.
Under various environmental
laws, including the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), a current or previous
owner or operator of real estate may be liable for contamination resulting from the release or threatened release of hazardous
or toxic substances or petroleum at that property. Additionally, an entity that arranges for the disposal or treatment of a hazardous
or toxic substance or petroleum at another property may be held jointly and severally liable for the cost of investigating and
cleaning up such property or other affected property. Such parties are known as potentially responsible parties ("PRPs").
These environmental laws often impose liability regardless of whether the PRP knew of, or was responsible for, the presence of
the contaminants, and the costs of any required investigation or cleanup of these substances can be substantial. PRPs may also
be liable to parties who have claims for contribution in connection with any such contamination, such as other PRPs or state and
federal governmental agencies. The liability is generally not limited under such laws and therefore could easily exceed the property’s
value and the assets of the liable party.
The presence of contamination,
hazardous materials or environmental issues, or the failure to remediate such conditions, at a property may expose us to third-party
liability for personal injury or property damage, remediation costs or adversely affect our ability to sell, lease or develop the
property or to borrow using the property as collateral, which could materially and adversely affect our financial condition and
results of operations.
Environmental laws also
impose ongoing compliance requirements on owners and operators of real estate. Environmental laws potentially affecting us address
a wide variety of matters, including, but not limited to, asbestos-containing building materials ("ACBMs"), storage tanks,
storm water and wastewater discharges, lead-based paint, radon, wetlands and hazardous wastes. Failure to comply with these laws
could result in fines and penalties or expose us to third-party liability, which could materially and adversely affect us. Some
of our properties may have conditions that are subject to these requirements and we could be liable for such fines or penalties
or could be liable to third parties.
The conditions at some of our properties
may expose us to liability and remediation costs related to environmental matters, which could materially and adversely affect
us.
Certain of our properties
may contain, or may have contained, ACBMs. Environmental laws require that ACBMs be properly managed and maintained, and regulators
may impose fines and penalties on building owners and operators for failure to comply with these requirements. Also, some of our
properties may contain, or may have contained, or are adjacent to or near other properties that may contain or may have contained
storage tanks for the storage of petroleum products or other hazardous or toxic substances. Any of these conditions create the
potential for the release of these contaminants. Third parties may be permitted by law to seek recovery from owners or operators
for personal injury or property damage arising from such tanks. Additionally, third parties may be permitted by law to seek recovery
from owners or operators for personal injury or property damage associated with exposure to these or other contaminants that may
be present on, at or under the properties. Furthermore, some of our properties include regulated wetlands on undeveloped portions
of such properties and mitigated wetlands on or near our properties, the existence of which can delay or impede development or
require costs to be incurred to mitigate the impact of any disturbance. Absent appropriate permits, we can be held responsible
for restoring wetlands and be required to pay fines and penalties, which could materially and adversely affect our cash flows,
financial condition, results of operations and ability to pay distributions on our securities.
Over the past several
years there have been an increasing number of lawsuits against owners and operators of properties alleging personal injury and
property damage caused by the presence of mold in real estate. Mold growth can occur when excessive moisture accumulates in buildings
or on building materials, particularly if the moisture problem remains undiscovered or is not addressed over a period of time.
Concern about indoor exposure to mold has been increasing as some molds have been shown to produce airborne toxins and irritants
and exposure to these and other types of molds may lead to adverse health effects and symptoms, including allergic or other reactions.
Some of our properties may contain microbial matter such as mold and mildew. The presence of significant mold at any of our properties
could require us to undertake a costly remediation program to contain or remove the mold from the affected property and could expose
us to liability from student-tenants, employees and others if property damage or health concerns arise, which could materially
and adversely affect our cash flows, financial condition, results of operations and ability to pay distributions on our securities.
If any of our properties
are not properly connected to a water or sewer system, or if the integrity of such systems is breached, microbial matter or other
contamination can develop. If this were to occur, we could incur significant remedial costs and we could also be subject to private
damage claims and awards, which could be material. If we become subject to claims in this regard, it could materially and adversely
affect our business and our insurability for such matters in the future.
Independent environmental
consultants have conducted Phase I environmental site assessments on all of our properties. These Phase I environmental site assessments
are intended to evaluate information regarding the environmental condition of the surveyed property and surrounding properties
based generally on visual observations, interviews and the review of publicly available information. These assessments do not typically
take into account all environmental issues including, but not limited to, testing of soil or groundwater, a comprehensive asbestos
survey or an invasive inspection for the presence of lead-based paint, radon or mold contamination. As a result, these assessments
may have failed to reveal all environmental conditions, liabilities, or other compliance issues affecting our properties. Material
environmental conditions, liabilities, or compliance issues may have arisen after the assessments were conducted or may arise in
the future.
In addition, future laws,
ordinances or regulations may impose material additional environmental liabilities. We cannot assure you that the cost of future
environmental compliance or remedial measures will not affect our ability to make distributions to our stockholders or that such
costs or other remedial measures will not be material to us.
We may incur significant costs complying
with the Americans with Disabilities Act, the Fair Housing Act and similar laws, which could materially and adversely affect us.
Under the Americans with
Disabilities Act (“ADA”), all public accommodations must meet various federal requirements related to access and use
by disabled persons. Compliance with the ADA’s requirements may require modifications to our properties, such as the removal
of access barriers or restrict our ability to renovate or develop our properties in the manner we desire. Additional federal, state
and local laws may also require us to make similar modifications or impose similar restrictions on us. For example, the Fair Housing
Act (“FHA”) requires apartment properties first occupied after March 13, 1990 to be accessible to the handicapped.
We have not conducted
an audit or investigation of all of our properties to determine our compliance with present requirements of the ADA, FHA or any
similar laws. Noncompliance with any of these laws could result in us incurring significant costs to make substantial modifications
to our properties or in the imposition of fines or an award or damages to private litigants. We cannot predict the ultimate amount
of the cost of compliance with the ADA, FHA or other legislation. If we incur substantial costs to comply with the ADA, FHA or
any other legislation, our results of operations, financial condition and our ability to make distributions on our securities could
be materially and adversely affected.
We may incur significant costs complying
with other regulatory requirements, which could materially and adversely affect us.
Our properties are subject
to various federal, state and local regulatory requirements, such as state and local fire and life safety requirements. If we fail
to comply with these various requirements, we might incur governmental fines or private damage awards. Furthermore, existing requirements
could change and require us to make significant unanticipated expenditures, which could materially and adversely affect our results
of operations or financial condition and our ability to make distributions on our securities.
Uninsured losses or losses in excess
of insured limits could materially and adversely affect us.
We carry comprehensive
liability, fire, extended coverage, terrorism and rental loss insurance covering all of the properties in our portfolio. Our insurance
includes coverage for earthquake damage to properties located in seismically active areas, windstorm damage to properties exposed
to hurricanes, and terrorism insurance on all of our properties. Our insurance policies are subject to coverage limits and applicable
deductibles, and if we suffer a substantial loss, our coverage may be insufficient. All insurance policies are also subject to
coverage extensions that we believe are typical for our business. We do not carry insurance for generally uninsured losses such
as loss from riots or other acts of God.
In the event we experience
a loss which is uninsured or which exceeds our policy limits, we could lose the capital invested in the damaged property as well
as the anticipated future cash flows from such property. In addition, we might nevertheless remain obligated for any mortgage debt
or other financial obligations related to the property. Inflation, changes in building codes and ordinances, environmental considerations
and other factors might also keep us from using insurance proceeds to replace or renovate a property after it has been damaged
or destroyed. Under such circumstances, the insurance proceeds we receive might be inadequate to restore our economic position
with respect to the damaged or destroyed property. Furthermore, in the event of a substantial loss at one or more of our properties
that is covered by one or more policies, the remaining insurance under these policies, if any, could be insufficient to adequately
insure our other properties. In such event, securing additional insurance policies, if possible, could be significantly more expensive
than our current policies. Any loss of these types may materially and adversely affect our business, financial condition and results
of operations.
Future terrorist attacks in the United
States or an increase in incidents of violence on college campuses could reduce the demand for, and the value of, our properties,
which could materially and adversely affect us.
Future terrorist attacks
in the United States, such as the attacks that occurred in New York and Washington, D.C. on September 11, 2001, and acts
of war, or threats of the same, could reduce the demand for, and the value of, our properties. Any such event in any of the markets
in which our properties are located would make it difficult for us to maintain the affected property’s occupancy or to re-lease
the property at rates equal to or above historical rates, which could materially and adversely affect our results of operations
and the market price of our capital stock and could also materially adversely affect our ability to make distributions on our securities.
Incidents of violence
on college campuses could pose similar problems, if such an incident were to occur on a college campus in one of our markets. Such
an event in any of our markets could not only adversely affect our occupancy rates, but would also likely lead to increased operating
expenses for such properties due to increased security costs, which would likely be necessary to reassure our student-tenants in
the wake of such an incident. Any such increase in operating expenses may have a material adverse effect on the results of operations
of the affected property.
In addition, terrorist
attacks or violent incidents could directly impact the value of our properties through damage, destruction or loss and the availability
of insurance for such acts may be limited or prohibitively expensive. If we receive casualty proceeds, we may not be able to reinvest
such proceeds profitably or at all, and we may be forced to recognize taxable gain on the affected property, which could materially
and adversely affect our business, financial condition and results of operations.
Risks Related to Our Company and Structure
Provisions of our charter allow our board
of directors to authorize the issuance of additional securities, which may limit the ability of a third party to acquire control
of us through a transaction that our stockholders believe to be in their best interest.
Our charter authorizes
our board of directors to issue up to 500,000,000 shares of common stock and up to 50,000,000 shares of preferred stock.
In addition, subject to the rights of holders of Series A Preferred Stock to approve the classification or issuance of any
class or series of stock ranking senior to the Series A Preferred Stock, our board of directors may, without stockholder approval,
amend our charter to increase the aggregate number of our shares or the number of shares of any class or series that we have the
authority to issue and to classify or reclassify any unissued common stock or preferred stock and to set the preferences, rights
and other terms of the classified or reclassified stock. As a result, our board of directors may authorize the issuance of additional
stock or establish a series of common or preferred stock that may have the effect of delaying, deferring or preventing a change
in control of us, including through a transaction at a premium over the market price of our securities, even if our stockholders
believe that a change in control through such a transaction is in their best interest.
Provisions of Maryland law may limit
the ability of a third party to acquire control of us, which, in turn, may negatively affect our stockholders’ ability to
realize a premium over the market price of our securities.
Certain provisions of
the Maryland General Corporation Law (the "MGCL") may have the effect of inhibiting a third party from making a proposal
to acquire us or of impeding a change in control under circumstances that otherwise could provide our stockholders with the opportunity
to realize a premium over the market price of our securities, including:
| · | The Maryland Business Combination Act, which, subject to limitations,
prohibits certain business combinations between us and an "interested stockholder" (defined generally as any person who
beneficially owns 10% or more of the voting power of our voting capital stock) or an affiliate of any interested stockholder for
five years after the most recent date on which the stockholder becomes an interested stockholder, and thereafter imposes special
appraisal rights and special stockholder voting requirements on these combinations; and |
| · | The Maryland Control Share Acquisition Act, which provides
that our "control shares" (defined as shares which, when aggregated with other shares controlled by the stockholder,
entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a "control
share acquisition" (defined as the direct or indirect acquisition of ownership or control of "control shares") have
no voting rights except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all the votes
entitled to be cast on the matter, excluding all interested shares. |
By resolution of our board
of directors, we have opted out of the business combination provisions of the MGCL and provided that any business combination between
us and any other person is exempt from the business combination provisions of the MGCL, provided that the business combination
is first approved by our board of directors (including a majority of directors who are not affiliates or associates of such persons).
Pursuant to a provision in our bylaws, we have opted out of the control share provisions of the MGCL. However, our board of directors
may by resolution elect to opt into the business combination provisions of the MGCL and we may, by amendment to our bylaws, opt
into the control share provisions of the MGCL in the future.
Additionally, Title 3,
Subtitle 8 of the MGCL permits our board of directors, without stockholder approval and regardless of what is currently provided
in our charter or bylaws, to implement certain takeover defenses, such as a classified board, some of which we do not yet have.
These provisions may have the effect of inhibiting a third party from making an acquisition proposal for us or of delaying, deferring
or preventing a change in control of us that otherwise could provide our stockholders with the opportunity to realize a premium
over the market price of our securities.
The ownership limitations in our charter
may restrict or prevent you from engaging in certain transfers of our securities, which may delay or prevent a change in control
of us that our stockholders believe to be in their best interest.
In order for us to qualify
as a REIT, no more than 50% in value of the outstanding shares of our capital stock may be owned, directly or indirectly, by five
or fewer individuals (as defined in the federal income tax laws to include various kinds of entities) during the last half of any
taxable year. Attribution rules in the Internal Revenue Code determine if any individual or entity actually or constructively owns
our capital stock under this requirement. Additionally, at least 100 persons must beneficially own shares of our capital stock
during at least 335 days of each taxable year. To assist us in qualifying as a REIT, our charter contains a stock ownership
limit which provides that, subject to certain exceptions, no person or entity may beneficially own, or be deemed to own by virtue
of the applicable constructive ownership provisions of the Internal Revenue Code, more than 9.8% by vote or value, whichever is
more restrictive, of either our outstanding common stock or our outstanding capital stock in the aggregate. In addition, the Series A
Preferred Stock articles supplementary provide generally that no person may own, or be deemed to own by virtue of the attribution
provisions of the Internal Revenue Code, more than 9.8% in value or in number of shares, whichever is more restrictive, of our
outstanding Series A Preferred Stock. Generally, any of our shares of capital stock owned by affiliated owners will be added
together for purposes of the stock ownership limits.
If anyone transfers shares
of our stock in a way that would violate the stock ownership limits or prevent us from qualifying as a REIT under the federal income
tax laws, those shares instead will be transferred to a trust for the benefit of a charitable beneficiary and will be either redeemed
by us or sold to a person whose ownership of the shares will not violate the stock ownership limits or we will consider the transfer
to be null and void from the outset, and the intended transferee of those shares will be deemed never to have owned the shares.
Anyone who acquires securities in violation of the stock ownership limits or the other restrictions on transfer in our charter
bears the risk of suffering a financial loss when the shares are redeemed or sold if their market price falls between the date
of purchase and the date of redemption or sale.
The constructive ownership
rules under the Internal Revenue Code are complex and may cause stock owned actually or constructively by a group of related individuals
or entities to be owned constructively by one individual or entity. As a result, the acquisition of less than 9.8% of our stock
(or the acquisition of an interest in an entity that owns, actually or constructively, our stock) by an individual or entity, could
nevertheless cause that individual or entity, or another individual or entity, to own constructively in excess of 9.8% of our outstanding
stock and therefore would subject the individual or entity to the stock ownership limits. However, under certain circumstances,
our charter provides that our board of directors shall make an exception to this limitation if our board determines that such exception
will not jeopardize our tax status as a REIT.
In addition, the stock
ownership limits and the other restrictions on transfer in our charter may have the effect of delaying, deferring or preventing
a third party from acquiring control of us, whether such a transaction involved a premium price for our securities or otherwise
was in the best interest of our stockholders.
Our rights and the rights of our stockholders
to take action against our directors and officers are limited, which could limit the recourse available in the event actions are
taken that are not in the best interest of our stockholders.
Maryland law provides
that a director has no liability in connection with the director’s management of the business and affairs of a corporation
if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in the best interests of
the corporation and with the care that an ordinarily prudent person in a like position would use under similar circumstances. In
addition, our charter exculpates our directors and officers from liability to us and our stockholders for money damages except
for liability resulting from actual receipt of an improper benefit in money, property or services or active and deliberate dishonesty
established by a final judgment and which is material to the cause of action. Our charter authorizes us to indemnify our directors
and officers for actions taken by them in those capacities to the maximum extent permitted by Maryland law. Our bylaws require
us to indemnify each director or officer, to the maximum extent permitted by Maryland law, in the defense of any proceeding to
which he or she is made, or threatened to be made, a party by reason of his or her service to us. In addition, we may be obligated
to fund the defense costs incurred by our directors and officers. As a result, we and our stockholders may have more limited rights
against our directors and officers, which could limit the recourse available in the event actions are taken that are not in our
stockholders’ best interest.
Our charter contains provisions that
make removal of our directors difficult, which could make it difficult for our stockholders to effect changes to our management
that our stockholders believe to be in their best interest.
Our charter provides that
a director may be removed only for cause (as defined in our charter) and then only by the affirmative vote of at least two-thirds
of the votes entitled to be cast generally in the election of directors. Our charter also provides that vacancies on our board
of directors may be filled only by a majority of the remaining directors in office, even if less than a quorum. These requirements
prevent stockholders from removing directors except for cause and with a substantial affirmative vote and from replacing directors
with their own nominees. As a result, a change in our management that our stockholders believe is in their best interest may be
delayed, deferred or prevented.
Our board of directors has approved very
broad investment guidelines for us and does not review or approve each investment decision made by our management team.
Our management team is
authorized to follow broad investment guidelines and, therefore, has great latitude in determining which investments are proper
for us, as well as in making the individual investment decisions. Our management team may make investments with lower rates of
return than those anticipated under current market conditions and/or may make investments with greater risks to achieve those anticipated
returns.
The ability of our board of directors
to change some of our policies without the consent of our stockholders may lead to the adoption of policies that are not in the
best interest of our stockholders.
Our major policies, including
our policies with respect to investments, leverage, financing, growth, debt and capitalization, are determined by our board of
directors or those committees or officers to whom our board of directors may delegate such authority. Our board of directors also
establishes the form, timing and/or amount of any dividends or distributions that we may pay to our stockholders. Our board of
directors or the committees or officers to which such decisions may be delegated have the ability to amend or revise these and
our other policies at any time without stockholder vote. Accordingly, our stockholders may not have control over changes in our
policies, and we may adopt policies that may not prove to be in the best interests of our stockholders.
Members of our board of directors may
in the future be holders of OP units, and the interests of holders of OP units may differ from those of our stockholders.
Currently no members of
our board of directors are holders of OP Units. However, members of our board of directors may in the future be direct or indirect
holders of OP units. For example, the former members (the “Sellers”) of Copper Beech Townhome Communities, LLC (“CBTC”)
and Copper Beech Townhome Communities (PA), LLC (“CBTC PA” and, together with CBTC, “Copper Beech”) are
holders of OP units and may receive additional OP units in connection with a second closing for the Copper Beech acquisition (see
Note 19 in the accompanying consolidated financial statements for additional information regarding the Copper Beech acquisition).
Pursuant to agreements with the Sellers in connection with the Copper Beech acquisition, we agreed to nominate John R. McWhirter,
one of the Sellers who holds OP Units, for election to our board of directors at our 2015 annual meeting of stockholders. Accordingly,
if Dr. McWhirter is elected to our board of directors at our 2015 annual meeting of stockholders, one of the members of our board
of directors will be a holder of OP Units. However, if Dr. McWhirter is not elected to our board of directors at the 2015 annual
meeting of stockholders, we have no further obligation to nominate Dr. McWhirter to the board of directors.
As holders of OP units
board members may have conflicting interests with our stockholders. For example, board members with OP units may have different
tax positions from our stockholders, which could influence their decisions regarding whether and when to dispose of assets, whether
and when to incur new indebtedness or refinance existing indebtedness and how to structure future transactions. As a result, if
one or more of our board members are holders of OP units, our board of directors may implement policies or make decisions that
are not in the best interest of our stockholders.
We have entered into employment agreements
with certain of our executive officers that require us to make payments in the event such officer’s employment is terminated
by us without cause or by such officer for good reason. This may make it difficult for us to effect changes to our management or
limit the ability of a third party to acquire control of us when it would otherwise be in the best interest of our stockholders.
The employment agreements
that we entered into with certain of our executive officers provide benefits under certain circumstances that could make it more
difficult for us to terminate these officers. Therefore, even if we sought to replace these officers, it may not be economically
viable for us to do so. Furthermore, because an acquiring company would likely seek to replace these officers with their own personnel,
these employment agreements could have the effect of delaying, deterring or preventing a change in control of us that would otherwise
be in the best interest of our stockholders.
Our primary assets are our general partnership
interest in the Operating Partnership and OP units and, as a result, we depend on distributions from the Operating Partnership
to pay dividends and expenses.
We are a holding company
and have no material assets other than our general partnership interest and OP units. We intend to cause the Operating Partnership
to make distributions to its limited partners, including us, in an amount sufficient to allow us to qualify as a REIT for federal
income tax purposes and to pay all our expenses. To the extent we need funds and the Operating Partnership is restricted from making
distributions under applicable law, agreement or otherwise, or if the Operating Partnership is otherwise unable to provide such
funds, the failure to make such distributions could adversely affect our liquidity and financial condition and our ability to make
distributions to our stockholders.
We operate through a partnership structure,
which could materially and adversely affect us.
Our primary property-owning
vehicle is the Operating Partnership, of which we are the sole general partner. Our acquisition of properties through the Operating
Partnership in exchange for OP units may permit certain tax deferral advantages to the sellers of those properties. If properties
contributed to the Operating Partnership have unrealized gain attributable to the difference between the fair market value and
adjusted tax basis in such properties prior to contribution, then the sale of such properties could cause material and adverse
tax consequences to the partners who contributed such properties. Although we, as the sole general partner of the Operating Partnership,
generally have no obligation to consider the tax consequences of our actions to any limited partner, in connection with our formation
transactions, we agreed to indemnify MXT Capital for certain tax consequences related to our properties. We also have a tax indemnification
agreement with Copper Beech. There can be no assurance that the Operating Partnership will not acquire properties in the future
subject to material restrictions designed to minimize the adverse tax consequences to the partners who contribute such properties.
Such restrictions could result in significantly reduced flexibility to manage our properties, which could materially and adversely
affect our business, financial condition and results of operations.
We have fiduciary duties as the sole
general partner of the Operating Partnership which may result in conflicts of interest in representing your interests as our stockholders.
Conflicts of interest
could arise in the future as a result of the relationship between us, on the one hand, and the Operating Partnership or any partner
thereof, on the other. We, as the sole general partner of the Operating Partnership, have fiduciary duties to the other limited
partners in the Operating Partnership under Delaware law. At the same time, our directors and officers have duties to us and our
stockholders under applicable Maryland law in connection with their management of us. Our duties as the sole general partner of
the Operating Partnership may come in conflict with the duties of our directors and officers to us and our stockholders. For example,
those persons holding OP units will have the right to vote on certain amendments to the partnership agreement (which require approval
by a majority in interest of the limited partners, including us) and individually to approve certain amendments that would adversely
affect their rights. These voting rights may be exercised in a manner that conflicts with the interests of our stockholders. We
are unable to modify the rights of limited partners to receive distributions as set forth in the partnership agreement in a manner
that adversely affects their rights without their consent, even though such modification might be in the best interest of our stockholders.
Our partnership agreement provides that if there is a conflict between the interests of our stockholders, on one hand, and the
interests of the limited partners, on the other, we will endeavor in good faith to resolve the conflict in a manner not adverse
to either our stockholders or the limited partners; provided, however, that for so long as we own a controlling interest in the
Operating Partnership, we have agreed to resolve any conflict that cannot be resolved in a manner not adverse to either our stockholders
or the limited partners in favor of our stockholders.
Changes in accounting rules, assumptions
and/or judgments could materially and adversely affect us.
Accounting rules and interpretations
for certain aspects of our operations are highly complex and involve significant assumptions and judgment. These complexities could
lead to a delay in the preparation and public dissemination of our financial statements. Furthermore, changes in accounting rules
and interpretations or in our accounting assumptions and/or judgments, such as those described in our summary of significant accounting
policies in the notes to the consolidated and combined financial statements, could significantly impact the actual results included
in our financial statements. Under any of these circumstances, our financial condition and results of operations could be materially
and adversely affected.
We may not make distributions to our
stockholders or be able to maintain our current distribution rate, and we may be required to fund the minimum distribution necessary
to qualify for taxation as a REIT from sources that could reduce our cash flows.
Our ability to fund any
distributions will depend, in part, upon continued successful leasing of our existing portfolio and successful management services.
To the extent these sources are insufficient, we may use our working capital or borrowings under our revolving credit facility
to fund distributions, if and to the extent then permitted under the terms of our credit facility. If we need to fund future distributions
with borrowings under our revolving credit facility or from working capital, or if we reduce our distribution rate, our stock price
may be adversely affected. In addition, to the extent that we fund any distributions with borrowings under our revolving credit
facility or from working capital, our cash available for investment in our business, including for property development and acquisition
purposes, will decrease.
In addition, in order
to qualify for taxation as a REIT, among other requirements, we must make distributions to stockholders aggregating annually to
at least 90% of our REIT taxable income, excluding net capital gains. To the extent that, in respect of any calendar year, cash
available for distribution to our stockholders is less than our REIT taxable income, we would be required to fund the minimum distribution
necessary to qualify for taxation as a REIT from other sources, which could include asset sales or borrowings. Funding a distribution
through asset sales or borrowings could reduce our cash flow from operations, increase our interest expense and decrease our cash
available for investment in our business. We may also choose to meet this distribution requirement by distributing a combination
of cash and shares of our common stock. See "Federal Income Tax Risk Factors—We may pay taxable dividends of our common
stock and cash, in which case stockholders may sell shares of our common stock to pay tax on such dividends, placing downward pressure
on the market price of our common stock."
Any distributions in excess
of our current and accumulated earnings and profits will not be taxable to a holder to the extent that they do not exceed the holder’s
adjusted basis in the shares of stock in respect of which the distributions were made, but rather, will reduce the adjusted basis
of these shares. To the extent that such distributions exceed the adjusted basis of a stockholder’s shares, they will generally
be included in income as capital gains.
We have the right to accumulate
and not pay dividends on the Series A Preferred Stock. If dividends on the Series A Preferred Stock are not paid, holders of our
Common Stock will not receive any dividend distributions. If we have REIT taxable income during 2015, and we do not distribute
at least 90% of our REIT taxable income, excluding net capital gains, then we will not be taxed as a REIT during calendar year
2015, which could have a material adverse effect on us and on the value of our securities.
The market price of our securities may
be volatile due to numerous circumstances, some of which are beyond our control.
The market price of our
securities may be highly volatile and subject to wide fluctuations. Our financial performance, government regulatory action, tax
laws, interest rates and market conditions in general could have a significant impact on the market price of our securities. Some
of the factors that could negatively affect the market price or result in fluctuations in the market price of our securities include:
| · | actual or anticipated variations in our quarterly operating results;
|
| · | changes in our financial performance or earnings estimates; |
| · | increases in market interest rates (which, among other consequences,
may lead purchasers of our securities to require a higher dividend yield to make or maintain an investment); |
| · | changes in market valuations of similar companies; |
| · | adverse market reaction to any indebtedness we incur in the future;
|
| · | additions or departures of key personnel; |
| · | actions by our stockholders; |
| · | speculation in the press or investment community; |
| · | general market, economic and political conditions, including the
recent economic slowdown and dislocation in the global credit markets; |
| · | our issuance of additional shares of common stock or other securities;
|
| · | activist or proxy contests; |
| · | availability of outstanding shares of our common stock, including
sales of a substantial number of shares of our common stock in the public market (including shares held by our directors, officers
or their affiliates); |
| · | the performance of other similar companies; |
| · | changes in accounting principles; |
| · | passage of legislation or other regulatory developments that adversely
affect us or our industry; and |
| · | the potential impact of the recent economic slowdown on the student
housing industry and related budgets of colleges and universities. |
Future offerings of debt securities,
which would be senior to our common stock upon liquidation, or equity securities, which would dilute our existing stockholders
and may be senior to our common stock for the purposes of distributions, may limit our operating and financial flexibility and
adversely affect the market price of our securities.
Our common stock is ranked
junior to our Series A Preferred Stock. Our outstanding Series A Preferred Stock also has a preference upon our dissolution, liquidation
or winding up in respect of assets available for distribution to our stockholders. Holders of our common stock are not entitled
to preemptive rights or other protections against dilution. In the future, we may attempt to increase our capital resources by
making additional offerings of debt or equity securities, including commercial paper, medium-term notes, senior or subordinated
notes and classes of preferred or common stock. Upon liquidation, holders of our debt securities and shares of preferred stock
and lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of our common
stock. Additional equity offerings may dilute the holdings of our existing stockholders or reduce the market price of our securities
or both. In addition, it is possible that these securities or indebtedness will be governed by an indenture or other instrument
containing covenants restricting our operating flexibility and limiting our ability to make distributions to our stockholders.
Because our decision to issue debt or equity securities in any future offering or otherwise incur indebtedness will depend on then-current
market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future
offerings or financings. Thus, our stockholders bear the risk of our future offerings reducing the market price of our securities
and diluting their proportionate ownership.
Our lack of a formal enterprise risk
management framework could adversely affect our profitability, business, financial condition or results of operations.
In the course of our senior
management’s efforts to identify, assess and manage our risks, they currently do not have the benefit of a formal enterprise
risk management program to facilitate their efforts. While many of the risks that we monitor and manage are described in this section
of this report, our business operations could also be affected by additional factors that are not presently described or known
to us or that we currently consider immaterial to our operations. Without a formal enterprise risk management framework, we may
not be able to effectively manage and mitigate the risks to which we are subject or effectively minimize any losses stemming from
such risks. Even with a formal enterprise risk management framework, our efforts to identify, monitor and manage risks may not
be fully effective. Failure to identify, prioritize and appropriately manage or mitigate these risks could adversely affect our
profitability or our ability to retain or grow business and could adversely affect our business, financial condition or results
of operations.
Federal Income Tax Risk Factors
Our failure to remain qualified as a
REIT could have a material and adverse effect on us and on the value of our securities.
We intend to continue
to operate in a manner that will allow us to continue to qualify as a REIT for U.S. federal income tax purposes under the
Internal Revenue Code. If we lose our qualification as a REIT, we will face significant adverse tax consequences that would substantially
reduce the funds available for distribution to our stockholders for each of the years involved because:
| · | we would not be allowed a deduction for distributions to stockholders
in computing our taxable income and we would be subject to U.S. federal income tax at regular corporate rates; |
| · | we also could be subject to the U.S. federal alternative minimum
tax and possibly increased state and local taxes; and |
| · | unless we are entitled to relief under applicable statutory provisions,
we could not elect to be taxed as a REIT for four taxable years following a year during which we were disqualified. |
In addition, if we lose
our qualification as a REIT, we will not be required to make distributions to stockholders, and all distributions to our stockholders
will be subject to tax as regular corporate dividends to the extent of our current and accumulated earnings and profits. This means
that our U.S. stockholders that are individuals would be taxed on our dividends at the current maximum U.S. federal income
tax rate currently of 20%, and our corporate stockholders generally would be entitled to the dividends received deduction with
respect to such dividends, subject, in each case, to applicable limitations under the Internal Revenue Code.
Qualification as a REIT
involves the application of highly technical and complex Internal Revenue Code provisions and regulations promulgated thereunder
for which there are only limited judicial and administrative interpretations. Even a technical or inadvertent violation could jeopardize
our ability to qualify as a REIT. The complexity of these provisions and of the applicable U.S. Treasury Department regulations
("Treasury Regulations") that have been promulgated under the Internal Revenue Code is greater in the case of a REIT
that, like us, holds its assets through a partnership. The determination of various factual matters and circumstances not entirely
within our control may affect our ability to qualify as a REIT. In order to continue to qualify as a REIT, we must satisfy a number
of requirements on a continuing basis, including requirements regarding the composition of our assets, sources of our gross income
and stockholder ownership. Also, we must make distributions to stockholders aggregating annually at least 90% of our REIT taxable
income, excluding net capital gains.
As a result of these factors,
our failure to continue to qualify as a REIT could materially and adversely affect us and the market price of our securities.
To remain qualified as a REIT, we will
likely rely on the availability of equity and debt capital to fund our business.
To remain qualified as
a REIT, we generally must distribute to our stockholders at least 90% of our REIT taxable income each year, excluding net capital
gains, and we will be subject to regular corporate income taxes to the extent that we distribute less than 100% of our REIT taxable
income each year. In addition, we will be subject to a 4% nondeductible excise tax on the amount, if any, by which distributions
paid by us in any calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income and 100%
of our undistributed income from prior years. Because of REIT distribution requirements, we may be unable to fund capital expenditures,
such as our developments, future acquisitions or property upgrades or renovations from operating cash flow. Therefore, we may be
dependent on the public equity and debt capital markets and private lenders to fund our growth and other capital expenditures.
However, we may not be able to obtain this capital on favorable terms or at all. Our access to third-party sources of capital depends,
in part, on:
| · | general market conditions; |
| · | our current debt levels and the number of properties subject to encumbrances;
|
| · | our current performance and the market’s perception of our
growth potential; |
| · | our cash flow and cash dividends; and |
| · | the market price of our securities. |
If we cannot obtain capital
from third-party sources, we may not be able to acquire or develop properties when strategic opportunities exist, satisfy our debt
service obligations or make the cash distributions to our stockholders, including those necessary to maintain our qualification
as a REIT, which could materially and adversely affect us.
Even if we remain qualified as a REIT,
we may face other tax liabilities that have a material and adverse effect on us.
Even if we continue to
qualify for taxation as a REIT, we may be subject to certain federal, state and local taxes on our income and assets, including
taxes on any undistributed income, taxes on income from some activities conducted as a result of a foreclosure, and state or local
income, property and transfer taxes. Any of these taxes would cause our operating costs to increase, and therefore our business,
financial condition and results of operations could be materially and adversely affected.
In particular, various
services provided at our properties generally cannot be provided directly by the property owner, but must be provided through TRSs
that are treated as fully taxable corporations.
To remain qualified as a REIT, we may
be forced to limit the activities of our TRSs, which could materially and adversely affect our business and results of operations.
To remain qualified as
a REIT, no more than 25% of the value of our total assets may consist of the securities of one or more TRSs. Certain of our activities,
such as our third-party development, construction, management and leasing services, must be conducted through our TRSs for us to
qualify or remain qualified as a REIT. In addition, certain non-customary services must be provided by a TRS or an independent
contractor. If the revenues from such activities create a risk that the value of our TRSs, based on revenues or otherwise, approaches
the 25% threshold, we will be forced to curtail such activities or take other steps to remain under the 25% threshold. Since the
25% threshold is based on value, it is possible that the IRS could successfully contend that the value of our TRSs exceeds the
25% threshold even if our TRSs account for less than 25% of our consolidated revenues, income or cash flow. Our third-party services
generally are performed by our TRSs. Consequently, income earned from our third-party services and non-customary services will
be subject to regular federal income taxation and state and local income taxation where applicable, thus reducing the amount of
cash available for distribution to our stockholders.
A TRS is not permitted
to directly or indirectly operate or manage a "hotel, motel or other establishment more than one-half of the dwelling units
in which are used on a transient basis." We previously have been advised by counsel that the method of operating our TRSs
will not be considered to constitute such an activity. However, future Treasury Regulations or other guidance interpreting the
applicable provisions might adopt a different approach, or the IRS might disagree with the conclusion of our counsel. In such event
we might be forced to change our method of operating our TRSs, or one or more of the TRSs could fail to qualify as a TRS, which
could cause us to fail to qualify as a REIT. Any of the foregoing circumstances could materially and adversely affect our business,
financial condition and results of operations.
If the Operating Partnership fails to
qualify as a partnership for federal income tax purposes, we would cease to qualify as a REIT and we could be materially and adversely
affected.
We believe that the Operating
Partnership qualifies to be treated as a partnership for federal income tax purposes. As a partnership, the Operating Partnership
is not subject to federal income tax on its income. Instead, each of its partners, including us, is required to pay tax on its
allocable share of the Operating Partnership’s income. No assurance can be provided, however, that the IRS, will not challenge
its status as a partnership for federal income tax purposes, or that a court would not sustain such a challenge. If the IRS were
successful in treating the Operating Partnership as a corporation for tax purposes, we would fail to meet the gross income tests
and certain of the asset tests applicable to REITs and, accordingly, cease to qualify as a REIT. The failure of the Operating Partnership
to qualify as a partnership would also cause it to become subject to federal state and corporate income tax, which would reduce
significantly the amount of cash available for debt service and for distribution to its partners, including us.
Dividends payable by REITs do not qualify
for the reduced tax rates available for some dividends, which could materially and adversely affect the market price of our securities.
The maximum tax rate applicable
to "qualified dividend income" payable to U.S. stockholders that are taxed at individual rates is 20%. Dividends
payable by REITs, however, generally are not eligible for the reduced rates on qualified dividend income. Although this does not
adversely affect the taxation of REITs or dividends payable by REITs, the more favorable rates applicable to regular corporate
qualified dividends could cause investors taxed at individual rates to perceive investments in REITs to be relatively less attractive
than investments in the stocks of non-REIT corporations that pay dividends, which could materially and adversely affect the market
price of the stock of REITs, including our securities.
We may pay taxable dividends in the form
our common stock and cash, in which case stockholders may sell shares of our common stock to pay tax on such dividends, placing
downward pressure on the market price of our common stock.
We may distribute taxable
dividends that are payable in cash and common stock at the election of each stockholder. The IRS has issued private letter rulings
to other REITs treating certain distributions that are paid partly in cash and partly in stock as taxable dividends that would
satisfy the REIT annual distribution requirement and qualify for the dividends paid deduction for federal income tax purposes.
Those rulings may be relied upon only by taxpayers to whom they were issued, but we could request a similar ruling from the IRS.
Accordingly, it is unclear whether and to what extent we will be able to make taxable dividends payable in cash and common stock.
If we made a taxable dividend
payable in cash and common stock, taxable stockholders receiving such dividends will be required to include the full amount of
the dividend as ordinary income to the extent of our current and accumulated earnings and profits, as determined for federal income
tax purposes. As a result, stockholders may be required to pay income tax with respect to such dividends in excess of the cash
dividends received. If a U.S. stockholder sells the common stock that it receives as a dividend in order to pay this tax, the sales
proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our common
stock at the time of the sale. Furthermore, with respect to certain non-U.S. stockholders, we may be required to withhold federal
income tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in common
stock. If we made a taxable dividend payable in cash and our common stock and a significant number of our stockholders determine
to sell shares of our common stock in order to pay taxes owed on such dividends, it may be viewed as economically equivalent to
a dividend reduction and put downward pressure on the trading price of our common stock. We do not currently intend to pay taxable
dividends in the form of our common stock and cash, although we may choose to do so in the future.
Complying with REIT requirements may
limit our ability to hedge effectively and may cause us to incur tax liabilities, which could materially and adversely affect our
financial condition and results of operations.
The REIT provisions of
the Internal Revenue Code substantially limit our ability to hedge our liabilities. Any income from a hedging transaction we enter
into to manage risk of interest rate changes with respect to borrowings made or to be made to acquire or carry real estate assets
will not constitute "gross income" for purposes of the 75% gross income test or the 95% gross income test, if certain
requirements are not met. To the extent that we enter into other types of hedging transactions, the income from those transactions
is likely to be treated as non-qualifying income for purposes of both of the gross income tests. As a result, we might have to
limit our use of advantageous hedging techniques or implement those hedges through a TRS. This could increase the cost of our hedging
activities because a domestic TRS would be subject to tax on gains or expose us to greater risks associated with changes in interest
rates than we would otherwise want to bear. In addition, losses in our TRSs will generally not provide any tax benefit, except
for being carried forward against future taxable income in the respective TRS. These increased costs could materially and adversely
affect our financial condition and results of operations.
The tax imposed on REITs engaging in
"prohibited transactions" may limit our ability to engage in transactions which would be treated as sales or otherwise
as taxable dispositions for federal income tax purposes.
A REIT’s net income
from prohibited transactions is subject to a 100% penalty tax. In general, prohibited transactions are sales or other dispositions
of property, other than foreclosure property, held in inventory primarily for sale to customers in the ordinary course of business.
Although we do not intend to hold any properties that would be characterized as inventory held for sale to customers in the ordinary
course of our business, subject to certain statutory safe harbors, such characterization is a factual determination and no guarantee
can be given that the IRS would agree with our characterization of our properties or that we will always be able to make use of
the available safe harbors.
Re-characterization of sale-leaseback
transactions may cause us to lose our REIT status.
We may purchase properties
and lease them back to the sellers of such properties. While we will use our best efforts to structure any such sale-leaseback
transaction so that the lease will be characterized as a "true lease," thereby allowing us to be treated as the owner
of the property for federal income tax purposes, the IRS could challenge such characterization. In the event that any sale-leaseback
transaction is challenged and re-characterized as a financing transaction or loan for federal income tax purposes, deductions for
depreciation and cost recovery relating to such property would be disallowed. If a sale-leaseback transaction were so re-characterized,
we might fail to satisfy the REIT qualification "asset tests" or the "income tests" and, consequently, lose
our REIT status effective with the year of re-characterization. Alternatively, the amount of our REIT taxable income could be recalculated,
which might also cause us to fail to meet the distribution requirement for a taxable year.
Liquidation of assets may jeopardize
our REIT status.
To continue to qualify
as a REIT, we must comply with requirements regarding our assets and our sources of income. If we are compelled to liquidate our
investments to satisfy our obligations to our lenders, we may be unable to comply with these requirements, ultimately jeopardizing
our status as a REIT, or we may be subject to a 100% tax on any resultant gain if we sell assets treated as dealer property or
inventory.
Complying with REIT requirements may
cause us to liquidate otherwise attractive investments or to forgo otherwise attractive investment opportunities, which could materially
and adversely affect our business, financial condition and results of operations.
To continue to qualify
as a REIT for U.S. federal income tax purposes, we continually must satisfy tests concerning, among other things, the sources
of our income, the type and diversification of our assets, the amounts we distribute to our stockholders and the ownership of our
stock. If we fail to comply with these requirements at the end of any calendar quarter, we must correct such failure within 30 days
after the end of the calendar quarter to avoid suffering adverse tax consequences, including potentially losing our REIT status.
As a result, we may be required to liquidate otherwise attractive investments, which could materially and adversely affect us.
In addition, we may be unable to pursue investments that would be otherwise advantageous to us in order to satisfy the source-of-income,
asset-diversification or distribution requirements for qualifying as a REIT. Thus, compliance with the REIT requirements may hinder
our ability to make certain attractive investments, which could materially and adversely affect our business, financial condition
and results of operations.
The ability of our board of directors
to revoke our REIT election without stockholder approval may cause adverse consequences to our stockholders.
Our charter provides that
our board of directors may revoke or otherwise terminate our REIT election, without the approval of our stockholders, if it determines
that it is no longer in our best interests to continue to qualify as a REIT. If we cease to qualify as a REIT, we would become
subject to federal income tax on our taxable income and would no longer be required to distribute most of our taxable income to
our stockholders, which may have adverse consequences on the total return to our stockholders.
New legislation, regulation or administrative
or judicial action, in each instance potentially with retroactive effect, could make it more difficult or impossible for us to
qualify as a REIT.
The present U.S. federal
income tax treatment of REITs may be modified, possibly with retroactive effect, by legislative, regulatory, administrative or
judicial action at any time, which could affect the U.S. federal income tax treatment of an investment in our stock. The U.S. federal
income tax rules that affect REITs are under constant review by persons involved in the legislative process, the IRS and the U.S. Treasury
Department, which results in statutory changes as well as frequent revisions to regulations and interpretations. Revisions in U.S. federal
tax laws and interpretations thereof could cause us to change our investments and commitments, which could also affect the tax
considerations of an investment in our stock.
Risks Related to the Copper Beech Acquisition
If we are unable to successfully integrate
the operations of the CB Portfolio, we could be materially and adversely affected.
In February 2013, we entered
into purchase and sale agreements to acquire interests in a portfolio of 35 student housing properties, one undeveloped land parcel
and corporate office building held by the members of Copper Beech Townhome Communities, LLC ("CBTC") and Copper Beech
Townhome Communities (PA), LLC ("CBTC PA", together with CBTC, "Copper Beech" or the "Sellers") (the
“CB Portfolio”). On January 30, 2015, we completed the acquisition of the Sellers’ remaining interests in 29
of the student housing properties, one undeveloped land parcel, and one other student housing property. The CB Portfolio Acquisition
represents the largest acquisition of a property portfolio that we have ever acquired. The transaction involves the integration
of a portfolio of properties that has previously operated independently. Successful integration of these operations will depend
primarily on our ability to consolidate standards, controls, procedures and policies. This transaction also poses other risks commonly
associated with similar transactions, including unanticipated liabilities, unexpected costs and the diversion of management’s
attention to the integration of the operations of the CB Portfolio. We may not be able to integrate these operations without encountering
difficulties, including, but not limited to, the disruption of our ongoing businesses or possible inconsistencies in standards,
controls, procedures and policies. If we have difficulties with any of these integrations, we might not achieve the economic benefits
we expect to result from the transaction, and this may hurt our business and financial results. In addition, we may experience
greater-than-expected costs or difficulties relating to the integration of the operations of the CB Portfolio. Additional risks
include, but are not limited to, the following:
| · | inability to effectively monitor and manage our expanded portfolio of properties, retain key employees
or attract highly qualified new employees; |
| · | inability to compete in new markets; |
| · | increased costs or increases in taxable income due to restructuring or other steps required in
connection with the integration of the CB Portfolio as a result of our compliance with the tax requirements applicable to REITs
under the Code; |
| · | projections of estimated future revenues, cost savings or operating metrics that we developed during
the due diligence and integration planning process may not be achieved; |
| · | the value of the acquired properties or the market price of our common stock may decline; |
| · | adverse impact on the effectiveness of our internal controls and compliance with the regulatory
requirements under the Sarbanes-Oxley Act of 2002; |
| · | unanticipated issues, expenses and liabilities; diversion of our management’s attention away
from other business concerns; |
| · | unanticipated expenses and liabilities associated with the tax indemnification agreement which
we entered into with the Sellers in connection with the transaction; |
| · | exposure to any undisclosed or unknown potential liabilities relating to the CB Portfolio; and |
| · | potential underinsured losses on the CB Portfolio. |
We cannot assure you that
we will be able to integrate the CB Portfolio without encountering difficulties or that any such difficulties will not have a material
adverse effect on us. Additionally, we cannot assure you that the CB Portfolio Acquisition will be accretive to us in the near
term or at all. Failure to realize the intended benefits of the CB Portfolio Acquisition could have a material adverse effect on
our results of operations, financial condition, the market price of our common shares and our distributions to our shareholders.
Furthermore, if we fail to realize the intended benefits of the CB Portfolio Acquisition, the market price of our common stock
could decline to the extent that the market price reflects those benefits.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
As of December 31, 2014,
we owned interests in 50 The Grove® and evo® operating properties and 36 Copper Beech
branded operating properties. All of The Grove® and evo® operating properties are less
than ten years old and more than half are less than four years old. No single property accounted for more than 5% of our total
assets or gross revenue as of December 31, 2014 or 2013 or for the years then ended.
We focus our investment
activities on properties located in medium-sized college and university markets where we believe the overall market dynamics are
favorable. Thirty-six of our operating properties are wholly-owned and are operated under the brand The Grove®.
Additionally, fourteen of our joint venture operating properties operate under the brands The Grove® and
evo®. Our brands provide an identity for our marketing and selling activities, our operations and other on-site
activities. The brands figure prominently on our web site, promotional materials and local signage.
Amenities at our properties
generally include a resort style swimming pool, basketball courts, beach volleyball courts, fire pits, barbeque areas and a large
clubhouse featuring a 24-hour fitness center, library and computer center, tavern style game room with billiards and other games,
tanning beds, coffee shop and study areas. All of our properties are furnished with upholstered couches, chairs
and durable wood case goods.
Generally, each student-tenant
at our properties executes an individual lease agreement with us that is guaranteed by a parent or guardian. Lease terms are generally
11.5 months, which provides us with approximately two weeks to prepare a unit for a new tenant if the current tenant is vacating
upon the expiration of the lease. Rent is payable monthly in 12 equal installments. In addition to unlimited use of all the property
amenities listed above, each tenant is entitled to cable, water/sewer and a $25 per month electricity allowance. Student-tenants
are prohibited from subletting units without our prior written consent, which is conditioned on, among other things, the payment
of a transfer fee. Student-tenants are responsible for the outstanding lease obligations in the event that they are denied admission
to, withdraw from or are placed on academic suspension or dismissed by, the college or university that our property services.
At December 31, 2014,
we owned a 48% effective ownership interest in 36 Copper Beech branded operating properties. The Copper Beech units are townhomes
with 3 or 4 beds and may be rented by the unit or by the bed with leases that are generally guaranteed by a parent or guardian.
Lease terms are generally 11.5 months, which provides approximately two weeks to prepare a unit for a new tenant if the current
tenant is vacating upon the expiration of the lease. Rent is payable monthly in 12 equal installments. Student-tenants are prohibited
from subletting units without our prior written consent, which is conditioned on, among other things, the payment of a transfer
fee. Student-tenants are responsible for the outstanding lease obligations in the event that they are denied admission to, withdraw
from or are placed on academic suspension or dismissed by, the college or university that our property services. Subsequent to
December 31, 2014, we completed the acquisition on January 30, 2015, of the remaining interests in 29 of the Copper Beech student
housing properties, one undeveloped land parcel, and one other Copper Beech student housing property.
The following table presents
certain summary information about our The Grove® and evo® operating properties:
| |
| |
| |
| |
| | |
| | |
| | |
| | |
| | |
Average | |
| |
| |
| |
| |
| | |
| | |
| | |
| | |
Occupancy | | |
Monthly | |
| |
| |
| |
| |
Fall 2013 | | |
Distance to | | |
| | |
| | |
as of | | |
Total Revenue | |
| |
| |
Year | |
| |
Overall | | |
Campus | | |
Number | | |
Number | | |
December 31, | | |
Per | |
| |
Location | |
Opened | |
Primary
University Served | |
Enrollment | | |
(miles) | | |
of
Units | | |
of
Beds | | |
2014 (1) | | |
Occupied
Bed (2) | |
| |
| |
| |
| |
| | |
| | |
| | |
| | |
| | |
| |
1 | |
The Grove at Asheville, NC | |
2005 | |
UNC - Asheville | |
| 3,784 | | |
| 0.1 | | |
| 154 | | |
| 448 | | |
| 98.2 | % | |
$ | 484 | |
2 | |
The Grove at Carrollton, GA | |
2006 | |
University of West Georgia | |
| 11,929 | | |
| 0.1 | | |
| 168 | | |
| 492 | | |
| 94.9 | % | |
$ | 463 | |
3 | |
The Grove at Las Cruces, NM | |
2006 | |
New Mexico State University | |
| 16,765 | | |
| 0.4 | | |
| 168 | | |
| 492 | | |
| 81.2 | % | |
$ | 456 | |
4 | |
The Grove at Milledgeville, GA | |
2006 | |
Georgia College & State University | |
| 6,551 | | |
| 0.1 | | |
| 168 | | |
| 492 | | |
| 98.7 | % | |
$ | 599 | |
5 | |
The Grove at Abilene, TX | |
2007 | |
Abilene Christian University | |
| 4,461 | | |
| 0.5 | | |
| 192 | | |
| 504 | | |
| 92.5 | % | |
$ | 477 | |
6 | |
The Grove at Ellensburg, WA | |
2007 | |
Central Washington University | |
| 11,287 | | |
| 0.5 | | |
| 192 | | |
| 504 | | |
| 97.5 | % | |
$ | 531 | |
7 | |
The Grove at Greeley, CO | |
2007 | |
University of Northern Colorado | |
| 12,710 | | |
| 1.0 | | |
| 192 | | |
| 504 | | |
| 99.1 | % | |
$ | 519 | |
8/9 | |
The Grove at Mobile, AL—Phase I & II (3) | |
2007/2008 | |
University of South Alabama | |
| 15,065 | | |
| 0.0 | | |
| 384 | | |
| 1,008 | | |
| 82.2 | % | |
$ | 484 | |
10 | |
The Grove at Nacogdoches, TX—Phase I & II | |
2007/2012 | |
Stephen F. Austin State University | |
| 12,772 | | |
| 0.4 | | |
| 260 | | |
| 682 | | |
| 89.2 | % | |
$ | 573 | |
11 | |
The Grove at Cheney, WA | |
2008 | |
Eastern Washington University | |
| 12,791 | | |
| 0.5 | | |
| 192 | | |
| 512 | | |
| 93.5 | % | |
$ | 472 | |
12 | |
The Grove at Lubbock, TX | |
2008 | |
Texas Tech University | |
| 33,111 | | |
| 1.2 | | |
| 192 | | |
| 504 | | |
| 92.5 | % | |
$ | 497 | |
13 | |
The Grove at Stephenville, TX | |
2008 | |
Tarleton State University | |
| 13,307 | | |
| 0.8 | | |
| 192 | | |
| 504 | | |
| 89.4 | % | |
$ | 565 | |
14 | |
The Grove at Troy, AL | |
2008 | |
Troy University | |
| 20,573 | | |
| 0.4 | | |
| 192 | | |
| 514 | | |
| 93.7 | % | |
$ | 517 | |
15 | |
The Grove at Waco, TX | |
2008 | |
Baylor University | |
| 15,616 | | |
| 0.8 | | |
| 192 | | |
| 504 | | |
| 89.3 | % | |
$ | 564 | |
16 | |
The Grove at Murfreesboro, TN | |
2009 | |
Middle Tennessee State University | |
| 23,881 | | |
| 0.8 | | |
| 186 | | |
| 504 | | |
| 96.6 | % | |
$ | 468 | |
17 | |
The Grove at San Marcos, TX | |
2009 | |
Texas State University | |
| 35,546 | | |
| 1.7 | | |
| 192 | | |
| 504 | | |
| 97.3 | % | |
$ | 565 | |
18 | |
The Grove at Moscow, ID | |
2009 | |
University of Idaho | |
| 12,024 | | |
| 0.5 | | |
| 192 | | |
| 504 | | |
| 90.6 | % | |
$ | 492 | |
19 | |
The Grove at Huntsville, TX | |
2010 | |
Sam Houston State University | |
| 19,210 | | |
| 0.2 | | |
| 192 | | |
| 504 | | |
| 99.3 | % | |
$ | 502 | |
20 | |
The Grove at Statesboro, GA | |
2010 | |
Georgia Southern University | |
| 20,517 | | |
| 0.7 | | |
| 200 | | |
| 536 | | |
| 78.2 | % | |
$ | 454 | |
21 | |
The Grove at Ames, IA | |
2011 | |
Iowa State University | |
| 32,955 | | |
| 0.3 | | |
| 216 | | |
| 584 | | |
| 99.4 | % | |
$ | 534 | |
22 | |
The Grove at Clarksville, TN | |
2011 | |
Austin Peay State University | |
| 10,399 | | |
| 1.3 | | |
| 208 | | |
| 560 | | |
| 77.1 | % | |
$ | 515 | |
23 | |
The Grove at Columbia, MO | |
2011 | |
University of Missouri | |
| 34,616 | | |
| 0.9 | | |
| 216 | | |
| 632 | | |
| 67.0 | % | |
$ | 483 | |
24 | |
The Grove at Ft. Wayne, IN | |
2011 | |
Indiana University / Purdue University | |
| 13,459 | | |
| 1.1 | | |
| 204 | | |
| 540 | | |
| 84.9 | % | |
$ | 432 | |
25 | |
The Grove at Valdosta, GA | |
2011 | |
Valdosta State University | |
| 11,885 | | |
| 1.9 | | |
| 216 | | |
| 584 | | |
| 87.7 | % | |
$ | 490 | |
32 | |
The Grove at Denton, TX | |
2011 | |
University of North Texas | |
| 38,315 | | |
| 0.6 | | |
| 216 | | |
| 584 | | |
| 100.0 | % | |
$ | 584 | |
26 | |
The Grove at Auburn, AL | |
2012 | |
Auburn University | |
| 24,864 | | |
| 0.0 | | |
| 216 | | |
| 600 | | |
| 99.6 | % | |
$ | 604 | |
27 | |
The Grove at Flagstaff, AZ—Phase I & II | |
2012/2013 | |
Northern Arizona University | |
| 26,594 | | |
| 0.2 | | |
| 270 | | |
| 776 | | |
| 99.7 | % | |
$ | 651 | |
28 | |
The Grove at Orono, ME | |
2012 | |
University of Maine | |
| 11,247 | | |
| 0.5 | | |
| 188 | | |
| 620 | | |
| 93.8 | % | |
$ | 556 | |
29 | |
The Grove at Ft. Collins, CO (3) | |
2013 | |
Colorado State University | |
| 31,186 | | |
| 0.0 | | |
| 218 | | |
| 612 | | |
| 99.7 | % | |
$ | 617 | |
30 | |
The Grove at Muncie, IN | |
2013 | |
Ball State University | |
| 20,503 | | |
| 0.1 | | |
| 216 | | |
| 584 | | |
| 75.6 | % | |
$ | 516 | |
31 | |
The Grove at Pullman, WA | |
2013 | |
Washington State University | |
| 27,642 | | |
| 0.0 | | |
| 216 | | |
| 584 | | |
| 99.9 | % | |
$ | 573 | |
33 | |
The Grove at Gainesville, FL | |
2014 | |
University of Florida | |
| 49,878 | | |
| 0.3 | | |
| 256 | | |
| 682 | | |
| 54.7 | % | |
$ | 548 | |
34 | |
The Grove at Grand Forks, ND | |
2014 | |
University of North Dakota | |
| 15,143 | | |
| 0.1 | | |
| 224 | | |
| 600 | | |
| 99.6 | % | |
$ | 549 | |
35 | |
The Grove at Mt. Pleasant, MI | |
2014 | |
Central Michigan University | |
| 26,841 | | |
| 0.9 | | |
| 224 | | |
| 584 | | |
| 75.8 | % | |
$ | 508 | |
36 | |
The Grove at Slippery Rock, PA | |
2014 | |
Slippery Rock University | |
| 8,347 | | |
| 0.3 | | |
| 201 | | |
| 603 | | |
| 85.3 | % | |
$ | 566 | |
| |
Subtotal | |
| |
| |
| 19,594 | (4) | |
| 0.5 | (4) | |
| 7,305 | | |
| 19,945 | | |
| 89.6 | %(5) | |
$ | 526 | |
| |
| |
| |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
Joint Venture Properties (6) | |
| |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
37 | |
The Grove at Lawrence, KS | |
2009 | |
Kansas University | |
| 26,968 | | |
| 1.6 | | |
| 172 | | |
| 500 | | |
| 79.2 | % | |
$ | 444 | |
38 | |
The Grove at San Angelo, TX | |
2009 | |
Angelo State University | |
| 6,536 | | |
| 0.3 | | |
| 192 | | |
| 504 | | |
| 98.1 | % | |
$ | 520 | |
39 | |
The Grove at Conway, AR | |
2010 | |
University of Central Arkansas | |
| 11,534 | | |
| 0.4 | | |
| 180 | | |
| 504 | | |
| 68.3 | % | |
$ | 442 | |
40 | |
The Grove at Fayetteville, AR | |
2012 | |
University of Arkansas | |
| 25,341 | | |
| 0.5 | | |
| 232 | | |
| 632 | | |
| 59.0 | % | |
$ | 489 | |
41 | |
The Grove at Stillwater, OK | |
2012 | |
Oklahoma State University | |
| 26,073 | | |
| 0.8 | | |
| 206 | | |
| 612 | | |
| 91.7 | % | |
$ | 470 | |
42 | |
The Grove at Laramie, WY | |
2012 | |
University of Wyoming | |
| 12,778 | | |
| 0.3 | | |
| 224 | | |
| 612 | | |
| 84.6 | % | |
$ | 488 | |
43 | |
The Grove at Indiana, PA | |
2013 | |
Indiana University of Pennsylvania | |
| 14,925 | | |
| 0.6 | | |
| 224 | | |
| 600 | | |
| 78.6 | % | |
$ | 578 | |
44 | |
The Grove at State College, PA | |
2013 | |
Penn State University | |
| 46,615 | | |
| 0.8 | | |
| 224 | | |
| 600 | | |
| 80.5 | % | |
$ | 642 | |
45 | |
The Grove at Norman, OK | |
2013 | |
University of Oklahoma | |
| 27,292 | | |
| 0.6 | | |
| 216 | | |
| 584 | | |
| 79.2 | % | |
$ | 550 | |
46 | |
The Grove at Greensboro, NC | |
2014 | |
University of North Carolina Greensboro | |
| 18,074 | | |
| 0.5 | | |
| 216 | | |
| 584 | | |
| 57.2 | % | |
$ | 546 | |
47 | |
The Grove at Louisville, KY | |
2014 | |
University of Louisville | |
| 21,444 | | |
| 0.3 | | |
| 219 | | |
| 660 | | |
| 62.3 | % | |
$ | 592 | |
48 | |
evo at Cira Centre South (3) | |
2014 | |
University of Pennsylvania | |
| 24,630 | | |
| 0.0 | | |
| 344 | | |
| 850 | | |
| 45.3 | % | |
$ | 1,310 | |
| |
| |
| |
Drexel University | |
| 26,132 | | |
| 0.2 | | |
| N/A | | |
| N/A | | |
| N/A | | |
| N/A | |
49/50 | |
evo à Square Victoria and evo à Sherbrooke | |
2014 | |
McGill University | |
| 39,349 | | |
| 0.6 | | |
| 711 | | |
| 1200 | | |
| 13.8 | % | |
$ | 828 | |
| |
| |
| |
Concordia University | |
| 43,752 | | |
| 0.8 | | |
| N/A | | |
| N/A | | |
| N/A | | |
| N/A | |
| |
| |
| |
L’École de Technologie Supérieure
(ÉTS) | |
| 6,160 | | |
| 0.3 | | |
| N/A | | |
| N/A | | |
| N/A | | |
| N/A | |
| |
Subtotal | |
| |
| |
| 23,600 | (4) | |
| 0.5 | (4) | |
| 3,360 | | |
| 8,442 | | |
| 64.0 | %(5) | |
$ | 608 | |
| |
| |
| |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
Total Properties | |
| |
| |
| 20,851 | (4) | |
| 0.5 | (4) | |
| 10,665 | | |
| 28,387 | | |
| 82.0 | %(5) | |
$ | 548 | |
| (1) | Represents executed leases in place for the 2014-2015 academic year. |
| (2) | Total revenue (rental and service) for the year ended December 31, 2014 divided by the sum of leased
beds at the properties per month. |
| (3) | Properties subject to a ground lease with an unaffiliated third-party. |
| (4) | Represents an average of the properties within the grouping. |
| (5) | Weighted average by number of leased beds as of December 31, 2014. |
| (6) | Joint venture properties include three properties in which we own a 63.9% interest, three properties
in which we own a 10% interest, three properties in which we own a 20% interest, three properties in which we own a 30% interest,
and two properties in which we own a 47% interest. |
The following table presents
certain summary information about our Copper Beech branded operating properties:
| |
| |
| |
| |
| | |
| | |
| | |
| | |
| | |
Average | |
| |
| |
| |
| |
| | |
| | |
| | |
| | |
Occupancy | | |
Monthly | |
| |
| |
| |
| |
Fall 2013 | | |
Distance to | | |
| | |
| | |
as of | | |
Total Revenue | |
| |
| |
Year | |
| |
Overall | | |
Campus | | |
Number | | |
Number | | |
December 31, | | |
Per | |
| |
Location | |
Opened | |
Primary
University Served | |
Enrollment | | |
(miles) | | |
of
Units | | |
of
Beds | | |
2014 (1) | | |
Occupied
Bed (2) | |
1 | |
Copper Beech at State College, PA - CB I | |
1996 | |
Penn State University | |
46,615 | | |
1.8 | | |
59 | | |
177 | | |
91.5 | % | |
$ |
555 | |
2 | |
Copper Beech at State College, PA - CB II | |
1998 | |
Penn State University | |
| 46,615 | | |
| 1.7 | | |
| 87 | | |
| 257 | | |
| 93.0 | % | |
$ | 568 | |
3 | |
Copper Beech at State College, PA - Oakwood | |
2000 | |
Penn State University | |
| 46,615 | | |
| 2.3 | | |
| 48 | | |
| 144 | | |
| 77.1 | % | |
$ | 557 | |
4 | |
Copper Beech at State College, PA - Northbrook Greens | |
2003 | |
Penn State University | |
| 46,615 | | |
| 1.9 | | |
| 166 | | |
| 250 | | |
| 100.0 | % | |
$ | 787 | |
5 | |
Copper Beech at State College, PA - Parkway Plaza | |
1967 | |
Penn State University | |
| 46,615 | | |
| 1.1 | | |
| 429 | | |
| 633 | | |
| 88.3 | % | |
$ | 718 | |
6 | |
Copper Beech at Indiana, PA - IUP I | |
1971 | |
Indiana University of Pennsylvania | |
| 14,925 | | |
| 0.6 | | |
| 95 | | |
| 239 | | |
| 100.0 | % | |
$ | 474 | |
7 | |
Copper Beech at Indiana, PA - IUP II | |
1973 | |
Indiana University of Pennsylvania | |
| 14,925 | | |
| 0.6 | | |
| 72 | | |
| 172 | | |
| 100.0 | % | |
$ | 494 | |
8 | |
Copper Beech at Indiana, PA - IUP Buy | |
1975 | |
Indiana University of Pennsylvania | |
| 14,925 | | |
| 0.6 | | |
| 43 | | |
| 74 | | |
| 100.0 | % | |
$ | 572 | |
9 | |
Copper Beech at Radford, VA | |
2005 | |
Radford University | |
| 9,928 | | |
| 0.5 | | |
| 222 | | |
| 500 | | |
| 99.6 | % | |
$ | 351 | |
10 | |
Copper Beech at West Lafayette, IN – Klondike | |
2003 | |
Purdue University | |
| 39,794 | | |
| 2.2 | | |
| 219 | | |
| 486 | | |
| 91.4 | % | |
$ | 446 | |
11 | |
Copper Beech at West Lafayette, IN – Baywater | |
2004 | |
Purdue University | |
| 39,794 | | |
| 0.8 | | |
| 137 | | |
| 488 | | |
| 98.8 | % | |
$ | 387 | |
12 | |
Copper Beech at Bloomington, IN | |
2005 | |
Indiana University | |
| 46,817 | | |
| 2.7 | | |
| 107 | | |
| 297 | | |
| 83.8 | % | |
$ | 457 | |
13 | |
Copper Beech at Mount Pleasant, MI - Phase I | |
2005 | |
Central Michigan University | |
| 26,841 | | |
| 0.7 | | |
| 204 | | |
| 632 | | |
| 100.0 | % | |
$ | 460 | |
14 | |
Copper Beech at Fresno, CA | |
2006 | |
California State University at Fresno | |
| 23,060 | | |
| 2.7 | | |
| 178 | | |
| 506 | | |
| 91.3 | % | |
$ | 500 | |
15 | |
Copper Beech at Bowling Green, OH - Phase I | |
2005 | |
Bowling Green University | |
| 16,958 | | |
| 1.2 | | |
| 128 | | |
| 400 | | |
| 98.8 | % | |
$ | 355 | |
16 | |
Copper Beech at Bowling Green, OH - Phase II | |
2007 | |
Bowling Green University | |
| 16,958 | | |
| 1.2 | | |
| 72 | | |
| 216 | | |
| 99.5 | % | |
$ | 367 | |
17 | |
Copper Beech at Allendale, MI - Phase I | |
2006 | |
Grand Valley State University | |
| 24,477 | | |
| 0.5 | | |
| 206 | | |
| 614 | | |
| 100.0 | % | |
$ | 454 | |
18 | |
Copper Beech at Allendale, MI - Phase II | |
2007 | |
Grand Valley State University | |
| 24,477 | | |
| 0.5 | | |
| 82 | | |
| 290 | | |
| 100.0 | % | |
$ | 434 | |
19 | |
Copper Beech at Columbia, MO | |
2006 | |
University of Missouri | |
| 34,616 | | |
| 1.5 | | |
| 214 | | |
| 654 | | |
| 100.0 | % | |
$ | 464 | |
20 | |
Copper Beech at Bloomington, IN - Colonial Crest | |
1970 | |
Indiana University | |
| 46,817 | | |
| 0.8 | | |
| 206 | | |
| 402 | | |
| 82.3 | % | |
$ | 371 | |
21 | |
Copper Beech at Columbia, SC - Phase I | |
2007 | |
University of South Carolina | |
| 31,964 | | |
| 2.4 | | |
| 278 | | |
| 824 | | |
| 99.4 | % | |
$ | 532 | |
22 | |
Copper Beech at Columbia, SC - Phase II | |
2008 | |
University of South Carolina | |
| 31,964 | | |
| 2.4 | | |
| 72 | | |
| 178 | | |
| 99.4 | % | |
$ | 546 | |
23 | |
Copper Beech at Morgantown, WV | |
2010 | |
West Virginia University | |
| 29,466 | | |
| 1.8 | | |
| 335 | | |
| 920 | | |
| 99.9 | % | |
$ | 485 | |
24 | |
Copper Beech at Harrisonburg, VA | |
2008 | |
James Madison University | |
| 20,181 | | |
| 1.2 | | |
| 414 | | |
| 1,218 | | |
| 99.7 | % | |
$ | 492 | |
25 | |
Copper Beech at Greenville, NC | |
2008 | |
East Carolina University | |
| 26,887 | | |
| 1.9 | | |
| 439 | | |
| 1,232 | | |
| 97.6 | % | |
$ | 482 | |
26 | |
Copper Beech at San Marcos, TX - Phase I | |
2011 | |
Texas State University | |
| 35,546 | | |
| 0.5 | | |
| 273 | | |
| 840 | | |
| 90.1 | % | |
$ | 557 | |
27 | |
Copper Beech at San Marcos, TX - Phase II | |
2012 | |
Texas State University | |
| 35,546 | | |
| 0.6 | | |
| 142 | | |
| 410 | | |
| 92.4 | % | |
$ | 563 | |
28 | |
Copper Beech at Harrisonburg, VA - Grand Duke | |
2001 | |
James Madison University | |
| 20,181 | | |
| 1.2 | | |
| 120 | | |
| 124 | | |
| 97.6 | % | |
$ | 529 | |
29 | |
Copper Beech at Mount Pleasant, MI - Phase II | |
2013 | |
Central Michigan University | |
| 26,841 | | |
| 0.7 | | |
| 119 | | |
| 256 | | |
| 60.2 | % | |
$ | 513 | |
30 | |
Copper Beech at Statesboro, GA - Phase II | |
2013 | |
Georgia Southern University | |
| 20,517 | | |
| 0.3 | | |
| 82 | | |
| 262 | | |
| 66.6 | % | |
$ | 464 | |
31 | |
Copper Beech at State College, PA - Oak Hill | |
2003 | |
Penn State University | |
| 46,615 | | |
| 1.7 | | |
| 106 | | |
| 318 | | |
| 85.0 | % | |
$ | 574 | |
32 | |
Copper Beech at Kalamazoo, MI - Phase I | |
2007 | |
Western Michigan University | |
| 24,294 | | |
| 2.4 | | |
| 256 | | |
| 784 | | |
| 80.7 | % | |
$ | 419 | |
33 | |
Copper Beech at Kalamazoo, MI - Phase II | |
2008 | |
Western Michigan University | |
| 24,294 | | |
| 2.4 | | |
| 115 | | |
| 340 | | |
| 71.0 | % | |
$ | 448 | |
34 | |
Copper Beech at Auburn, AL | |
2009 | |
Auburn University | |
| 24,864 | | |
| 1.8 | | |
| 271 | | |
| 754 | | |
| 84.2 | % | |
$ | 453 | |
35 | |
Copper Beech at Statesboro, GA - Phase I | |
2007 | |
Georgia Southern University | |
| 20,517 | | |
| 0.3 | | |
| 246 | | |
| 754 | | |
| 80.0 | % | |
$ | 465 | |
| |
| |
| |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
Consolidated Property: 48%
Ownership Interest | |
| |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| |
| |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
36 | |
Copper Beech at Ames, IA | |
2014 | |
Iowa State University | |
| 32,955 | | |
| 0.2 | | |
| 219 | | |
| 636 | | |
| 79.5 | % | |
$ | 557 | |
| |
| |
| |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
Total Copper Beech Properties | |
| |
| |
| 30,028 | (3) | |
| 1.3 | (3) | |
| 6,461 | | |
| 17,281 | | |
| 91.9 | %(4) | |
$ | 496 | |
| (1) | Represents executed leases in place for the 2014-2015 academic year. |
| (2) | Total revenue (rental and service) for the year ended December 31, 2014 divided by the sum of leased
beds at the properties per month. |
| (3) | Represents an average of the properties within the grouping. |
| (4) | Weighted average by number of leased beds as of December 31, 2014. |
Item 3. Legal Proceedings.
In the normal course of
business, we are subject to claims, lawsuits and legal proceedings. In addition to the matters described below, we are involved
in various routine legal proceedings arising in the ordinary course of business. Although the outcomes of such routine legal proceedings
cannot be predicted with certainty, in the opinion of management, the ultimate resolution of such routine matters will not have
a material adverse effect on our financial position or results of operations.
On July 3, 2012, we and
certain of our subsidiaries were named as defendants in a lawsuit filed in the 250th Judicial District Court in Travis
County in Austin, Texas. The case arose from an accident at The Grove at Denton, located in Denton, Texas, in which a balcony of
one of the units broke and three people were seriously injured. The claims in the lawsuit against Campus Crest and certain of its
subsidiaries by the plaintiffs were settled in their entirety on July 29, 2014 without any admission of liability on the part of
Campus Crest or its subsidiaries. The settlement, which is covered by our existing insurance coverage, will not have a material
adverse effect on our financial position or results of operations.
On January 21, 2015, we
and certain of our subsidiaries were named as defendants in a lawsuit filed in the 7th Division of the Jefferson Circuit
Court in Jefferson County in Louisville, Kentucky. The case arose from an individual who fell to his death at a construction site
located at 2501 South 4th Street, Louisville, Jefferson County, Kentucky. Also named as co-defendants in the case are
three other companies associated with the construction and/or employment of the deceased individual. The plaintiffs allege, among
other things, we were negligent and/or allowed a dangerous or hazardous condition to exist on the premises. The plaintiffs’
initial complaint did not specify the amount of damages sought. We are presently reviewing the complaint, reviewing applicable
law and venue, and preparing our responsive pleadings. Based upon the totality of the circumstances, including the existence of
insurance coverage and anticipated indemnity from third-parties, we do not believe that the lawsuit, if adversely determined, would
have a material adverse effect on our financial position or results of operation.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II.
Item 5. Market for Registrant’s
Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Information about our
Amended and Restated Equity Incentive Compensation Plan is incorporated by reference to our definitive Proxy Statement for our
2014 annual meeting of stockholders (the "Proxy Statement").
Market Information
Our common stock has been
listed and is traded on the NYSE under the symbol "CCG." The following table sets forth, for the quarterly periods
indicated, the high and low sale prices per share reported on the NYSE and declared dividends per share for our common stock:
| |
| | |
| | |
Common | | |
Preferred | |
| |
Stock Price | | |
Stock | | |
Series A | |
Period | |
High | | |
Low | | |
Dividends | | |
Dividends | |
| |
| | |
| | |
| | |
| |
2013: | |
| | | |
| | | |
| | | |
| | |
First Quarter | |
$ | 14.11 | | |
$ | 11.81 | | |
$ | 0.165 | | |
$ | 0.50 | |
Second Quarter | |
| 14.36 | | |
| 10.73 | | |
| 0.165 | | |
| 0.50 | |
Third Quarter | |
| 12.43 | | |
| 10.10 | | |
| 0.165 | | |
| 0.50 | |
Fourth Quarter | |
| 10.82 | | |
| 8.90 | | |
| 0.165 | (1) | |
| 0.50 | (2) |
2014: | |
| | | |
| | | |
| | | |
| | |
First Quarter | |
$ | 9.54 | | |
$ | 8.14 | | |
$ | 0.165 | | |
$ | 0.50 | |
Second Quarter | |
| 9.00 | | |
| 8.50 | | |
| 0.165 | | |
| 0.50 | |
Third Quarter | |
| 9.19 | | |
| 6.13 | | |
| 0.165 | | |
| 0.50 | |
Fourth Quarter | |
| 7.86 | | |
| 6.00 | | |
| 0.090 | (3) | |
| 0.50 | (4) |
| (1) | Paid January 8, 2014, to stockholders of record on December 23, 2013. |
| (2) | Paid January 15, 2014, to stockholders of record on December 23, 2013. |
| (3) | Paid January 29, 2015, to stockholders of record on December 31, 2014. |
| (4) | Paid January 15, 2015, to stockholders of record on December 31, 2014. |
On December 19, 2014,
our Board of Directors declared a fourth quarter 2014 dividend of $0.09 per common share and OP Unit that was paid in cash on January
29, 2015, to stockholders of record on December 31, 2014. The common stock dividends of $0.585 per share are classified for income
tax purposes as 100% return of capital.
On December 19, 2014,
our Board of Directors also declared a cash dividend of $0.50 per share of Series A Preferred Stock for the fourth quarter of 2014
that was paid in cash on January 15, 2015, to stockholders of record on December 31, 2014. The Preferred Series A stock dividends
of $2.00 per share are classified for income tax purposes as 100% return of capital.
Performance Graph
The following graph provides
a comparison of the cumulative total return on our common stock from October 19, 2010 (first day of trading for our common
stock) to the NYSE closing price per share on December 31, 2014 with the cumulative total return on the Standard & Poor’s
500 Composite Stock Price Index, or the S&P 500 Index, and the FTSE EPRA/NAREIT United States Index, or the FTSE EPRA/NAREIT
US Index. Total return values were calculated assuming a $100 investment on October 19, 2010 with the reinvestment of all dividends
in (i) our common stock, (ii) the S&P 500 Index and (iii) the FTSE EPRA/NAREIT US Index.
The actual returns on
the graph above are as follows:
| |
Initial Investment at | | |
Value of Initial Investment as of December 31, | |
Name | |
October 19, 2010 | | |
2010 | | |
2011 | | |
2012 | | |
2013 | | |
2014 | |
Campus Crest Communities, Inc. | |
$ | 100.00 | | |
$ | 112.96 | | |
$ | 85.76 | | |
$ | 110.54 | | |
$ | 90.13 | | |
$ | 75.36 | |
S&P 500 | |
| 100.00 | | |
| 108.33 | | |
| 110.62 | | |
| 128.32 | | |
| 169.88 | | |
| 193.14 | |
FTSE EPRA/NAREIT US Index | |
| 100.00 | | |
| 103.06 | | |
| 111.05 | | |
| 131.01 | | |
| 134.24 | | |
| 175.09 | |
Holders
As of December 31, 2014,
there were approximately 41 holders of record of our common stock and 64,742,713 shares of common stock outstanding.
Distributions
We intend to continue
to declare quarterly distributions on our common stock. The actual amount, timing and form of payment of distributions, however,
will be at the discretion of our Board of Directors and will depend upon our financial condition in addition to the requirements
of the Internal Revenue Code, and no assurance can be given as to the amounts, timing or form of payment of future distributions. The
payment of distributions is subject to restrictions under our corporate-level debt described in Management’s Discussion and
Analysis of Financial Condition and Results of Operations in Item 7 under "Liquidity and Capital Resources."
Item 6. Selected Financial Data.
The following selected
financial and operating data should be read in conjunction with the Notes to Consolidated Financial Statements in Item 15
and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Item 7.
Statements of Operations Information:
| |
The
Company | | |
Predecessor | |
| |
| | |
| | |
| | |
| | |
October 19, | | |
January 1, | |
| |
| | |
| | |
| | |
| | |
2010 | | |
2010 | |
| |
| | |
| | |
| | |
| | |
Through | | |
Through | |
| |
Year Ended
December 31, | | |
December 31, | | |
October 18 | |
(in thousands, except share data) | |
2014 | | |
2013 | | |
2012 | | |
2011 | | |
2010 | | |
2010 | |
Revenues: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Student housing
rental | |
$ | 101,724 | | |
$ | 87,635 | | |
$ | 71,211 | | |
$ | 49,048 | | |
$ | 8,784 | | |
$ | 32,609 | |
Student housing services | |
| 3,768 | | |
| 3,615 | | |
| 2,880 | | |
| 2,062 | | |
| 254 | | |
| 1,254 | |
Development,
construction and management services | |
| 1,249 | | |
| 820 | | |
| 559 | | |
| 199 | | |
| - | | |
| - | |
Total
revenues | |
| 106,741 | | |
| 92,070 | | |
| 74,650 | | |
| 51,309 | | |
| 9,038 | | |
| 33,863 | |
Operating
expenses: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Student housing operations | |
| 47,154 | | |
| 40,726 | | |
| 33,013 | | |
| 23,696 | | |
| 4,658 | | |
| 17,921 | |
General and administrative | |
| 14,303 | | |
| 10,658 | | |
| 8,821 | | |
| 6,749 | | |
| 1,157 | | |
| 5,515 | |
Severance | |
| 6,159 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Impairment of land &
pre-development costs | |
| 31,927 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Write-off of corporate
other assets | |
| 15,110 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Transaction costs | |
| 3,046 | | |
| 1,121 | | |
| - | | |
| - | | |
| - | | |
| - | |
Ground leases | |
| 477 | | |
| 249 | | |
| 217 | | |
| 209 | | |
| 42 | | |
| 214 | |
Depreciation
and amortization | |
| 29,426 | | |
| 23,700 | | |
| 20,693 | | |
| 16,524 | | |
| 3,052 | | |
| 11,311 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total
operating expenses | |
| 147,602 | | |
| 76,454 | | |
| 62,744 | | |
| 47,178 | | |
| 8,909 | | |
| 34,961 | |
Equity in earnings (loss)
of unconsolidated entities | |
| (5,510 | ) | |
| (3,727 | ) | |
| 361 | | |
| (1,164 | ) | |
| (163 | ) | |
| (259 | ) |
Impairment of unconsolidated
entities | |
| (57,789 | ) | |
| (312 | ) | |
| - | | |
| - | | |
| - | | |
| - | |
Effect of not exercising
Copper Beech purchase option | |
| (33,375 | ) | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Operating
income (loss) | |
| (137,535 | ) | |
| 11,577 | | |
| 12,267 | | |
| 2,967 | | |
| (34 | ) | |
| (1,357 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Nonoperating
income (expense): | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest expense | |
| (16,156 | ) | |
| (12,969 | ) | |
| (11,545 | ) | |
| (6,888 | ) | |
| (2,149 | ) | |
| (19,379 | ) |
Other income (expense) | |
| 42 | | |
| 1,414 | | |
| (410 | ) | |
| 720 | | |
| 190 | | |
| 914 | |
Gain on purchase of previously
unconsolidated entities | |
| - | | |
| - | | |
| 6,554 | | |
| 3,159 | | |
| 577 | | |
| - | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total
nonoperating expenses, net | |
| (16,114 | ) | |
| (11,555 | ) | |
| (5,401 | ) | |
| (3,009 | ) | |
| (1,382 | ) | |
| (18,465 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Income
(loss) before income taxes | |
| (153,649 | ) | |
| 22 | | |
| 6,866 | | |
| (42 | ) | |
| (1,416 | ) | |
| (19,822 | ) |
Income tax benefit (expense) | |
| (731 | ) | |
| 727 | | |
| (356 | ) | |
| (464 | ) | |
| - | | |
| - | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Income
(loss) from continuing operations | |
| (154,380 | ) | |
| 749 | | |
| 6,510 | | |
| (506 | ) | |
| (1,416 | ) | |
| (19,822 | ) |
Income
(loss) from discontinued operations | |
| (9,576 | ) | |
| 489 | | |
| 3,908 | | |
| 3,907 | | |
| (569 | ) | |
| (830 | ) |
Net
income (loss) | |
| (163,956 | ) | |
| 1,238 | | |
| 10,418 | | |
| 3,401 | | |
| (1,985 | ) | |
| (20,652 | ) |
Net income (loss) attributable
to noncontrolling interests | |
| (1,233 | ) | |
| (34 | ) | |
| 46 | | |
| 51 | | |
| (14 | ) | |
| (7,479 | ) |
Dividends
on preferred stock | |
| 12,200 | | |
| 6,183 | | |
| 4,114 | | |
| - | | |
| - | | |
| - | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net
income (loss) attributable to | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Campus
Crest Communities, Inc and Predecessor | |
$ | (174,923 | ) | |
$ | (4,911 | ) | |
$ | 6,258 | | |
$ | 3,350 | | |
$ | (1,971 | ) | |
$ | (13,173 | ) |
Net income (loss) per
share attributable to common stockholders - basic and diluted: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Basic and diluted | |
$ | (2.69 | ) | |
$ | (0.08 | ) | |
$ | 0.18 | | |
$ | 0.11 | | |
$ | (0.07 | ) | |
| | |
Weighted-average common
shares and OP Units outstanding: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Basic | |
| 65,102 | | |
| 59,984 | | |
| 34,781 | | |
| 30,717 | | |
| 29,877 | | |
| | |
Diluted | |
| 65,102 | | |
| 60,418 | | |
| 35,217 | | |
| 31,153 | | |
| 29,877 | | |
| | |
Distributions per common share | |
$ | 0.59 | | |
$ | 0.66 | | |
$ | 0.64 | | |
$ | 0.64 | | |
$ | 0.13 | | |
| | |
Balance Sheet Information:
| |
The Company | |
| |
December 31, | |
(in thousands) | |
2014 | | |
2013 | | |
2012 | | |
2011 | | |
2010 | |
Assets | |
| | | |
| | | |
| | | |
| | | |
| | |
Investment in real estate, net: | |
| | | |
| | | |
| | | |
| | | |
| | |
Student housing properties | |
$ | 935,962 | | |
$ | 716,285 | | |
$ | 669,387 | | |
$ | 512,227 | | |
$ | 372,746 | |
Accumulated depreciation | |
| (128,121 | ) | |
| (102,356 | ) | |
| (97,820 | ) | |
| (76,164 | ) | |
| (57,463 | ) |
Development in process | |
| - | | |
| 91,184 | | |
| 50,781 | | |
| 45,278 | | |
| 24,232 | |
Land held for sale | |
| 38,105 | | |
| - | | |
| - | | |
| - | | |
| - | |
Land held for investment | |
| 7,413 | | |
| - | | |
| - | | |
| - | | |
| - | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Investment in real estate, net | |
| 853,359 | | |
| 705,113 | | |
| 622,348 | | |
| 481,341 | | |
| 339,515 | |
Investment in unconsolidated entities | |
| 259,740 | | |
| 324,838 | | |
| 22,555 | | |
| 21,052 | | |
| 13,751 | |
Other assets, net | |
| 63,712 | | |
| 152,728 | | |
| 51,417 | | |
| 37,864 | | |
| 17,991 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Total assets | |
$ | 1,176,811 | | |
$ | 1,182,679 | | |
$ | 696,320 | | |
$ | 540,257 | | |
$ | 371,257 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Liabilities and equity | |
| | | |
| | | |
| | | |
| | | |
| | |
Liabilities: | |
| | | |
| | | |
| | | |
| | | |
| | |
Mortgage and construction loans | |
$ | 300,673 | | |
$ | 205,531 | | |
$ | 218,337 | | |
$ | 186,914 | | |
$ | 60,840 | |
Line of credit and other debt | |
| 317,746 | | |
| 207,952 | | |
| 75,375 | | |
| 82,052 | | |
| 42,500 | |
Other liabilities | |
| 76,389 | | |
| 76,115 | | |
| 57,706 | | |
| 40,156 | | |
| 21,127 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Total liabilities | |
| 694,808 | | |
| 489,598 | | |
| 351,418 | | |
| 309,122 | | |
| 124,467 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Equity: | |
| | | |
| | | |
| | | |
| | | |
| | |
Stockholders’ and owner’s equity | |
| 473,212 | | |
| 688,427 | | |
| 340,461 | | |
| 227,109 | | |
| 243,159 | |
Cumulative redeemable preferred stock | |
| 61 | | |
| 61 | | |
| 23 | | |
| - | | |
| - | |
Noncontrolling interests | |
| 8,730 | | |
| 4,593 | | |
| 4,418 | | |
| 4,026 | | |
| 3,631 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Total equity | |
| 482,003 | | |
| 693,081 | | |
| 344,902 | | |
| 231,135 | | |
| 246,790 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Total liabilities and equity | |
$ | 1,176,811 | | |
$ | 1,182,679 | | |
$ | 696,320 | | |
$ | 540,257 | | |
$ | 371,257 | |
Other Data:
| |
The
Company | | |
Predecessor | |
| |
| | |
| | |
| | |
| | |
October 19, | | |
January 1, | |
| |
| | |
| | |
| | |
| | |
2010 | | |
2010 | |
| |
Year Ended | | |
Year Ended | | |
Year Ended | | |
Year Ended | | |
Through | | |
Through | |
| |
December 31, | | |
December 31, | | |
December 31, | | |
December 31, | | |
December 31, | | |
October 18 | |
(unaudited and in thousands) | |
2014 | | |
2013 | | |
2012 | | |
2011 | | |
2010 | | |
2010 | |
Funds
from operations (“FFO”)(1) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net income
(loss) attributable to common stockholders | |
$ | (174,923 | ) | |
$ | (4,911 | ) | |
$ | 6,258 | | |
$ | 3,350 | | |
$ | (1,971 | ) | |
$ | (13,173 | ) |
Net income (loss) attributable
to noncontrolling interests | |
| (1,233 | ) | |
| (34 | ) | |
| 46 | | |
| 51 | | |
| (14 | ) | |
| (7,479 | ) |
Gain on purchase of joint
venture properties(2) | |
| - | | |
| - | | |
| (6,554 | ) | |
| (3,159 | ) | |
| (577 | ) | |
| - | |
Real estate related depreciation
and amortization | |
| 27,858 | | |
| 25,503 | | |
| 23,521 | | |
| 19,832 | | |
| 3,911 | | |
| 14,660 | |
Real
estate related depreciation and amortization unconsolidated entities | |
| 25,034 | | |
| 23,271 | | |
| 1,731 | | |
| 2,434 | | |
| 454 | | |
| 245 | |
FFO
(3) | |
$ | (123,263 | ) | |
$ | 43,829 | | |
$ | 25,002 | | |
$ | 22,508 | | |
$ | 1,803 | | |
$ | (5,747 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
FFO | |
$ | (123,263 | ) | |
$ | 43,829 | | |
$ | 25,002 | | |
$ | 22,508 | | |
$ | 1,803 | | |
$ | (5,747 | ) |
Elimination of change
in fair value of interest rate derivatives(4) | |
| - | | |
| - | | |
| - | | |
| (337 | ) | |
| (139 | ) | |
| (5,002 | ) |
Elimination of Copper
Beech dividend equivalency(5) | |
| 1,200 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Elimination of write-off
of unamortized deferred financing fees | |
| - | | |
| 236 | | |
| 966 | | |
| - | | |
| - | | |
| - | |
Elimination of transaction costs(6) | |
| 4,801 | | |
| 2,027 | | |
| - | | |
| - | | |
| - | | |
| - | |
Elimination of fair value
debt and purchase accounting adjustments at our investment in Copper Beech(7) | |
| (6,491 | ) | |
| (3,576 | ) | |
| - | | |
| - | | |
| - | | |
| - | |
Elimination of write off
of land, pre-development costs and asset held for sale(8) | |
| 31,927 | | |
| 175 | | |
| - | | |
| - | | |
| - | | |
| 537 | |
Elimination of impairment of disposed assets(9) | |
| - | | |
| 4,729 | | |
| - | | |
| - | | |
| - | | |
| - | |
Elimination of impairment of unconsolidated
entities(10) | |
| 57,789 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Elimination of effect
of not exercising Copper Beach purchase option(11) | |
| 33,375 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Elimination of write-off of corporate other
assets(12) | |
| 15,110 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Elimination of severance(13) | |
| 6,159 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Elimination of discontinued operations(14) | |
| 9,576 | | |
| (489 | ) | |
| (3,908 | ) | |
| (3,907 | ) | |
| 569 | | |
| 830 | |
Elimination of change
in valuation allowance for deferred tax asset | |
| 731 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Funds
from operations adjusted (“FFOA”)(15) | |
$ | 30,914 | | |
$ | 46,931 | | |
$ | 22,060 | | |
$ | 18,264 | | |
$ | 2,233 | | |
$ | (9,382 | ) |
| (1) | 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 Association
of Real Estate Investment Trusts, or NAREIT. FFO, as defined by NAREIT, represents net income (loss) determined in accordance with
GAAP, excluding extraordinary items as defined under 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. In addition, in October 2011, NAREIT communicated to its members that the exclusion
of impairment write-downs of depreciable real estate is consistent with the definition of FFO. 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 from 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 income (loss) as presented in the consolidated and combined financial statements and the other financial statements accompanying
this report. FFO should not be considered as an alternative to net income (loss) (computed in accordance with GAAP) as an indicator
of the properties’ financial performance or to cash flow from operating activities (computed in accordance with GAAP) as
an indicator of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends
or make distributions. |
| (2) | For 2010, gain was from the purchase of our joint venture partner’s interest in The Grove
at San Marcos, Texas; for 2011, gain was from the purchase of our joint venture partner’s interests in The Grove at Huntsville,
Texas, and The Grove at Statesboro, Georgia; for 2012, gain was from the purchase of our joint venture partner's interests in The
Grove at Moscow, Idaho, and The Grove at Valdosta, Georgia. |
| (3) | The fair value debt and purchase accounting adjustments included in equity in earnings related
to Copper Beech were approximately $6.5 million and $3.6 million for the years ended December 31, 2014 and 2013, respectively.
In addition, the immaterial correction described in Note 2 to the consolidated financial statements was not material to FFO. |
| (4) | Includes only the non-cash portion of the change in unhedged derivatives. |
| (5) | Amount represents a one-time cash dividend equivalency payment made during the year ended December
31, 2014 to the CB Investors, per the CB Investors’ interpretation of the second amendment to the purchase and sale agreement
of Copper Beech. |
| (6) | Includes costs incurred in connection with Copper Beech and CSH Montreal for the years presented,
including our proportional share of costs incurred within the ventures. |
| (7) | Includes our proportionate share of non-cash fair value debt and other purchase accounting adjustments
in our investment in Copper Beech. |
| (8) | During the year ended December 31, 2014, we recorded impairment for land and pre-development costs
of $31.9 million in the consolidated statement of operations and comprehensive income (loss), based on our estimated fair values.
The fair values were obtained from third-party appraisals based on comparable properties (market approach; which involved Level
3 inputs in the fair value hierarchy). |
| (9) | In 2013, we sold four unencumbered, wholly-owned properties: The Grove at Jacksonville, Alabama,
The Grove at Jonesboro, Arkansas, The Grove at Wichita, Kansas, and The Grove at Wichita Falls, Texas, for a combined sales price
of $51.0 million resulting in net proceeds of approximately $48.6 million. In connection with the disposition of these properties,
we recorded an impairment of $4.7 million. |
| (10) | During the year ended December 31, 2014, we recorded an impairment of $57.8 million in the consolidated
statement of operations and comprehensive income (loss) for certain unconsolidated entities, including $31.3 million related to
HSRE I, HSRE V, HSRE VI and HSRE X (the “HSRE Investments”) and $26.5 million related to the investment in CSH Montreal. |
| (11) | During the year ended December 31, 2014, we recorded expense of $33.4 million due to the effect
of not exercising the Copper Beech purchase option during August of 2014. See Note 6 in the accompanying consolidated financial
statements for the year ended December 31, 2014. |
| (12) | In 2014, we recorded $15.1 million of impairments of other assets related to corporate infrastructure
changes, as a result of the strategic repositioning. Assets impaired included the corporate aircraft and Enterprise Resource Planning
system. |
| (13) | We recognized severance expense of $9.1 million during the year ended December 31, 2014, of which
$2.9 million is included in loss from discontinued operations and $6.2 million is included in operating expenses (see Note 4 of
the accompanying consolidated financial statements). |
| (14) | In connection with the strategic repositioning initiatives announced in Form 10-Q for the quarterly
period ended September 30, 2014, we discontinued all construction and development operations, which resulted in the income (loss)
from discontinued operations of $(9.6) million in 2014, $3.5 million in 2013, $3.2 million in 2012, $3.8 million in 2011, and $1.8
million for the full year ended December 31, 2010. Additionally, in December 2013, we sold four unencumbered, wholly-owned properties:
The Grove at Jacksonville, Alabama, The Grove at Jonesboro, Arkansas, The Grove at Wichita, Kansas, and The Grove at Wichita Falls,
Texas, for a combined sales price of $51.0 million, resulting in net proceeds of approximately $48.6 million. In connection with
the disposition of these properties, an impairment of $4.7 million was recorded which is presented in discontinued operations in
the accompanying consolidated statements of operations and comprehensive income (loss) for the year ended December 31, 2013. This
resulted in income (loss) from discontinued operations of $(3.0) million in 2013, $0.7 million in 2012, $0.1 million in 2011, and
$(3.2) million in 2010. An additional impairment of $1.4 million was recorded at December 31, 2014 related to settlement costs
for these properties. |
| (15) | When considering our FFO, we believe it is also a meaningful measure of our performance to adjust
FFO to exclude the change in fair value of unhedged interest rate derivatives, Copper Beech dividend equivalency, write-off of
unamortized deferred financing fees, transaction costs (including those within equity in earnings), fair value of debt adjustments
within our investment in Copper Beech, the write-off of land and pre-development costs, impairment of disposed assets, impairment
of unconsolidated entities, effect of not exercising Copper Beech purchase option, write-off of corporate other assets, severance,
discontinued operations, and change in valuation for deferred tax asset. Excluding these items adjusts FFO to be more reflective
of operating results prior to capital replacement or expansion, debt amortization of principal or other commitments and contingencies.
This measure is referred to herein as FFOA. The immaterial correction described in Note 2 to the consolidated financial statements
was not material to FFOA. |
The
following table represents our operating costs related to our leased aircrafts and our owned aircraft for the years ended
December 31, 2014, 2013 and 2012 (in thousands):
| |
Year ended December 31, | |
| |
2014 | | |
2013 | | |
2012 | |
Leased | |
| 2,502 | | |
| 4,658 | | |
| 3,855 | |
Owned | |
| 2,184 | | |
| 1,377 | | |
| - | |
| |
| 4,686 | | |
| 6,035 | | |
| 3,855 | |
| |
| | |
The Company | |
| |
The Company | | |
and Predecessor | |
| |
| | |
| | |
| | |
| | |
Year Ended | |
| |
Year Ended December 31, | | |
December 31, | |
(in thousands) | |
2014 | | |
2013 | | |
2012 | | |
2011 | | |
2010 | |
Net cash flow information: | |
| | | |
| | | |
| | | |
| | | |
| | |
Net cash provided by (used in) operating activities | |
$ | 66,322 | | |
$ | 14,388 | | |
$ | 29,470 | | |
$ | 22,770 | | |
$ | (6,923 | ) |
Net cash used in investing activities | |
| (213,300 | ) | |
| (489,673 | ) | |
| (133,053 | ) | |
| (126,916 | ) | |
| (59,931 | ) |
Net cash provided by financing activities | |
| 130,164 | | |
| 501,369 | | |
| 98,818 | | |
| 112,554 | | |
| 66,279 | |
Selected Property Information:
| |
| | |
The Company | |
| |
The Company | | |
and Predecessor | |
| |
| | |
| | |
| | |
| | |
Year Ended | |
| |
Year Ended December 31, | | |
December 31, | |
| |
2014 (1) | | |
2013 (1) | | |
2012 | | |
2011 | | |
2010 | |
| |
| | |
| | |
| | |
| | |
| |
Operating Properties | |
| 86 | | |
| 69 | | |
| 39 | | |
| 33 | | |
| 27 | |
Units | |
| 17,651 | | |
| 13,198 | | |
| 7,670 | | |
| 6,324 | | |
| 5,048 | |
Beds | |
| 46,689 | | |
| 35,480 | | |
| 20,884 | | |
| 17,064 | | |
| 13,580 | |
Occupancy | |
| 84.9 | % | |
| 92.3 | % | |
| 90.4 | % | |
| 89.0 | % | |
| 89.0 | % |
| (1) | Includes The Grove®, evo®, and Copper Beech properties for the years ended December 31, 2014 and December 31, 2013. |
Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operations.
As used herein, references
to “we,” “us,” “our,” the “Company” and “Campus Crest” refer to Campus
Crest Communities, Inc. and our consolidated subsidiaries, including Campus Crest Communities Operating Partnership, LP (the “Operating
Partnership”), except where the context otherwise requires.
Overview
Our Company
We are a self-managed
and self-administered REIT focused on owning and managing a high-quality student housing portfolio located close to college campuses
in targeted markets. We operate our business through the Operating Partnership and our subsidiaries. We derive substantially all
of our revenue from student housing rental, student housing services and management services. As of December 31, 2014, we owned
(i) the sole general partnership interest, (ii) 99.3% of the outstanding common units of limited partnership interest in the Operating
Partnership, or OP Units, and (iii) 100% of the outstanding preferred units of limited partnership interest in the Operating Partnership.
We believe that we are
one of the largest owners and managers of high-quality student housing properties in the United States, based on beds owned and
under management. As of December 31, 2014, we owned interests in 47 operating student housing The Grove® properties
containing approximately 9,700 apartment units and 26,300 beds. Thirty-six of our operating The Grove® properties
are wholly-owned and eleven of our The Grove® properties are owned through joint ventures with HSRE. As of
December 31, 2014, we also owned interests in 36 operating student housing Copper Beech branded properties containing approximately
6,500 apartment units and 17,300 beds. Our Copper Beech branded properties are owned by us and the CB Investors (see "CB Portfolio"
below). On November 3, 2014, we entered into an agreement that will result in a restructuring of our ownership in Copper Beech
branded properties. See "CB Portfolio" below. As of December 31, 2014, we also owned interests in three operating student
housing evo® properties containing approximately 1,500 units and 3,000 beds and owned one wholly-owned redevelopment
property containing approximately 170 units and 340 beds. As of December 31, 2014, our operating portfolio consisted of the following:
| |
Properties in | | |
| | |
Number | | |
Number | |
| |
Operation | | |
Ownership | | |
of Units | | |
of Beds | |
Wholly-owned Grove properties(1) | |
| 36 | | |
| 100.0 | % | |
| 7,305 | | |
| 19,945 | |
Joint venture Grove properties: | |
| | | |
| | | |
| | | |
| | |
HSRE I | |
| 3 | | |
| 63.9 | %(2) | |
| 544 | | |
| 1,508 | |
HSRE V | |
| 3 | | |
| 10.0 | % | |
| 662 | | |
| 1,856 | |
HSRE VI | |
| 3 | | |
| 20.0 | % | |
| 664 | | |
| 1,784 | |
HSRE X | |
| 2 | | |
| 30.0 | % | |
| 468 | | |
| 1,240 | |
Total Grove properties | |
| 47 | | |
| | | |
| 9,643 | | |
| 26,333 | |
| |
| | | |
| | | |
| | | |
| | |
Joint venture evo properties: | |
| | | |
| | | |
| | | |
| | |
CSH Montreal | |
| 2 | | |
| 47.0 | % | |
| 1,203 | | |
| 2,223 | |
HSRE IX | |
| 1 | | |
| 30.0 | % | |
| 344 | | |
| 850 | |
Total evo properties | |
| 3 | | |
| | | |
| 1,547 | | |
| 3,073 | |
| |
| | | |
| | | |
| | | |
| | |
CB Portfolio | |
| 36 | | |
| 48.0 | %(3) | |
| 6,461 | | |
| 17,283 | |
| |
| | | |
| | | |
| | | |
| | |
Total Portfolio(4) | |
| 86 | | |
| | | |
| 17,651 | | |
| 46,689 | |
| (1) | In January 2014, we acquired the remaining outstanding interests in The Grove at Denton, Texas. |
| (2) | In January 2014, we amended and restated our operating agreement with HSRE resulting in our previously
held preferred interest in The Grove at San Angelo, Texas, and The Grove at Conway, Arkansas, being converted to additional membership
units of HSRE-Campus Crest I, LLC. |
| (3) | As of September 30, 2014, we held an effective interest in the CB Portfolio of 48.0%, with 35 unconsolidated
properties and one consolidated property (Copper Beech at Ames). See Note 6 to the consolidated financial statements. |
| (4) | Our 100% owned property in Toledo, Ohio, which was acquired in March 2013, is excluded as it is
in re-development. |
As of December 31, 2014,
the average occupancy for our 47 operating The Grove® properties was approximately 87.2% and the average
monthly total revenue per occupied bed was approximately $527. Our operating The Grove® properties are located
in 23 states, contain modern apartment units with many resort-style amenities, and have an average age of approximately 4.0 years
as of December 31, 2014. 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 5,000
to 20,000 students. We believe such markets are underserved and are generally experiencing enrollment growth.
We have developed, built
and managed substantially all of our wholly-owned properties and several of our unconsolidated, joint venture properties, which
are based upon a common prototypical residential building design. We believe that our use of this prototypical building design,
which we have built more than 700 times (approximately 15 of such residential buildings make up one student housing property),
allows us to efficiently deliver a uniform and proven student housing product in multiple markets. All of our operating properties
(other than those in the CB Portfolio as defined below, evo® and Toledo) operate under The Grove®
brand, and we believe that our brand and the associated lifestyle are effective differentiators that create higher visibility and
appeal for our properties within their markets both with the student as well as the universities we serve.
In
connection with our strategic repositioning initiatives, we discontinued all construction and development operations during the
year ended December 31, 2014. As a result, we recorded impairment for land and pre-development costs of $31.9 million in the consolidated
statement of operations and comprehensive income (loss), based on their estimated fair values. The fair values were obtained from
third-party appraisals based on comparable properties (market approach; which involved Level 3 inputs in the fair value hierarchy).
As of December 31, 2014, we had no properties under development.
Additionally,
we recorded $15.1 million of impairments of other assets related to corporate infrastructure changes, as a result of the
strategic repositioning. Assets impaired included the corporate aircraft and Enterprise Resource Planning system.
We
eliminated positions via termination of the employment of certain employees and acceptance of the resignation of certain employees
as part of the strategic repositioning. In connection with these terminations and resignations, the Company recognized severance
expense of $9.1 million during the year ended December 31, 2014, of which $2.9 million is included in loss from discontinued operations
and $6.2 million is included in operating expenses in the consolidated statements of operations and comprehensive income (loss).
Severance expense included $2.7 million for the acceleration of the vesting conditions of restricted shares. As of December 31,
2014, there was $5.7 million included in accounts payable and accrued expenses in the consolidated balance sheet of which $4.3
million and $1.4 million is expected to be paid in 2015 and 2016, respectively.
CB Portfolio Acquisition
In February 2013, we entered
into purchase and sale agreements to acquire an approximate 48.0% interest in a portfolio of 35 student housing properties, one
undeveloped land parcel and a corporate office building held by the members of Copper Beech Townhome Communities, LLC ("CBTC")
and Copper Beech Townhome Communities (PA), LLC ("CBTC PA," together with CBTC, "Copper Beech" or the "Sellers")
(the “CB Portfolio”), and a fully integrated platform and brand with management, development and construction teams,
for an initial purchase price of approximately $230.2 million, including the repayment of $106.7 million of debt. The remaining
interests in the CB Portfolio are held by certain of the former members of CBTC and CBTC PA, (the “CB Investors”).
Pursuant to our 48.0% interest in the CB Portfolio, we entered into a purchase and sale agreement (the “Purchase Agreement”),
and related transactions, with the members of CBTC and CBTC PA, to acquire in steps a 36.3% interest in the CB Portfolio. We also
entered into a purchase and sale agreement with certain investors in the CB Portfolio who are not members of Copper Beech (the
“Non-Member Investors”) to acquire the interests in the CB Portfolio held by such Non-Member Investors (the “Non-Member
Purchase Agreement”). Pursuant to the Non-Member Purchase Agreement, we acquired approximately an 11.7% interest in the CB
Portfolio from the Non-Member Investors. We refer to this transaction as the “CB Portfolio Acquisition.”
Our $230.2 million investment
in the CB Portfolio entitled us to a preferred payment of $13.0 million for the first year of our investment and 48.0% of remaining
operating cash flows. In connection with the CB Portfolio Acquisition we loaned approximately $31.7 million to the CB Investors.
The loan had an interest rate of 8.5% per annum and a term of three years, and was secured by the CB Investors’ interests
in six unencumbered properties in the CB Portfolio. This amount was repaid by year ended December 31, 2013. See below for further
discussion.
We recognized approximately
$1.6 million and $3.8 million in equity in losses of Copper Beech as well as no interest income and approximately $1.4 million
interest income from the loan to the CB Investors for the years ended December 31, 2014 and December 31, 2013, respectively. Additionally,
we recognized approximately $3.0 million and $1.1 million of transaction expenses related to the CB Portfolio Acquisition and incurred
$4.0 million and $16.9 million of costs which were included in our investment basis in Copper Beech for the years ended December
31, 2014 and December 31, 2013, respectively.
On January 30, 2015, we
and certain of our affiliates completed the acquisition (the “Initial Closing”) of (i) the Sellers’ remaining
interests in the CB Portfolio and (ii) the Sellers’ remaining interests in Copper Beech at Ames, Iowa, pursuant to that certain
Amendment (the “Second Amendment”) to the Purchase Agreement with the Sellers.
Pursuant to the terms
of the Second Amendment, we agreed to acquire the Sellers’ remaining interests in each of the properties comprising the CB
Portfolio other than Copper Beech Kalamazoo Phase 1, Copper Beech Kalamazoo Phase 2, Copper Beech Morgantown, Copper Beech Harrisonburg,
Copper Beech Greenville and Copper Beech Parkway Plaza. Following the consummation of the Initial Closing, we hold a 100% interest
in 27 of the properties in the CB Portfolio including one land parcel and a corporate office, an 85% interest in one property in
the CB Portfolio, an 86% interest in one property in the CB Portfolio and a 48% interest in 4 of the properties in the CB Portfolio
and have no ownership interests in 2 of the properties in the CB Portfolio and have a 100% interest in Copper Beech at Ames, Iowa.
We expect to complete the acquisition of the Sellers’ interests in the remaining 2 properties in the CB Portfolio –
Copper Beech San Marcos Phase 1 and Copper Beech IUP Buy – at such time as we obtain the requisite lender consents. We currently
expect to obtain all such consents and to complete the acquisition of Copper Beech San Marcos Phase 1 and Copper Beech IUP Buy
on or before the end of the first quarter of 2015 (the date of completion of such acquisition is referred to herein as the “Second
Closing Date”).
As consideration for the
additional interests acquired in the Initial Closing, we paid to the Sellers aggregate cash consideration of approximately $58.9
million and the Operating Partnership issued to the Sellers an aggregate of approximately 10.4 million limited partnership units
of the Operating Partnership (“OP units”). The remaining consideration pursuant to the Second Amendment, consisting
of approximately $1.4 million in cash and approximately 2.0 million in OP units, will be payable to the Sellers on the Second Closing
Date.
The following table presents
certain summary information about the properties in the CB Portfolio:
Copper Beech Properties | |
Primary University | |
Units | | |
Beds | |
Copper Beech I—State College | |
Penn State University | |
| 59 | | |
| 177 | |
Copper Beech II—State College | |
Penn State University | |
| 87 | | |
| 257 | |
Oakwood—State College | |
Penn State University | |
| 48 | | |
| 144 | |
Northbrook Greens—State College | |
Penn State University | |
| 166 | | |
| 250 | |
Parkway Plaza—State College | |
Penn State University | |
| 429 | | |
| 633 | |
IUP Phase I—Indiana | |
Indiana University of Pennsylvania | |
| 95 | | |
| 239 | |
IUP Phase II—Indiana | |
Indiana University of Pennsylvania | |
| 72 | | |
| 172 | |
IUP Buy—Indiana | |
Indiana University of Pennsylvania | |
| 43 | | |
| 76 | |
Radford, VA | |
Radford University | |
| 222 | | |
| 500 | |
Klondike—Purdue | |
Purdue University | |
| 219 | | |
| 486 | |
Baywater—Purdue | |
Purdue University | |
| 137 | | |
| 488 | |
Bloomington, IN | |
Indiana University | |
| 107 | | |
| 297 | |
CMU Phase I—Mount Pleasant, MI | |
Central Michigan University | |
| 204 | | |
| 632 | |
Fresno, CA | |
California State University at Fresno | |
| 178 | | |
| 506 | |
Bowling Green Phase I | |
Bowling Green University | |
| 128 | | |
| 400 | |
Bowling Green Phase II | |
Bowling Green University | |
| 72 | | |
| 216 | |
Allendale Phase I | |
Grand Valley State University | |
| 206 | | |
| 614 | |
Allendale Phase II | |
Grand Valley State University | |
| 82 | | |
| 290 | |
Columbia, MO | |
University of Missouri | |
| 214 | | |
| 654 | |
Colonial Crest—Bloomington, IN | |
Indiana University | |
| 206 | | |
| 402 | |
Columbia, SC Phase I | |
University of South Carolina | |
| 278 | | |
| 824 | |
Columbia, SC Phase II | |
University of South Carolina | |
| 72 | | |
| 178 | |
Morgantown, WV | |
West Virginia University | |
| 335 | | |
| 920 | |
Harrisonburg, VA | |
James Madison University | |
| 414 | | |
| 1,218 | |
Grand Duke | |
James Madison University | |
| 120 | | |
| 124 | |
Greenville, NC | |
East Carolina University | |
| 439 | | |
| 1,232 | |
San Marcos, TX Phase I | |
Texas State University | |
| 273 | | |
| 840 | |
San Marcos, TX Phase II | |
Texas State University | |
| 142 | | |
| 410 | |
Oak Hill—State College | |
Penn State University | |
| 106 | | |
| 318 | |
CMU Phase II—Mount Pleasant, MI | |
Central Michigan University | |
| 119 | | |
| 256 | |
Statesboro, GA Phase I | |
Georgia Southern University | |
| 246 | | |
| 754 | |
Statesboro, GA Phase II | |
Georgia Southern University | |
| 82 | | |
| 262 | |
Kalamazoo Phase I | |
Western Michigan University | |
| 256 | | |
| 784 | |
Kalamazoo Phase II | |
Western Michigan University | |
| 115 | | |
| 340 | |
Auburn, AL | |
Auburn University | |
| 271 | | |
| 754 | |
| |
| |
| | | |
| | |
Total - Copper Beech Properties | |
| |
| 6,242 | | |
| 16,647 | |
Our Relationship with HSRE
We are a party to active
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. As of December 31, 2014, we held 12 operating joint venture properties with HSRE, including one joint
venture property where we are partners with both HSRE and Brandywine.
HSRE I. Our first
joint venture with HSRE, HSRE-Campus Crest I, LLC ("HSRE I"), indirectly owned 100% of the interests in the following
three properties at December 31, 2014: The Grove at Conway, Arkansas, The Grove at Lawrence, Kansas, and The Grove at San
Angelo, Texas. On July 5, 2012, we completed the purchase of HSRE's 50.1% interest in The Grove at Moscow, Idaho, which was
included in HSRE I prior to that date. On December 29, 2011, we completed the purchase of HSRE's 50.1% interests in The Grove
at Huntsville, Texas and The Grove at Statesboro, Georgia, which were included in HSRE I prior to that date. At December 31, 2014,
we owned a 63.9% interest in HSRE I and HSRE owned the remaining 36.1%. At December 31, 2014, we are entitled to 50% of the net
proceeds from a sale of a property owned by HSRE I. During the year ended December 31, 2014, we recorded an other than temporary
impairment on our investment in HSRE I. See Note 4 to the consolidated financial statements regarding our write-down of the carrying
value of our investment to fair value.
In general, we are responsible
for the day-to-day management of HSRE I’s business and affairs, provided that major decisions must be approved by us and
HSRE. In addition to distributions to which we are entitled as an investor in HSRE I, we receive or have 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 provided at least $40 million
of equity funding to HSRE I and/or certain related ventures. This right of first opportunity was amended in conjunction with the
formation of HSRE IV 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. In January
2011, we entered into a joint venture with HSRE, HSRE-Campus Crest IV, LLC ("HSRE IV") to develop and operate additional
purpose-built student housing properties. HSRE IV completed two new student housing properties in August 2011 for the 2011-2012
academic year. The properties, located in Denton, Texas, and Valdosta, Georgia, contain an aggregate of approximately 1,168 beds
and cost approximately $45.7 million. We owned a 20.0% interest in this venture and affiliates of HSRE own the balance. On
July 5, 2012, we completed the purchase of HSRE's 80% interest in The Grove at Valdosta, which was included in HSRE IV prior
to that date. In January 2014, we completed the purchase of HSRE’s 80% interest in The Grove at Denton, Texas, which was
included in HSRE IV prior to that date. Following the sale of The Grove at Denton, HSRE IV was dissolved.
HSRE V. In October
2011, we entered into a joint venture with HSRE, HSRE-Campus Crest V, LLC ("HSRE V"), to develop and operate additional
purpose-built student housing properties. HSRE V completed three new student housing properties in August 2012 for the 2012-2013
academic year. The properties, located in Fayetteville, Arkansas, Laramie, Wyoming, and Stillwater, Oklahoma, contain an aggregate
of approximately 1,856 beds and cost approximately $72.1 million. We own a 10% interest in this venture and affiliates of
HSRE own the balance. During the year ended December 31, 2014, we recorded an other than temporary impairment on our investment
in HSRE V. See Note 4 to the consolidated financial statements regarding our write-down of the carrying value of our investment
to fair value.
HSRE VI. In March
2012, we entered into a joint venture with HSRE, HSRE-Campus Crest VI, LLC ("HSRE VI"), to develop and operate additional
purpose-built student housing properties. HSRE VI completed three new student housing properties in August 2013 for the 2013-2014
academic year. The properties, located in Norman, Oklahoma, State College, Pennsylvania and Indiana, Pennsylvania, contain an aggregate
of approximately 1,784 beds and cost approximately $83.3 million. We own a 20.0% interest in this venture and affiliates of
HSRE own the balance. During the year ended December 31, 2014, we recorded an other than temporary impairment on our investment
in HSRE VI. See Note 4 to the consolidated financial statements regarding our write-down of the carrying value of our investment
to fair value.
HSRE IX. In January
2013, we entered into a joint venture with HSRE and Brandywine, HSRE-Campus Crest IX, LLC ("HSRE IX"), to develop and
operate additional purpose-built student housing properties. HSRE IX has completed one new student housing property, evo®
at Cira Centre South. The property, located in the University City submarket of Philadelphia, Pennsylvania, contains approximately
850 beds and cost approximately $158.5 million. We own a 30.0% interest in this venture, Brandywine owns 30.0% and affiliates
of HSRE own the balance.
In general, we, along
with Brandywine, are responsible for the day-to-day management of HSRE IX’s business and affairs, provided that major decisions
(including deciding to pursue a particular development opportunity) must be approved by us, HSRE, and Brandywine. In addition to
distributions to which we are entitled as an investor in HSRE IX, we, along with Brandywine, will receive fees for providing services
to HSRE IX pursuant the property management agreement. In general, we, along with Brandywine, will earn management fees equal to
approximately 3.0% of the gross revenues and 3.0% of the net operating income of operating properties held by HSRE IX.
HSRE X. In March
2013, we entered into a joint venture agreement with HSRE, HSRE-Campus Crest X, LLC ("HSRE X"), to develop and operate
additional purpose-built student housing properties. HSRE X has completed two new student housing properties, The Grove at Louisville,
Kentucky and The Grove at Greensboro, North Carolina. The properties, located in Louisville, Kentucky and Greensboro, North Carolina
contain an aggregate of approximately 1,240 beds and cost approximately $69.1 million. We own a 30.0% interest in this joint venture
and affiliates of HSRE own the balance. During the year ended December 31, 2014, we recorded an other than temporary impairment
on our investment in HSRE X. See Note 4 to the consolidated financial statements regarding our write-down of the carrying value
of our investment to fair value.
In general, we are responsible
for the day-to-day management of HSRE I’s, HSRE V’s, HSRE VI's, and HSRE X’s business and affairs, provided that
major decisions (including deciding to pursue a particular development opportunity) must be approved by us and HSRE. In addition
to distributions to which we are entitled as an investor in HSRE I, HSRE V, HSRE VI and HSRE X, we will receive fees for providing
services to HSRE I, HSRE V, HSRE VI and HSRE X, pursuant to property management agreements. In general, we will earn management
fees equal to approximately 3.0% of the gross revenues and 3.0% of the net operating income of operating properties held by HSRE
I, HSRE V, HSRE VI, and HSRE X.
We amended HSRE’s
right of first opportunity, originally granted with respect to HSRE I, 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 an aggregate $50 million in HSRE IV, HSRE V, HSRE VI, HSRE IX, and HSRE X or caused HSRE IV, HSRE V, HSRE
VI, HSRE IX, and HSRE X to decline three development opportunities in any calendar year. As of December 31, 2014, HSRE had funded
approximately all of the $50 million right of first opportunity. The terms of this joint venture do not prohibit us from developing
a wholly-owned student housing property for our own account.
Our Relationship with Beaumont
In
July 2013, we entered into a joint venture, DCV Holdings, LP (“DCV Holdings”) with Beaumont Partners SA (“Beaumont”)
to acquire a 711 room, 33-story hotel in downtown Montreal, Quebec, Canada, for approximately CAD 51.0 million ($44.9 million).
During 2014, the joint venture converted the property into an upscale student housing tower featuring a mix of single and double
units serving McGill University, Concordia University and L’Ecole de Technologie for the 2014-2015 academic year.
In
December 2013, the joint venture partnership formed a holding company, CSH Montreal LP (“CSH Montreal”). With regard
to CSH Montreal, we are a limited partner with no general partner representation and limited control rights. DCV Holdings was subsequently
contributed to CSH Montreal, such that CSH Montreal became the sole limited partner in DCV Holdings. In addition, following the
insertion of CSH Montreal as the holding company in the joint venture arrangement, CSH Montreal acquired ownership of HIM Holdings
LP (“HIM Holdings”), an entity formed to facilitate the acquisition of another property in Canada.
On
January 15, 2014, through the newly formed HIM Holdings, the joint venture partnership acquired the 488-room, 22-story Holiday
Inn Midtown in Montréal, Québec for approximately CAD 65 million ($56.1 million). During 2014, the joint venture
converted the property into an upscale evo® student housing tower near McGill University. In connection with
the acquisition of the Holiday Inn property, we increased our ownership interest from 20.0% to 47.0% in CSH Montreal, the joint
venture that holds the newest evo® and the previously announced evo® à Square
Victoria. In connection with our investment in CSH Montreal, we guarantee up to 50% of the outstanding balance of the acquisition
and development credit facility (“CSH Montreal Debt”) of CAD 112.0 million ($96.8 million) at December 31, 2014 exchange
rate. As of December 31, 2014, the outstanding balance of the CSH Montreal Debt was CAD 101.8 million ($88.0 million) at December
31, 2014 exchange rate, of which we guaranteed CAD 50.9 ($44.0 million) at December 31, 2014 exchange rate. The term of the guarantee
follows the term of the underlying debt, which matures on January 13, 2016, unless the twelve month extension, which is subject
to lender approval, is exercised. The CSH Montreal debt is secured by, among other things, a first mortgage position on the real
estate and improvements owned by CSH Montreal.
In
January 2014, with the acquisition of the Holiday Inn Midtown property, we provided CAD 16.0 million ($13.8 million) of preferred
bridge equity financing to CSH Montreal to be repaid to us on or before September 2, 2014. As of September 2, 2014, our preferred
equity had not been repaid in full and, as a result, we are now entitled to 60.54% of all cash distributions from CSH Montreal
with Beaumont and its partners being entitled to the remaining 39.46%. We currently retain an ownership interest of 47.0% in CSH
Montreal and, as such, are responsible for funding only 47.0% of operating losses.
The
occupancy levels and rental rates for the CSH Montreal properties for the year ended December 31, 2014, were significantly below
our expectations when we entered into this joint venture and acquired the joint venture properties. We have determined that the
initial performance results indicate that there has been a permanent impairment to our investment in this joint venture. As a result,
during the year ended December 31, 2014, we recorded an other than temporary impairment on our investment in CSH Montreal. See
Note 4 to the consolidated financial statements.
Critical Accounting Policies
Set forth below is a summary
of the accounting policies that management believes are critical to the preparation of the consolidated financial statements. Certain
of these accounting policies are particularly important for an understanding of the financial position and results of operations
presented in the consolidated financial statements set forth elsewhere in this report. These policies require the application of
judgment and assumptions by management and, as a result, are subject to a degree of uncertainty. Actual results could differ as
a result of such judgment and assumptions.
Our consolidated financial
statements include the accounts of all investments, which include joint ventures in which we have a controlling interest and our
consolidated subsidiaries. The preparation of financial statements in conformity with GAAP requires management to make estimates
and assumptions that affect amounts reported in our historical consolidated financial statements and related notes. In preparing
these financial statements, management has utilized all available information, including its past history, industry standards and
the current economic environment, among other factors, in forming its estimates and judgments of certain amounts included in the
historical consolidated financial statements, giving due consideration to materiality. Our estimates may not be ultimately realized.
Application of the critical accounting policies below involves the exercise of judgment and use of assumptions as to future uncertainties
and, as a result, actual results may differ from these estimates. In addition, other companies in similar businesses may utilize
different estimation policies and methodologies, which may impact the comparability of our results of operations and financial
condition to those companies.
Valuation of Investment in Real Estate
Investment in real estate
is recorded at historical cost. Pre-development expenditures include items such as entitlement costs, architectural fees and deposits
associated with the pursuit of partially-owned and wholly-owned development projects. These costs are capitalized until such time
that management believes it is no longer probable that a contract will be executed and/or construction will commence. 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 commencement
of construction is not probable. Such write-offs are included within discontinued operations for 2013 and 2012, and in a separate
line for 2014 in the accompanying consolidated statements of operations.
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 assessed 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 are less than the carrying value of the property.
The estimation of expected 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.
Investment in Unconsolidated Entities
Under the equity method,
investments in unconsolidated entities are initially recognized in 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. Any difference between the carrying amount of these investments on our balance sheet and the underlying equity
in net assets is amortized as an adjustment to equity in earnings (loss) of unconsolidated entities. When circumstances indicate
there may have been a loss in value of an equity method investment, and we determine the loss in value is other than temporary,
we recognize an impairment charge to reflect the investment at fair value.
During the year ended
December 31, 2014, we recorded an other than temporary impairment of $57.8 million in the consolidated statement of operations
and comprehensive income (loss) for certain unconsolidated entities, including $31.3 million related to HSRE I, HSRE V, HSRE VI
and HSRE X (the “HSRE Investments”) and $26.5 million related to the investment in CSH Montreal. Factors giving
rise to the strategic repositioning including results below expectations in original underwriting transactions as well as communication
from the venture partner about their desire to dispose of certain properties in the HSRE Investments in the near term, resulted
in our determination that an other than temporary impairment existed during the year ended December 31, 2014. After the impairments
were recorded, the carrying values of our HSRE investments and investment in CSH Montreal were $15.1 million and $6.9, respectively.
We engaged third-party specialists to assist us with our valuation of certain of the underlying properties in the HSRE Investments.
An income approach was used to determine the fair value of our HSRE Investments. Inputs and assumptions included in the determination
of fair value included our expectation of projected net operating income to be earned and capital expenditures to be incurred at
the underlying properties and capitalization rates ranging between 5.9% and 8.5%. The capitalization rates were determined based
on the marketability of each of the properties and the extent to which the operations of the property has stabilized.
For our investment in
CSH Montreal, we used a discounted cash flow valuation technique to estimate the fair value of the Company’s investment.
The discounted cash flows take into consideration current occupancy levels with revenue per available bed increasing in conjunction
with occupancies growing up to 92% over a four year period, an expected exit value based on a 7.25% capitalization rate, and a
9.25% discount rate. The discount rate includes the Company’s belief that the properties have not stabilized yet, given the
occupancy levels of the properties owned by CSH Montreal during its first year of operations. These valuation techniques involve
Level 3 inputs in the fair value hierarchy, and the Company believes that the highest and best use of these properties continues
to be for student housing.
The information above
is provided to allow transparency into the assumptions used to calculate our impairment of unconsolidated entities. There is a
significant level of subjectivity and judgment necessary to account for highly uncertain matters and there is susceptibility of
such assumptions not being realized. The impact of these estimates and assumptions not being met would result in a material impact
to our consolidated results of operations. In connection with the HSRE investments, for every one percent change in net operating
income and for every 10 basis point change in the capitalization rate, the impairment would change by $1.0 million and $1.1 million,
respectively, should the result of certain key assumptions be different than those used in the impairment calculations. In connection
with our investment in CSH Montreal, for every one percent change in net operating income, the impairment would change by an immaterial
amount. For every 10 basis point change in the capitalization rate, the impairment would change by $2.1 million.
Discontinued Development and Construction
Services
During the year ended
December 31, 2014, we discontinued all construction and development activities. 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 revenue recognized.
Development and construction
service revenues are recognized for contracts with entities we do not consolidate. For projects where 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 our interest in the unconsolidated
entity. Any incentive fees, net of the impact of our ownership interest, 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. When 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 to the extent these amounts are determined to be realizable. Entitlement
fees, where applicable, are recognized when earned based on the terms of the related contract.
Property Management Services
In addition to our wholly-owned
properties, all but one of which are managed by us, we also provide management services to unconsolidated joint 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.
We have set forth a discussion
comparing our consolidated results for the year ended December 31, 2014 to the consolidated results of our operations for the year
ended December 31, 2013. Additionally, we have set forth a discussion comparing our consolidated results for year ended December
31, 2013 to the consolidated results for the year ended December 31, 2012. The historical results of operations presented below
should be reviewed in conjunction with the notes to the consolidated financial statements accompanying this report.
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 receivables are uncollectible,
they are written off against the allowance for doubtful accounts.
Fair Value of Financial Instruments
The carrying value of
cash, cash equivalents, restricted cash, student receivables and accounts payable are representative of their respective fair values
due to the short-term nature of these instruments. The estimated fair value of our revolving line of credit approximates the outstanding
balance due to the frequent market based re-pricing of the underlying variable rate index. The estimated fair values of mortgages
and construction loans 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, construction loans, and Exchangeable Senior Notes.
Fair value guidance for
financial assets and liabilities that 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 1
- Observable inputs, such as quoted prices in active markets at the measurement date for identical, unrestricted assets or
liabilities.
Level 2
- Other 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 3
- Unobservable inputs for which there is little or no market data and which we make our 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.
Income Taxes
We have made an election
to qualify, and believe we are operating so as to qualify, as a REIT under Sections 856 through 859 of the Internal Revenue Code.
Our qualification as a REIT depends upon our 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 our gross income,
the composition and values of our assets, our distribution levels and the diversity of ownership of our stock. We believe that
we are organized in conformity with the requirements for qualification and taxation as a REIT under the Internal Revenue Code and
that our intended manner of operation will enable us to meet the requirements for qualification and taxation as a REIT.
As a REIT, we generally
will not be subject to U.S. federal and state income tax on taxable income that we distribute currently to our stockholders. If
we fail to qualify as a REIT in any taxable year and do not qualify for certain statutory relief provisions, we 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 we lost our 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.
We have made the election
to treat TRS Holdings, our wholly-owned subsidiary as a TRS. TRS Holdings holds our management companies that provide services
to entities in which we do not own 100% of the equity interests. As a TRS, the operations of TRS Holdings and its subsidiaries
are generally subject to federal, state and local income and franchise taxes. Our TRS accounts for its income taxes in accordance
with U.S. GAAP, which includes an estimate of the amount of taxes payable or refundable for the current year and deferred tax liabilities
and assets for the future tax consequences of events that have been recognized in our financial statements or tax returns. Deferred
tax assets and liabilities of the TRS entities 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.
We follow a two-step approach
for evaluating uncertain tax positions. Recognition (step one) occurs when we conclude that a tax position, based solely on its
technical merits, is more-likely-than-not (a likelihood of more than 50 percent) to be sustained upon examination. Measurement
(step two) determines the amount of benefit that more-likely-than-not will be realized upon
settlement. Derecognition of a tax position that was previously recognized would occur when we subsequently determined that a tax
position no longer met the more-likely-than-not threshold of being sustained. The use of a valuation allowance as a substitute
for derecognition of tax positions is prohibited.
Property Acquisitions
We allocate 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 over the remaining initial term of the respective leases, generally less than one year. The
purchase price of property acquisitions is not expected to be allocated to tenant relationships, considering the terms of the leases
and the expected levels of renewals. Acquisition-related costs such as due diligence, legal and accounting fees are expensed as
incurred and not applied in determining the fair value of an acquired property.
Changes in Financial Condition
In January 2013,
we entered into the second amended and restated credit agreement (the "Second Amended and Restated Credit Agreement"),
which provides for a $250 million senior unsecured revolving credit facility (the "Revolving Credit Facility"), a $50
million term loan (the “Term Loan”, together with the “Revolving Credit Facility”, the “Amended Credit
Facility”), and an accordion feature that allows us, under certain circumstances, to request an increase in the total commitments
by an additional $300.0 million, increasing total commitments to $600.0 million. The Second Amended and Restated Credit Facility
will mature in January 2017 and contains a one-year extension option, subject to certain terms and conditions. For additional information
regarding the Amended Credit Facility, please refer to "Liquidity and Capital Resources—Principal Capital Resources"
below.
In March 2013, we completed
an underwritten public offering of approximately 25.5 million shares of common stock, including approximately 3.3 million shares
issued and sold pursuant to the full exercise of the underwriters’ option to purchase additional shares, resulting in net
proceeds of approximately $299.7 million. The net proceeds were used: (1) to fund our investment in the CB Portfolio and related
transactional costs, including investment banking advisory fees (see Note 6 to the accompanying consolidated financial statements);
and (2) for general corporate purposes, including the repayment of debt.
In June 2013, we implemented
an At-The-Market offering program under which we may sell at market price up to $100.0 million in shares of our common stock over
the term of the program. As of December 31, 2014, we had not issued and sold any shares under this program.
In
October 2013, we reopened our Series A Preferred Stock in an underwritten public offering
of 3,800,000 shares, including 400,000 shares issued and sold pursuant to the partial exercise of the underwriters’ option
to purchase additional shares of the Series A Preferred Stock. The shares of Series A Preferred Stock were issued at a public offering
price of $25.0611 per share, for net proceeds of approximately $91.3 million, after deducting the underwriting discount and other
estimated offering expenses of approximately $4.0 million. We used the net proceeds, as well as the net proceeds from our issuance
of Exchangeable Senior Notes (defined below), to repay approximately $46.8 million of indebtedness outstanding under three
construction loans, to repay amounts owed under the Amended Credit Facility and for general corporate purposes.
In
October 2013, the Operating Partnership completed a private offering of $100.0 million of unsecured 4.75% exchangeable senior notes
(the "Exchangeable Senior Notes") due October 15, 2018. Interest on the Exchangeable Senior Notes is payable semi-annually
on April 15 and October 15, beginning April 15, 2014. Upon exchange of the notes, the Operating Partnership will deliver cash,
shares of Campus Crest common stock, or a combination of both at an initial exchange rate of 79.6020 shares per $1,000 principal
amount of Exchangeable Senior Notes (equivalent to an initial exchange price of approximately $12.56 per share of our common stock).
The Exchangeable Senior Notes may not be redeemed prior to the maturity date. At any time prior to July 15, 2018, the Operating
Partnership may irrevocably elect, in its sole discretion without the consent of the holders of the notes, to settle all of its
future exchange obligation entirely in shares of our common stock. The Exchangeable Senior Notes rank equally in right of payment
to all other unsecured debt and are subordinated in right of payment to all secured debt, liabilities, and preferred equity of
our subsidiaries.
We
used the net proceeds from the reopening of the Series A Preferred Stock and the Exchangeable
Senior Notes offerings for the repayment of debt, development funding and working capital purposes.
REIT Qualification Requirements
We have elected to be
treated as a REIT under Sections 856 through 859 of the Internal Revenue Code. Our continued qualification as a REIT depends
upon our 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 our gross income, the composition and values of our assets,
our distribution levels and the diversity of ownership of our stock. We believe that our intended manner of operation will enable
us to meet the requirements for qualification and taxation as a REIT. As a REIT, we generally will not be subject to U.S. federal
income tax on taxable income that we distribute currently to our stockholders.
Factors Expected to 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-tenant’s liability to his or her own rent without liability for a roommate’s
rent. A parent or guardian is required to execute each lease as a guarantor unless the 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 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 terminates at the completion
of the last 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, which typically begins each October and ends in September of the following
year. As of the start of the fall term for the 2014-2015 and 2013-2014 academic years, we had approximately 37.6% and 41.7%, respectively;
of our current tenants renew their lease for the upcoming academic year.
Results of Operations
Our Business Segments
We define business segments
by their distinct customer base and services provided. We have identified two reportable business segments: (i) student housing
operations and (ii) property management services. All construction and development activities are reported in discontinued operations
at December 31, 2014. Management evaluates each segment’s performance by reference to net operating income (“NOI”),
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 footnote (Note 2) to our consolidated 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. In 2014, we opened
four wholly-owned properties and an additional six properties that are owned in a real estate ventures in which we have a noncontrolling
interest.
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.
"Same store"
properties are our wholly-owned operating properties acquired or placed in-service prior to the beginning of the earliest period
presented and owned by us and remaining in service through the end of the latest period presented or period being analyzed. "New
properties" are our wholly-owned operating properties that we acquired or placed in service after the beginning of the earliest
period presented or period being analyzed.
We monitor NOI of our
student housing properties, which is a non-GAAP financial measure. In general terms, we define NOI as student housing rental revenue
less student housing operating expenses including real estate taxes related to our properties. We believe this measure provides
an operating perspective not immediately apparent from GAAP operating income (loss) or net income (loss). We use NOI to evaluate
performance on a community-by-community basis because it allows management to evaluate the impact that factors such as lease structure,
lease rates and tenant base, which vary by locality, have on our financial performance.
We specifically calculate
NOI by adding back to (or subtracting from) net income (loss) attributable to common stockholders the following expenses or charges:
income tax expense, other expense, interest expense, equity in loss of unconsolidated entities, depreciation and amortization,
ground lease expense, general and administrative expense, property management services expenses and other non-recurring costs or
expenses. The following income or gains are then deducted from net income (loss) attributable to common stockholders, adjusted
for add backs of expenses or charges: other income, property management services revenues and non-recurring income or gains.
NOI excludes multiple
components of net income (loss) attributable to common stockholders (computed in accordance with GAAP) 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. Therefore, the utility of NOI as a measure of our performance is limited. Additionally, other
companies, including other equity REITs, may use different methodologies for calculating NOI and, accordingly, NOI as disclosed
by such other companies may not be comparable to NOI published herein. We believe that in order to facilitate a clear understanding
of our historical operating results, NOI should be examined in conjunction with net income (loss) as presented in the consolidated
financial statements accompanying this report. NOI should not be considered as an alternative to net income (loss) attributable
to common stockholders as an indicator of our properties’ financial performance or to cash flow from operating activities
(computed in accordance with GAAP) as an indicator of our liquidity, nor is it indicative of funds available to fund our cash needs,
including our ability to pay dividends or make distribution.
Management Services
In addition to our wholly-owned
properties, all but one of which are managed by us, we also provide management services to unconsolidated joint 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.
We have set forth a discussion
comparing our consolidated results for the year ended December 31, 2014 to the consolidated results of our operations for the year
ended December 31, 2013. Additionally, we have set forth a discussion comparing our consolidated results for year ended December
31, 2013 to the consolidated results for the year ended December 31, 2012. The historical results of operations presented below
should be reviewed in conjunction with the notes to the consolidated financial statements accompanying this report.
Comparison of Years Ended December 31,
2014 and December 31, 2013
As of December 31, 2014,
our property portfolio consisted of 37 consolidated operating properties, containing approximately 7,520 apartment units and 20,580
beds, and 49 operating properties held in seven unconsolidated joint ventures, containing approximately 10,130 apartment units
and 26,110 beds. Four consolidated operating properties have been presented in discontinued operations.
As of December 31, 2013,
our property portfolio consisted of 31 consolidated operating properties, containing approximately 6,065 apartment units and 16,570
beds, and 38 operating properties held in five unconsolidated joint ventures, containing approximately 7,135 apartment units and
18,910 beds. Four consolidated operating properties have been presented in discontinued operations.
The following table presents
our results of operations for the periods presented, including the amount and percentage change in these results between the periods
(in thousands):
| |
Year Ended December 31, | | |
| | |
| |
| |
2014 | | |
2013 | | |
Change ($) | | |
Change (%) | |
Revenues: | |
| | | |
| | | |
| | | |
| | |
Student housing rental | |
$ | 101,724 | | |
$ | 87,635 | | |
| 14,089 | | |
| 16.1 | % |
Student housing services | |
| 3,768 | | |
| 3,615 | | |
| 153 | | |
| 4.2 | % |
Property management services | |
| 1,249 | | |
| 820 | | |
| 429 | | |
| 52.3 | % |
| |
| | | |
| | | |
| | | |
| | |
Total revenues | |
| 106,741 | | |
| 92,070 | | |
| 14,671 | | |
| 15.9 | % |
Operating expenses: | |
| | | |
| | | |
| | | |
| | |
Student housing operations | |
| 47,154 | | |
| 40,726 | | |
| 6,428 | | |
| 15.8 | % |
General and administrative | |
| 14,303 | | |
| 10,658 | | |
| 3,645 | | |
| 34.2 | % |
Severance | |
| 6,159 | | |
| - | | |
| 6,159 | | |
| N/A | |
Impairment of land and pre-development costs | |
| 31,927 | | |
| - | | |
| 31,927 | | |
| N/A | |
Write-off of corporate other assets | |
| 15,110 | | |
| - | | |
| 15,110 | | |
| N/A | |
Transaction costs | |
| 3,046 | | |
| 1,121 | | |
| 1,925 | | |
| 171.7 | % |
Ground leases | |
| 477 | | |
| 249 | | |
| 228 | | |
| 91.6 | % |
Depreciation and amortization | |
| 29,426 | | |
| 23,700 | | |
| 5,726 | | |
| 24.2 | % |
| |
| | | |
| | | |
| | | |
| | |
Total operating expenses | |
| 147,602 | | |
| 76,454 | | |
| 71,148 | | |
| 93.1 | % |
Equity in losses of unconsolidated entities | |
| (5,510 | ) | |
| (3,727 | ) | |
| (1,783 | ) | |
| 47.8 | % |
Impairment of unconsolidated entities | |
| (57,789 | ) | |
| (312 | ) | |
| (57,477 | ) | |
| 18422.1 | % |
Effect of not exercising Copper Beech purchase option | |
| (33,375 | ) | |
| - | | |
| (33,375 | ) | |
| N/A | |
| |
| | | |
| | | |
| | | |
| | |
Operating income (loss) | |
| (137,535 | ) | |
| 11,577 | | |
| (149,112 | ) | |
| -1288.0 | % |
| |
| | | |
| | | |
| | | |
| | |
Nonoperating income (expense): | |
| | | |
| | | |
| | | |
| | |
Interest expense | |
| (16,156 | ) | |
| (12,969 | ) | |
| (3,187 | ) | |
| 24.6 | % |
Other income | |
| 42 | | |
| 1,414 | | |
| (1,372 | ) | |
| -97.0 | % |
| |
| | | |
| | | |
| | | |
| | |
Total nonoperating expense, net | |
| (16,114 | ) | |
| (11,555 | ) | |
| (4,559 | ) | |
| 39.5 | % |
| |
| | | |
| | | |
| | | |
| | |
Net income (loss) before income tax benefit (expense) | |
| (153,649 | ) | |
| 22 | | |
| (153,671 | ) | |
| -698504.5 | % |
Income tax benefit (expense) | |
| (731 | ) | |
| 727 | | |
| (1,458 | ) | |
| -200.6 | % |
| |
| | | |
| | | |
| | | |
| | |
Income (loss) from continuing operations | |
| (154,380 | ) | |
| 749 | | |
| | | |
| | |
Income (loss) from discontinued operations | |
| (9,576 | ) | |
| 489 | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Net income (loss) | |
| (163,956 | ) | |
| 1,238 | | |
| (165,194 | ) | |
| -13343.6 | % |
| |
| | | |
| | | |
| | | |
| | |
Net income (loss) attributable to noncontrolling interests | |
| (1,233 | ) | |
| (34 | ) | |
| (1,199 | ) | |
| 3526.5 | % |
Dividends on preferred stock | |
| 12,200 | | |
| 6,183 | | |
| 6,017 | | |
| 97.3 | % |
| |
| | | |
| | | |
| | | |
| | |
Net income (loss) attributable to common stockholders | |
$ | (174,923 | ) | |
$ | (4,911 | ) | |
| (170,012 | ) | |
| 3461.9 | % |
Student Housing Operations
Revenues in the student
housing operations segment (which include student housing rental and student housing service revenues) increased by approximately
$14.2 million and operating expenses in the student housing operations segment increased by approximately $6.4 million
during the year ended December 31, 2014, as compared to the year ended December 31, 2013. The increase in revenues was primarily
due to the opening of two new properties in August 2013 (The Grove at Muncie, Indiana, and The Grove at Fort Collins, Colorado),
the opening of the undamaged portion of a new property in August 2013 (The Grove at Pullman, Washington), the acquisition of the
remaining ownership interests in The Grove at Denton, Texas, in January 2014, the opening of five new properties in August 2014
(The Grove at Slippery Rock, Pennsylvania, The Grove at Grand Forks, North Dakota, The Grove at Mt. Pleasant, Michigan, The Grove
at Gainesville, Florida and Copper Beech at Ames, Iowa), offset by the prior period reclassification of four properties disposed
in December 2013 (The Grove at Jacksonville, Alabama, The Grove at Jonesboro, Arkansas, The Grove at Wichita, Kansas, and The Grove
at Wichita Falls, Texas) to discontinued operations. The increase in student housing operations expenses was primarily due to the
aforementioned activity.
New Property Operations. In
March 2013, we acquired Campus Crest at Toledo, Ohio, which contributed approximately $0.5 million of NOI ($1.3 million of revenues
and $0.8 million of operating expenses) for the year ended December 31, 2014, compared to $0.5 million of NOI ($1.7 million of
revenues and $1.2 million of operating expenses) for the year ended December 31, 2013. In August 2013, we began operations at The
Grove at Muncie, Indiana, The Grove at Fort Collins, Colorado, The Grove at Flagstaff II, Arizona, and partial operations at The
Grove at Pullman, Washington, which contributed approximately $8.7 million of NOI ($11.8 million of revenues and $3.1 million of
student housing operations expenses) for the year ended December 31, 2014, compared to approximately $3.8 million of NOI ($4.1
million of revenues and $0.3 million of operating expenses) for the year ended December 31, 2013. In January 2014, we acquired
the remaining ownership interests in The Grove at Denton, Texas, which contributed approximately $2.1 million of NOI ($3.9 million
of revenues and $1.8 million of student housing operations expenses) for the year ended December 31, compared to no contribution
for the year ended December 31, 2013. Prior to the acquisition of these interests, we accounted for our ownership in The Grove
at Denton, Texas under the equity method. In August 2014, we began operations at The Grove at Slippery Rock, Pennsylvania, The
Grove at Grand Forks, North Dakota, The Grove at Mt. Pleasant, Michigan, The Grove at Gainesville, Florida, and Copper Beech at
Ames, Iowa which contributed approximately $4.5 million of NOI ($6.8 million of revenues and $2.3 million of student housing operations
expenses) for the year ended December 31, 2014, compared to no contribution for the year ended December 31, 2013.
"Same-Store"
Property Operations. Our 28 "same-store” properties contributed approximately $42.9 million of NOI ($82.8 million
of revenues and $39.9 million of operating expenses) for the year ended December 31, 2014 compared to approximately $46.6 million
of NOI ($85.6 million of revenues and $39.0 million of student housing operations expenses) for the year ended December 31, 2013.
The decrease in revenue at our "same-store" properties was primarily due to a decrease in average occupancy to approximately
90.5% for the year ended December 31, 2014 compared to approximately 92.5% for the year ended December 31, 2013. Operating expenses
for the year ended December 31, 2014 stayed materially the same when compared to the year ended December 31, 2013.
The following is a reconciliation
of our net income attributable to common stockholders to NOI for the periods presented, including our same store and new properties
(in thousands):
| |
Year Ended December 31, | |
| |
2014 | | |
2013 | |
Net loss attributable to common stockholders | |
$ | (174,923 | ) | |
$ | (4,911 | ) |
Net loss attributable to noncontrolling interests | |
| (1,233 | ) | |
| (34 | ) |
Preferred stock dividends | |
| 12,200 | | |
| 6,183 | |
Income tax (benefit) expense | |
| 731 | | |
| (727 | ) |
Other (income) expense, net | |
| (42 | ) | |
| (1,414 | ) |
Severance | |
| 6,159 | | |
| - | |
(Income) loss on discontinued operations | |
| 9,576 | | |
| (489 | ) |
Impairment of unconsolidated joint venture | |
| 57,789 | | |
| 312 | |
Interest expense | |
| 16,156 | | |
| 12,969 | |
Equity in loss of unconsolidated entities | |
| 5,510 | | |
| 3,727 | |
Depreciation and amortization | |
| 29,426 | | |
| 23,700 | |
Ground lease expense | |
| 477 | | |
| 249 | |
General and administrative expense | |
| 14,303 | | |
| 10,658 | |
Effect of not exercising Copper Beech purchase option | |
| 33,375 | | |
| - | |
Impairment of land, predevelopment costs and asset held for sale | |
| 31,927 | | |
| - | |
Write-off of corporate other assets | |
| 15,110 | | |
| - | |
Transaction costs | |
| 3,046 | | |
| 1,121 | |
Property management services revenues | |
| (1,249 | ) | |
| (820 | ) |
Total NOI from Continuing Operations | |
$ | 58,338 | | |
$ | 50,524 | |
Same store properties NOI | |
$ | 42,552 | | |
$ | 34,666 | |
New properties NOI | |
$ | 11,408 | | |
$ | 14,293 | |
The Grove at Pullman and Toledo NOI | |
$ | 4,378 | | |
$ | 1,565 | |
Property Management Services
Property management services
revenues increased by approximately $0.4 million for the year ended December 31, 2014, compared to the year ended December 31,
2013. The increase was primarily due to an increase in the number of property management contracts (we added three property management
contracts in August 2013 (The Grove at Norman, Indiana, The Grove at State College, Pennsylvania, and The Grove at Indiana, Pennsylvania)
and five property management contracts in August 2014 (The Grove at Greensboro, North Carolina, The Grove at Louisville, Kentucky,
evo® at Cira Centre South, Pennsylvania, evo® à Square Victoria, Montreal, Quebec,
Canada, evo® à Sherbrooke, Montreal, Quebec, Canada)), partially offset by termination of the property
management contract for The Grove at Denton, Texas, in January 2014.
General and Administrative
General and administrative
expenses increased from approximately $10.7 million for the year ended December 31, 2013 to approximately $14.3 million for the
year ended December 31, 2014. The increases were primarily due to an increase in the number of full-time employees, professional
fees, and travel expenses resulting from our growth and greater number of projects in 2014 when compared to 2013.
Severance Costs
For the year ended December
31, 2014, we recorded a total of approximately $9.1 million in severance costs ($2.9 million is included in loss from discontinued
operations and $6.2 million included in operating expenses in the accompanying consolidated statements of operations and comprehensive
income (loss)) relating to separation agreements for former executives as well as employees within our discontinued development
and construction service companies. See Note 4 in the accompanying consolidated financial statements for the year ended December
31, 2014. There were no such charges for the year ended December 31, 2013.
Write-off of Pre-Development Costs
For the year ended December
31, 2014, we recorded approximately $31.9 million in write-offs related to pre-development costs, land and an asset held for sale
due to the discontinuation of our development and construction service companies and our strategic repositioning initiative. Pre-development
costs included $8.9 million for locations in the United States and $2.1 million for various international expansion projects. See
Note 4 in the accompanying consolidated financial statements for the year ended December 31, 2014. There was no such charge for
the year ended December 31, 2013.
Write-off of Corporate Other Assets
For the year ended December
31, 2014, we recorded approximately $15.1 million in write-offs of corporate assets in conjunction with our strategic repositioning
initiative. These write-offs include $9.5 million related to the impairment of an enterprise resource planning system that was
abandoned as part of our strategic repositioning, $2.3 million impairment related to a company owned aircraft, $1.2 million
of deferred offering costs and $2.1 million in miscellaneous other items. See Note 4 in the accompanying consolidated financial
statements for the year ended December 31, 2014. There was no such charge for the year ended December 31, 2013.
Transaction Costs
We recognized approximately
$3.0 million and approximately $1.1 million in transaction costs related to the CB Portfolio, CSH Montreal and other transactions
for the year ended December 31, 2014 and 2013, respectively. We capitalized approximately $4.0 million of direct, incremental costs
related to the CB Portfolio Acquisition into the basis of our investment for the year ended December 31, 2014.
Depreciation and Amortization
Depreciation and amortization
expense increased from approximately $23.7 million for the year ended December 31, 2013 to approximately $29.4 million for the
year ended December 31, 2014. This increase was primarily due to the increase in the number of operating properties.
Equity in Earnings (Loss) of Unconsolidated
Entities
Equity in loss of unconsolidated
entities, which represents our share of the net loss from entities in which we have a non-controlling interest, increased from
a loss of $3.7 million in the year ended December 31, 2013 to a loss of $5.5 million for the year ended December 31, 2014. The
2014 loss consists of $3.7 million related to our Montreal joint venture compared to no such loss in 2013; $1.6 million loss related
our CB portfolio (which included a dividend equivalency payment of $1.2 million based on the CB Investors’ interpretation
of the purchase agreement which closed in January 2015) compared to $3.8 million loss for the same period for 2013; $0.2 million
loss related to our HSRE investments compared to $0.1 million income for the same period in 2013.
Our investment in the
CB Portfolio entitled us to a preferred payment of $13.0 million over the first year of our investment, beginning March 18, 2013
and ending March 17, 2014. During the period from January 1, 2014 through March 17, 2014, we were entitled to approximately $2.8
million of the preferred payment, of which, we recognized $0.9 million of the $2.8 million in equity in earnings. The remaining
$1.9 million of the $2.8 million was not recognized in equity in earnings, as we are required to eliminate the portion of the preferred
payment related to our ownership interest in the CB Portfolio.
Impairment of Unconsolidated Entities
During the year ended
December 31, 2014, we recorded impairment of $57.8 million for certain of our unconsolidated entities, including $31.3 million
related to HSRE I, HSRE V, HSRE VI and HSRE X (the “HSRE Investments”) and $26.5 million related to the investment
in CSH Montreal. See Note 4 in the accompanying consolidated financial statements for the year ended December 31, 2014.
Effect of not exercising CB purchase
option
During the year ended
December 31, 2014, we recorded a non-cash charge of $33.4 million due to the effect of not exercising the Copper Beech purchase
option during August of 2014. See Note 6 in the accompanying consolidated financial statements for the year ended December 31,
2014. There was no such charge for the year ended December 31, 2013.
Interest Expense
Interest expense increased
approximately $3.2 million for the year ended December 31, 2014 as compared to the year ended December 31, 2013 primarily
due to an increase in average outstanding indebtedness mainly associated with the acquisition of Denton, the consolidation of Copper
Beech at Ames and draws from the line of credit.
Other Income/(Expense)
In connection with the
CB Portfolio Acquisition, we recognized $1.4 million of income for the year ended December 31, 2013, resulting from interest earned
on our $31.7 million notes receivable from the CB Investors. There was no such income for the year ended December 31, 2014. See
Note 6 to the accompanying consolidated financial statements.
Income Tax Benefit (Expense)
Income tax benefit (expense)
for the year ended December 31, 2014, was a $(0.7) million expense as compared to a $0.7 million benefit for the year ended December
31, 2013, primarily due to the write-off of deferred taxes in conjunction with our strategic repositioning initiatives. See Note
4 of the accompanying consolidated financial statements.
Income (Loss) from Discontinued Operations
In September 2014, we
began unwinding our development and construction services companies due to restructuring activities and accordingly reclassified
the results of these operations to “Income (loss) from discontinued operations” in the consolidated statement of operations
and comprehensive income (loss) for the periods presented resulting in a loss from discontinued operations of $9.6 million for
the year ended December 31, 2014 and income from discontinued operations of $3.5 million for the year ended December 31, 2013.
In December 2013, we sold
four wholly-owned properties: The Grove at Jacksonville, Alabama, The Grove at Jonesboro, Arkansas, The Grove at Wichita, Kansas,
and The Grove at Wichita Falls, Texas and classified $(3.0) million of loss within income (loss) from discontinued operations in
the consolidated statements of operations and comprehensive income (loss) associated with the year ended December 31, 2013.
Net Loss Attributable to Noncontrolling Interests
Net loss attributable
to noncontrolling interests increased to $1.2 million for the year ended December 31, 2014, when compared to $0.1 million for the
year ended December 31, 2013. This is driven by increased losses due to write-offs and impairments in connection with our strategic
repositioning initiatives.
Dividends on Preferred Stock
Dividends on preferred
stock increased to approximately $12.2 million for the year ended December 31, 2014, compared to $6.2 million for the year ended
December 31, 2013, primarily due to an increase in the average number of shares of preferred stock outstanding in 2014. In October
2013, we reopened our Series A Preferred Stock in an underwritten public offering of 3,800,000 shares of preferred
stock. See Note 13 in the accompanying consolidated financial statements.
Cash Flows
Net cash provided by operating
activities was approximately $66.3 million for the year ended December 31, 2014 as compared to approximately $14.4 million for
the year ended December 31, 2013, an increase of approximately $51.9 million. Net income adjusted for non-cash items provided approximately
$26.9 million for the year ended December 31, 2014 as compared to approximately $45.8 million for the year ended December 31, 2013,
a decrease of approximately $18.9 million. This decrease is due in part to the losses associated with our strategic repositioning
initiatives offset by the addition of properties placed into service in 2014 and 2013. Approximately $39.4 million was provided
by working capital purposes for the year ended December 31, 2014 as compared to approximately $31.5 million used by working capital
accounts for the year ended December 31, 2013, an increase of approximately $70.9 million. The increase was primarily due to the
timing of construction billings and vendor payments associated with the discontinuation of our construction and development business.
Net cash used in investing
activities totaled approximately $213.3 million for the year ended December 31, 2014 as compared to net cash used of approximately
$489.7 million for the year ended December 31, 2013, a decrease of approximately $276.4 million. This decrease was primarily due
to the CB Portfolio Acquisition as well as the property acquisitions in Toledo, Ohio and Montreal, Quebec, Canada in 2013. No such
transactions occurred in 2014. See Note 6 to the accompanying consolidated financial statements.
Net cash provided by financing
activities totaled approximately $130.2 million for the year ended December 31, 2014 as compared to net cash provided of approximately
$501.4 million for the year ended December 31, 2013, a decrease of approximately $371.2 million. For the year ended December 31,
2013, we received net proceeds of approximately $299.7 million from our common stock offering, which was used to fund the CB Portfolio
Acquisition and net proceeds of $91.3 million and $100.0 million from our issuance of Series A Preferred Stock and Exchangeable
Senior Notes, respectively, which were used in the repayment of debt, development funding and working capital purposes. No such
offerings were made for the year ended December 31, 2014. Additionally, dividend payments were made on higher average shares during
2014 as compared to 2013.
Comparison of Years Ended December 31,
2013 and December 31, 2012
As of December 31, 2013,
our property portfolio consisted of 31 consolidated operating properties, containing approximately 6,065 apartment units and 16,570
beds, and 38 operating properties held in five unconsolidated joint ventures, containing approximately 7,135 apartment units and
18,910 beds. Four consolidated operating properties have been presented in discontinued operations.
As of December 31, 2012,
our property portfolio consisted of 28 consolidated operating properties, containing approximately 5,480 apartment units and 14,920
beds, and seven operating properties held in three unconsolidated joint ventures, containing approximately 1,420 apartment units
and 3,950 beds. Four consolidated operating properties have been presented in discontinued operations.
The following table presents
our results of operations for the periods presented, including the amount and percentage change in these results between the periods
(in thousands):
| |
Year Ended December 31, | | |
| | |
| |
| |
2013 | | |
2012 | | |
Change ($) | | |
Change (%) | |
Revenues: | |
| | |
| | |
| | |
| |
Student housing rental | |
$ | 87,635 | | |
$ | 71,211 | | |
| 16,424 | | |
| 23.1 | % |
Student housing services | |
| 3,615 | | |
| 2,880 | | |
| 735 | | |
| 25.5 | % |
Property management services | |
| 820 | | |
| 559 | | |
| 261 | | |
| 46.7 | % |
| |
| | | |
| | | |
| | | |
| | |
Total revenues | |
| 92,070 | | |
| 74,650 | | |
| 17,420 | | |
| 23.3 | % |
Operating expenses: | |
| | | |
| | | |
| | | |
| | |
Student housing operations | |
| 40,726 | | |
| 33,013 | | |
| 7,713 | | |
| 23.4 | % |
General and administrative | |
| 10,658 | | |
| 8,821 | | |
| 1,837 | | |
| 20.8 | % |
Transaction costs | |
| 1,121 | | |
| - | | |
| 1,121 | | |
| N/A | |
Ground leases | |
| 249 | | |
| 217 | | |
| 32 | | |
| 14.7 | % |
Depreciation and amortization | |
| 23,700 | | |
| 20,693 | | |
| 3,007 | | |
| 14.5 | % |
| |
| | | |
| | | |
| | | |
| | |
Total operating expenses | |
| 76,454 | | |
| 62,744 | | |
| 13,710 | | |
| 21.9 | % |
Equity in earnings (loss) of unconsolidated entities | |
| (3,727 | ) | |
| 361 | | |
| (4,088 | ) | |
| -1132.4 | % |
Impairment of unconsolidated entities | |
| (312 | ) | |
| - | | |
| (312 | ) | |
| N/A | |
| |
| | | |
| | | |
| | | |
| | |
Operating income | |
| 11,577 | | |
| 12,267 | | |
| (690 | ) | |
| -5.6 | % |
| |
| | | |
| | | |
| | | |
| | |
Nonoperating income (expense): | |
| | | |
| | | |
| | | |
| | |
Interest expense | |
| (12,969 | ) | |
| (11,545 | ) | |
| (1,424 | ) | |
| 12.3 | % |
Other income | |
| 1,414 | | |
| 6,144 | | |
| (4,730 | ) | |
| -77.0 | % |
| |
| | | |
| | | |
| | | |
| | |
Total nonoperating expense, net | |
| (11,555 | ) | |
| (5,401 | ) | |
| (6,154 | ) | |
| 113.9 | % |
| |
| | | |
| | | |
| | | |
| | |
Net income before income tax benefit (expense) | |
| 22 | | |
| 6,866 | | |
| (6,844 | ) | |
| -99.7 | % |
Income tax benefit (expense) | |
| 727 | | |
| (356 | ) | |
| 1,083 | | |
| -304.2 | % |
| |
| | | |
| | | |
| | | |
| | |
Income from continuing operations | |
| 749 | | |
| 6,510 | | |
| | | |
| | |
Income from discontinued operations | |
| 489 | | |
| 3,908 | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Net income | |
| 1,238 | | |
| 10,418 | | |
| (9,180 | ) | |
| -88.1 | % |
| |
| | | |
| | | |
| | | |
| | |
Net income (loss) attributable to noncontrolling interests | |
| (34 | ) | |
| 46 | | |
| (80 | ) | |
| -173.9 | % |
Dividends on preferred stock | |
| 6,183 | | |
| 4,114 | | |
| 2,069 | | |
| 50.3 | % |
| |
| | | |
| | | |
| | | |
| | |
Net income (loss) attributable to common stockholders | |
$ | (4,911 | ) | |
$ | 6,258 | | |
| (11,169 | ) | |
| -178.5 | % |
Student Housing Operations
Revenues in the student
housing operations segment (which include student housing rental and student housing service revenues) increased by approximately
$17.2 million and operating expenses in the student housing operations segment increased by approximately $7.7 million
during the year ended December 31, 2013, as compared to the year ended December 31, 2012. The increase in revenues was primarily
due to the opening of three new properties in August 2012 (The Grove at Auburn, Alabama, The Grove at Flagstaff, Arizona, and The
Grove at Orono, Maine), our acquisitions in July 2012 (The Grove at Valdosta, Georgia, and The Grove at Moscow, Idaho), the acquisition
of Campus Crest at Toledo, Ohio, in March 2013, the opening of two new properties in August 2013 (The Grove at Muncie, Indiana,
and The Grove at Fort Collins, Colorado), the opening of the undamaged portion of a new property in August 2013 (The Grove at Pullman,
Washington, see Note 3 to the accompanying consolidated financial statements) and an increase in our monthly revenue per occupied
bed at our "same store" properties, offset by a decrease in our occupancy at our "same store" properties. The
increase in operating expenses was primarily due to the aforementioned activity.
New Property Operations. In
August 2012, we began operations at The Grove at Auburn, Alabama, The Grove at Flagstaff, Arizona, and The Grove at Orono, Maine,
which contributed approximately $8.2 million of NOI ($13.2 million of revenues and $5.0 million of operating expenses) for the
year ended December 31, 2013 compared to $3.9 million of NOI ($5.3 million of revenues and $1.4 million of operating expenses)
for the year ended December 31, 2012. In July 2012, we acquired the remaining ownership interests in The Grove at Valdosta, Georgia,
and The Grove at Moscow, Idaho, which contributed approximately $3.4 million of NOI ($6.0 million of revenues and $2.6 million
of operating expenses) for the year ended December 31, 2013, compared to approximately $1.7 million of NOI ($2.9 million of revenues
and $1.2 million of operating expenses) for the year ended December 31, 2012. Prior to the acquisition of these interests, we accounted
for our ownership in these properties under the equity method. In March 2013, we acquired Campus Crest at Toledo, Ohio, which contributed
approximately $0.5 million of NOI ($1.7 million of revenues and $1.2 million of operating expenses) for the year ended December
31, 2013, compared to no contribution for the year ended December 31, 2012. In August 2013, we began operation at The Grove at
Muncie, Indiana, The Grove at Fort Collins, Colorado, The Grove at Flagstaff II, Arizona, and partial operations at The Grove at
Pullman, Washington, which contributed, approximately $3.8 million of NOI ($4.1 million of revenues and $0.3 million of operating
expenses) for the year ended December 31, 2013, compared to no contribution for the year ended December 31, 2012.
"Same-Store"
Property Operations. Our 23 "same-store” properties contributed approximately $35.0 million of NOI for the
year ended December 31, 2013, as compared to approximately $35.9 million of NOI for the year ended December 31, 2012. The decrease
in revenue at our "same-store" properties was due a decrease in average occupancy to approximately 91.8% for the year
ended December 31, 2013 from approximately 92.4% for the year ended December 31, 2012, partially offset by an increase in
average monthly revenue per occupied bed ("RevPOB") to $508 for the year ended December 31, 2013 from $501 for the
year ended December 31, 2012. The increase in operating expenses was primarily due to increases in property-level payroll and utilities.
The following is a reconciliation
of our net income attributable to common stockholders to NOI for the periods presented, including our same store and new properties
(in thousands):
| |
Year Ended December 31, | |
| |
2013 | | |
2012 | |
Net (loss) income attributable to common stockholders | |
$ | (4,911 | ) | |
$ | 6,258 | |
Net (loss) income attributable to noncontrolling interests | |
| (34 | ) | |
| 46 | |
Preferred stock dividends | |
| 6,183 | | |
| 4,114 | |
Income tax expense | |
| (727 | ) | |
| 356 | |
Other (income) expense | |
| (1,414 | ) | |
| 410 | |
Gain on purchase of previously unconsolidated entities | |
| - | | |
| (6,554 | ) |
Income from discontinued operations | |
| (489 | ) | |
| (3,908 | ) |
Impairment of unconsolidated entities | |
| 312 | | |
| - | |
Interest expense | |
| 12,969 | | |
| 11,545 | |
Equity in (earnings) loss of unconsolidated entities | |
| 3,727 | | |
| (361 | ) |
Depreciation and amortization | |
| 23,700 | | |
| 20,693 | |
Ground lease expense | |
| 249 | | |
| 217 | |
General and administrative expense | |
| 10,658 | | |
| 8,821 | |
Transaction costs | |
| 1,121 | | |
| - | |
Property management services | |
| (820 | ) | |
| (559 | ) |
Total NOI from Continuing Operations | |
$ | 50,524 | | |
$ | 41,078 | |
Same store properties NOI | |
$ | 34,666 | | |
$ | 35,495 | |
New properties NOI | |
$ | 14,293 | | |
$ | 5,583 | |
The Grove at Pullman and Toledo NOI | |
$ | 1,565 | | |
$ | - | |
Property Management Services
Property management services
revenues increased from approximately $0.6 million for the year ended December 31, 2012 to approximately $0.8 million for the year
ended December 31, 2013. The increase is primarily due to a larger number of property management contracts. In 2013, we added three
new contracts at the following locations: The Grove at Norman, Indiana; The Grove at State College, Pennsylvania; and The Grove
at Indiana, Pennsylvania.
General and Administrative
General and administrative
expenses increased from approximately $8.8 million for the year ended December 31, 2012 to approximately $10.7 million for the
year ended December 31, 2013. The $1.9 million increase was primarily due to an increase in the number of full-time employees and
travel expenses resulting from our growth.
Transaction Costs
We recognized approximately
$1.0 million in transaction costs related to the CB Portfolio Acquisition and approximately $0.1 million in transaction costs and
travel related to the acquisition of the Toledo, Ohio property for the year ended December 31, 2013. See Note 6 to the accompanying
consolidated financial statements.
We capitalized approximately
$16.9 million of direct, incremental costs related to the CB Portfolio Acquisition into the basis of our investment for the year
ended December 31, 2013.
Depreciation and Amortization
Depreciation and amortization
expense increased from approximately $20.7 million for the year ended December 31, 2012 to approximately $23.7 million for the
year ended December 31, 2013. This increase was primarily due to the increase in the number of operating properties.
Equity in Earnings (Loss) of Unconsolidated
Entities
Equity in earnings (loss)
of unconsolidated entities, which represents our share of the net income (loss) from entities in which we have a noncontrolling
interest, decreased from income of approximately $0.4 million for the year ended December 31, 2012 to a loss of approximately
$(3.7) million for the year ended December 31, 2013 primarily due to the CB Portfolio Acquisition and associated depreciation
and amortization. See Note 6 to the accompanying consolidated financial statements.
Impairment of Unconsolidated Joint Venture
We recognized an impairment
of approximately $0.3 million in our investment in The Grove at Denton due to the difference between our purchase price in the
acquisition of our remaining ownership interests in that joint venture as compared to its carrying value. See Note 6 to the accompanying
consolidated financial statements.
Interest Expense
Interest expense increased
approximately $1.4 million for the year ended December 31, 2013 as compared to the year ended December 31, 2012
primarily due to an increase in average outstanding indebtedness, partially offset by a lower interest rate on our Revolving Credit
Facility in 2013 and the write-off of approximately $1.0 million of deferred financing costs for the year ended December 31,
2012.
Other Income (Expense)
In connection with the
CB Portfolio Acquisition, we recognized $1.4 million of income for the year ended December 31, 2013, resulting from interest
earned on our $31.7 million notes receivable from the CB Investors. See Note 6 to the accompanying consolidated financial statements.
For the year ended December 31, 2012, $6.6 million of gain on purchase of previously unconsolidated entities was recognized and
included as other income offset by $0.4 million of other expense.
Income Tax Benefit (Expense)
Income tax benefit (expense)
for the year ended December 31, 2013, was a $0.7 million benefit as compared to a $0.4 million expense for the year ended December
31, 2012, primarily due to the recognition of current and deferred tax credits related to solar panels owned by our TRS entities.
See Note 5 in the accompanying consolidated financial statements.
Income (Loss) from Discontinued Operations
Income (loss) from discontinued
operations includes the results of our construction and development business as well as the results of four wholly owned properties
which were sold in 2013 for the years ended December 31, 2013 and December 31, 2012. For the year ending December 31, 2013, the
income of $0.5 million consists of a income related to our discontinued construction and development business $3.5 million, which
is offset by a loss of $3.0 million related to discontinued properties driven by an impairment of approximately $4.7 million we
recorded in connection with the sale of those four wholly-owned properties: The Grove at Jacksonville, Alabama, The Grove at Jonesboro,
Arkansas, The Grove at Wichita, Kansas, and The Grove at Wichita Falls, Texas which offset their income for the year. For the year
ended December 31, 2012, the construction and development income was $3.2 million, while the income from the four properties was
$0.7 million.
Dividends on Preferred Stock
Dividends on preferred
stock increased to approximately $6.2 million for the year ended December 31, 2013, compared to $4.1 million for the year
ended December 31, 2012, primarily due to an increase in the average number of shares of preferred stock outstanding in 2013.
In October 2013, we reopened our Series A Preferred Stock
in an underwritten public offering of 3,800,000 shares of preferred stock. See Note 13 in the accompanying consolidated
financial statements.
Cash Flows
Net cash provided by operating
activities was approximately $14.4 million for the year ended December 31, 2013 as compared to approximately $29.5 million for
the year ended December 31, 2012, a decrease of approximately $15.1 million. Net income adjusted for non-cash items provided approximately
$44.9 million for the year ended December 31, 2013 as compared to approximately $34.0 million for the year ended December 31, 2012,
an increase of approximately $10.9 million. This increase is due to the addition of properties placed into service in 2013 and
2012 as well as non-cash equity in loss from the CB Portfolio results of operations. Approximately $30.5 million was used by working
capital accounts for the year ended December 31, 2013 as compared to approximately $4.6 million used by working capital accounts
for the year ended December 31, 2012, an increase of approximately $25.9 million. The increase was primarily due to the timing
of construction billings and vendor payments.
Net cash used in investing
activities totaled approximately $489.7 million for the year ended December 31, 2013 as compared to net cash used of approximately
$133.1 million for the year ended December 31, 2012, an increase of approximately $356.6 million. This increase was primarily due
to the CB Portfolio Acquisition as well as the property acquisitions in Toledo, Ohio and Montreal, Quebec, Canada. See Note 6 to
the accompanying consolidated financial statements.
Net cash provided by financing
activities totaled approximately $501.4 million for the year ended December 31, 2013 as compared to net cash provided of approximately
$98.8 million for the year ended December 31, 2012, an increase of approximately $402.6 million. For the year ended December 31,
2013, we received net proceeds of approximately $299.7 million from our common stock offering, which was used to fund the CB Portfolio
Acquisition and net proceeds of $91.3 million and $100.0 million from our issuance of Series A Preferred Stock and Exchangeable
Senior Notes, respectively, which were used in the repayment of debt, development funding and working capital purposes, offset
by dividend payments on higher average shares during 2013 as compared to 2012.
Liquidity and Capital Resources
Our capital resources
include accessing the public debt and equity markets, when available, mortgage and construction loan financing and immediate access
to the Amended Credit Facility (discussed below).
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; however, we do not currently expect that any
such minimum distributions will be required for 2015, and do not currently intend to make distributions to our stockholders
in 2015 unless we experience sufficient improvement in our operating results, including successfully completing the sale of
certain assets and enhancing our liquidity position by raising additional capital and/or refinancing our existing credit
facilities. Additionally, we would expect to make distributions in future periods only to the extent permitted by the terms
of our Second Amended and Restated Credit Agreement and our projected ability to comfortably satisfy the financial covenants
in that credit agreement for the next four quarters. To the extent we determine to make such distributions in future periods,
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
provide assurance 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. Although we are currently in compliance with the terms of our Second
Amended and Restated Credit Agreement, our Board has determined, based on an evaluation by our management of the
Company’s ability to satisfy all financial covenants in the credit agreement for the next four quarters, not to declare
or pay a dividend on our Common Stock or our Series A Preferred Stock for the first quarter of 2015. In addition, our Board
does not currently intend to declare or pay dividends on our Common Stock or Series A Preferred Stock for the remainder of
2015 unless we experience sufficient improvement in our operating results, including successfully completing the sale
of certain assets and enhancing our liquidity position by raising additional capital and/or refinancing our existing
credit facilities. Whether or not we declare dividends on our Series A Preferred Stock, dividends will accrue on the Series A
Preferred Stock at the effective rate of $2.00 per share until paid, and we will not be permitted to pay dividends on our
Common Stock until the accrued dividends on our Series A Preferred Stock are paid in full.
Principal Capital Resources
In January 2013,
we entered into the Second Amended and Restated Credit Agreement, which provides for a $250.0 million senior unsecured Revolving
Credit Facility, a $50.0 million term loan, and an accordion feature that, under certain circumstances, allows us to request an
increase in the total commitments by an additional $300.0 million, increasing total commitments to $600.0 million. The Second Amended
and Restated Credit Facility will mature in January 2017 and contains a one-year extension option, subject to certain terms and
conditions.
As of December 31, 2014,
we had approximately $167.5 million outstanding under our Revolving Credit Facility and $50.0 million outstanding under the Term
Loan. The amounts outstanding under our Revolving Credit Facility and Term Loan, as well as outstanding letters of credit, will
reduce the amount that we may be able to borrow under this facility for other purposes. As of December 31, 2014, we had approximately
$50.0 million in borrowing capacity under our revolving credit facility, and amounts borrowed under the facility will be due at
its maturity in January 2017, subject to a one-year extension, which we may exercise at our option, subject to the satisfaction
of certain terms and conditions, including the payment of an extension fee. The amount available for us to borrow under the Amended
Credit Facility is based on the sum of (a) the lesser of (i) 60.0% of the "as-is" appraised value of our properties that
form the borrowing base of the Amended Credit Facility and (ii) the amount that would create a debt service coverage ratio of not
less than 1.5, and (b) 50% of the aggregate of the lesser of (i) the book value of each of our development assets (as such term
is defined in the Second Amended and Restated Credit Agreement) and (ii) the "as-is" appraised value of each of our development
assets, subject to certain limitations in the Second Amended and Restated Credit Agreement.
We incur an unused fee
on the balance between the amount available under the Revolving Credit Facility and the amount outstanding under the Revolving
Credit Facility (i) of 0.30% per annum if our average borrowing is less than 50.0% of the total amount available or (ii) 0.25%
per annum if our average borrowing is greater than 50.0% of the total amount available.
Additionally, the Amended
Credit Facility has an accordion feature that allows us to request an increase in the total commitments from $300.0 million to
$600.0 million, subject to conditions. Amounts outstanding under the Amended 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 Second Amended and Restated Credit Agreement)
plus a spread that depends upon our leverage ratio. The spread for borrowings under the Revolving Credit Facility ranges from 1.75%
to 2.50% for Eurodollar Rate based borrowings and from 0.75% to 1.50% for Base Rate based borrowings, and the spread for the Term
Loan ranges from 1.70% to 2.45% for Eurodollar Rate based borrowings and from 0.70% to 1.45% for Base Rate based borrowings.
On February 25, 2015,
we entered into the Second Amendment to the Revolving Credit Facility, which amended, among other things, certain of the financial
covenants from and including December 31, 2014 until and including September 30, 2015 (the “Relief Period”).
Our ability to borrow
under the Amended Credit Facility is subject to our ongoing compliance with a number of customary financial covenants during the
Relief Period, including:
| · | a maximum leverage ratio of not greater than 0.65:1.00; |
| · | a minimum fixed charge coverage ratio of not less than 1.30:1.00; |
| · | a minimum ratio of fixed rate debt and debt subject to hedge agreements to total debt of not less
than 66.67%; |
| · | a maximum secured recourse debt ratio of not greater than 20.0%; |
| · | a minimum tangible net worth of not less than the sum of $330,788,250 plus an amount equal to 75.0%
of the net proceeds of any additional equity issuances; and |
| · | a maximum secured debt ratio of not greater than 47.5% |
Pursuant to
the terms of the Amended Credit Facility, we may not pay distributions that exceed the greater of (i) 95.0% of our funds
from operations, or (ii) the minimum 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 also may be precluded from making certain distributions (other than those
required to allow us to qualify and maintain our status as a REIT). In April 2013, as a result of the CB Portfolio
Acquisition, we received a waiver from our lender group allowing for distributions up to 110.0% of our funds from operations
for the remainder of 2013. Additionally, on February 25, 2015, the dividend payout ratio was amended to be calculated on a
rolling twelve month pro forma basis based on an assumed quarterly dividend of $0.09 per share on our Common Stock, which was
the level established by our Board for the fourth quarter of 2014.
In February 2013, we amended
the Amended Credit Facility to provide for certain exclusions related to our investments in joint ventures as well as the treatment
of certain other investments within the compliance calculation of our secured debt ratio and certain negative covenants.
We and certain of our
subsidiaries guarantee the obligations under the Amended Credit Facility, and we and certain of our subsidiaries have provided
a negative pledge against specified assets (including real property), stock and other interests.
In June 2013, in connection
with our investment in a joint venture with Beaumont to acquire a property in Montreal, Quebec, Canada, we received a waiver from
our lender group allowing us to guarantee debt incurred by our subsidiary, Campus Crest at Montreal I, LLC, to fund such investment.
As of December 31, 2014,
after receipt of waivers, we were in compliance with the above financial covenants with respect to our Amended Credit Facility.
We intend to explore alternatives for reducing our leverage and maintaining compliance with our financial covenants, including
the possible issuance of additional equity, sales of assets, cost controls or other measures.
In February 2012, we completed
an underwritten public offering of approximately 2.3 million shares of our Series A Preferred Stock, including approximately 0.3
million shares issued and sold pursuant to the exercise of the underwriters’ overallotment option in full (see Note 13 in
the accompanying consolidated financial statements).
In July 2012, we issued
approximately 7.5 million shares of common stock, including the full exercise of the underwriters’ option to purchase additional
shares (see Note 13 in the accompanying consolidated financial statements).
In March 2013, we completed
an underwritten public offering of approximately 25.5 million shares of common stock, including the full exercise of the underwriters’
option to purchase additional shares (see Note 13 in the accompanying consolidated financial statements).
In October 2013, we reopened
our Series A Preferred Stock in an underwritten public offering of approximately 3.8 million shares, including approximately 0.4
million shares issued and sold pursuant to the exercise of the underwriters’ option to purchase additional shares of the
Series A Preferred Stock (see Note 13 in the accompanying consolidated financial statements).
In October 2013, we issued
$100.0 million of Exchangeable Senior Notes due October 15, 2018 (see Note 9 in the accompanying consolidated financial statements).
Short-Term Liquidity Needs
We believe that we will
have sufficient capital resources as a result of operations and the borrowings in place to fund ongoing operations and distributions
required to maintain REIT compliance. We anticipate using our cash flow from continuing operations, cash and cash equivalents,
and Amended Credit Facility availability to fund our business operations, cash dividends and distributions, debt amortization,
and recurring capital expenditures.
Recurring Capital Expenditures
Our properties require
periodic investments of capital for general maintenance. These recurring capital expenditures vary in size annually based upon
the nature of the maintenance required for that time period. For example, recently developed properties typically do not require
major maintenance such as the replacement of a roof. In addition, capital expenditures associated with newly acquired or developed
properties are capitalized as part of their acquisition price or development budget, so that such properties typically begin to
require recurring capital expenditures only following their first year of ownership.
We invested approximately
$179.2 million, $126.2 million and $104.0 million in wholly-owned developments for the years ended December 31, 2014, 2013, and
2012, respectively. In 2014, we completed construction on five development projects and subsequently discontinued our development
and construction operations. In 2013, we completed construction on three development projects, and in 2012, we completed construction
on three development projects.
We invested approximately
$16.9 million, $29.7 million and $22.5 million in our operating properties for the years ended December 31, 2014, 2013, and 2012,
respectively. Capital improvements at our wholly-owned properties include betterments to buildings, clubhouse renovations, parking
lots, solar panel installations and other capital improvements. We expect our capital improvements to increase over time as our
portfolio expands as well as our average recurring capital expenditures per bed to increase as our portfolio ages.
Long-Term Liquidity Needs
Our long-term liquidity
needs consist primarily of funds necessary to pay for 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 acquire, or renovations necessary to
comply with the ADA 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 future contractual commitments as of December 31, 2014 (including future interest payments) (in thousands):
Contractual Obligations | |
Total | | |
2015 | | |
2016-2017 | | |
2018-2019 | | |
Thereafter | |
Long-Term Debt Obligations | |
$ | 621,000 | | |
$ | 47,022 | | |
$ | 372,872 | | |
$ | 147,936 | | |
$ | 53,170 | |
Interest Payments on Outstanding Debt Obligations | |
| 81,948 | | |
| 23,042 | | |
| 42,470 | | |
| 10,343 | | |
| 6,093 | |
Operating Lease Obligations | |
| 33,374 | | |
| 1,293 | | |
| 2,624 | | |
| 2,636 | | |
| 26,821 | |
Purchase Obligations(1) | |
| 14,539 | | |
| 14,140 | | |
| 399 | | |
| - | | |
| - | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Total(2)(3) | |
$ | 750,861 | | |
$ | 85,497 | | |
$ | 418,365 | | |
$ | 160,915 | | |
$ | 86,084 | |
| (1) | Obligations relate to subcontracts executed by Campus Crest Construction to wind down previous
wholly-owned development projects that were under construction at December 31, 2014. |
| (2) | Excludes joint venture debt of approximately $32.5 million due to mature in February 2015, of which
we are a 63.9% owner, approximately $49.6 million that matures January and April 2015, of which we are a 10.0% owner, approximately
$53.7 million that matures May 2015 and December 2015, of which we are a 20.0% owner, approximately $88.0 million that matures
in January 2016, of which we are a 40.7% owner, approximately $90.2 million that matures in July 2016, of which we are a 30.0%
owner, and approximately $40.7 million that matures September 2016 and September 2018, of which we are a 30.0% owner. We are the
guarantor of these debt obligations. |
| (3) | Excludes all debt from Copper Beech. |
Long-Term Indebtedness Outstanding
See Note 9 in the accompanying
consolidated financial statements for our outstanding consolidated indebtedness.
The weighted average annual
interest rate on our total long-term indebtedness as of December 31, 2014 was approximately 3.65%. At December 31, 2014, our
ratio of debt to total market capitalization was approximately 56.66%, excluding indebtedness encumbering our current and future
joint venture properties.
At December 31, 2014,
after receipt of waivers, we were in compliance with all financial covenants with respect to our Amended Credit Facility.
Off-Balance Sheet Arrangements
Joint Ventures
We have investments in
real estate ventures with CB Investors, HSRE, Brandywine and Beaumont which are not consolidated by us. These joint ventures are
engaged primarily in developing, constructing, owning and managing student housing properties in the United States and Canada.
Along with the joint venture partners, we hold joint approval rights for major decisions, including those regarding property acquisition
and disposition as well as property operations. As such, we hold noncontrolling interests in these joint ventures and account for
them under the equity method of accounting.
We are the guarantor of
the construction and mortgage debt of our ventures with HSRE and Beaumont. Detail of our unconsolidated investments at December
31, 2014 is presented in the following table (in thousands):
| |
| | |
| |
| | |
| | |
| | |
| | |
Debt |
| |
| | |
| |
| | |
| | |
| | |
| | |
| | |
Weighted | | |
|
| |
| | |
| |
Number of | | |
| | |
| | |
| | |
| | |
Average | | |
|
| |
Our | | |
Year | |
Properties In | | |
Total | | |
Total (5) | | |
Net Total | | |
Amount | | |
Interest | | |
|
Unconsolidated Entities | |
Ownership | | |
Founded | |
Operation | | |
Investment | | |
Impairment | | |
Investment | | |
Outstanding | | |
Rate | | |
Maturity Date
/ Range |
HSRE-Campus Crest I, LLC | |
| 63.9 | % | |
2009 | |
| 3 | | |
$ | 10,380 | | |
$ | (10,168 | ) | |
$ | 212 | | |
$ | 32,485 | | |
| 2.67 | %(1) | |
5/9/2015 |
HSRE-Campus Crest V, LLC | |
| 10.0 | % | |
2011 | |
| 3 | | |
| 4,093 | | |
| (4,093 | ) | |
| - | | |
| 49,614 | | |
| 2.89 | %(1) | |
4/20/2015-5/05/2015 |
HSRE-Campus Crest VI, LLC | |
| 20.0 | % | |
2012 | |
| 3 | | |
| 15,089 | | |
| (8,274 | ) | |
| 6,815 | | |
| 53,706 | | |
| 2.48 | %(1) | |
5/08/2015 – 12/19/2015 |
HSRE-Campus Crest IX, LLC | |
| 30.0 | % | |
2013 | |
| 1 | | |
| 18,975 | | |
| - | | |
| 18,975 | | |
| 90,204 | | |
| 2.37 | %(1) | |
7/25/2016 |
HSRE-Campus Crest X, LLC | |
| 30.0 | % | |
2013 | |
| 2 | | |
| 12,307 | | |
| (4,234 | ) | |
| 8,073 | | |
| 40,739 | | |
| 2.36 | %(1) | |
9/06/2016-9/30/2018 |
CB Portfolio | |
| 48.0 | %(3) | |
2013 | |
| 35 | | |
| 218,718 | | |
| - | | |
| 218,718 | | |
| 227,698 | | |
| 5.14 | %(2) | |
9/01/2015 – 10/01/2020 |
CSH Montreal | |
| 47.0 | %(4) | |
2013 | |
| 2 | | |
| 33,470 | | |
| (26,523 | ) | |
| 6,947 | | |
| 87,970 | | |
| 6.39 | %(1) | |
1/13/2016 |
Total unconsolidated entities | |
| | | |
| |
| 49 | | |
$ | 313,032 | | |
$ | (53,292 | ) | |
$ | 259,740 | | |
$ | 582,416 | | |
| 4.13 | % | |
|
| (1) | Variable interest rates. |
| (2) | Comprised of fixed rate debt. |
| (3) | As of December 31, 2014, we had a 48.0% ownership interest in the CB Portfolio. |
| (4) | As of January 2014, our ownership increased from 20.0% to 47.0% due to the acquisition of Holiday
Inn Midtown in Montreal, Quebec. See discussion above. |
| (5) | Total impairment related to unconsolidated entities is $57.8 million as included on the accompanying
consolidated statements of operation and comprehensive income (loss). $4.5 million of this amount, related to HSRE V, is not included
in the above table as it is related to guarantee obligations and has instead been included in other liabilities on the consolidated
balance sheet. |
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 NAREIT. FFO, as defined by NAREIT, represents net income (loss) determined in accordance
with GAAP, excluding extraordinary items as defined under 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. In addition, in October 2011, NAREIT communicated to its members that the exclusion
of impairment write-downs of depreciable real estate is consistent with the definition of FFO.
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 income (loss) as presented in the consolidated financial statements accompanying this report. FFO should not be considered
as an alternative to net income (loss) (computed in accordance with GAAP) as an indicator of our properties’ financial performance
or to cash flow from operating activities (computed in accordance with GAAP) as an indicator of our liquidity, nor is it indicative
of funds available to fund our cash needs, including our ability to pay dividends or make distributions.
The following table presents
a reconciliation of our FFO to our net income (loss) for the periods presented (in thousands):
| |
Year Ended
December 31, | |
(in thousands) | |
2014 | | |
2013 | | |
2012 | |
Funds from operations (“FFO”) | |
| | | |
| | | |
| | |
Net income (loss) attributable
to common stockholders | |
$ | (174,923 | ) | |
$ | (4,911 | ) | |
$ | 6,258 | |
Net income (loss) attributable to
noncontrolling interests | |
| (1,233 | ) | |
| (34 | ) | |
| 46 | |
Gain
on purchase of joint venture properties(1) | |
| - | | |
| - | | |
| (6,554 | ) |
Real estate related depreciation and
amortization | |
| 27,858 | | |
| 25,503 | | |
| 23,521 | |
Real estate related
depreciation and amortization unconsolidated entities | |
| 25,034 | | |
| 23,271 | | |
| 1,731 | |
FFO
(2) | |
$ | (123,263 | ) | |
$ | 43,829 | | |
$ | 25,002 | |
| (1) | For 2012, gain was from the purchase
of our joint venture partner's interests in The Grove at Moscow, Idaho, and The Grove
at Valdosta, Georgia. |
| (2) | The fair value debt and purchase accounting
adjustments included in equity in earnings related to Copper Beech were approximately
$6.5 million and $3.6 million for the years ended December 31, 2014 and 2013, respectively.
In addition, the immaterial correction described in Note 2 to the consolidated financial
statements was not material to FFO. |
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 unhedged interest
rate derivatives, Copper Beech dividend equivalency, write-off of unamortized deferred financing fees, transaction costs (including
those within equity in earnings), fair value of debt adjustments within our investment in Copper Beech and the write-off of development
costs. Also excluded are write-offs and impairments, severance expense, discontinued operations, and change in valuation allowance
for the deferred tax asset. Excluding these items adjusts FFO to be more reflective of operating results prior to capital replacement
or expansion, debt amortization of principal, impairments, discontinued operations or other commitments and contingencies. This
measure is referred to herein as "FFOA."
| |
Year
Ended December 31, | |
| |
2014 | | |
2013 | | |
2012 | |
| |
| | |
| | |
| |
FFO | |
$ | (123,263 | ) | |
$ | 43,829 | | |
$ | 25,002 | |
Elimination
of change in fair value of interest rate derivatives(4) | |
| - | | |
| - | | |
| - | |
Elimination
of Copper Beech dividend equivalency(5) | |
| 1,200 | | |
| - | | |
| - | |
Elimination of write-off of unamortized
deferred financing fees | |
| - | | |
| 236 | | |
| 966 | |
Elimination of transaction
costs(6) | |
| 4,801 | | |
| 2,027 | | |
| - | |
Elimination
of fair value debt and purchase accounting adjustments at our investment in Copper Beech(7) | |
| (6,491 | ) | |
| (3,576 | ) | |
| - | |
Elimination
of write off of land, pre-development costs and asset held for sale(8) | |
| 31,927 | | |
| 175 | | |
| - | |
Elimination of impairment
of disposed assets(9) | |
| - | | |
| 4,729 | | |
| - | |
Elimination of impairment
of unconsolidated entities(10) | |
| 57,789 | | |
| - | | |
| - | |
Elimination
of effect of not exercising Copper Beach purchase option(3) | |
| 33,375 | | |
| - | | |
| - | |
Elimination of write-off
of corporate other assets(11) | |
| 15,110 | | |
| - | | |
| - | |
Elimination of severance(12) | |
| 6,159 | | |
| - | | |
| - | |
Elimination of discontinued
operations(13) | |
| 9,576 | | |
| (489 | ) | |
| (3,908 | ) |
Elimination of
change in valuation allowance for deferred tax asset | |
| 731 | | |
| - | | |
| - | |
Funds
from operations adjusted (“FFOA”) | |
$ | 30,914 | | |
$ | 46,931 | | |
$ | 22,060 | |
| (3) | During the year ended December 31,
2014, we recorded a non-cash charge of $33.4 million due to the effect of not exercising
the Copper Beech purchase option during August of 2014. See Note 6 in the accompanying
consolidated financial statements for the year ended December 31, 2014. |
| (4) | Includes only the non-cash portion
of the change in unhedged derivatives. |
| (5) | Amount represents a one-time cash
dividend equivalency payment made during the year ended December 31, 2014 to the CB Investors,
per the CB Investors’ interpretation of the second amendment to the purchase and
sale agreement of Copper Beech. |
| (6) | Includes costs incurred in connection
with Copper Beech and CSH Montreal for 2014 including our proportional share of costs
incurred within the ventures. |
| (7) | Includes our proportionate share of
non-cash fair value debt and other purchase accounting adjustments in our investment
in Copper Beech. |
| (8) | During the year ended December 31,
2014, we recorded impairment for land and pre-development costs of $31.9 million in the
consolidated statement of operations and comprehensive income (loss), based on our estimated
fair values. The fair values were obtained from third-party appraisals based on comparable
properties (market approach; which involved Level 3 inputs in the fair value hierarchy). |
| (9) | In 2013, we sold four unencumbered,
wholly-owned properties: The Grove at Jacksonville, Alabama, The Grove at Jonesboro,
Arkansas, The Grove at Wichita, Kansas, and The Grove at Wichita Falls, Texas, for a
combined sales price of $51.0 million resulting in net proceeds of approximately $48.6
million. In connection with the disposition of these properties, we recorded an impairment
of $4.7 million. |
| (10) | During the year ended December 31,
2014, we recorded an impairment of $57.8 million in the consolidated statement of operations
and comprehensive income (loss) for certain unconsolidated entities, including $31.3
million related to HSRE I, HSRE V, HSRE VI and HSRE X (the “HSRE Investments”)
and $26.5 million related to the investment in CSH Montreal. |
| (11) | In 2014, the Company recorded $15.1
million of impairments of other assets related to corporate infrastructure changes, as
a result of the strategic repositioning. Assets impaired included the corporate aircraft
and Enterprise Resource Planning system. |
| (12) | We recognized severance expense of
$9.1 million during the year ended December 31, 2014, of which $2.9 million is included
in loss from discontinued operations and $6.2 million is included in operating expenses
(see Note 4 of the accompanying consolidated financial statements). |
| (13) | In connection with the strategic
repositioning initiatives announced in Form 10-Q for the quarterly period ended September
30, 2014, we discontinued all construction and development operations, which resulted
in the income (loss) from discontinued operations of $(9.6) million in 2014, $3.5 million
in 2013, $3.2 million in 2012, $3.8 million in 2011, and $1.8 million for the full year
ended December 31, 2010. Additionally, in December 2013, we sold four unencumbered, wholly-owned
properties: The Grove at Jacksonville, Alabama, The Grove at Jonesboro, Arkansas, The
Grove at Wichita, Kansas, and The Grove at Wichita Falls, Texas, for a combined sales
price of $51.0 million resulting in net proceeds of approximately $48.6 million. In connection
with the disposition of these properties, an impairment of $4.7 million was recorded
which is presented in discontinued operations in the accompanying consolidated statements
of operations and comprehensive income (loss) for the year ended December 31, 2013. This
resulted in income (loss) from discontinued operations of $(3.0) million in 2013 and
$0.7 million in 2012, $0.1 million in 2011, and $(3.2) million in the year ended December
31, 2010. |
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 any rising costs. However, our ability to raise rental rates could be limited by a weak economic environment, declining
student enrollment at our principal colleges and universities or competition in the marketplace.
Recent Accounting Pronouncements
See Note 2 in the accompanying consolidated
financial statements.
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk.
As of December 31, 2014,
our Revolving Credit Facility bears 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 1.75%
to 2.50% for Eurodollar Rate based borrowings and from 0.75% to 1.50% for Base Rate based borrowings. At December 31, 2014, the
spread on our Revolving Credit Facility was 2.50%.
Interest Rate Sensitivity
The table below provides
information about financial instruments that are sensitive to changes in interest rates, including mortgage obligations, bonds
and lines of credit. For debt obligations, the table presents scheduled maturities, excluding debt discounts, and related weighted
average interest rates by expected maturity dates (in thousands, except interest rates):
| |
2015 | | |
2016 | | |
2017 | | |
2018 | | |
2019 | | |
Thereafter | | |
Total | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Fixed rate debt | |
$ | 2,914 | | |
$ | 46,091 | | |
$ | 16,058 | | |
$ | 146,583 | | |
$ | 1,353 | | |
$ | 53,170 | | |
$ | 266,169 | |
Weighted average interest rate | |
| 5.16 | % | |
| 5.16 | % | |
| 4.97 | % | |
| 4.91 | % | |
| 3.99 | % | |
| 3.99 | % | |
| 5.16 | % |
Variable rate debt | |
| 44,108 | | |
| 16,288 | | |
| 294,435 | | |
| - | | |
| - | | |
| - | | |
| 354,831 | |
Weighted average interest rate | |
| 2.27 | % | |
| 2.30 | % | |
| 2.32 | % | |
| - | | |
| - | | |
| - | | |
| 2.53 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total | |
$ | 47,022 | | |
$ | 62,379 | | |
$ | 310,493 | | |
$ | 146,583 | | |
$ | 1,353 | | |
$ | 53,170 | | |
$ | 621,000 | |
The table above presents
the principal amount of debt maturing each year through December 31, 2019 and thereafter and weighted average interest rates
for the debt maturing in each specified period. This table reflects indebtedness outstanding as of December 31, 2014, excluding
joint venture debt, and does not reflect indebtedness incurred after that date. Our ultimate exposure to interest rate fluctuations
depends on the amount of indebtedness that bears interest at variable rates, the time at which the interest rate is adjusted,
the amount of adjustment, the ability to prepay or refinance variable rate indebtedness and hedging strategies used to reduce
the impact of any increases in rates.
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 December 31, 2014, approximately $354.8 million of our aggregate indebtedness (57.4% 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 cost would increase or decrease, depending on rate movement, future
earnings and cash flows by approximately $3.1 million annually. This assumes that the amount outstanding under our variable rate
debt remains at $354.8 million, the balance as of December 31, 2014.
We do, and may in the
future, continue to use derivative financial instruments to manage, or hedge, interest rate risks related to such variable rate
borrowings. 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 8.
Financial Statements and Supplementary Data.
The information required
herein is included as set forth in Item 15—Exhibits and Financial Statement Schedules.
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and
Procedures
As required by SEC Rule
13a-15(b), our management, as represented by our Principal Executive Officer and Principal Financial Officer, performed an evaluation
of our disclosure controls and procedures, which have been designed to permit us to effectively identify and timely disclose important
information. Management concluded that the disclosure controls and procedures were not effective as of December 31, 2014 and in
prior periods due to the material weaknesses in internal control over financial reporting described in “Management’s
Annual Report on Internal Control Over Financial Reporting” below.
Management’s Annual Report on Internal
Control Over Financial Reporting
The Company is responsible
for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f)
and 15d-15(f) promulgated under the Exchange Act as amended. Our internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles.
Because of its inherent
limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions
or that the degree of compliance with the policies may deteriorate.
In the course of preparing
this Annual Report on Form 10-K and the consolidated financial statements included herein, our management conducted an evaluation
of the effectiveness of our internal control over financial reporting as of December 31, 2014 using the criteria issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in the Internal Control-Integrated Framework (1992).
Based on that evaluation, management believes that the Company’s internal control over financial reporting was not effective
as of December 31, 2014 due to the material weaknesses in internal control over financial reporting described below.
A material weakness is
a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely
basis.
As part of our evaluation
of internal control over financial reporting as described above, management concluded that:
The Company did not maintain
an effective control environment and risk assessment and information and communication processes, specifically the Company did
not have:
| · | sufficient finance and accounting resources within the organization with adequate knowledge of
the Company’s processes and controls. |
| · | an adequate risk assessment process to identify and analyze changes in the business and personnel
and implement process level controls and monitoring activities that are responsive to those changes and aligned with the Company’s
financial reporting objectives. |
| · | timely communication by senior management to those responsible for financial reporting regarding
key terms of non-routine transactions. |
The Company did not design
and maintain effective process-level controls over:
| · | the completeness and accuracy of accrued property taxes, which are included in accounts payable
and accrued expenses, specifically the review of terms related to ground leases entered into eight years ago; |
| · | the completeness, existence, and accuracy of the Company’s investments in and equity in earnings
of unconsolidated entities and transactions between the Company and its investees, specifically, the Company did not obtain timely,
quality information to effectively monitor the underlying business operations and financial risks related to the investees; |
| · | the completeness, existence, accuracy, valuation and presentation of non-routine transactions,
specifically, the Company did not have sufficient management review controls over the key assumptions and underlying data elements
used in the acquisition and impairment of long-lived assets and investments in unconsolidated entities and sufficient knowledge
of the contractual terms affecting the financial reporting for a consolidated variable interest entity; |
| · | the authorization of cash expenditures in accordance with the Company’s expenditure authorization
matrix; |
| · | the completeness and accuracy of stock compensation expense and disclosures; |
| · | the recognition and measurement of other assets processed by manual journal entries; and |
| · | effective information technology systems access controls supporting the processing and recording
of student housing revenue and accounts receivables that are designed and implemented to restrict users’ access commensurate
with their job responsibilities. |
The control deficiencies
resulted in material and certain immaterial misstatements in the financial statement accounts described above that were corrected
prior to the issuance of the annual consolidated financial statements. In addition, in some instances, no material misstatements
were identified. The control deficiencies create a reasonable possibility that a material misstatement to the consolidated financial
statements will not be prevented or detected on a timely basis, and therefore we concluded that the deficiencies represent material
weaknesses in the Company’s internal control over financial reporting and our internal control over financial reporting was
not effective as of December 31, 2014.
KPMG LLP, an independent
registered public accounting firm who audited the consolidated financial statements included in this annual report on Form 10-K,
has issued an adverse report on the effectiveness of the Company's internal control over financial reporting as of December 31,
2014. This attestation report appears on Page 74 of this annual report on Form 10-K.
Plan for Remediation of Material
Weaknesses
In connection with the
recent steps taken by the Board of Directors to begin to implement a strategic repositioning of the Company, the Board and our
management are focused on improving the Company’s internal controls and processes. In order to remediate the aforementioned
material weaknesses in the Company’s control environment, risk assessment process, information and communication components
and process-level controls, the Audit Committee of the Board of Directors of the Company has directed management to:
| · | provide training on key aspects of the Company's system of internal control over financial reporting,
including Company policies and procedures, individuals' operational and control responsibilities and how individuals will be held
accountable for those responsibilities. |
| · | evaluate and revise risk assessment process in order to effectively identify, analyze and determine
how the Company will respond to operational, legal, regulatory and financial reporting risks affecting the Company and specifically,
the Company’s internal controls over financial reporting. In addition, the Board of Directors will establish a Risk Management
Committee that will provide oversight and direction to management. |
| · | implement a process whereby senior management ensures the timely communication of the key terms
of non-routine transactions to those responsible for financial reporting. |
| · | conduct a business process review to ensure that processes, information systems, personnel, internal
controls and monitoring activities are aligned with financial reporting objectives, implement and monitor the recommendations from
this review. |
| · | improve the documentation of business processes and internal controls over financial reporting
including the redesign, communication and enforcement of an expenditure approval authority matrix. |
| · | establish a rigorous process to ensure that the design and maintenance of management review controls
are implemented and executed on a timely basis, including a more rigorous process to ensure that information necessary for financial
reporting is shared across the organization on a timely basis. |
Changes in Internal Control over Financial
Reporting
There were no material
changes, other than those discussed in the following paragraphs, in our internal control over financial reporting identified in
connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during our most recent
fiscal quarter that has materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting. In the course of preparing this Annual Report on Form 10-K and the consolidated financial statements included herein,
our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31,
2014 as described above, and identified the material weaknesses in internal control over financial reporting described above. As
described in the following paragraphs, based on that evaluation, our management believes that these material weaknesses developed
during the fourth quarter of 2014 and prior periods.
During the third quarter
of 2014, the Board of Directors began to implement a strategic repositioning of the Company with a renewed focus on the Company's
internal controls. The Company affected the exit from the Company's construction and development initiatives and sought to simplify
its balance sheet. In connection with the repositioning, the Company experienced significant turnover in the fourth quarter at
its most senior executive positions, including its Chief Executive Officer, Chief Financial Officer, and Chief Operating Officer,
and other executives (or, in the case of the Chief Executive Officer, the Lead Outside Director) were appointed to fill these positions
on an interim basis, in addition to their regular duties, while searches are conducted for permanent replacements. During the fourth
quarter, the Company hired a new Director of Internal Audit tasked with evaluating, identifying and remediating internal control
deficiencies and weaknesses. The Company also spent significant effort to negotiate the Copper Beech transaction and effect the
actions necessary to exit the construction and development initiatives.
The Company believes it
is likely that many of the material weaknesses identified in management’s evaluation of the effectiveness of our internal
controls over financial reporting commenced or existed in prior periods but were not previously identified by management and remained
unremediated as of December 31, 2014. Accordingly, disclosure controls and procedures were also not effective in prior periods.
The Company believes that the significant senior management turnover and strained internal control processes led to and revealed
the material weaknesses in internal control over financial reporting identified in the report described above which remained unremediated
at December 31, 2014.
Item
9B. Other Information
None.
PART III.
Item 10. Directors, Executive Officers
and Corporate Governance
The information required
by this item is incorporated herein by reference to the material in the Proxy Statement.
Item 11. Executive Compensation
The information required
by this item is incorporated herein by reference to the material in the Proxy Statement.
Item 12. Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters
The information required
by this item is incorporated herein by reference to the material in the Proxy Statement.
Item 13. Certain Relationships and
Related Transactions, and Director Independence
The information required
by this item is incorporated herein by reference to the material in the Proxy Statement.
Item 14. Principal Accountant
Fees and Services
The information required
by this item is incorporated herein by reference to the material in the Proxy Statement.
PART IV.
Item 15. Exhibits and Financial Statement
Schedules
|
|
1. Financial Statements |
Page |
|
|
Reports of Independent Registered Public Accounting Firm |
73 |
|
|
Consolidated Balance Sheets of Campus Crest Communities, Inc. and subsidiaries as of December 31, 2014 and 2013 |
75 |
|
|
Consolidated Statements of Operations and Comprehensive Income (Loss) for Campus Crest Communities, Inc. for the years ended December 31, 2014, 2013, and 2012 |
76 |
|
|
Consolidated Statements of Changes in Equity for Campus Crest Communities, Inc. for the years ended December 31, 2014, 2013, and 2012 |
78 |
|
|
Consolidated Statements of Cash Flows for Campus Crest Communities, Inc. for the years ended December 31, 2014, 2013, and 2012 |
79 |
|
|
Notes to Consolidated Financial Statements |
81 |
|
|
2. Financial Statement Schedules |
|
|
|
Schedule III — Real Estate and Accumulated Depreciation as of December 31, 2014 |
116 |
|
|
All
other schedules for which provision is made in Regulation S-X are either not required to be included herein under the related
instructions or are inapplicable or the related information is included in the footnotes to the applicable financial statement
and, therefore, have been omitted. |
|
|
3. Exhibits |
|
The following exhibits are filed as part of this annual report
on Form 10-K:
Exhibit
Number |
|
Description
of Document |
2.1 |
|
Purchase and Sale Agreement, dated as of February 26, 2013, by and
among CB-Campus Crest, LLC, CB-Campus Crest PA, LLC, Campus Crest Communities, Inc., Copper Beech Townhome Communities, LLC,
Copper Beech Townhome Communities (PA), LLC and the sellers named therein (incorporated by reference to Exhibit 2.1 to the
Company’s Current Report on Form 8-K filed on February 27, 2013). |
2.2 |
|
First Amendment to Purchase and Sale Agreement, dated as of September
30, 2013, by and among CB-Campus Crest, LLC, CB-Campus Crest PA, LLC, Campus Crest Communities, Inc., Copper Beech Townhome
Communities, LLC, Copper Beech Townhome Communities (PA), LLC and the sellers named therein (incorporated by reference to
Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on October 2, 2013). |
2.3 |
|
Purchase and Sale Agreement, dated as of March 15, 2013, by and
among Copper Beech Townhome Communities, LLC, Copper Beech Townhome Communities (PA), LLC, Campus Crest Communities, Inc.
and the sellers named therein (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K
filed on March 21, 2013). |
3.1 |
|
Articles of Amendment and Restatement of Campus Crest Communities,
Inc. (incorporated by reference to Exhibit 3.1 to the registrant’s registration statement on Form S-11 (No. 333-166834)
initially filed on May 14, 2010). |
3.2 |
|
Articles of Amendment to Articles of Amendment and Restatement of the
Company, effective April 25, 2013 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form
8-K filed on April 26, 2013). |
3.3 |
|
Articles Supplementary designating Campus Crest Communities, Inc.’s 8.00% Series A
Cumulative Redeemable Preferred Stock (incorporated by reference to Exhibit 3.1 to the registrant’s current report on
Form 8-K filed on February 9, 2012). |
3.4 |
|
Articles Supplementary establishing additional shares of Campus Crest Communities, Inc.’s
8.00% Series A Cumulative Redeemable Preferred Stock (incorporated by reference to Exhibit 3.1 to the registrant’s current
report on Form 8-K filed on October 9, 2013). |
3.5 |
|
Bylaws of Campus Crest Communities, Inc. (incorporated by reference to Exhibit 3.2 to the
registrant’s registration statement on Form S-11 (No. 333-166834) initially filed on May 14, 2010). |
4.1 |
|
Form of Certificate for Common Stock of Campus Crest Communities, Inc. (incorporated by
reference to Exhibit 4.1 to the registrant’s registration statement on Form S-11 (No. 333-166834) initially filed on
May 14, 2010). |
4.2 |
|
Form of Certificate for 8.00% Series A Cumulative Redeemable Preferred Stock of Campus Crest
Communities, Inc. (incorporated by reference to Exhibit 4.1 to the registrant’s registration statement on Form 8-A
filed on February 7, 2012). |
4.3 |
|
Indenture, dated October 9, 2013, among Campus Crest Communities Operating Partnership,
LP, as issuer, Campus Crest Communities, Inc., as guarantor, and U.S. Bank National Association, as trustee, including the
form of 4.75% Exchangeable Senior Notes due 2018 and the form of the related guarantee (incorporated by reference to Exhibit
4.2 to the registrant’s current report on Form 8-K filed on October 9, 2013). |
4.4 |
|
Registration Rights Agreement, dated October 9, 2013, among Campus Crest Communities Operating
Partnership, LP, Campus Crest Communities, Inc., Barclays Capital Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated
and Citigroup Global Markets Inc. (incorporated by reference to Exhibit 10.1 to the registrant’s current report on Form
8-K filed on October 9, 2013). |
10.1 |
|
Second Amended and Restated Agreement of Limited Partnership of Campus Crest Communities
Operating Partnership, LP (incorporated by reference to Exhibit 10.1 to the registrant’s current report on Form 8-K
filed on February 9, 2012). |
10.2 |
|
First Amendment to Second Amended and Restated Agreement of Limited Partnership of Campus
Crest Communities Operating Partnership, LP (incorporated by reference to Exhibit 10.2 to the registrant’s current report
on Form 8-K filed on October 9, 2013). |
10.3 |
|
Campus Crest Communities, Inc. Amended and Restated Equity Incentive Compensation Plan (incorporated
by reference to Exhibit 10.2 to the registrant’s annual report on Form 10-K for the fiscal year ended December 31, 2010).* |
10.4 |
|
Form of Restricted Stock Award Agreement (incorporated by reference to Exhibit 4.3 to the
registrant’s registration statement on Form S-8 (No. 333-169958) filed on October 15, 2010).* |
10.5 |
|
Form of Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 4.4
to the registrant’s registration statement on Form S-8 (No. 333-169958) filed on October 15, 2010).* |
10.6 |
|
Form of Indemnification Agreement (incorporated by reference to Exhibit 10.2 to the registrant’s
current report on Form 8-K filed on October 21, 2010).* |
10.7 |
|
Amended and Restated Employment Agreement, dated August 5, 2013, between Campus Crest Communities,
Inc. and Michael S. Hartnett (incorporated by reference to Exhibit 10.4 to the registrant’s current report on Form 8-K
filed on August 8, 2013).* |
10.8 |
|
Employment Agreement by and between Campus Crest Communities, Inc. and Donald L. Bobbitt,
Jr. (incorporated by reference to Exhibit 10.9 to the registrant’s annual report on Form 10-K for the fiscal year ended
December 31, 2011).* |
10.9 |
|
First Amendment to Employment Agreement, dated August 5, 2013, between Campus Crest Communities,
Inc. and Donald L. Bobbitt, Jr. (incorporated by reference to Exhibit 10.2 to the registrant’s current report on Form
8-K filed on August 8, 2013).* |
10.10 |
|
Employment Agreement by and between Campus Crest Communities, Inc. and Robert Dann (incorporated
by reference to Exhibit 10.4 to the registrant’s quarterly report on Form 10-Q for the quarter ended March 31, 2011).* |
10.11 |
|
First Amendment to Employment Agreement, dated August 5, 2013, between
Campus Crest Communities, Inc. and Robert Dann (incorporated by reference to Exhibit 10.3 to the registrant’s current
report on Form 8-K filed on August 8, 2013).* |
10.12 |
|
Employment Agreement, dated August 5, 2013, between Campus Crest Communities, Inc. and
Brian Sharpe (incorporated by reference to Exhibit 10.14 to the registrant’s annual report on Form 10-K for
the fiscal year ended December 31, 2013).* |
10.13 |
|
Confidentiality and Noncompetition Agreement by and between Campus Crest Communities, Inc.
and Michael S. Hartnett (incorporated by reference to Exhibit 10.13 to the registrant’s annual report on Form 10-K for
the fiscal year ended December 31, 2011).* |
10.14 |
|
Confidentiality and Noncompetition Agreement by and between Campus Crest Communities, Inc.
and Donald L. Bobbitt, Jr. (incorporated by reference to Exhibit 10.15 to the registrant’s annual report on Form 10-K
for the fiscal year ended December 31, 2011).* |
10.15 |
|
Confidentiality and Noncompetition Agreement by and between Campus Crest Communities, Inc.
and Robert Dann (incorporated by reference to Exhibit 10.5 to the registrant’s quarterly report on Form 10-Q for the
quarter ended March 31, 2011).* |
10.16 |
|
Confidentiality and Noncompetition Agreement by and between Campus Crest Communities, Inc.
and Brian Sharpe (incorporated by reference to Exhibit 10.19 to the registrant’s annual report on Form 10-K for the
fiscal year ended December 31, 2013).* |
10.17 |
|
Tax Protection Agreement by and among Campus Crest Communities, Inc., Campus Crest Communities
Operating Partnership, LP, and MXT Capital, LLC (incorporated by reference to Exhibit 10.1 to the registrant’s current
report on Form 8-K filed on October 21, 2010). |
10.18 |
|
Registration Rights Agreement by and among Campus Crest Communities, Inc., Campus Crest
Communities Operating Partnership, LP, MXT Capital, LLC and certain other parties thereto (incorporated by reference to Exhibit
10.17 to the registrant’s registration statement on Form S-11 (No. 333-166834) initially filed on May 14,
2010). |
10.19 |
|
Second Amended and Restated Credit Agreement, by and among Campus Crest Communities Operating
Partnership, LP, Campus Crest Communities, Inc., Citibank, N.A. and the other parties thereto, dated as of January 8, 2013
(incorporated by reference to Exhibit 10.1 to the registrant’s current report on Form 8-K filed on January 10,
2013). |
10.20 |
|
First Amendment to Second Amended and Restated Credit Agreement, dated as of February 22,
2013, among Campus Crest Communities Operating Partnership, LP, Citibank, N.A. and the other parties thereto (incorporated
by reference to Exhibit 10.1 to the registrant’s current report on Form 8-K filed on February 27, 2013). |
10.21 |
|
Waiver of Required Lenders and Administrative Agent, dated as of April 8, 2013, by and among
Campus Crest Communities Operating Partnership, LP, Citibank, N.A. and the other parties thereto. (incorporated by reference to Exhibit 10.1 to the registrants quarterly report on Form 10-Q for the quarter ended March 31, 2013). |
10.22 |
|
Waiver of Required Lenders and Administrative Agent, dated as of June 28, 2013, by and among
Campus Crest Communities Operating Partnership, LP, Citibank, N.A. and the other parties thereto. (incorporated by reference to Exhibit 10.2 to the registrants quarterly report on Form 10-Q for the quarter ended June 30, 2013). |
10.23 |
|
Amended and Restated Operating Agreement of HSRE-Campus Crest I, LLC, dated as of October 19,
2010 (incorporated by reference to Exhibit 10.4 to the registrant’s current report on Form 8-K filed on October 21,
2010). |
10.24 |
|
Operating Agreement of HRSE-Campus Crest IV, LLC, dated as of January 20, 2011 (incorporated
by reference to Exhibit 10.68 to the registrant’s annual report on Form 10-K for the fiscal year ended December 31,
2010). |
10.25 |
|
Amended and Restated Operating Agreement of HRSE-Campus Crest V, LLC, dated as of December
20, 2011 (incorporated by reference to Exhibit 10.55 to the registrant’s annual report on Form 10-K for the fiscal year
ended December 31, 2011). |
10.26 |
|
Contribution and Distribution Agreement by and among HSRE-Campus Crest IA, LLC, Campus Crest
Ventures III, LLC, HSRE-Campus Crest I, LLC and Campus Crest Properties, LLC, dated as of December 29, 2011 (incorporated
by reference to Exhibit 10.1 to the registrant’s current report on Form 8-K filed on January 5, 2012). |
10.27 |
|
Form of Aircraft Lease (incorporated by reference to Exhibit 10.43 to the registrant’s
registration statement on Form S-11 (No. 333-166834) initially filed on May 14, 2010). |
10.28 |
|
Employment Agreement, dated October 1, 2014, between Campus Crest Communities,
Inc. and Angel Herrera (incorporated by reference to Exhibit 10.1 to the registrant’s current report on Form 8-K filed
on October 31, 2014).* |
10.29 |
|
Confidentiality and Noncompetition Agreement, dated October 27, 2014, between Campus Crest
Communities, Inc. and Angel Herrera (incorporated by reference to Exhibit 10.2 to the registrant’s current report on
Form 8-K filed on October 31, 2014).* |
10.30 |
|
Employment Agreement, dated October 27, 2014, between Campus Crest Communities, Inc. and
Scott Rochon (incorporated by reference to Exhibit 10.3 to the registrant’s current report on Form 8-K filed on October
31, 2014).* |
10.31 |
|
Confidentiality and Noncompetition Agreement, dated October 27, 2014, between Campus Crest
Communities, Inc. and Scott Rochon (incorporated by reference to Exhibit 10.4 to the registrant’s current report on
Form 8-K filed on October 31, 2014).* |
10.32 |
|
Second Amendment to Purchase and Sale Agreement dated November 3, 2014, between CB-Campus
Crest, LLC, CB-Campus PA, LLC, Campus Crest Communities, Inc., Copper Beech Townhome Communities, LLC, Copper Beech Townhome
Communities (PA), LLC, CB-Campus Crest, CB-Campus Crest PA and CCG and the sellers named therein (incorporated by reference
to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on November 11, 2014). |
10.33 |
|
Separation Agreement, dated November 3, 2014, by and between Campus Crest Communities, Inc.
and Ted W. Rollins (incorporated by reference to Exhibit 10.1 to the registrant’s current report on Form 8-K filed on
November 11, 2014). |
10.34 |
|
Separation Agreement, dated October 1, 2014, by and between Campus Crest Communities, Inc.
and Brian Sharpe (incorporated by reference to Exhibit 10.1 to the registrant’s current report on Form 8-K filed on
October 7, 2014). |
10.35 |
|
Separation Agreement, dated October 1, 2014, by and between Campus Crest Communities, Inc.
and Robert Dann (incorporated by reference to Exhibit 10.2 to the registrant’s current report on Form 8-K filed on October
7, 2014). |
10.36 |
|
Campus Crest Communities, Inc. Amended and Restated Equity Incentive Compensation Plan (incorporated
by reference to Exhibit 10.1 to the registrant’s current report on Form 8-K filed on April 23, 2014).* |
10.37 |
|
Separation Agreement, dated November 13, 2014, by and between Campus Crest Communities,
Inc. and Donald L. Bobbitt, Jr. |
10.38 |
|
Employment Agreement, dated July 31, 2014, between Campus
Crest Communities, Inc. and Aaron S. Halfacre.*
|
12.1 |
|
Computation of Ratios of Earnings to Combined Fixed Charges and Preferred Stock Dividends |
21.1 |
|
List of Subsidiaries of the registrant |
23.1 |
|
Consent of KPMG LLP. |
31.1 |
|
Certification of Principal Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
31.2 |
|
Certification of Acting Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. |
32.1 |
|
Certification of Principal Executive Officer and Acting 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.’ Annual Report on Form
10-K for the year ended December 31, 2014 formatted in XBRL (eXtensible Business Reporting
Language): (i) the Consolidated Balance Sheets of Campus Crest Communities, Inc., (ii) the
Consolidated Statements of Operations of Campus Crest Communities, Inc., (iii) the
Consolidated Statements of Changes in Equity and Comprehensive Income (Loss) of Campus
Crest Communities, Inc., (iv) the Consolidated Statements of Cash Flows of Campus
Crest Communities, Inc., and (v) related notes to the Consolidated Financial Statements
of Campus Crest Communities, Inc., tagged as blocks of text.
|
* Represents management contract
or compensatory plan or agreement.
SIGNATURES
Pursuant to the requirements
of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
March 31, 2015 |
CAMPUS CREST COMMUNITIES, INC. |
|
|
|
By: |
/s/ Aaron S. Halfacre |
|
President and Chief Investment Officer |
POWER OF ATTORNEY
KNOW ALL MEN BY THESE
PRESENTS, that we, the undersigned officers and directors of Campus Crest Communities, Inc., hereby severally constitute Aaron
S. Halfacre and Scott R. Rochon, and each of them singly, our true and lawful attorneys with full power to them, and each of them
singly, to sign for us and in our names in the capacities indicated below, the Form 10-K filed herewith and any and all amendments
to said Form 10-K, and generally to do all such things in our names and in our capacities as officers and directors to enable
Campus Crest Communities, Inc. to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all requirements
of the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorneys,
or any of them, to said Form 10-K and any and all amendments thereto.
Pursuant to the requirements
of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
Name |
|
Title |
|
Date |
|
|
|
|
|
/s/ Aaron S. Halfacre |
|
President and Chief Investment Officer |
|
March 31, 2015 |
Aaron S. Halfacre |
|
(Principal Executive Officer) |
|
|
|
|
|
|
|
/s/ Scott R. Rochon |
|
Acting Chief Financial Officer and Chief Accounting Officer |
|
March 31, 2015 |
Scott R. Rochon |
|
(Principal Financial Officer and Principal Accounting Officer) |
|
|
|
|
|
|
|
/s/ Lauro Gonzalez-Moreno |
|
Director |
|
March 31, 2015 |
Lauro Gonzalez-Moreno |
|
|
|
|
|
|
|
|
|
/s/ Richard
S. Kahlbaugh |
|
Director |
|
March 31, 2015 |
Richard
S. Kahlbaugh |
|
|
|
|
|
|
|
|
|
/s/ James W. McCaughan |
|
Director |
|
March 31, 2015 |
James W. McCaughan |
|
|
|
|
|
|
|
|
|
/s/ Denis McGlynn |
|
Director |
|
March 31, 2015 |
Denis McGlynn |
|
|
|
|
|
|
|
|
|
/s/ Daniel L. Simmons |
|
Director |
|
March 31, 2015 |
Daniel L. Simmons |
|
|
|
|
Report of Independent Registered Public
Accounting Firm
The Board of Directors and Stockholders
Campus Crest Communities, Inc.:
We have audited the accompanying
consolidated balance sheets of Campus Crest Communities, Inc. and subsidiaries as of December 31, 2014 and 2013, and the related
consolidated statements of operations and comprehensive income (loss), changes in equity, and cash flows for each of the years
in the three-year period ended December 31, 2014. In connection with our audits of the consolidated financial statements, we also
have audited financial statement Schedule III, real estate and accumulated depreciation. These consolidated financial statements
and financial statement Schedule III are the responsibility of Campus Crest Communities, Inc.’s management. Our responsibility
is to express an opinion on these consolidated financial statements and financial statement Schedule III based on our audits.
We conducted our audits
in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the consolidated financial position of Campus
Crest Communities, Inc. and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 2014, in conformity with U.S. generally accepted accounting
principles. Also in our opinion, the related financial statement Schedule III, real estate and accumulated depreciation, when
considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects,
the information set forth therein.
We also have audited,
in accordance with the standards of the Public Company Accounting Oversight Board (United States), Campus Crest Communities, Inc.
and subsidiaries’ internal control over financial reporting as of December 31, 2014, based on criteria established in Internal
Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO), and our report dated March 31, 2015, expressed an adverse opinion on the effectiveness of Campus Crest Communities,
Inc. and subsidiaries’ internal control over financial reporting.
As discussed in Note
2 to the consolidated financial statements, the Company has changed its method for reporting discontinued operations as of January
1, 2014.
/s/
KPMG LLP
Charlotte, North Carolina
March 31, 2015
Report of Independent Registered Public Accounting
Firm
The Board of Directors and Stockholders
Campus Crest Communities, Inc.:
We have audited Campus Crest Communities, Inc.’s
internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control - Integrated
Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Campus Crest
Community, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s
Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that
our audit provides a reasonable basis for our opinion.
A company's internal control over financial
reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or a combination
of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement
of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following
material weaknesses have been identified and included in management’s assessment:
| · | The Company did not maintain an effective control environment and risk assessment and information
and communication processes. |
| · | The Company did not design and maintain effective process-level controls over the completeness
and accuracy of accrued property taxes; the completeness, existence, and accuracy of the Company’s investments in and equity
in earnings of the Company’s unconsolidated entities and transactions between the Company and its investees; the completeness,
existence, accuracy, valuation and presentation of non-routine transactions; the authorization of cash expenditures in accordance
with the Company’s expenditure authorization matrix; the completeness and accuracy of stock compensation expense and disclosures;
the recognition and measurement of other assets processed by manual journal entries. And the Company did not maintain effective
information technology systems access controls supporting the processing and recording of student housing revenue and accounts
receivables. |
We also have audited, in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Campus Crest Communities,
Inc. as of December 31, 2014 and 2013 and the related consolidated statements of operations and comprehensive income (loss), changes
in equity and cash flows for each of the years in the three-year period ended December 31, 2014. These material weaknesses were
considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2014 consolidated financial
statements, and this report does not affect our report dated March 31, 2015, which expressed an unqualified opinion on those consolidated
financial statements.
In our opinion, because of the effect of the
aforementioned material weaknesses on the achievement of the objectives of the control criteria, Campus Crest Communities, Inc.
has not maintained effective internal control over financial reporting as of December 31, 2014, based on criteria established in
Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
We do not express an opinion or any other form
of assurance on management’s statements referring to corrective actions taken after December 31, 2014, relative to the aforementioned
material weaknesses in internal control over financial reporting.
/s/
KPMG LLP
Charlotte, North Carolina
March 31, 2015
CAMPUS CREST COMMUNITIES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
| |
December 31, | |
| |
2014 | | |
2013 | |
| |
| | |
| |
ASSETS | |
| | | |
| | |
Investment in real estate, net: | |
| | | |
| | |
Student housing properties ($32,875 related to
VIE) | |
$ | 935,962 | | |
$ | 716,285 | |
Accumulated depreciation (($318) related to VIE) | |
| (128,121 | ) | |
| (102,356 | ) |
Development in process | |
| - | | |
| 91,184 | |
Land and properties held for sale | |
| 38,105 | | |
| - | |
Land held for investment | |
| 7,413 | | |
| - | |
Investment in real estate, net | |
| 853,359 | | |
| 705,113 | |
Investment in unconsolidated entities | |
| 259,740 | | |
| 324,838 | |
Cash and cash equivalents ($670 related to VIE) | |
| 15,240 | | |
| 32,054 | |
Restricted cash | |
| 5,429 | | |
| 32,636 | |
Student receivables, net of allowance
for doubtful accounts of $459 and $539, respectively ($36, net of allowance of $9 related to VIE) | |
| 1,587 | | |
| 2,825 | |
Cost and earnings in excess of construction billings | |
| 3,887 | | |
| 42,803 | |
Other assets, net ($236 related to VIE) | |
| 37,569 | | |
| 42,410 | |
Total assets | |
$ | 1,176,811 | | |
$ | 1,182,679 | |
| |
| | | |
| | |
LIABILITIES AND EQUITY | |
| | | |
| | |
Liabilities: | |
| | | |
| | |
Mortgage and construction loans ($21,170 related to VIE) | |
$ | 300,673 | | |
$ | 205,531 | |
Line of credit and other debt | |
| 317,746 | | |
| 207,952 | |
Accounts payable and accrued expenses ($534 related to VIE) | |
| 53,816 | | |
| 64,348 | |
Construction billings in excess of cost and earnings | |
| 481 | | |
| 600 | |
Other liabilities ($607 related to VIE) | |
| 22,092 | | |
| 11,167 | |
Total liabilities | |
| 694,808 | | |
| 489,598 | |
Commitments and contingencies | |
| | | |
| | |
Equity: | |
| | | |
| | |
Preferred stock, $0.01 par value,
50,000,000 shares authorized: 8.00% Series A Cumulative Redeemable Preferred Stock (liquidation preference $25.00 per share),
6,100,000 shares issued and outstanding at December 31, 2014 and 2013 | |
| 61 | | |
| 61 | |
Common stock, $0.01 par value, 500,000,000
and 500,000,000 shares authorized, 64,742,713 and 64,502,430 shares issued and outstanding at December 31, 2014 and 2013,
respectively | |
| 648 | | |
| 645 | |
Additional common and preferred
paid-in capital | |
| 773,998 | | |
| 773,896 | |
Accumulated deficit and distributions | |
| (298,818 | ) | |
| (86,043 | ) |
Accumulated
other comprehensive loss | |
| (2,616 | ) | |
| (71 | ) |
Total Campus Crest Communities, Inc. stockholders' equity | |
| 473,273 | | |
| 688,488 | |
Noncontrolling interests | |
| 8,730 | | |
| 4,593 | |
Total equity | |
| 482,003 | | |
| 693,081 | |
Total liabilities and equity | |
$ | 1,176,811 | | |
$ | 1,182,679 | |
See accompanying notes to consolidated financial
statements.
CAMPUS CREST COMMUNITIES, INC.
CONSOLIDATED STATEMENTS
OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share data)
| |
For
the year ended December 31, | |
| |
2014 | | |
2013 | | |
2012 | |
| |
| | |
| | |
| |
Revenues: | |
| | | |
| | | |
| | |
Student housing rental | |
$ | 101,724 | | |
$ | 87,635 | | |
$ | 71,211 | |
Student housing services | |
| 3,768 | | |
| 3,615 | | |
| 2,880 | |
Property management services | |
| 1,249 | | |
| 820 | | |
| 559 | |
Total revenues | |
| 106,741 | | |
| 92,070 | | |
| 74,650 | |
Operating expenses: | |
| | | |
| | | |
| | |
Student housing operations | |
| 47,154 | | |
| 40,726 | | |
| 33,013 | |
General and administrative | |
| 14,303 | | |
| 10,658 | | |
| 8,821 | |
Severance | |
| 6,159 | | |
| - | | |
| - | |
Impairment of land and pre-development costs | |
| 31,927 | | |
| - | | |
| - | |
Write-off of corporate other assets | |
| 15,110 | | |
| - | | |
| - | |
Transaction costs | |
| 3,046 | | |
| 1,121 | | |
| - | |
Ground leases | |
| 477 | | |
| 249 | | |
| 217 | |
Depreciation and amortization | |
| 29,426 | | |
| 23,700 | | |
| 20,693 | |
Total operating expenses | |
| 147,602 | | |
| 76,454 | | |
| 62,744 | |
Equity in earnings (loss) of unconsolidated entities | |
| (5,510 | ) | |
| (3,727 | ) | |
| 361 | |
Impairment of unconsolidated entities | |
| (57,789 | ) | |
| (312 | ) | |
| - | |
Effect of not exercising Copper Beech purchase option | |
| (33,375 | ) | |
| - | | |
| - | |
Operating income (loss) | |
| (137,535 | ) | |
| 11,577 | | |
| 12,267 | |
| |
| | | |
| | | |
| | |
Nonoperating income (expense): | |
| | | |
| | | |
| | |
Interest expense, net | |
| (16,156 | ) | |
| (12,969 | ) | |
| (11,545 | ) |
Other income | |
| 42 | | |
| 1,414 | | |
| 6,144 | |
Total nonoperating expense, net | |
| (16,114 | ) | |
| (11,555 | ) | |
| (5,401 | ) |
Net income (loss) before income tax benefit (expense) | |
| (153,649 | ) | |
| 22 | | |
| 6,866 | |
Income tax benefit (expense) | |
| (731 | ) | |
| 727 | | |
| (356 | ) |
Income (loss) from continuing operations | |
| (154,380 | ) | |
| 749 | | |
| 6,510 | |
Income (loss) from discontinued operations | |
| (9,576 | ) | |
| 489 | | |
| 3,908 | |
Net income (loss) | |
| (163,956 | ) | |
| 1,238 | | |
| 10,418 | |
Net income (loss) attributable to noncontrolling interests | |
| (1,233 | ) | |
| (34 | ) | |
| 46 | |
Dividends on preferred stock | |
| 12,200 | | |
| 6,183 | | |
| 4,114 | |
Net income (loss) attributable to
common stockholders | |
$ | (174,923 | ) | |
$ | (4,911 | ) | |
$ | 6,258 | |
| |
| | | |
| | | |
| | |
Per share data - basic and diluted | |
| | | |
| | | |
| | |
Income (loss) from continuing operations
attributable to common stockholders | |
$ | (2.54 | ) | |
$ | (0.08 | ) | |
$ | 0.07 | |
Income (loss)
from discontinued operations attributable to common shareholders | |
| (0.15 | ) | |
| - | | |
| 0.11 | |
Net income
(loss) per share attributable to common stockholders | |
$ | (2.69 | ) | |
$ | (0.08 | ) | |
$ | 0.18 | |
| |
| | | |
| | | |
| | |
Weighted-average common shares and OP units outstanding: | |
| | | |
| | | |
| | |
Basic | |
| 65,102 | | |
| 59,984 | | |
| 34,781 | |
Diluted | |
| 65,102 | | |
| 60,418 | | |
| 35,217 | |
CAMPUS CREST COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS) (CONTINUED)
(In thousands, except per share data)
| |
For
the year ended December 31, | |
| |
2014 | | |
2013 | | |
2012 | |
| |
| | |
| | |
| |
Consolidated statements of comprehensive income (loss): | |
| | | |
| | | |
| | |
Net income (loss) | |
$ | (163,956 | ) | |
$ | 1,238 | | |
$ | 10,418 | |
Foreign currency translation | |
| (2,564 | ) | |
| (71 | ) | |
| - | |
Change in fair value of interest rate
derivatives | |
| - | | |
| 59 | | |
| 332 | |
Comprehensive income (loss) | |
| (166,520 | ) | |
| 1,226 | | |
| 10,750 | |
Net income (loss) attributable to
noncontrolling interests | |
| (1,233 | ) | |
| (34 | ) | |
| 46 | |
Change in fair value of interest
rate derivatives attributable to noncontrolling interest | |
| - | | |
| 1 | | |
| 3 | |
Foreign currency translation attributable
to noncontrolling interest | |
| (19 | ) | |
| - | | |
| - | |
Dividends on preferred stock | |
| 12,200 | | |
| 6,183 | | |
| 4,114 | |
Comprehensive
income (loss) attributable to common stockholders | |
$ | (177,468 | ) | |
$ | (4,924 | ) | |
$ | 6,587 | |
See accompanying notes to consolidated financial
statements.
CAMPUS CREST COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(In thousands)
| |
Series
A | | |
| | |
Additional | | |
| | |
Accumulated | | |
| | |
| | |
| |
| |
Cumulative | | |
| | |
Common
and | | |
Accumulated | | |
Other | | |
Total | | |
| | |
| |
| |
Redeemable | | |
Common | | |
Preferred
Paid- | | |
Deficit
and | | |
Comprehensive | | |
Stockholders' | | |
Noncontrolling | | |
Total | |
| |
Preferred
Stock | | |
Stock | | |
in
Capital | | |
Distributions | | |
Income
(Loss) | | |
Equity | | |
Interests | | |
Equity | |
Balance at December 31, 2011 | |
| - | | |
| 307 | | |
| 248,599 | | |
| (22,550 | ) | |
| (387 | ) | |
| 225,969 | | |
| 4,026 | | |
| 229,995 | |
Net
proceeds of sale of preferred stock | |
| 23 | | |
| - | | |
| 54,870 | | |
| - | | |
| - | | |
| 54,893 | | |
| - | | |
| 54,893 | |
Net
proceeds of sale of common stock | |
| - | | |
| 75 | | |
| 72,087 | | |
| - | | |
| - | | |
| 72,162 | | |
| - | | |
| 72,162 | |
Issuance
of restricted stock | |
| - | | |
| 4 | | |
| (4 | ) | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Amortization
of restricted stock awards and operating partnership units | |
| - | | |
| - | | |
| 1,628 | | |
| - | | |
| - | | |
| 1,628 | | |
| 624 | | |
| 2,252 | |
Dividends
on preferred stock | |
| - | | |
| - | | |
| - | | |
| (4,114 | ) | |
| - | | |
| (4,114 | ) | |
| - | | |
| (4,114 | ) |
Dividends
on common stock | |
| - | | |
| - | | |
| - | | |
| (22,275 | ) | |
| - | | |
| (22,275 | ) | |
| - | | |
| (22,275 | ) |
Dividends
to noncontrolling interests | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (281 | ) | |
| (281 | ) |
Change
in fair value of interest rate derivatives | |
| - | | |
| - | | |
| - | | |
| - | | |
| 329 | | |
| 329 | | |
| 3 | | |
| 332 | |
Net
income | |
| - | | |
| - | | |
| - | | |
| 10,372 | | |
| - | | |
| 10,372 | | |
| 46 | | |
| 10,418 | |
Balance at December 31, 2012 | |
| 23 | | |
| 386 | | |
| 377,180 | | |
| (38,567 | ) | |
| (58 | ) | |
| 338,964 | | |
| 4,418 | | |
| 343,382 | |
Net
proceeds of sale of preferred stock | |
| 38 | | |
| - | | |
| 91,244 | | |
| - | | |
| - | | |
| 91,282 | | |
| - | | |
| 91,282 | |
Net
proceeds of sale of common stock | |
| - | | |
| 255 | | |
| 299,464 | | |
| - | | |
| - | | |
| 299,719 | | |
| - | | |
| 299,719 | |
Equity
portion of issuance of convertible notes | |
| - | | |
| - | | |
| 3,207 | | |
| - | | |
| - | | |
| 3,207 | | |
| - | | |
| 3,207 | |
Issuance
of restricted stock | |
| - | | |
| 4 | | |
| (4 | ) | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Amortization
of restricted stock awards and operating partnership units | |
| - | | |
| - | | |
| 2,805 | | |
| - | | |
| - | | |
| 2,805 | | |
| 495 | | |
| 3,300 | |
Dividends
on preferred stock | |
| - | | |
| - | | |
| - | | |
| (6,183 | ) | |
| - | | |
| (6,183 | ) | |
| - | | |
| (6,183 | ) |
Dividends
on common stock | |
| - | | |
| - | | |
| - | | |
| (42,565 | ) | |
| - | | |
| (42,565 | ) | |
| - | | |
| (42,565 | ) |
Dividends
to noncontrolling interests | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (287 | ) | |
| (287 | ) |
Change
in fair value of interest rate derivatives | |
| - | | |
| - | | |
| - | | |
| - | | |
| 58 | | |
| 58 | | |
| 1 | | |
| 59 | |
Foreign
currency translation | |
| - | | |
| - | | |
| - | | |
| - | | |
| (71 | ) | |
| (71 | ) | |
| - | | |
| (71 | ) |
Net
income (loss) | |
| - | | |
| - | | |
| - | | |
| 1,272 | | |
| - | | |
| 1,272 | | |
| (34 | ) | |
| 1,238 | |
Balance at December 31, 2013 | |
| 61 | | |
| 645 | | |
| 773,896 | | |
| (86,043 | ) | |
| (71 | ) | |
| 688,488 | | |
| 4,593 | | |
| 693,081 | |
Issuance
of restricted stock | |
| - | | |
| 3 | | |
| (3 | ) | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Amortization
of restricted stock awards and operating partnership units | |
| - | | |
| - | | |
| 5,744 | | |
| - | | |
| - | | |
| 5,744 | | |
| - | | |
| 5,744 | |
Dividends
on preferred stock | |
| - | | |
| - | | |
| - | | |
| (12,200 | ) | |
| - | | |
| (12,200 | ) | |
| - | | |
| (12,200 | ) |
Dividends
on common stock | |
| - | | |
| - | | |
| - | | |
| (37,852 | ) | |
| - | | |
| (37,852 | ) | |
| - | | |
| (37,852 | ) |
Dividends
to noncontrolling interests | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (250 | ) | |
| (250 | ) |
Foreign
currency translation | |
| - | | |
| - | | |
| - | | |
| - | | |
| (2,545 | ) | |
| (2,545 | ) | |
| (19 | ) | |
| (2,564 | ) |
Non-controlling
interest in Copper | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Beech
at Ames | |
| - | | |
| - | | |
| (5,639 | ) | |
| - | | |
| - | | |
| (5,639 | ) | |
| 5,639 | | |
| - | |
Net
loss | |
| - | | |
| - | | |
| - | | |
| (162,723 | ) | |
| - | | |
| (162,723 | ) | |
| (1,233 | ) | |
| (163,956 | ) |
Balance at December 31, 2014 | |
$ | 61 | | |
$ | 648 | | |
$ | 773,998 | | |
$ | (298,818 | ) | |
$ | (2,616 | ) | |
$ | 473,273 | | |
$ | 8,730 | | |
$ | 482,003 | |
See accompanying notes to consolidated financial
statements.
CAMPUS CREST COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| |
For
the year ended December 31, | |
| |
2014 | | |
2013 | | |
2012 | |
| |
| | |
| | |
| |
Operating activities: | |
| | | |
| | | |
| | |
Net (loss) income | |
$ | (163,956 | ) | |
$ | 1,238 | | |
$ | 10,418 | |
Adjustments to reconcile net (loss)
income to net cash provided by operating activities: | |
| | | |
| | | |
| | |
Depreciation and amortization | |
| 29,426 | | |
| 23,700 | | |
| 20,693 | |
Depreciation included in discontinued operations | |
| - | | |
| 2,672 | | |
| 3,144 | |
Impairment of damaged assets | |
| - | | |
| 5,041 | | |
| - | |
Impairment of land and pre-development costs | |
| 31,927 | | |
| - | | |
| - | |
Write-off of corporate other assets | |
| 15,110 | | |
| - | | |
| - | |
Amortization of deferred financing costs and debt discount | |
| 2,270 | | |
| 1,969 | | |
| 2,838 | |
Gain on purchase of previously unconsolidated entities | |
| - | | |
| - | | |
| (6,554 | ) |
Loss on disposal of assets | |
| 138 | | |
| 350 | | |
| 154 | |
Proceeds received for business interruption insurance | |
| - | | |
| 400 | | |
| - | |
Provision for bad debts | |
| 3,249 | | |
| 3,432 | | |
| 1,728 | |
Deferred income tax expense (benefit) | |
| 731 | | |
| (927 | ) | |
| - | |
Severance expense | |
| 6,159 | | |
| - | | |
| - | |
Severance expense included in discontinued operations | |
| 2,959 | | |
| - | | |
| - | |
Impairment of unconsolidated entities | |
| 57,789 | | |
| - | | |
| - | |
Equity in (earnings) loss of unconsolidated entities | |
| 5,510 | | |
| 3,727 | | |
| (361 | ) |
Effect of not exercising Copper Beech purchase option | |
| 33,375 | | |
| - | | |
| - | |
Distributions of earnings from unconsolidated entities | |
| 502 | | |
| 17 | | |
| 766 | |
Share based compensation expense | |
| 1,729 | | |
| 3,300 | | |
| 1,194 | |
Changes in operating assets and liabilities: | |
| | | |
| | | |
| | |
Restricted cash | |
| 505 | | |
| (533 | ) | |
| (736 | ) |
Student receivables | |
| (2,174 | ) | |
| (4,067 | ) | |
| (2,492 | ) |
Construction billings | |
| 38,797 | | |
| (19,175 | ) | |
| (10,967 | ) |
Accounts payable and accrued expenses | |
| (3,470 | ) | |
| 4,984 | | |
| 12,248 | |
Other | |
| 5,746 | | |
| (11,740 | ) | |
| (2,603 | ) |
Net cash provided by operating activities | |
| 66,322 | | |
| 14,388 | | |
| 29,470 | |
Investing activities: | |
| | | |
| | | |
| | |
Investments in development in process | |
| (179,218 | ) | |
| (126,242 | ) | |
| (104,051 | ) |
Insurance proceeds received for damaged assets | |
| 590 | | |
| 2,500 | | |
| - | |
Investments in student housing properties | |
| (9,277 | ) | |
| (15,925 | ) | |
| (7,116 | ) |
Acquisition of student housing properties | |
| - | | |
| (13,801 | ) | |
| - | |
Investments in unconsolidated entities | |
| (45,765 | ) | |
| (348,831 | ) | |
| (7,363 | ) |
Acquisition of previously unconsolidated entities | |
| (7,661 | ) | |
| - | | |
| (15,352 | ) |
Proceeds from the disposition of student housing properties | |
| - | | |
| 48,577 | | |
| - | |
Issuance of notes receivable | |
| - | | |
| (31,700 | ) | |
| - | |
Repayment of notes receivable | |
| - | | |
| 31,700 | | |
| - | |
Capital distributions from unconsolidated entities | |
| 7,455 | | |
| 7,286 | | |
| 3,355 | |
Corporate capital expenditures | |
| (6,126 | ) | |
| (15,036 | ) | |
| (1,855 | ) |
Change in restricted cash | |
| 26,702 | | |
| (28,201 | ) | |
| (671 | ) |
Net cash used in investing activities | |
| (213,300 | ) | |
| (489,673 | ) | |
| (133,053 | ) |
Financing activities: | |
| | | |
| | | |
| | |
Proceeds from mortgage and construction loans | |
| 80,656 | | |
| 47,924 | | |
| 97,220 | |
Repayments of mortgage and construction loans | |
| (2,353 | ) | |
| (60,730 | ) | |
| (93,096 | ) |
Proceeds from line of credit and other debt | |
| 124,000 | | |
| 267,274 | | |
| 59,400 | |
Repayments of line of credit and other debt | |
| (15,435 | ) | |
| (96,681 | ) | |
| (66,077 | ) |
Debt issuance costs | |
| (735 | ) | |
| (4,273 | ) | |
| (1,219 | ) |
Payment of offering costs | |
| (817 | ) | |
| (17,193 | ) | |
| (6,018 | ) |
Dividends paid to common stockholders | |
| (42,665 | ) | |
| (38,089 | ) | |
| (21,028 | ) |
Dividends paid to preferred stockholders | |
| (12,200 | ) | |
| (4,600 | ) | |
| (3,156 | ) |
Dividends paid to noncontrolling interest | |
| (287 | ) | |
| (287 | ) | |
| (281 | ) |
Proceeds from sale of common stock | |
| - | | |
| 312,742 | | |
| 75,573 | |
Proceeds from sale of preferred stock | |
| - | | |
| 95,282 | | |
| 57,500 | |
Net cash provided by financing activities | |
| 130,164 | | |
| 501,369 | | |
| 98,818 | |
Net change in cash and cash equivalents | |
| (16,814 | ) | |
| 26,084 | | |
| (4,765 | ) |
Cash and cash equivalents at beginning of period | |
| 32,054 | | |
| 5,970 | | |
| 10,735 | |
Cash and cash equivalents at end of period | |
$ | 15,240 | | |
$ | 32,054 | | |
$ | 5,970 | |
CAMPUS CREST COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
| |
For the year
ended December 31, | |
| |
2014 | | |
2013 | | |
2012 | |
Supplemental disclosure of cash flow information: | |
| | |
| | |
| |
Cash paid for interest,
net of capitalized interest of $6.3 million, $3.3 million and $2.4 million | |
$ | 6,959 | | |
$ | 7,794 | | |
$ | 6,235 | |
Cash paid for income taxes | |
| 163 | | |
| 173 | | |
| 571 | |
| |
| | | |
| | | |
| | |
Non-cash investing and financing activity: | |
| | | |
| | | |
| | |
Other debt assumed by investment in unconsolidated entity | |
$ | - | | |
$ | 34,774 | | |
$ | - | |
Contribution of land to investment in unconsolidated entities | |
| - | | |
| 16,900 | | |
| 3,347 | |
Common and preferred stock dividends declared but not paid | |
| 8,916 | | |
| 13,765 | | |
| 7,197 | |
Assumption of mortgage debt related to purchase of previously | |
| | | |
| | | |
| | |
unconsolidated entities | |
| 16,901 | | |
| - | | |
| 27,299 | |
Insurance proceeds receivable related to damaged assets | |
| 5,529 | | |
| 1,029 | | |
| - | |
Accounts payable related to capital expenditures | |
| 6,930 | | |
| 25,107 | | |
| 10,588 | |
Conversion of costs and earnings
in excess of construction billings to investment in unconsolidated entities | |
| - | | |
| - | | |
| 898 | |
Equipment acquired under capital lease obligations | |
| 568 | | |
| - | | |
| - | |
Share-based compensation capitalized to development in process | |
| 1,307 | | |
| 900 | | |
| 600 | |
The Company acquired the remaining
ownership in HSRE IV for approximately $7.7 million | |
| | | |
| | | |
| | |
In conjunction with the acquisition liabilities assumed
were as follows: | |
| | | |
| | | |
| | |
Fair value of assets acquired | |
$ | 26,854 | | |
$ | - | | |
$ | - | |
Cash paid for 80% interest | |
| (7,661 | ) | |
| - | | |
| - | |
Fair value of Company's 20% interest
owned prior to the acquisition | |
| (1,915 | ) | |
| - | | |
| - | |
Liabilities assumed | |
| 17,278 | | |
| - | | |
| - | |
See accompanying notes to consolidated financial
statements.
CAMPUS CREST COMMUNITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Organization and Description of Business
Campus Crest Communities,
Inc., together with its subsidiaries, referred to herein as the “Company” and “Campus Crest,” is a self-managed
and self-administered real estate investment trust (“REIT”) focused on owning and managing a high-quality student
housing portfolio located close to college campuses. The Company currently owns the sole general partner interest and owns limited
partner interests in Campus Crest Communities Operating Partnership, LP (the “Operating Partnership”). The Company
holds substantially all of its assets and conducts substantially all of its business, through the Operating Partnership.
Campus Crest has made
an election to qualify, and the Company believes it is operating so as to qualify, as a REIT under Sections 856 through 859 of
the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). As a REIT, the Company generally will
not be subject to U.S. federal income tax to the extent that the Company meets the organizational and operational requirements
and its distributions equal or exceed 90.0% of REIT taxable income. For all periods subsequent to the REIT election, the Company
has met the organizational and operational requirements and distributions have exceeded net taxable income.
The Company has made
an election to treat Campus Crest TRS Holdings, Inc. (“TRS Holdings”), its wholly-owned subsidiary, as a taxable REIT
subsidiary (“TRS”). TRS Holdings holds the development, construction and management companies (see Note 4 regarding
the discontinuation of operations of the development and construction services companies) that provide services to entities in
which the Company does not own 100% of the equity interests. As a TRS, the operations of TRS Holdings and its subsidiaries are
generally subject to federal, state and local income and franchise taxes.
As of December 31, 2014,
the Company had ownership interests in 47 operating student housing Grove properties containing approximately 9,700 apartment
units and 26,300 beds. Thirty-six of the Company’s operating Grove properties are wholly-owned and eleven of the Company’s
operating Grove properties are owned through joint ventures with Harrison Street Real Estate Capital ("HSRE"). Additionally,
the Company holds ownership interests in three evo® properties as joint ventures containing approximately
1,500 units and 3,000 beds, one with HSRE and Brandywine Realty Trust (“Brandywine”), and two with Beaumont Partners
SA (“Beaumont”). As of December 31, 2014, the Company also owned interests in 36 (35 unconsolidated and one consolidated
(Copper Beech at Ames)) operating student housing Copper Beech properties (“CB Portfolio”), containing approximately
6,500 units and 17,300 beds, and one wholly-owned redevelopment property containing approximately 170 units and 340 beds. The
Company’s portfolio consists of the following:
| |
Properties in | |
| |
Operation | |
Wholly owned Grove properties | |
| 36 | |
Joint Venture Grove properties | |
| 11 | |
Total Grove Properties | |
| 47 | |
Joint Venture evo properties | |
| 3 | |
CB Portfolio | |
| 36 | |
Total Portfolio(1) | |
| 86 | |
______________
| (1) | The Company’s 100%
owned redevelopment property in Toledo, Ohio, which was acquired in March 2013 is excluded.
As of December 31, 2014, this property was classified as an asset held for sale. |
2. Summary of Significant Accounting
Policies
Basis
of Presentation
The accompanying consolidated
financial statements, presented in U.S. dollars, have been prepared in accordance with U.S. generally accepted accounting principles
(“U.S. GAAP”) and represent the Company’s financial position, results of operations and cash flows. Third-party
equity interests in the Operating Partnership and a consolidated variable interest entity, Copper Beech at Ames, LLC, are reflected
as non-controlling interests in the consolidated financial statements. The Company also has 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, primarily related to discontinued operations associated with the asset dispositions discussed
in Note 7.
Reclassifications
During the year ended
December 31, 2014, the Company reclassified its development and construction services companies as discontinued operations due
to its strategic repositioning initiatives (see Note 4). Accordingly, the Company has reclassified the results of these operations
to “Income (loss) from discontinued operations” in the consolidated statements of operations and comprehensive income
(loss) for the years ended December 31, 2014, 2013 and 2012. The development and construction services companies were included
within the development, construction and management services segment in the Company’s prior year consolidated financial
statements.
In December 2013, the
Company sold four wholly-owned properties: The Grove at Jacksonville, Alabama, The Grove at Jonesboro, Arkansas, The Grove at
Wichita, Kansas, and The Grove at Wichita Falls, Texas. These four properties were included within the student housing operations
segment in the prior year consolidated financial statements. Prior period amounts related to the December 2013 asset dispositions
have also been reclassified as discontinued operations in the Company’s consolidated statement of operations and comprehensive
income (loss).
Use of Estimates
The preparation of consolidated
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 (which is included in income (loss) from discontinued operations) under the
percentage of completion method, useful lives of student housing properties, valuation of investment in real estate and investments
in unconsolidated entities and land and property held for sale, initial valuation and underlying allocation of purchase price
to newly acquired student housing properties, valuation allowance on deferred tax assets, determination of fair value for impairment
assessments, determination of the effect of not exercising the Copper Beech option, fair value of guarantee obligations related
to unconsolidated entities, allowance for doubtful accounts, insurance proceeds receivable from damaged assets, fair value of
the debt and equity components of the exchangeable notes at the date of issuances and the fair value of financial assets and liabilities,
including derivatives. Actual results may differ from previously estimated amounts and such differences may be material to the
consolidated financial statements. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected
prospectively in the periods in which they occur.
Investment
in Real Estate and Depreciation
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:
Land improvements |
15 years |
Buildings and leasehold improvements |
10-40 years |
Furniture, fixtures and equipment |
5-10 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, as well as certain internal costs related to the development and construction of the Company’s
student housing properties. All costs are capitalized as development in process until the asset is ready for its intended use,
which is typically at the completion of the project. Interest totaling approximately $6.3 million, $3.3 million, and $2.4 million
was capitalized during the years ended December 31, 2014, 2013, and 2012 respectively.
The Company capitalizes
costs during the development of assets beginning with the determination that development of a future asset is probable until the
asset, or a portion of the asset, is delivered and is ready for its intended use. During development efforts, the Company capitalizes
all direct costs and indirect costs that have been incurred as a result of the development. These costs include interest and related
loan fees, property taxes as well as other direct and indirect costs. The Company capitalizes interest costs for debt incurred
for project specific financing and for capital contributions to equity method investees who utilize such funds for construction-related
activities. Indirect project costs, which include personnel, office and administrative costs that are clearly associated with
the Company’s development and redevelopment efforts, are capitalized. Indirect costs not clearly related to the acquisition,
development, redevelopment and construction activity, including general and administrative expenses, are expensed in the period
incurred. Capitalized indirect costs associated with the Company’s development activities were $10.8 million, $9.0 million,
and $7.4 million for the years ended December 31, 2014, 2013, and 2012, respectively. All such costs are capitalized as development
in process until the asset is delivered and ready for its intended use, which is typically at the completion of the project. Upon
completion, costs are transferred into the applicable asset category and depreciation commences.
Pre-development costs
are capitalized when they are directly identifiable with the specific property and would be capitalized if the property were already
acquired and acquisition of the property or an option to acquire the property is probable. Capitalized pre-development costs are
expensed when management believes it is no longer probable that a contract will be executed and/or construction will commence.
Because the Company frequently incurs these pre-development expenditures before a financing commitment and/or required permits
and authorizations have been obtained, the Company will bear the risk of loss of these pre-development expenditures if financing
cannot ultimately be arranged on acceptable terms or the Company is unable to successfully obtain the required permits and authorizations.
As such, management evaluates the status of projects where the Company has not yet acquired the target property or where the Company
has not yet commenced construction on a periodic basis and write-off any pre-development costs related to projects whose current
status indicates the acquisition or commencement of construction is not probable. In 2013 and 2012, such write-offs are included
within income (loss) from discontinued operations in the accompanying consolidated statements of operations and comprehensive
income (loss). In 2014, such write-offs were included within impairment of land and pre-development costs in the accompanying
consolidated statements of operations and comprehensive income. As of December 31, 2014, the Company had no capitalized pre-development
costs related to development projects for which construction had not commenced and as of December 31, 2013, the Company deferred
approximately $10.5 million in pre-development costs related to development projects for which construction had not commenced
(see Note 4). As of December 31, 2014, the Company owned four strategically held land parcels that could be used for the development
of four phase two properties with an aggregate bed count ranging from approximately 1,000 to 1,500 (unaudited), and twelve additional
land parcels, six of which were sold in January 2015, with the remaining parcels expected to be sold during 2015. The costs associated
with the four strategically held land parcels are included in land held for investment on the accompanying consolidated balance
sheets. The costs associated with the parcels in which the Company intends to divest are included in land held for sale in the
accompanying consolidated balance sheets.
Management assesses whether
there has been impairment in the value of the Company’s 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 over the expected hold period. 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 economic and market conditions. If such
conditions change, then an adjustment reducing the carrying value of the Company’s 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 recorded as an impairment charge. Fair value is determined based upon the discounted
cash flows of the property, quoted market prices or independent appraisals, as considered necessary.
Property
Acquisitions
Campus Crest allocates
the purchase price of acquired properties to tangible and identified intangible assets and liabilities based on the fair values
of these assets and liabilities for both consolidated entities and investments in unconsolidated entities. Fair value estimates
are based on information obtained from independent appraisals, 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.
The purchase price of property acquisitions is not expected to be allocated to tenant relationships, considering the terms of
the leases and the expected levels of renewals.
Additionally, mortgage
debt premiums and discounts represent fair value adjustments for the difference between the stated rates and market rates of mortgage
debt assumed in connection with the Company’s acquisitions. The mortgage debt premiums and discounts are amortized to interest
expense of the respective investee over the term of the related mortgage loans using the effective-interest method. The fair value
debt and purchase accounting adjustments included in equity in earnings (loss) related to Copper Beech were approximately $6.5
million and $3.6 million for the years ended December 31, 2014 and 2013, respectively. Acquisition-related costs such as due diligence,
legal, accounting and advisory fees are either expensed as incurred for acquisitions that are consolidated or capitalized for
acquisitions accounted for under the equity method of accounting.
Long-Lived Assets – Held for Sale
Long-lived assets to
be disposed of are classified as held for sale in the period in which all of the following criteria are met:
| a. | Management, having the authority
to approve the action, commits to a plan to sell the assets. |
| b. | The asset is available for immediate
sale in its present condition subject only to terms that are usual and customary for
sales of such assets. |
| c. | An active program to locate a
buyer and other actions required to complete the plan to sell the asset have been initiated. |
| d. | The sale of the asset is probable,
and transfer of asset is expected to qualify for recognition as a completed sale, within
one year. |
| e. | The asset is being actively marketed
for sale at a price that is reasonable in relation to its current fair value. |
| f. | Actions required to complete the
plan indicate that it is unlikely that significant changes to the plans will be made
or that the plan will be withdrawn. |
Concurrent with this
classification, the land and property held for sale is recorded at the lower of cost or fair value less estimated selling costs,
and depreciation ceases. As discussed in more detail in Note 4, the Company reduced the carrying amount of land and properties
held for sale to their estimated fair value less estimated selling costs which resulted in an impairment charge.
Ground
Leases
Ground lease expense
is recognized on a straight-line basis over the term of the related lease.
In-Place
Lease Intangible Assets
In-place lease intangible
assets are amortized on a straight-line basis over the average remaining term of the underlying leases, typically one year or
less. Amortization expense was approximately $1.5 million, $0.7 million and $1.1 million for the years ended December 31, 2014,
2013 and 2012, respectively. The amortization of intangible assets is included in depreciation and amortization expense in the
accompanying consolidated statements of operations and comprehensive income (loss).
Cash,
Cash Equivalents, and Restricted Cash
Campus Crest considers
all highly liquid investments with an original maturity of three months or less to be cash equivalents. Restricted cash is excluded
from cash for the purpose of preparing the consolidated statements of cash flows. The Company maintains cash balances in various
banks. At times the Company’s balances may exceed the amount insured by the Federal Deposit Insurance Corporation (“FDIC”).
The Company does not believe this presents significant exposure for the business.
Restricted cash includes
escrow accounts held by lenders for the purpose of paying taxes, insurance and funding capital improvements. The Company’s
funds in escrow are typically held in interest bearing accounts covered under FDIC insurance with applicable limits. At December
31, 2013, we held approximately $28.2 million with a qualified intermediary to facilitate a tax deferred Section 1031 like-kind
exchange in conjunction with the disposition of four properties (see Note 7). Our funds in escrow are typically held in interest
bearing accounts covered under FDIC insurance with applicable limits.
Deferred
Financing Costs
Campus Crest defers costs
incurred in obtaining financing and amortizes these costs using the straight-line method, which approximates the effective interest
method, over the expected terms of the related loans. Deferred financing costs as of December 31, 2014 and 2013 were approximately
$11.7 million and $11.0 million, respectively, and accumulated amortization was approximately $4.8 million and $2.6 million, respectively.
Upon repayment of the underlying debt agreement, any unamortized costs are charged to earnings. Deferred financing costs, net
of accumulated amortization, are included in other assets, net in the accompanying consolidated balance sheets.
Noncontrolling
Interests
Noncontrolling interests
represent the portion of equity in the Company’s consolidated subsidiaries which are not attributable to the Company’s
stockholders. Accordingly, noncontrolling interests are reported as a component of equity, separate from stockholders’ equity,
in the accompanying consolidated balance sheets. On the consolidated statements of operations and comprehensive income (loss),
operating results are reported at their consolidated amounts, including both the amount attributable to the Company and to noncontrolling
interests. See also “Consolidated Variable Interest Entity.”
Real
Estate Ventures
Campus Crest holds interests
in its 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 to determine if a venture is a variable interest entity
(“VIE”). Generally, an entity is determined to be a VIE when either (1) the equity investors (if any) lack one or
more of the essential characteristics of a controlling financial interest, (2) the equity investment at risk is insufficient to
finance that entity’s activities without additional subordinated financial support or (3) the equity investors have voting
rights that are not proportionate to their economic interests and substantially all of the activities of the entity involve or
are conducted on behalf of an investor that has disproportionately fewer voting rights. The Company consolidates entities that
are VIEs for which the Company is determined to be the primary beneficiary. In instances where the Company is not the primary
beneficiary, the Company does not consolidate the entity for financial reporting purposes. The primary beneficiary is the entity
that has both (1) the power to direct the activities that most significantly impact the VIE’s economic performance and (2)
the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE.
Entities that are not defined as VIEs are consolidated where the Company is the general partner (or the equivalent) and the limited
partners (or the equivalent) in such investments do not have rights which would preclude control.
For entities where the
Company is the general partner (or the equivalent), but do not control the real estate venture, and the other partners (or the
equivalent) hold substantive participating rights, the Company uses the equity method of accounting. For entities where the Company
is a limited partner (or the equivalent), management considers factors such as ownership interest, voting control, authority to
make decisions and contractual and substantive participating rights of the partners (or the equivalent) to determine if the presumption
that the general partner controls the entity is overcome. In instances where these factors indicate the Company controls the entity,
the Company would consolidate the entity; otherwise the Company accounts for its investments using the equity method of accounting.
Under the equity method
of accounting, investments are initially recognized in the consolidated balance sheet at cost and are subsequently adjusted to
reflect the Company’s proportionate share of net earnings or losses of the entity, distributions received, contributions
and certain other adjustments, as appropriate. Any difference between the carrying amount of these investments on the Company’s
balance sheet and the underlying equity in net assets is amortized as an adjustment to equity in earnings (loss) of unconsolidated
entities. When circumstances indicate there may have been a loss in value of an equity method investment, and the Company determines
the loss in value is other than temporary, the Company recognizes an impairment charge to reflect the investment at fair value
(see Note 4).
Segments
The Company has identified
two reportable business segments: (i) student housing operations and (ii) property management services. The Company evaluates
the performance of its operating segments based on operating income (loss). All inter-segment sales pricing is based on current
market conditions. Unallocated corporate amounts include general expenses associated with managing the Company’s two reportable
operating segments. Prior to the third quarter of 2014, the Company’s segments consisted of student housing operations and
construction, development and management services. Upon discontinuation of the construction and development operations of the
business, the Company identified its two segments as student housing operations and property management services. All construction
and development activities are reported in discontinued operations at December 31, 2014.
Student
Housing Revenue
Students are required
to execute lease contracts with payment schedules that vary from annual to monthly payments. The Company recognizes revenue on
a straight-line basis over the term of the lease contracts which for new tenants is typically 11.5 months and for renewing tenants
is typically 12 months. Generally, unless sufficient income can be verified, each executed contract is required to be accompanied
by a signed parental/guardian guaranty. Amounts received in advance of the occupancy period or prior to the contractual due date
are recorded as deferred revenues and included in other liabilities on the accompanying consolidated balance sheets.
Property Management Services
Management fees are recognized
when earned in accordance with each management contract. Incentive management fees are recognized when the incentive criteria
are met.
Development and Construction 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 for each property under development and construction. For the purpose of applying this method,
significant estimates are necessary to determine the percentage of completion as of the balance sheet date. This method is used
because management considers total cost to be the best measure of progress toward completion of the contract. 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 revenue recognized.
Development and construction
service revenue is recognized for contracts with entities the Company does not consolidate. For projects where 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 Company’s
interest in the unconsolidated entity. Any incentive fees, net of the impact of the Company’s 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. When 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. Entitlement fees and arrangement fees, where applicable, are recognized when earned based on the terms of the related
contracts.
Costs and estimated earnings
in excess of billings represents the excess of construction costs and profits recognized to date using the percentage of completion
method over billings to date on certain contracts. Billings in excess of costs and estimated earnings represents the excess of
billings to date over the amount of contract costs and profits recognized to date using the percentage of completion method on
certain contracts. Total billings to date on such contracts totaled $49.3 million and $51.3 million as of December 31, 2014 and
2013, respectively. The Company expects to bill and collect the cost and estimated earnings in excess of billings in 2015.
Allowance
for Doubtful Accounts
Allowances for student
receivables are maintained to reduce the Company’s receivables to the amount that management estimates to be collectible,
which approximates fair value. The allowance is estimated based on past due balances not received on contractual terms, as well
as historical collections experience and current economic and business conditions. When management has determined that receivables
are uncollectible, they are written off against the allowance for doubtful accounts. Recoveries of accounts previously written
off are recorded when received.
The allowance for doubtful
accounts is summarized as follows (in thousands):
| |
Year
Ended December 31, | |
| |
2014 | | |
2013 | | |
2012 | |
Balance at beginning of period | |
$ | 539 | | |
$ | 121 | | |
$ | 246 | |
Charged to expense | |
| 3,249 | | |
| 3,432 | | |
| 1,728 | |
Write-offs | |
| (3,329 | ) | |
| (2,433 | ) | |
| (1,853 | ) |
Sale of properties | |
| - | | |
| (581 | ) | |
| - | |
Balance at end of period | |
$ | 459 | | |
$ | 539 | | |
$ | 121 | |
Marketing
and Advertising Costs
Marketing and advertising
costs are expensed during the period incurred and included in student housing and general and administrative expenses in the accompanying
consolidated statements of operations and comprehensive income (loss). Marketing and advertising expenses were $1.5 million, $1.5
million, and $1.3 million for the years ended December 31, 2014, 2013, and 2012, respectively.
Derivative
Instruments and Hedging Activities
Campus Crest enters into
interest rate cap and interest rate swap agreements 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. The Company had no interest rate
swaps as of December 31, 2014.
All derivative
instruments are recognized as either assets or liabilities on the consolidated balance sheets at their respective fair values.
Changes in fair value are recognized either in earnings or as other comprehensive income (loss), depending on whether the derivative
has been designated as a 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 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 other income (expense) line item on the accompanying consolidated statements of operations and comprehensive income (loss).
As of December 31, 2014 and 2013, the fair value of derivative contracts was insignificant.
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 has made
an election to qualify, and believes it is operating so as to qualify, as a REIT under Sections 856 through 859 of the Internal
Revenue Code. The Company’s 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 Company’s gross income, the composition and values of the Company’s assets, the Company’s
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 Company’s 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, the Company’s failure to qualify as a REIT could materially and adversely affect the Company, including its
ability to make distributions to its stockholders in the future.
Campus Crest has made
the election to treat TRS Holdings, the Company’s subsidiary which holds the Company’s management companies (as well
as the development and construction companies included within discontinued operations) that provide services to entities in which
the Company does not own 100% of the equity interests, as a TRS. As a TRS, the operations of TRS Holdings and its subsidiaries
are generally subject to federal, state and local income and franchise taxes. The Company’s TRS accounts for its income
taxes in accordance with U.S. GAAP, which includes an estimate of the amount of taxes payable or refundable for the current year
and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the Company’s
financial statements or tax returns. Deferred tax assets and liabilities of the TRS entities 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.
Campus Crest follows
a two-step approach for evaluating uncertain tax positions. Recognition (step one) occurs when the Company concludes that a tax
position, based solely on its technical merits, is more-likely-than-not (a likelihood of more than 50 percent) to be sustained
upon examination. Measurement (step two) determines the amount of benefit that more-likely-than-not will be realized upon settlement.
De-recognition of a tax position that was previously recognized would occur when the Company subsequently determines a tax position
no longer met the more-likely-than-not threshold of being sustained. The use of a valuation allowance as a substitute for de-recognition
of tax positions is prohibited.
Comprehensive Income (Loss)
Comprehensive income
(loss) includes net income (loss) and other comprehensive income (loss), which consists of unrealized gains (losses) on derivative
instruments and foreign currency translation adjustments. Comprehensive income (loss) is presented in the accompanying consolidated
statements of operations and comprehensive income (loss), and accumulated other comprehensive income (loss) is displayed as a
separate component of stockholders’ equity.
Common Stock Issuances and Costs
Specific incremental
costs directly attributable to the Company’s equity offerings are deferred and charged against the gross proceeds of the
offering. As such, underwriting commissions and other common stock issuance costs are reflected as a reduction of additional paid
in capital. See Note 13 for an expanded discussion on common stock issuances and costs.
Stock-Based Compensation
The Company grants restricted
stock and restricted Operating Partnership ("OP Unit”) awards that typically vest over either a three or five year
period. A restricted stock or OP Unit award is an award of shares of the Company’s common stock or OP Units that are subject
to restrictions on transferability and other restrictions determined by the Company’s compensation committee at the date
of grant. A grant date generally is established for a restricted stock award or restricted OP Unit award upon approval from the
Company’s 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 Company’s compensation committee may determine. Except to the extent
restricted under the award agreement, a participant awarded restricted stock or OP Units has all the rights of a stockholder or
OP Unit holder as to these shares or units, including the right to vote and the right to receive dividends or distributions on
the shares or units. The fair value of the award generally is determined based on the market value of the Company’s 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.
Foreign Currency
Transactions denominated
in foreign currencies are recorded in local currency at actual exchange rates at the date of the transaction. Monetary assets
and liabilities denominated in foreign currencies at the balance sheet dates are reported at the rates of exchange prevailing
at those dates. Any gains or losses arising on monetary assets and liabilities from a change in exchange rates subsequent to the
date of the transaction have been included in discontinued operations, if resulting from operations within the Company’s
development or construction service company, or other income (expense) in the accompanying consolidated statements of operations
and comprehensive income (loss). As of December 31, 2014 and 2013, the Company had foreign currency exposure to the Canadian dollar.
The aggregate transaction gains and losses included in the accompanying consolidated statements of operations and comprehensive
income (loss) for the years ended December 31, 2014 and 2013 were not significant.
The financial statements
of certain equity method investees and certain foreign subsidiaries are translated from their respective functional currencies
into U.S. dollars using current and historical exchange rates. Translation adjustments resulting from this process are reported
separately and included as a component of accumulated other comprehensive income (loss) in stockholders' equity in the accompanying
consolidated balance sheets. Upon classification as held for sale, sale or liquidation of the Company’s investments, the
translation adjustment would be reported as part of the gain or loss on classification, sale or liquidation. During the years
ended December 31, 2014 and 2013, the Company recognized a foreign currency translation loss of approximately $2.6 million and
$0.1 million, respectively, related to its investment in CSH Montreal, LP ("CSH Montreal”). Foreign currency translation
loss is included in accumulated other comprehensive loss on the accompanying consolidated balance sheets and in comprehensive
income (loss) in the accompanying consolidated statements of operations and comprehensive income (loss).
Insurance
Recoveries
Insurance recoveries
are amounts due or received under the Company’s applicable insurance policies for asset damage and business interruption
relating to the previously disclosed fire at The Grove at Pullman, Washington and to the damage at The Grove at Wichita Kansas,
and The Grove at Wichita Falls, Texas. Business interruption recovery is recorded when realized and included as a reduction within
student housing operations expenses within the consolidated statements of operations and comprehensive income (loss). For the
year ended December 31, 2014 and 2013, the Company recognized approximately $1.2 million and $1.4 million, respectively of business
interruption recovery. As of December 31, 2014 and 2013, the Company had a receivable for property damage of $5.5 million and
$1.0 million, respectively.
Consolidated Variable Interest Entity
During the year ended
December 31, 2013, the Company entered into a variable interest entity ("VIE") with Copper Beech Townhome Communities,
LLC ("CBTC") to develop, construct and manage a student housing property in Ames, Iowa (“Copper Beech at Ames”).
The Company concluded that it is the primary beneficiary of Copper Beech at Ames as the Company funded all of the equity of this
entity, resulting in the Copper Beech investor’s interest being deemed a de facto agent of Campus Crest. Therefore, the
Company has consolidated the financial position and the results of operations of Copper Beech at Ames in the accompanying balance
sheet, consolidated statements of operations and comprehensive income (loss). The Company recorded $1.3 million and $0.5 million
in revenues and expenses, respectively, related to the VIE for the year ended December 31, 2014. The Company recorded $33.5 million
in assets, $22.3 million in liabilities, and $5.6 million of noncontrolling interests on the accompanying consolidated balance
sheet as of December 31, 2014. The creditors of the loan for Copper Beech at Ames do not have recourse to the assets of Campus
Crest, nor is the Company required to provide financial support to Copper Beech at Ames. On January 30, 2015, in connection with
the Copper Beech purchase transaction (see Note 19), the Company’s ownership interest in Copper Beech at Ames increased
to a 100% interest.
Immaterial Correction
During the year ended
December 31, 2014, the Company was made aware of a tax liability at one of its properties that extends back to the year ended
December 31, 2009. The total impact of the tax liability is approximately $2.3 million, of which $0.4 million relates to
2014. The Company has adjusted the prior year consolidated financial statements presented herein to reflect the impact of this
liability. For both the years ended December 31, 2013 and 2012, student housing operations expense on the consolidated statements
of operations and comprehensive income (loss) has been increased by approximately $0.4 million, and accumulated deficit and distributions
on the accompanying consolidated statement of changes in equity as of December 31, 2011 has been increased by $1.1 million.
In addition, accrued accounts payable on the consolidated balance sheet as of December 31, 2013 was increased by $1.9 million.
No changes in net cash provided by operating activities in the accompanying consolidated statement of cash flows resulted from
the immaterial correction to prior periods.
Recent
Accounting Pronouncements
In February 2015, the
FASB issued ASU 2015-02, "Consolidation (Topic 810)", which amends the consolidation requirements in ASC 810, “Consolidation”.
ASU 2015-02 affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. All
legal entities are subject to reevaluation under the revised consolidation model. Specifically, the amendments: (i) modify the
evaluation of whether limited partnerships and similar legal entities are variable interest entities ("VIEs") or voting
interest entities, (ii) eliminate the presumption that a general partner should consolidate a limited partnership, (iii) affect
the consolidated analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and
related party relationships and (iv) provide a scope exception for certain entities. ASU 2015-02 is effective for annual reporting
periods beginning after December 15, 2015, and interim periods within those fiscal years. The Company is currently evaluating
the provisions of this guidance and the impact is not known.
In April 2014, the FASB
issued ASU 2014-08, "Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360) - Reporting
Discontinued Operations and Disclosures of Disposals of Components of an Entity" ("ASU 2014-08"). ASU 2014-08 changes
the threshold for disclosing discontinued operations and the related disclosure requirements. Pursuant to ASU 2014-08, only disposals
representing a strategic shift, such as a major line of business, a major geographical area or a major equity investment, should
be presented as a discontinued operation. The guidance is to be applied prospectively to new disposals and new classifications
of disposal groups as held for sale after the effective date. ASU 2014-08 is effective for annual periods beginning on or after
December 15, 2014 with early adoption permitted. The Company adopted ASU 2014-08 as of January 1, 2014.
In May 2014, the FASB
issued ASU No. 2014-09, “Revenue from Contracts with Customers”. This ASU requires an entity to recognize the amount
of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This ASU will replace
most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for the Company
on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative
effect transition method. We are evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and
related disclosures. The Company has not yet selected a transition method nor have we determined the effect of the standard on
our ongoing financial reporting.
3. Student Housing Properties
The following is a summary
of the Company’s student housing properties, net for the periods presented (in thousands):
| |
December
31, | |
| |
2014 | | |
2013 | |
| |
| | |
| |
Land | |
$ | 76,043 | | |
$ | 58,439 | |
Buildings and improvements | |
| 781,739 | | |
| 597,141 | |
Furniture, fixtures and equipment | |
| 78,180 | | |
| 60,705 | |
| |
| 935,962 | | |
| 716,285 | |
| |
| | | |
| | |
Less: accumulated depreciation | |
| (128,121 | ) | |
| (102,356 | ) |
| |
$ | 807,841 | | |
$ | 613,929 | |
Included in depreciation
expense in the statements of operations and comprehensive income (loss) is $1.5 million, $0.7 million and $1.1 million of amortization
expense for in-place leases in 2014, 2013 and 2012, respectively.
In August 2014, the Company
began operations at The Grove at Slippery Rock, Pennsylvania, The Grove at Grand Forks, North Dakota, The Grove at Mt. Pleasant,
Michigan, The Grove at Gainesville, Florida, and Copper Beech at Ames, Iowa.
In January 2014, the
Company acquired the remaining 80% ownership interests in HSRE IV, which owns The Grove at Denton, Texas, thereby increasing its
student housing properties (see Note 6).
In July 2013, the Company
experienced a fire at The Grove at Pullman, Washington, a property under construction, which resulted in a partial loss of the
property. Management has estimated the loss to be approximately $7.5 million, of which we have received $2.5 million in insurance
proceeds in 2013 and expect to receive additional proceeds in the first quarter of 2015. While no assurances can be given, after
taking into account the Company’s existing insurance coverage, management believes that the damages sustained as a result
of this fire will not have a material adverse effect on the Company’s financial position or results of operations.
4. Strategic Repositioning Initiatives
The Company has begun
to implement a strategic repositioning which includes, among other things:
| (1) | Simplifying the business model
by discontinuing all construction and development and focusing on organic growth; |
| (2) | Reducing the number of joint
ventures through planned dispositions of certain assets within its joint ventures to
simplify asset ownership structure and reduce exposure to off-balance sheet obligations; |
| (3) | Disposing of land which was previously
held for future development (held in land and property held for sale as of December 31,
2014, some of which was disposed of subsequent to the year ended December 31, 2014 (See
Note 19) and the rest of which we expect to dispose of during 2015); |
| (4) | Identifying costs savings at
the Company's properties and at the corporate office; and |
| (5) | Focusing time and resources on
recruiting new members of our management team. |
During the year ended
December 31, 2014, the Company discontinued all construction and development operations (see Note 7).
During the year ended
December 31, 2014, the Company recorded an other than temporary impairment of $57.8 million in the consolidated statement of operations
and comprehensive income (loss) for certain of our unconsolidated entities, including $31.3 million related to HSRE I, HSRE V,
HSRE VI and HSRE X (the “HSRE Investments”) and $26.5 million related to our investment in CSH Montreal LP. Factors
giving rise to the strategic repositioning, including results below our expectations in original underwriting as well as our communications
from the venture partner during the year ended December 31, 2014 about their desire to dispose of certain properties in the HSRE
Investments in the near term, resulted in our determination that an other than temporary impairment existed. See Note 11 for additional
information on impairments.
In connection with exiting
the construction and development businesses during 2014, the Company recorded impairment for land and pre-development costs of
$31.9 million in the consolidated statement of operations and comprehensive income (loss), based on their estimated fair values.
The fair values were obtained from third-party appraisals based on comparable properties (market approach; which involved Level
3 inputs in the fair value hierarchy). The land held for sale is expected to be disposed of pursuant to a standard sale process
during 2015. See Note 19.
Additionally, the Company
recorded $15.1 million of impairments of other assets related to corporate infrastructure changes, as a result of the strategic
repositioning. Assets impaired included the corporate aircraft and certain enterprise resource planning related assets.
The Company also terminated
the employment of certain employees and eliminated positions as part of the strategic repositioning. In connection with these
terminations, the Company recognized severance expense of $9.1 million during the year ended December 31, 2014, of which $2.9
million is included in loss from discontinued operations and $6.2 million is included in operating expenses in the consolidated
statements of operations and comprehensive income (loss). Severance expense included $2.7 million for the acceleration of the
vesting conditions of restricted shares. As of December 31, 2014, there was $5.7 million included in accounts payable and accrued
expenses in the consolidated balance sheet of which $4.3 million and $1.4 million is expected to be paid in 2015 and 2016, respectively.
Significant components of the severance accrual during 2014 are as follows (in thousands):
Balance at January 1, 2014 | |
$ | - | |
New charges | |
| 6,411 | |
Cash payments | |
| (668 | ) |
Balance at December 31, 2014 | |
$ | 5,743 | |
5. Income Taxes
The Company believes
it is operating so as to qualify as a REIT under the Internal Revenue Code. Therefore, it is not subject to federal income tax
as long as the Company distributes at least 90% of its REIT taxable income to its stockholders each year. As a result, no provision
for federal income taxes has been included in the accompanying consolidated financial statements. If the Company fails to qualify
as a REIT, it will be subject to federal income tax (including any applicable alternative minimum tax) on its taxable income and
to federal income and excise taxes on its undistributed income. The Company’s TRSs are subject to federal, state, and local
income taxes. As such, deferred income taxes result from temporary differences between the carrying amounts of assets and liabilities
of the TRSs for financial reporting purposes and the amounts used for income tax purposes. 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. Significant
components of the deferred tax assets and liabilities of the TRSs are as follows (in thousands):
| |
2014 | | |
2013 | |
Deferred tax assets: | |
| | |
| |
Solar investment tax credit | |
$ | 2,116 | | |
$ | 1,924 | |
Federal and state net operating loss | |
| 2,284 | | |
| 79 | |
Other | |
| 22 | | |
| 23 | |
Less: valuation allowance | |
| (4,002 | ) | |
| (484 | ) |
Total deferred tax assets | |
| 420 | | |
| 1,542 | |
Deferred tax liabilities: | |
| | | |
| | |
Deferred revenue | |
| - | | |
| (260 | ) |
Depreciation and amortization | |
| (420 | ) | |
| (355 | ) |
Total deferred tax liabilities | |
| (420 | ) | |
| (615 | ) |
Net deferred tax assets | |
$ | - | | |
$ | 927 | |
The Company has a federal
net operating loss ("NOL") of approximately $5.9 million at December 31, 2014, which will expire in 2034. Additionally,
the Company has state NOLs of approximately $7.8 million and $1.3 million at December 31, 2014 and 2013, respectively, that will
expire at various times between 2018 and 2034.
Significant components
of the Company’s income tax provision are as follows (in thousands):
| |
December
31,
2014 | | |
December
31,
2013 | | |
December
31,
2012 | |
Current: | |
| | | |
| | | |
| | |
Federal | |
$ | - | | |
$ | - | | |
$ | 150 | |
State | |
| - | | |
| 200 | | |
| 206 | |
Current expense | |
| - | | |
| 200 | | |
| 356 | |
Deferred: | |
| | | |
| | | |
| | |
Federal | |
| 815 | | |
| (885 | ) | |
| - | |
State | |
| (84 | ) | |
| (42 | ) | |
| - | |
Deferred expense (benefit) | |
| 731 | | |
| (927 | ) | |
| - | |
Income tax expense (benefit) | |
$ | 731 | | |
$ | (727 | ) | |
$ | 356 | |
Due to the Company’s
decision to discontinue construction and development operations, it believes it is more likely than not that the Company will
not realize the value of its deferred tax assets, net of valuation allowance. Therefore, an increase of the valuation allowance
of approximately $3.5 million was recorded during the year ended December 31, 2014. The Company had no unrecognized tax benefits
as of December 31, 2014 and December 31, 2013.
As of December 31, 2014, the Company is not
under an income tax examination by the Internal Revenue Service (“IRS”) or by any state or local taxing authority.
The Company is no longer subject to income tax examinations by the IRS for tax years before 2011, or by state or local income
tax authorities for tax years before 2010.
6. Business Acquisitions
Denton, Texas Acquisition
In
January 2014, the Company acquired HSRE’s 80% ownership interest in HSRE IV, in which the Company previously held a 20%
interest and which owns The Grove at Denton, Texas, for approximately $7.7 million. Prior to the acquisition of this interest,
the Company accounted for its ownership interest in the property under the equity method. In connection with evaluating the Company’s
investment in HSRE IV for impairment as of December 31, 2013, the Company recognized a loss of approximately $0.3 million for
the other than temporary decline in value of its previously held equity interest in the property. The acquisition date fair value
of the Company’s equity interest in HSRE IV immediately before the acquisition of the remaining interest in HSRE IV was
$1.9 million based on the purchase price of the transaction. Subsequent to the Company’s acquisition of this interest, the
Company consolidated the balance sheet and results of operations of The Grove at Denton, Texas. For the year ended December 31,
2014, the acquired property contributed a total of $3.9 million in revenue and $1.0 million in expenses, which included $1.5 million
of amortization expense of in-place intangible assets.
The
following table is an allocation of the purchase price (in thousands):
Land | |
$ | 4,770 | |
Buildings and improvements | |
| 18,276 | |
Furniture, fixtures and equipment | |
| 2,284 | |
In-place leases | |
| 1,524 | |
Other | |
| (377 | ) |
Fair value of debt at acquisition | |
| (16,901 | ) |
| |
| 9,576 | |
Less estimated fair value of interest owned prior to acquisition | |
| (1,915 | ) |
| |
$ | 7,661 | |
Acquisition
of Properties Under Development
During the year ended
December 31, 2013, the Company acquired land at nine project sites. The purchase price for these nine sites totaled approximately
$32.4 million. The project sites were located in Slippery Rock, Pennsylvania, Grand Forks, North Dakota, Mt. Pleasant, Michigan,
Philadelphia, Pennsylvania, Louisville, Kentucky, Greensboro, North Carolina, Gainesville, Florida, Bellingham, Washington, and
Ames, Iowa. During 2013, the Company contributed its investment in the Philadelphia, Pennsylvania project to a joint venture with
Brandywine and HSRE. The project sites in Louisville, Kentucky, and Greensboro, North Carolina, were contributed into a joint venture
with HSRE during 2013. The investment in Ames, Iowa is a development project in conjunction with Copper Beech. The Company did
not acquire land for development in 2014.
Copper Beech Acquisition
In February 2013, the
Company entered into purchase and sale agreements to acquire a 48.0% interest in a portfolio of 35 student housing properties,
one undeveloped land parcel and a corporate office building held by the members of Copper Beech Townhome Communities, LLC (“CBTC”)
and Copper Beech Townhome Communities (PA), LLC (“CBTC PA”, together with CBTC, “Copper Beech” or the “Sellers”)
(the “CB Portfolio”), and a fully integrated platform and brand with a management team, for an initial purchase price
of approximately $230.2 million, including the repayment of $106.7 million of debt, with the remaining 52.0% interest in the CB
Portfolio to be held by certain of the current members of CBTC and CBTC PA, (the “CB Investors”). To effect the acquisition
of its 48.0% interest in the CB Portfolio, the Company entered into a purchase and sale agreement (the “Purchase Agreement”),
and related transactions, with the members of CBTC and CBTC PA, to acquire in steps an additional 36.3% interest in the CB Portfolio.
The Company also entered into a purchase and sale agreement with certain investors in the CB Portfolio who are not members of Copper
Beech (the “Non-Member Investors”) to acquire the interests in the CB Portfolio held by such Non-Member Investors (the
“Non-Member Purchase Agreement”). Pursuant to the Non-Member Purchase Agreement, the Company acquired approximately
an 11.7% interest in the CB Portfolio from the Non-Member Investors. The Company refers to this transaction as the “CB Portfolio
Acquisition.”
The CB Portfolio consists
of 36 student housing properties, one undeveloped land parcel, and Copper Beech’s corporate office building in State College,
Pennsylvania. The CB Portfolio consists primarily of townhouse units located in eighteen geographic markets in the United States
across thirteen states, with 30 of the 36 student housing properties having been developed by Copper Beech. As of the date of the
CB Portfolio Acquisition, the CB Portfolio comprised approximately 6,242 rentable units with approximately 16,645 rentable beds.
As of the date of the CB Portfolio Acquisition, the student housing properties had an average age of approximately 8.2 years.
The Company’s
investment in the CB Portfolio entitled it to a preferred payment of $13.0 million for the first year of its investment and 48%
of remaining operating cash flows. In connection with the CB Portfolio Acquisition, the Company loaned approximately $31.7 million
at an interest rate of 8.5% per annum to the CB Investors, which was repaid in connection with the Amendment to the Purchase Agreement
(as described below).
Amendment to Copper Beech Purchase Agreement
On September 30, 2013
and effective subject to the receipt of required third party consents, the Company entered into an Amendment (the “Amendment”)
to the Purchase Agreement. As consideration for entering into the Amendment, the Company paid the CB Investors $4.0 million.
Pursuant to the terms
of the Amendment, following receipt of required third party consents, the Company will transfer its 48.0% interest in five properties
in the Copper Beech Portfolio (Copper Beech Auburn, Copper Beech Kalamazoo Phase 1, Copper Beech Kalamazoo Phase 2, Copper Beech
Oak Hill and Copper Beech Statesboro Phase 1) back to the CB Investors and defer the acquisition of the two Phase II development
properties (Cooper Beech Mt. Pleasant Phase 2 and Cooper Beech Statesboro Phase 2) until August 18, 2014 as consideration for an
additional 19.0% interest in each of the remaining 30 properties in the Copper Beech Portfolio (the “Initial Copper Beech
Properties”). Following the transfer of such properties, the Company held a 67.0% interest in each of 30 properties in the
Copper Beech Portfolio, with the CB Investors holding the remaining 33.0% interest.
In addition, under the
terms of the Amendment, the Company has the option, exercisable from March 18, 2014 through August 18, 2014, to acquire an 18.0%
interest in each of the seven properties whose acquisition is being deferred (collectively, the “Deferred Copper Beech Properties”),
which will entitle the Company to 33.0% of the operating cash flows of such Deferred Copper Beech Properties. The purchase price
for the exercise of this option is approximately $16.9 million. In order to exercise this option, the Company must also exercise
the option to acquire an additional 18.0% interest in the Initial Copper Beech Properties, which is described below.
The Amendment was accounted
for as a nonmonetary exchange. The interests in the five properties transferred were accounted for by the Company as investments
under the equity method prior to the exchange. No gain or loss was recognized as a result of the transaction.
The Amendment also amends
the Company’s options to acquire additional interests in the Copper Beech Portfolio as follows:
• Beginning March
18, 2014 through August 18, 2014, the Company had the option to acquire an additional 18.0% interest in the Initial Copper Beech
Properties, increasing its aggregate interest in such properties to 85.0%, which entitled the Company to 100% of the operating
cash flows of the Initial Copper Beech Properties. The aggregate purchase price for the exercise of this purchase option was approximately
$93.5 million plus debt repayment of approximately $21.0 million.
• Subsequent
to December 31, 2014, the Company completed the acquistition of the Copper Beech Portfolio (see Note 19). Prior to
the acquisition, the Company had the option to acquire an additional 3.9% interest in the Initial Copper Beech Properties and
an additional 70.9% interest in the Deferred Copper Beech Properties through May 2015, which would have increased its
aggregate interest in all 37 properties in the Copper Beech Portfolio to 88.9% and entitled the Company to 100% of the
operating cash flows of the Initial Copper Beech Properties and the Deferred Copper Beech Properties. The aggregate purchase
price for the exercise of this purchase option was approximately $100.7 million plus debt repayment of approximately $19.0
million. Through May 2016, the Company had the option to acquire an additional 11.1% interest in the Copper Beech Portfolio,
which would have increased its aggregate interest to 100%. The aggregate purchase price for the exercise of this purchase
option was approximately $53.4 million.
In connection with the
Amendment, in October 2013, the Sellers repaid the entire principal balance of $31.7 million outstanding under the loans previously
provided by us.
Dilution of Ownership
On August 18, 2014, the
Company elected not to exercise the first purchase option to acquire additional interests in the properties comprising the CB Portfolio.
As a result of this decision, the Company is entitled to 48.0% of the operating cash flows in the 36 operating properties, one
office building and one parcel of land as well as 45.0% of the proceeds of any sale of any portion of the CB Portfolio. In addition,
any future purchase options to acquire additional interests in the CB Portfolio are forfeited. During the three months ended September
30, 2014, and as a result in the change in ownership percentage in the CB Portfolio, the Company incurred a non-cash charge of
$33.4 million, which is included in the accompanying consolidated statements of operations and comprehensive income (loss).
Both the Company and the
CB Investors hold joint approval rights for major decisions, including those regarding property acquisition and disposition as
well as property operation. As such, the Company holds a noncontrolling interest in the CB Portfolio and accordingly applies the
equity method of accounting. As of December 31, 2014, the Company held a 48% effective interest in 36 operating properties and
two non-operating properties in the CB Portfolio.
The Company recognized
approximately $1.6 million and $3.8 million in equity in losses of Copper Beech as well as no interest income and approximately
$1.4 million interest income from the loan to the CB Investors for the years ended December 31, 2014 and December 31, 2013, respectively.
Additionally, the Company recognized approximately $3.0 million and $1.1 million of transaction expenses related to the CB Portfolio
Acquisition and incurred $4.0 million and $16.9 million of costs which were included in its investment basis in Copper Beech for
the years ended December 31, 2014 and December 31, 2013, respectively.
Copper Beech Purchase
On January 30, 2015, the
Company closed on a transaction to acquire the remaining interest in certain of the Copper Beech properties (see Note 19).
Toledo, Ohio Acquisition
On
March 2, 2013, the Company acquired 100% of the ownership interests in Campus Crest at Toledo, Ohio, a 382 unit and 629 bed property
on the campus of the University of Toledo for approximately $13.8 million. The following table is an allocation of the purchase
price (in thousands):
Land | |
$ | 2,855 | |
In-place leases | |
| 469 | |
Buildings and improvements | |
| 9,496 | |
Furniture and fixtures | |
| 102 | |
Other | |
| 879 | |
| |
$ | 13,801 | |
Montreal, Quebec
Acquisitions
In
July 2013, the Company entered into a joint venture, DCV Holdings, LP (“DCV Holdings”) with Beaumont Partners SA (“Beaumont”)
to acquire a 711 room, 33-story hotel in downtown Montreal, Quebec, Canada, for approximately CAD 60.0 million. The joint venture
has since converted the property into an upscale student housing tower featuring a mix of single and double units serving McGill
University, Concordia University and L’Ecole de Technologie.
In December 2013, the
Company and Beaumont formed a holding company, CSH Montreal LP (“CSH Montreal”), and DCV Holdings was subsequently
contributed to CSH Montreal, such that CSH Montreal became the sole limited partner in DCV Holdings. In addition, following the
insertion of CSH Montreal as the holding company in the joint venture arrangement, CSH Montreal acquired ownership of HIM Holdings
LP (“HIM Holdings”), an entity formed to facilitate the acquisition of the Holiday Inn property in Canada. In
January 2014, HIM Holdings completed the acquisition of a hotel property, which has been converted into an upscale student housing
property serving McGill University. As of December 31, 2014, the Company owned a 47.0% common interest in CSH Montreal,
the holding company of DCV Holdings.
7. Asset Dispositions
and Discontinued Operations
In connection with the
strategic repositioning initiatives, the Company discontinued all construction and development operations. See Note 4 for additional
information related to the strategic repositioning. In connection with the discontinuation of these operations, the Company has
presented the results of construction and development as discontinued operations in the accompanying consolidated statements of
operations and comprehensive income (loss) for all years presented. These operations were previously included in the development,
construction and management services segment in the prior year’s consolidated financial statements. See Note 16 for additional
segment information.
Below is a summary of
the consolidated balance sheet for the construction and development operations for the years ended December 31, 2014 and 2013 (in
thousands):
| |
December 31, | |
| |
2014 | | |
2013 | |
| |
| | |
| |
Cash | |
$ | 1,118 | | |
$ | 331 | |
Other assets | |
| 2,461 | | |
| 4,408 | |
Costs and earnings in excess of construction billings | |
| 3,887 | | |
| 42,803 | |
Total assets | |
| 7,466 | | |
| 47,542 | |
| |
| | | |
| | |
Accounts payable and accrued expenses | |
| 6,050 | | |
| 18,660 | |
Construction billings in excess of cost and earnings | |
| 481 | | |
| 600 | |
Total liabilities | |
| 6,531 | | |
| 19,260 | |
Total net assets | |
$ | 935 | | |
$ | 28,282 | |
Below is a summary of
the results of operations for the construction and development operations for all periods presented (in thousands):
|
|
Year Ended December 31, |
|
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
24,383 |
|
|
$ |
50,249 |
|
|
$ |
53,736 |
|
Construction and development service expense |
|
|
(29,650 |
) |
|
|
46,759 |
|
|
|
50,493 |
|
Severance |
|
|
(2,959 |
) |
|
|
- |
|
|
|
- |
|
Operating income (loss) |
|
|
(8,226 |
) |
|
|
3,490 |
|
|
|
3,243 |
|
Depreciation and amortization |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Income (loss) from discontinued operations |
|
$ |
(8,226 |
) |
|
$ |
3,490 |
|
|
$ |
3,243 |
|
All construction and development
projects were substantially complete as of December 31, 2014.
In December 2013, the
Company sold four unencumbered, wholly-owned properties: The Grove at Jacksonville, Alabama, The Grove at Jonesboro, Arkansas,
The Grove at Wichita, Kansas, and The Grove at Wichita Falls, Texas, for a combined sales price of $51.0 million resulting in net
proceeds of approximately $48.6 million. In connection with the disposition of these properties, an impairment of $4.7 million
was recorded which is presented in discontinued operations in the accompanying consolidated statements of operations and comprehensive
income (loss) for the year ended December 31, 2013. In December 2014, the Company paid $1.4 million to the purchaser of these properties
to settle certain claims in connection with the sale which is included in loss on discontinued operations during the year ended
December 31, 2014 in the accompanying statement of operations and comprehensive income (loss). These properties were included in
the Company’s student housing properties segment. These properties were disposed of as of December 31, 2013 and therefore
have no activity for the year ended December 31, 2014.
Below is a summary of
the results of operations for the properties through the date of disposition for all periods presented (in thousands):
| |
Year Ended December 31, | |
| |
2014 | | |
2013 | | |
2012 | |
| |
| | |
| | |
| |
Revenue | |
$ | - | | |
$ | 9,754 | | |
$ | 8,993 | |
Operating expenses | |
| - | | |
| 5,354 | | |
| 5,184 | |
Loss on sale of disposed assets | |
| (1,350 | ) | |
| - | | |
| - | |
Operating income | |
| (1,350 | ) | |
| 4,400 | | |
| 3,809 | |
Depreciation and amortization | |
| - | | |
| 2,672 | | |
| 3,144 | |
Net income | |
$ | (1,350 | ) | |
$ | 1,728 | | |
$ | 665 | |
Impairment on discontinued operations | |
| - | | |
| (4,729 | ) | |
| - | |
Income (loss) from discontinued operations | |
$ | (1,350 | ) | |
$ | (3,001 | ) | |
$ | 665 | |
8. Investment in Unconsolidated
Entities
The Company has investments
in real estate ventures with HSRE, the former members (the “CB Investors”) of Copper Beech Townhome Communities, LLC
("CBTC") and Copper Beech Townhome Communities (PA), LLC (“CBTC PA,” together with CBTC, "Copper Beech"),
and Beaumont Partners SA (“Beaumont”) that the Company does not consolidate. These joint ventures are engaged primarily
in developing, constructing, owning and managing student housing properties. Both the Company and its joint venture partners hold
joint approval rights for major decisions, including those regarding property acquisitions and dispositions as well as property
operation. As such, the Company has significant influence but not control in these joint ventures and accounts for them under the
equity method of accounting.
The Company acts
as the operating member and day-to-day manager for its investments with HSRE and Beaumont and earns fees for these management services.
Additionally, for the periods presented, the Company has provided development and construction services to the ventures with HSRE,
Copper Beech and Beaumont and recognized fees as the services are performed. The fees related to development and construction services
are included in "Income (loss) from discontinued operations" in the accompanying consolidated statements of operations
and comprehensive income (loss).
In
January 2014, CSH Montreal LP (“CSH Montreal”), the Company’s joint venture with Beaumont, formed HIM Holdings
LP (“HIM Holdings”), to facilitate the acquisition of the Holiday Inn Midtown in Montréal, Québec for
approximately CAD 65 million ($56.2 million). In connection with the acquisition of the Holiday Inn property, the Company increased
its ownership interest from 20.0% to 47.0% in CSH Montreal, the joint venture that ultimately owns the Holiday Inn Midtown. In
January 2014, with the acquisition of the Holiday Inn Midtown property, the Company provided CAD 16.0 million ($13.8 million) of
preferred bridge equity financing to CSH Montreal to be repaid on or before September 2, 2014. As of September 2, 2014, the Company’s
preferred equity had not been repaid in full and as a result it is now entitled to 60.5% of all cash distributions related to earnings
from CSH Montreal with Beaumont and its partners being entitled to the remaining 39.5%. The Company retains its common ownership
interest of 47.0% in CSH Montreal and recognizes 47.0% in all losses from CSH Montreal with Beaumont and its partners recognizing
the remaining 53.0%. The Company’s maximum exposure to loss is its investment in CSH Montreal and the amount, if any,
that could be due under its debt guarantee described in Note 17. While the Company is not obligated to provide additional capital
to CSH Montreal, the Company may provide such funding. The Company estimates that it will
fund approximately $4.7 million in future operating commitments, taxes and future capital needs through the 2014/2015 academic
year. The Company funds operating commitments up to its 47.0% common ownership in the partnership.
See Note 17 for additional information on these guarantees.
In
conjunction with the Holiday Inn Midtown acquisition, CSH Montreal entered into a CAD 112.0 million ($96.8 million at December
31, 2014 exchange rate) acquisition and development credit facility to help fund the conversion of both hotels into upscale student
housing towers. The credit facility provides for variable interest-only payments at the higher of the Canadian Prime rate, which
was 3.00% at December 31, 2014, plus a weighted average spread of 3.39% or the Canadian Dealer Offered Rate (“CDOR”),
which was 1.3% at December 31, 2014, plus 1%, plus a weighted average spread of 3.39% through its maturity date on January 13,
2016. This facility has one twelve-month extension option, subject to lender approval.
In
January 2014, the Company amended and restated the HSRE-Campus Crest I, LLC operating agreement, which had the effect of exchanging
its preferred interests in The Grove at San Angelo, Texas, and The Grove at Conway, Arkansas, for additional membership interests
in HSRE-Campus Crest I, LLC, effectively increasing the Company’s equity investment in the joint venture to 63.9% from 49.9%.
HSRE-Campus Crest I, LLC owns The Grove at San Angelo, Texas, The Grove at Lawrence, Kansas, and The Grove at Conway, Arkansas.
In the event the joint venture is sold, the partners will share equally in the net proceeds.
There were no other material changes to the agreement. Subsequent to December 31,
2014, the Company entered into a binding agreement to sell two of these properties. See Note 19 for additional information.
On August 18, 2014, the
Company elected not to exercise the first purchase option to acquire additional interests in the properties comprising the CB Portfolio.
As a result of this decision, the Company is entitled to 48.0% of the operating cash flows in the 36 unconsolidated operating properties,
one office building and one parcel of land as well as 45.0% of the proceeds of any sale of any portion of the CB Portfolio. In
addition, any future purchase options to acquire additional interests in the CB Portfolio are forfeited. As a result in the change
in ownership percentage in the CB Portfolio, the Company incurred a charge of $33.4 million, which is included in the accompanying
consolidated statements of operations and comprehensive income (loss).
The Company is the
guarantor of the construction and mortgage debt or credit facilities of its joint ventures with HSRE and Beaumont. See Note 17.
Details of the Company’s unconsolidated investments at December 31, 2014 are presented in the following table (dollars in
thousands):
| |
| | |
| | |
| | |
| | |
| | |
| | |
Debt |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
Weighted | | |
|
| |
| | |
| | |
Number of | | |
| | |
| | |
| | |
| | |
Average | | |
|
| |
Our | | |
Year | | |
Properties In | | |
Total | | |
Total (5) | | |
Net Total | | |
Amount | | |
Interest | | |
|
Unconsolidated Entities | |
Ownership | | |
Founded | | |
Operation | | |
Investment | | |
Impairment | | |
Investment | | |
Outstanding | | |
Rate | | |
Maturity Date / Range |
HSRE-Campus Crest I, LLC | |
| 63.9 | % | |
| 2009 | | |
| 3 | | |
$ | 10,380 | | |
$ | (10,168 | ) | |
$ | 212 | | |
$ | 32,485 | | |
| 2.67 | %(1) | |
5/9/2015 |
HSRE-Campus Crest V, LLC | |
| 10.0 | % | |
| 2011 | | |
| 3 | | |
| 4,093 | | |
| (4,093 | ) | |
| - | | |
| 49,614 | | |
| 2.89 | %(1) | |
4/20/2015-5/05/2015 |
HSRE-Campus Crest VI, LLC | |
| 20.0 | % | |
| 2012 | | |
| 3 | | |
| 15,089 | | |
| (8,274 | ) | |
| 6,815 | | |
| 53,706 | | |
| 2.48 | %(1) | |
5/08/2015 – 12/19/2015 |
HSRE-Campus Crest IX, LLC | |
| 30.0 | % | |
| 2013 | | |
| 1 | | |
| 18,975 | | |
| - | | |
| 18,975 | | |
| 90,204 | | |
| 2.37 | %(1) | |
7/25/2016 |
HSRE-Campus Crest X, LLC | |
| 30.0 | % | |
| 2013 | | |
| 2 | | |
| 12,307 | | |
| (4,234 | ) | |
| 8,073 | | |
| 40,739 | | |
| 2.36 | %(1) | |
9/06/2016-9/30/2018 |
CB Portfolio | |
| 48.0 | %(3) | |
| 2013 | | |
| 35 | | |
| 218,718 | | |
| - | | |
| 218,718 | | |
| 227,698 | | |
| 5.14 | %(2) | |
9/01/2015 – 10/01/2020 |
CSH Montreal | |
| 47.0 | %(4) | |
| 2013 | | |
| 2 | | |
| 33,470 | | |
| (26,523 | ) | |
| 6,947 | | |
| 87,970 | | |
| 6.39 | %(1) | |
1/13/2016 |
Total unconsolidated entities | |
| | | |
| | | |
| 49 | | |
$ | 313,032 | | |
$ | (53,292 | ) | |
$ | 259,740 | | |
$ | 582,416 | | |
| 4.13 | % | |
|
| (1) | Variable interest rates. |
| (2) | Comprised of fixed rate debt. |
| (3) | As of December 31, 2014, the Company had a 48.0% ownership interest in the CB Portfolio. |
| (4) | As of January 2014, the Company’s ownership increased to 20.0% from 47.0% due to the acquisition
of Holiday Inn Midtown in Montreal, Quebec. See discussion above. |
| (5) | During the year ended December 31, 2014, the Company recognized an impairment of unconsolidated
entities of $57.8 million, of which $53.3 million reduced the carrying value of the investments and $4.5 million was recorded as
a guarantee obligation in other liabilities in the accompanying consolidated balance sheet. |
The following is a summary
of the combined financial position of the Company’s unconsolidated entities with HSRE and Beaumont in their entirety, not
only its interest in the entities, for the periods presented (in thousands):
| |
December 31, | |
| |
2014 | | |
2013 | |
Assets | |
| | | |
| | |
Student housing properties, net | |
$ | 437,108 | | |
$ | 289,797 | |
Development in process | |
| 7,429 | | |
| 81,994 | |
Other assets | |
| 12,947 | | |
| 15,341 | |
Total assets | |
$ | 457,484 | | |
$ | 387,132 | |
| |
| | | |
| | |
Liabilities and Equity | |
| | | |
| | |
Mortgage and construction loans | |
$ | 354,759 | | |
$ | 165,445 | |
Other liabilities | |
| 29,364 | | |
| 58,948 | |
Owners' equity | |
| 73,361 | | |
| 162,739 | |
Total liabilities and owners' equity | |
$ | 457,484 | | |
$ | 387,132 | |
| |
| | | |
| | |
Company's share of historical owners' equity | |
$ | 30,481 | | |
$ | 41,390 | |
Preferred investment(1) | |
| 7,322 | | |
| 16,468 | |
Net difference in carrying value of investment versus net book value of underlying net assets(2) | |
| 3,219 | | |
| 5,568 | |
Carrying value of investment in HSRE and other non-Copper Beech entities | |
$ | 41,022 | | |
$ | 63,426 | |
| (1) | As of December 31, 2014, the Company had Class B membership interests in The Grove at Indiana,
Pennsylvania, The Grove at Greensboro, North Carolina, and The Grove at Louisville, Kentucky, of approximately $2.7 million, $2.7
million and $1.9 million, respectively, entitling the Company to a 9.0% return on its investment upon the respective property being
operational. The Company also had, from January to September 2,
2014, a CAD 16 million ($13.8 million at December 31, 2014 exchange rate) Class A
interest in CSH Holdings entitling it to a commitment fee of 1.0% of the Class A interest each quarter and a 10.0% annual return
on its investment. |
| (2) | This amount represents the aggregate difference between the Company’s carrying amount and
its underlying equity in the net assets of its investments, which is typically amortized over the life of the related asset. The
basis differential occurs primarily due to the other than temporary impairments recorded during 2014 (see Note 4), the difference
between the allocated value to acquired entity interests and the venture’s basis in those interests, the capitalization of
additional investment in the unconsolidated entity, and the elimination of service related revenue to the extent of the Company’s
percentage ownership. |
ASC 323 Investments –
Equity Method and Joint Ventures and Article 4.08(g) of Regulation S-X requires that summarized financial information of material
investments accounted for under the equity method be provided of the investee’s financial position and results of operations
including assets, liabilities and results of operations under the investee’s historical cost basis of accounting. Notwithstanding
the extensive efforts of the Company and Copper Beech to compile the necessary financial information, the Company has determined
that the information needed for the preparation of historical financial statements of the CB Portfolio to satisfy these requirements
is not available or otherwise sufficiently reliable. As a result, the Company has elected to present financial information on its
investment in Copper Beech on the Company’s cost basis for its investment as of December 31, 2014 as it believes this information
is reliable and relevant to the users of its financial statements. Further, although the Company acknowledges that the information
provided does not comply with all of the provisions of ASC 323 or Article 4.08(g) of Regulation S-X, it does not believe that the
lack of the omitted disclosure, or the information of the financial position reflecting the cost basis of its investment provided
results in a material omission or misstatement of the Company’s consolidated financial statements taken as a whole.
The following is a summary
of the financial position reflecting the cost basis of the Company’s investments in the Copper Beech entities in their entirety
for the 35 and 28 unconsolidated properties in the CB Portfolio as of December 31, 2014 and December 31, 2013, respectively (in
thousands):
| |
December 31, | |
| |
2014 | | |
2013 | |
Assets | |
| | | |
| | |
Student housing properties, net | |
$ | 906,614 | | |
$ | 748,280 | |
Intangible assets | |
| 7,212 | | |
| 37,100 | |
Other assets | |
| 14,293 | | |
| 5,201 | |
Total assets | |
$ | 928,119 | | |
$ | 790,581 | |
| |
| | | |
| | |
Liabilities and Equity | |
| | | |
| | |
Mortgage and construction loans | |
$ | 476,985 | | |
$ | 421,239 | |
Other liabilities | |
| 15,541 | | |
| 13,112 | |
Owners' equity | |
| 435,593 | | |
| 356,230 | |
Total liabilities and owners' equity | |
$ | 928,119 | | |
$ | 790,581 | |
| |
| | | |
| | |
Company's share of historical owners' equity | |
$ | 199,281 | | |
$ | 244,964 | |
Net difference in carrying value of investment versus net book value of underlying net assets(1) | |
| 19,437 | | |
| 16,628 | |
Carrying value of investment in unconsolidated entity | |
$ | 218,718 | | |
$ | 261,592 | |
| (1) | This amount represents the aggregate difference between the historical cost basis and the basis
reflected at the entity level, which is typically amortized over the life of the related asset. The basis differential occurs primarily
due to the impairment recognized in connection with not exercising the Copper Beech purchase option offset by the capitalization
of transaction costs incurred to acquire the Company's interests in the Copper Beech entities. |
The following is a summary
of the combined operating results for the Company’s unconsolidated entities with HSRE and Beaumont in their entirety, not
only its interest in the entities, for the periods presented (in thousands):
| |
Year Ended December 31, | |
| |
2014 | | |
2013 | | |
2012 | |
| |
| | |
| | |
| |
Revenues | |
$ | 30,811 | | |
$ | 23,422 | | |
$ | 17,934 | |
Expenses: | |
| | | |
| | | |
| | |
Operating expenses | |
| 21,846 | | |
| 17,434 | | |
| 9,665 | |
Interest expense | |
| 7,577 | | |
| 5,025 | | |
| 4,962 | |
Depreciation and amortization | |
| 11,091 | | |
| 6,304 | | |
| 4,807 | |
Total expenses | |
| 40,514 | | |
| 28,763 | | |
| 19,434 | |
Net loss | |
$ | (9,703 | ) | |
$ | (5,341 | ) | |
$ | (1,500 | ) |
The following is a summary
of the operating results for the Company’s unconsolidated Copper Beech entities in their entirety, not only its interest
in the entities. For the year ended December 31, 2014, this summary includes results for 28 properties from January 1, 2014 through
August 18, 2014 and results for 35 unconsolidated properties from August 19, 2014 through December 31, 2014 (in thousands):
| |
| | |
Period from | |
| |
Year Ended December 31, 2014 | | |
March 18, 2013 to December 31, 2013 | |
| |
| | |
| |
Revenues | |
$ | 83,108 | | |
$ | 67,545 | |
Expenses: | |
| | | |
| | |
Operating expenses | |
| 34,525 | | |
| 28,316 | |
Interest expense | |
| 13,152 | | |
| 11,852 | |
Depreciation and amortization | |
| 35,827 | | |
| 56,106 | |
Total expenses | |
| 83,504 | | |
| 96,274 | |
Net loss | |
$ | (396 | ) | |
$ | (28,729 | ) |
During the year ended
December 31, 2014 the CB Portfolio had net cash provided by operating activities of approximately $24.6 million (unaudited), net
cash used in investing activities of approximately $(4.4) million (unaudited), and net cash used in financing activities of approximately
$(17.7) million (unaudited). During the year ended December 31, 2013, the CB Portfolio had net cash provided by operating activities
of $16.4 million (unaudited), net cash provided by investing activities of $24.2 million (unaudited), and net cash provided by
financing activities of $9.1 million (unaudited), respectively.
The following table is
the calculation of the Company’s equity in losses in the CB Portfolio for the year ended December 31, 2014 and for the period
from March 18, 2013 to December 31, 2013. As there are several components of the calculation, set forth below are notes corresponding
to the notes included in the Company’s calculation to further explain these components (in thousands).
| |
Year Ended | | |
Period from | |
| |
December 31, 2014 | | |
March 18, 2013 to December 31, 2013 | |
Net loss incurred by the CB Portfolio based on the Company's purchase price (1) | |
$ | (396 | ) | |
$ | (28,729 | ) |
Campus Crest's share of net loss (2) | |
| (606 | ) | |
| (9,215 | ) |
Campus Crest percentage of preferred payment (3) | |
| 911 | | |
| 5,663 | |
Campus Crest earnings from Copper Beech | |
| 305 | | |
| (3,552 | ) |
Amortization of basis difference (4) | |
| (557 | ) | |
| (264 | ) |
Total equity in earnings (loss) in the CB Portfolio | |
$ | (252 | ) | |
$ | (3,816 | ) |
| (1) | The basis of the financial statements of the CB Portfolio used in the calculation of the Company’s
equity in earnings for the year ended December 31, 2014 was computed using the cost basis for its investment in the CB Portfolio’s
underlying assets and liabilities for its properties at the dates the Company acquired its interests in the CB Portfolio. The calculation
includes the effects of purchase price adjustments determined at the date the Company acquired its interests in the CB Portfolio. |
The Company consummated the acquisition
of a 48.0% interest in 36 properties of the CB Portfolio. As a result of lender consents that were required to be obtained from
various lenders to the CB Portfolio prior to its ownership, the Company completed its acquisition of the 48.0% interest in stages,
which resulted in a variation in its ownership percentage from 25.3% to 48.0% in all 36 of the CB Portfolio operating properties
from March 18, 2013 to September 30, 2013. Effective October 1, 2013, the Company and the CB Portfolio sellers amended the purchase
and sale agreement, subject to receipt of all required third party consents, to increase the Company’s ownership interest
by 19.0% in 28 of the 35 properties (thereby increasing its ownership in the 28 properties to 67%) in exchange for the Company’s
48.0% interest in seven of the properties (thereby reducing its ownership in the seven properties to 0%) and deferring the Company’s
acquisition of any interests in two of the properties, plus a $20.2 million cash payment. Accordingly, the Company recognized its
proportionate share of earnings of the CB Portfolio for the specific percentage of ownership interest it held during the applicable
period, which was a 67.0% effective interest in the 28 properties during the first and second quarters of 2014 and through August
18, 2014. Due to the Company's decision not to exercise the first purchase option to acquire additional interests in the CB Portfolio,
on August 19, 2014, the Company's ownership interest in all 35 unconsolidated operating properties in the CB Portfolio reverted
to 48.0% and remained at 48.0% through December 31, 2014.
| (2) | For the year ended December 31, 2014, the losses incurred from January 1, 2014 through August 18,
2014 while the Company held 67% ownership in 28 of the properties exceeded the income earned from August 19, 2014 through December
31, 2014 while the Company held 48% ownership in 36 properties. |
| (3) | The Company was entitled to a preferred payment for the first year of its investment and the proportionate
share of the remaining operating cash flows in the CB Portfolio and it was currently entitled to its proportionate share of the
operating cash flows in the CB Portfolio. During the period from March 18, 2013 to March 17, 2014, the Company was entitled to
$13.0 million related to its preferred payment, all of which has been paid, and the Company received approximately $1.0 million
in other distributions, as of December 31, 2014. |
| (4) | The Company recorded in the calculation of equity in losses in the CB Portfolio the amortization
of the net difference in the Company’s carrying value of investment as compared to the underlying equity in net assets of
the investee. |
9. Debt
The following is a summary
of the Company’s mortgage and construction notes payable, the Credit Facility (defined below), Exchangeable Senior Notes
(defined below), and other debt (in thousands):
| |
Year Ended December 31, | |
| |
2014 | | |
2013 | |
Fixed-rate mortgage loans | |
$ | 163,341 | | |
$ | 165,393 | |
Variable-rate mortgage loans | |
| 16,613 | | |
| - | |
Construction loans | |
| 120,719 | | |
| 40,138 | |
Line of credit | |
| 217,500 | | |
| 108,500 | |
Exchangeable senior notes | |
| 97,419 | | |
| 96,758 | |
Other debt | |
| 2,827 | | |
| 2,694 | |
| |
$ | 618,419 | | |
$ | 413,483 | |
Mortgage
and Construction Loans
Mortgage and construction
loans are collateralized by properties and their related revenue streams. Mortgage loans are not cross-defaulted or cross-collateralized
with any other indebtedness. The Company’s mortgage loans generally may not be prepaid prior to maturity; however, in certain
cases, prepayment is allowed subject to prepayment penalties. The Company’s construction note agreements contain representations,
warranties, covenants (including financial covenants upon commencement of operations) and other terms that are customary for construction
financing. Construction loans are generally secured by a first deed of trust or mortgage on each property, primary UCC filings,
and an assignment of rents, leases and profits from the respective property. Mortgage and construction loans for the periods presented
consisted of the following (in thousands):
| |
Face Amount | | |
Principal
Outstanding at 12/31/2014 | | |
Principal
Outstanding at 12/31/2013 | | |
Stated Interest Rate | |
Interest Rate at
12/31/2014 | | |
Maturity Date
(1) | |
Amortization |
|
Construction loans | |
| | | |
| | | |
| | | |
| |
| | | |
| |
|
|
The Grove at Muncie | |
$ | 14,567 | | |
$ | 13,892 | | |
$ | 12,237 | | |
LIBOR + 225 BPS | |
| 2.42 | % | |
7/3/2015 | |
Interest only |
|
The Grove at Slippery Rock | |
| 17,961 | | |
| 16,031 | | |
| - | | |
LIBOR + 215 BPS | |
| 2.32 | % | |
6/21/2016 | |
Interest only |
|
The Grove at Fort Collins | |
| 19,073 | | |
| 19,073 | | |
| 17,228 | | |
LIBOR + 190 BPS | |
| 2.07 | % | |
7/13/2015 | |
Interest only |
|
The Grove at Pullman | |
| 16,016 | | |
| 10,886 | | |
| 10,673 | | |
LIBOR + 220 BPS | |
| 2.37 | % | |
9/5/2015 | |
Interest only |
|
The Grove at Grand Forks | |
| 16,916 | | |
| 12,474 | | |
| - | | |
LIBOR + 200 BPS | |
| 2.17 | % | |
2/5/2017 | |
Interest only |
|
The Grove at Gainesville | |
| 30,069 | | |
| 22,836 | | |
| - | | |
LIBOR + 215 BPS | |
| 2.32 | % | |
3/13/2017 | |
Interest only |
|
Copper Beech at Ames | |
| 23,551 | | |
| 21,170 | | |
| - | | |
LIBOR + 225 BPS | |
| 2.42 | % | |
5/2/2017 | |
Interest only |
|
Toledo Vivo | |
| 9,404 | | |
| 4,357 | | |
| - | | |
LIBOR + 215 BPS | |
| 2.32 | % | |
11/25/2017 | |
Interest only |
|
Mortgage loans | |
| | | |
| | | |
| | | |
| |
| | | |
| |
|
|
The Grove at Denton | |
| 17,167 | | |
| 16,613 | | |
| - | | |
LIBOR + 215 BPS | |
| 2.32 | % | |
3/1/2017 | |
30 years |
(2) |
The Grove at Milledgeville | |
| 16,250 | | |
| 15,640 | | |
| 15,847 | | |
6.12% | |
| 6.12 | % | |
10/1/2016 | |
30 years |
(2) |
The Grove at Carrollton and The Grove at Las Cruces | |
| 29,790 | | |
| 28,674 | | |
| 29,052 | | |
6.13% | |
| 6.13 | % | |
10/11/2016 | |
30 years |
(2) |
The Grove at Asheville | |
| 14,800 | | |
| 14,304 | | |
| 14,500 | | |
5.77% | |
| 5.77 | % | |
4/11/2017 | |
30 years |
(2) |
The Grove at Ellensburg | |
| 16,125 | | |
| 15,845 | | |
| 16,070 | | |
5.10% | |
| 5.10 | % | |
9/1/2018 | |
30 years |
(3) |
The Grove at Nacogdoches | |
| 17,160 | | |
| 16,857 | | |
| 17,100 | | |
5.01% | |
| 5.01 | % | |
9/1/2018 | |
30 years |
(3) |
The Grove at Greeley | |
| 15,233 | | |
| 14,945 | | |
| 15,194 | | |
4.29% | |
| 4.29 | % | |
10/1/2018 | |
30 years |
(3) |
The Grove at Clarksville | |
| 16,350 | | |
| 16,238 | | |
| 16,350 | | |
4.03% | |
| 4.03 | % | |
7/1/2022 | |
30 years |
(4) |
The Grove at Columbia | |
| 23,775 | | |
| 22,738 | | |
| 23,180 | | |
3.83% | |
| 3.83 | % | |
7/1/2022 | |
30 years |
(2) |
The Grove at Statesboro | |
| 18,100 | | |
| 18,100 | | |
| 18,100 | | |
4.01% | |
| 4.01 | % | |
1/1/2023 | |
30 years |
(5) |
| |
| | | |
$ | 300,673 | | |
$ | 205,531 | | |
| |
| | | |
| |
|
|
| (1) | For the construction loans, the maturity date is the stated maturity date in the respective loan
agreements, which can be extended for an additional one to two years, subject to the satisfaction of certain conditions, depending
on the loan. |
| (2) | Loan requires monthly payments of principal and interest, plus certain reserve and escrows, until
maturity when all principal is due. |
| (3) | Loan requires interest only payments plus certain reserves and escrows, payable monthly through
September 2013. Thereafter, principal and interest, plus certain reserves and escrows, are payable monthly until maturity. |
| (4) | Loan requires interest only payments plus certain reserves and escrows, payable monthly through
August 2014. Thereafter, principal and interest, plus certain reserves and escrows, are payable monthly until maturity. |
| (5) | Loan requires interest only payments plus certain reserves and escrows, payable monthly through
January 2015. Thereafter, principal and interest, plus certain reserves and escrows, are payable monthly until maturity. |
Line of Credit
In January 2013,
the Company entered into the second amended and restated credit agreement (the "Second Amended and Restated Credit Agreement"),
which provides for a $250.0 million senior unsecured revolving credit facility (the "Revolving Credit Facility") and
a $50 million term loan (the “Term Loan”, together with the “Revolving Credit Facility”, the “Amended
Credit Facility”). Additionally, under certain circumstances, there is an accordion feature that allows the Company to request
an increase in the total commitments of an additional $300.0 million to a total commitment of $600.0 million. The Second Amended
and Restated Credit Facility will mature in January 2017 and contains a one-year extension option, subject to certain terms and
conditions. Amounts outstanding under the Second Amended and Restated Credit Facility bears interest at a floating rate equal to,
at the Company’s election, the Eurodollar Rate or the Base Rate (each as defined in the Amended Credit Facility) plus a spread.
The spread for borrowings under the Revolving Credit Facility ranges from 1.75% to 2.50% for Eurodollar Rate based borrowings and
from 0.75% to 1.50% for Base Rate based borrowings, and the spread for the Term Loan ranges from 1.70% to 2.45% for Eurodollar
Rate based borrowings and from 0.70% to 1.45% for Base Rate based borrowings. At December 31, 2014 and 2013, the interest rate
was 2.68% on the Revolving Credit Facility borrowings and 2.63% on the Term Loan.
As of December 31, 2014,
the Company had approximately $167.5 million outstanding under the Revolving Credit Facility and $50.0 million outstanding under
the Term Loan. The amounts outstanding under the Revolving Credit Facility and Term Loan, as well as outstanding letters of credit
of $3.4 million, will reduce the amount that the Company may be able to borrow under this facility for other purposes. As of December
31, 2014, the Company had approximately $50.0 million in borrowing capacity under the Revolving Credit Facility, and amounts borrowed
under the facility are due at its maturity in January 2017, subject to a one-year extension, which the Company may exercise at
its option, subject to the satisfaction of certain terms and conditions, including the payment of an extension fee. The amount
available for the Company to borrow under the Amended Credit Facility is based on the sum of (a) the lesser of (i) 60.0% of the
"as-is" appraised value of the Company’s properties that form the borrowing base of the Amended Credit Facility
and (ii) the amount that would create a debt service coverage ratio of not less than 1.5, and (b) 50% of the aggregate of the lesser
of (i) the book value of each of the Company’s development assets (as such term is defined in the Second Amended and Restated
Credit Agreement) and (ii) the "as-is" appraised value of each of the Company’s development assets, subject to
certain limitations in the Second Amended and Restated Credit Agreement.
The Company incurs an
unused fee on the balance between the amount available under the Revolving Credit Facility and the amount outstanding under the
Revolving Credit Facility of (i) 0.30% per annum if the Company’s average borrowing is less than 50.0% of the total amount
available or (ii) 0.25% per annum if the Company’s average borrowing is greater than 50.0% of the total amount available.
On February 25, 2015,
the Company entered into the Second Amendment to the Revolving Credit Facility, which amended, among other things, certain of the
financial covenants from and including December 31, 2014 until and including September 30, 2015 (the “Relief Period”).
The Company’s ability
to borrow under the Amended Credit Facility is subject to its ongoing compliance with a number of customary financial covenants
during the Relief Period, including:
| · | a maximum leverage ratio of not greater than 0.65:1.00; |
| · | a minimum fixed charge coverage ratio of not less than 1.30:1.00; |
| · | a minimum ratio of fixed rate debt and debt subject to hedge agreements to total debt of not less
than 66.67%; |
| · | a maximum secured recourse debt ratio of not greater than 20%; |
| · | a minimum tangible net worth of not less than the sum of $330,788,250 plus an amount equal to 75%
of the net proceeds of any additional equity issuances; and |
| · | a maximum secured debt ratio of not greater than 47.5% |
Pursuant to the terms
of the Amended Credit Facility, the Company may not pay distributions that exceed the greater of (i) 95.0% of funds from operations,
or (ii) the minimum amount required for the Company to qualify and maintain its status as a REIT. If a default or event of default
occurs and is continuing, the Company also may be precluded from making certain distributions (other than those required to allow
the Company to qualify and maintain its status as a REIT). On September 30, 2014, the Company received a waiver with respect to
the distribution payout ratio for each distribution payout date through the end of 2015. The waiver was expressly conditioned on
the following: (i) no default or event of default shall have occurred and be continuing and (ii) as each test date during 2015,
the payout ratio shall be equal to or less than (A) 105% or (B) such greater amount as may be required by applicable law for the
Company to maintain its status of a REIT. Additionally, on February 25, 2015, the dividend payout ratio was amended to be calculated
on a rolling twelve month pro forma basis based on the current quarterly dividend of $0.09 per share.
During 2013, there were
several amendments to the Second Amended and Restated Credit Agreement. In February 2013, the Company amended the Second Amended
Credit Facility to provide for certain exclusions related to its investments in joint ventures as well as the treatment of certain
other investments within the compliance calculation of its secured debt ratio and certain negative covenants.
In April 2013, as a result
of the CB Portfolio Acquisition, the Company received a waiver from its lender group allowing for distributions up to, and not
to exceed, 110.0% of funds from operations for the remainder of 2013.
In June 2013, in connection
with the Company’s investment in its joint venture with Beaumont to acquire a property in Montreal, Quebec, Canada, the Company
received a waiver from its lender group allowing the Company to guarantee debt incurred by its subsidiary, Campus Crest at Montreal
I, LLC, to fund such investment, as there were no assets held by the joint venture at the time the Second Amended and Restated
Credit Agreement was entered into.
The Company and certain
of its subsidiaries guarantee the obligations under the Amended Credit Facility and the Company and certain of its subsidiaries
have provided a negative pledge against specified assets (including real property), stock and other interests.
Exchangeable Senior Notes
The
Company has outstanding $100.0 million of Exchangeable Senior Notes due 2018 (the “Exchangeable
Senior Notes”) which bear interest at 4.75% per annum. Interest is payable on April 15 and October 15 of each year beginning
April 15, 2014 until the maturity date of October 15, 2018. The Operating Partnership’s obligations under the Exchangeable
Senior Notes are fully and unconditionally guaranteed by the Company. The Exchangeable Senior Notes are senior unsecured obligations
of the Operating Partnership and rank equally in right of payment with all other existing and future senior unsecured indebtedness
of the Operating Partnership.
The
Exchangeable Senior Notes contain an exchange settlement feature which allows the holder, under certain circumstances, to exchange
its Exchangeable Senior Notes for cash, shares of the Company’s common stock or a combination of cash and shares of common
stock, at the option of the Operating Partnership, based on an initial exchange rate of 79.602 shares of common stock per $1,000
principal amount of Exchangeable Senior Notes. At the initial exchange rate, the Exchangeable Senior Notes are exchangeable for
common stock at an exchange price of approximately $12.56 per share of common stock.
The
Exchangeable Senior Notes will be exchangeable by the holder under the following circumstances on or prior to July 15, 2018: i)
during any calendar quarter beginning after December 31, 2013 (and only during such quarter) if the closing sale price of the common
stock, $0.01 par value per share, of the Company is more than 130% of the then-current exchange price for at least 20 trading days
(whether or not consecutive) in the period of the 30 consecutive trading days ending on the last trading day of the previous calendar
quarter; ii) during the five consecutive business-day period following any five consecutive trading-day period in which the trading
price per $1,000 principal amount of notes for each trading day during such five trading day period was less than 98% of the closing
sale price of the common stock of Campus Crest, or Campus Crest common stock, for each trading day during such five trading-day
period multiplied by the then current exchange rate; or iii) upon the occurrence of specified corporate transactions described
in the indenture governing the Exchangeable Senior Notes. On or after July 15, 2018, and on or prior to the second scheduled trading
day immediately preceding the maturity date, holders of the Exchangeable Senior Notes may exchange their notes without regard to
the foregoing conditions. Following certain corporate transactions that occur prior to maturity of the Exchangeable Senior Notes
and that also constitute a make-whole fundamental change, the Operating Partnership will increase the exchange rate for holders
who elect to exchange notes in connection with such make-whole fundamental change in certain circumstances. If specified fundamental
changes involving the Operating Partnership or the Company occur, holders may require the Operating Partnership to repurchase the
Exchangeable Senior Notes for cash at a price equal to 100% of the principal amount of the Exchangeable Senior Notes to be purchased
plus any accrued and unpaid interest to, but excluding, the repurchase date.
The
Operating Partnership may not redeem the Exchangeable Senior Notes prior to the maturity date. At any time prior to July 15, 2018,
the Operating Partnership may irrevocably elect, in its sole discretion without the consent of the holders of the Exchangeable
Senior Notes, to settle all of the future exchange obligation entirely in shares of the Company's common stock. On or after July
15, 2018, the Exchangeable Senior Notes will be exchangeable at any time prior to the close of business on the second business
day immediately preceding the maturity date.
In connection with the
issuance of the Exchangeable Senior Notes, the Company recorded approximately $97.4 million within line of credit and other debt
on the accompanying consolidated balance sheet, based on the fair value of the instrument at the time of issuance, and approximately
$2.6 million in additional paid-in-capital, net of offering costs, in the accompanying consolidated statements of changes in equity.
Amortization related to the $2.6 million in additional paid in capital was $0.5 million and $0.1 million for the years ended December
31, 2014 and 2013, respectively.
Other Debt
In June 2013, the Company
entered into a $33.4 million (CAD 35.0 million) unsecured note payable in connection with its acquisition of a hotel in Montreal,
Quebec, Canada. The note payable provided for interest-only payments at a variable interest rate equal to the Canadian Dealer Offered
Rate (“CDOR”), which was 1.30% at December 31, 2014, plus a spread of 2.50%. During the year ended December 31, 2014,
this facility was assigned to and assumed by CSH Montreal, an unconsolidated joint venture, at which time the Company became the
sole guarantor of the facility. The note was repaid in full during the year ended December 31, 2014.
Schedule of Debt Maturities
Scheduled debt maturities
for each of the five years subsequent to December 31, 2014 and thereafter, are as follows (in thousands):
2015 | |
$ | 47,022 | |
2016 | |
| 62,379 | |
2017 | |
| 310,493 | |
2018 | |
| 146,583 | |
2019 | |
| 1,353 | |
Thereafter | |
| 53,170 | |
| |
| 621,000 | |
Debt discount | |
| (2,581 | ) |
Outstanding as of December 31, 2014, net of debt discount | |
$ | 618,419 | |
Amortization of deferred
financing costs was approximately $2.3 million, $1.8 million and $2.8 million for the years ended December 31, 2014, 2013, and
2012, respectively.
10. Derivative Instruments and Hedging
Activities
The Company used variable
rate debt to finance the construction of student housing properties for the years ended December 31, 2014 and 2013. These debt
obligations allow exposure to variability in cash flows due to fluctuations in interest rates. The Company utilizes derivative
instruments (interest rate caps) to limit variability for a portion of the interest payments and to manage exposure to interest
rate risk. The Company has two interest rate caps totaling a notional amount of $200 million. Both instruments have a strike rate
of 2.5% with maturity dates of January 22, 2015 and July 22, 2015. As of December 31, 2014, the fair value of derivative contracts
was insignificant.
Derivatives not designated
as hedges are not speculative and are used to manage the Company’s exposure to interest rate movements and other identified
risks, but do not meet the strict hedge accounting requirements. Changes in the fair value of derivatives not designated in hedging
relationships are recorded directly into earnings. The Company recorded an insignificant loss related to derivatives not designated
in hedging relationships in earnings for the years ended December 31, 2014, 2013, and 2012.
11. Fair Value Disclosures
Fair value guidance for
financial assets and liabilities that 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 three levels of the fair value hierarchy are as follows:
Level 1 — Observable
inputs, such as quoted prices in active markets at the measurement date for identical, unrestricted assets or liabilities.
Level 2 — Other
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 3 — Unobservable
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.
As of December 31, 2014
and 2013, the Company’s financial assets and liabilities carried at fair value on a recurring basis consisted of interest
rate caps. As of December 31, 2014 and 2013, the fair value of the Company’s interest rate caps, valued using level 2 inputs,
was approximately zero.
Fair
Value of Financial Instruments
The fair value of a financial
instrument represents the amount at which the instrument could be exchanged in a current transaction between market participants
at the measurement date (exit price), other than in a forced sale or liquidation. 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. Management’s assessment of the significance of a particular input to the fair value measurement requires judgment
and considers factors specific to the asset or liability.
Financial instruments
consist primarily of cash, cash equivalents, restricted cash, student receivables, interest rate caps, accounts payable, mortgages,
construction loans, Exchangeable Senior Notes, the line of credit and other debt. The carrying value of cash, cash equivalents,
restricted cash, student receivables and accounts payable are representative of their respective fair values due to the short-term
nature of these instruments. The estimated fair value of the Company’s revolving line of credit approximates the outstanding
balance due to the frequent market based re-pricing of the underlying variable rate index. The estimated fair values of the Company’s
mortgages, construction loans and Exchangeable Senior Notes were determined by comparing current borrowing rates and risk spreads
to the stated interest rates and risk spreads. The weighted average interest rate for all borrowings was 3.65% and 4.23% at December
31, 2014 and 2013, respectively.
The following is a summary
of the fair value of the Company’s mortgages, construction loans payable, other debt and Exchangeable Senior Notes aggregated
by the level in the fair value hierarchy within which those measurements fall (in thousands):
| |
Estimated Fair Value | | |
| |
December 31, 2014 | |
Quoted Prices in
Active Markets
for Identical
Assets and
Liabilities (Level 1) | | |
Significant Other Observable Inputs (Level 2) | | |
Significant Unobservable Inputs (Level 3) | | |
Carrying Value | |
Fixed-rate mortgage loans | |
$ | - | | |
$ | 164,808 | | |
$ | - | | |
$ | 163,341 | |
Variable-rate mortgage loans | |
| - | | |
| 16,467 | | |
| - | | |
| 16,613 | |
Construction loans | |
| - | | |
| 119,952 | | |
| - | | |
| 120,719 | |
Exchangeable Senior Notes | |
| - | | |
| 101,793 | | |
| - | | |
| 97,419 | |
Other Debt | |
| - | | |
| 3,014 | | |
| - | | |
| 2,827 | |
| |
| | | |
| | | |
| | | |
| | |
December 31, 2013 | |
| | | |
| | | |
| | | |
| | |
Fixed-rate mortgage loans | |
| - | | |
| 161,379 | | |
| - | | |
| 165,393 | |
Construction loans | |
| - | | |
| 40,258 | | |
| - | | |
| 40,138 | |
Exchangeable Senior Notes | |
| - | | |
| 98,547 | | |
| - | | |
| 96,758 | |
Other Debt | |
| - | | |
| 2,671 | | |
| - | | |
| 2,694 | |
All of the Company’s
nonrecurring valuations made in connection with property acquisitions in Note 6 and impairments in Note 4 used significant unobservable
inputs and, therefore, fall under Level 3 of the fair value hierarchy.
Fair
Value Measurements of Investments in Unconsolidated Entities
Assets measured at fair
value on the accompanying consolidated balance sheets consist of joint venture investments related to HSRE I, HSRE V, HSRE VI and
HSRE X (the “HSRE Investments”) and to the Company’s investment in CSH Montreal and land parcels that were written-down
to estimated fair value at December 31, 2014. The valuation techniques and inputs used to develop the fair value estimates of the
HSRE investments and certain land parcels are described in Note 4. Factors giving rise to the strategic repositioning, including
results below expectations in original underwriting transactions and communication from the venture partner during the year ended
December 31, 2014 about their desire to dispose of certain properties in the HSRE Investments in the near term, resulted in the
Company’s determination that an other than temporary impairment existed. After the impairments were recorded, the carrying
values of the Company’s HSRE Investments and investment in CSH Montreal were $15.1 million and $6.9 million, respectively.
The Company engaged third-party specialists to assist them with the Company’s valuation of certain of the underlying properties
in the HSRE Investments. An income approach was used to determine the fair value of the Company’s HSRE Investments. Inputs
and assumptions included in the determination of fair value included the Company’s expectation of projected net operating
income to be earned ranging from $1.0 million to $2.6 million and capital expenditures to be incurred at the underlying properties
and capitalization rates ranging between 5.9% and 8.5%. The capitalization rates were determined based on the marketability of
each of the properties and the extent to which the operations of the property has stabilized. For the Company’s investment
in CSH Montreal, the Company used a discounted cash flow valuation technique to estimate the fair value of the Company’s
investment. The discounted cash flows take into consideration current occupancy levels with revenue per available bed increasing
in conjunction with occupancies growing up to 92% over a four year period, an expected exit value based on a 7.25% capitalization
rate, and a 9.25% discount rate. The discount rate includes the Company’s belief that the properties have not stabilized
yet, given the occupancy levels of the properties owned by CSH Montreal during its first year of operations. These valuation techniques
involve Level 3 inputs in the fair value hierarchy, and the Company believes that the highest and best use of these properties
continues to be for student housing.
The table below aggregates
the fair values of these assets by their level in the fair value hierarchy (in thousands):
| |
December 31, 2014 | |
| |
Total | | |
Level 1 | | |
Level 2 | | |
Level 3 | |
HSRE JV - I | |
$ | 212 | | |
$ | - | | |
$ | - | | |
$ | 212 | |
HSRE JV - V | |
| - | | |
| - | | |
| - | | |
| - | |
HSRE JV - VI | |
| 6,815 | | |
| - | | |
| - | | |
| 6,815 | |
HSRE JV - X | |
| 8,073 | | |
| - | | |
| - | | |
| 8,073 | |
CSH Montreal | |
| 6,947 | | |
| - | | |
| - | | |
| 6,947 | |
Land Parcels and Toledo | |
| 45,518 | | |
| - | | |
| - | | |
| 45,518 | |
Total assets | |
$ | 67,565 | | |
$ | - | | |
$ | - | | |
$ | 67,565 | |
| |
| | | |
| | | |
| | | |
| | |
HSRE JV - V | |
| (4,500 | ) | |
| - | | |
| - | | |
| (4,500 | ) |
Total liabilities | |
$ | (4,500 | ) | |
$ | - | | |
$ | - | | |
$ | (4,500 | ) |
12. Earnings per Share
Basic earnings per share
is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of shares of the Company’s
common stock outstanding during the period. All unvested stock-based payment awards are included in the computation of basic earnings
per share. The computation of diluted earnings per share includes common stock issuable upon the conversion of Exchangeable Senior
Notes and other potentially dilutive securities in the weighted average shares, unless the effect of their conversion is anti-dilutive
in nature.
Computations of basic
and diluted income (loss) per share for the periods presented are as follows (in thousands, except per share data):
| |
Year Ended December 31, | |
| |
2014 | | |
2013 | | |
2012 | |
| |
| | |
| | |
| |
Basic earnings: | |
| | | |
| | | |
| | |
Income (loss) from continuing operations | |
$ | (154,380 | ) | |
$ | 749 | | |
$ | 6,510 | |
Preferred stock dividends | |
| 12,200 | | |
| 6,183 | | |
| 4,114 | |
Income (loss) from continuing operations attributable to noncontrolling interests | |
| (1,166 | ) | |
| (37 | ) | |
| 19 | |
Income (loss) from continuing operations attributable to common stockholders | |
| (165,414 | ) | |
| (5,397 | ) | |
| 2,377 | |
| |
| | | |
| | | |
| | |
Income (loss) from discontinued operations | |
| (9,576 | ) | |
| 489 | | |
| 3,908 | |
Income (loss) from discontinued operations attributable to noncontrolling interests | |
| (67 | ) | |
| 3 | | |
| 27 | |
Income (loss) from discontinued operations attributable to common stockholders | |
| (9,509 | ) | |
| 486 | | |
| 3,881 | |
| |
| | | |
| | | |
| | |
Net income (loss) attributable to common stockholders | |
$ | (174,923 | ) | |
$ | (4,911 | ) | |
$ | 6,258 | |
| |
| | | |
| | | |
| | |
Weighted average common shares and OP Units outstanding: | |
| | | |
| | | |
| | |
Basic | |
| 65,102 | | |
| 59,984 | | |
| 34,781 | |
Incremental shares from assumed conversion (1) | |
| - | | |
| 434 | | |
| 436 | |
Diluted | |
| 65,102 | | |
| 60,418 | | |
| 35,217 | |
| |
| | | |
| | | |
| | |
Basic and diluted earnings per share: | |
| | | |
| | | |
| | |
Income (loss) from continuing operations attributable to common stockholders | |
$ | (2.54 | ) | |
$ | (0.08 | ) | |
$ | 0.07 | |
Income (loss) from discontinued operations attributable to common stockholders | |
| (0.15 | ) | |
| - | | |
| 0.11 | |
Net income (loss) attributable to common stockholders | |
$ | (2.69 | ) | |
$ | (0.08 | ) | |
$ | 0.18 | |
| (1) | The effect of the inclusion of all potentially dilutive securities for 2014 and 2013 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 years ended December 31, 2014 and 2013, shares issuable upon settlement of the exchange feature of the Exchangeable Senior
notes were anti-dilutive and were not included in the computation of diluted earnings per share based on the “if-converted”
method. |
13.
Equity
Preferred Stock
The Company’s 8.0%
Series A Cumulative Redeemable Preferred Stock (“Series A Preferred Stock”) ranks senior to the Company’s common
stock with respect to dividend rights and rights upon the voluntary or involuntary liquidation, dissolution or winding up of the
Company’s affairs. The Company pays cumulative dividends on the Series A Preferred Stock from the date of original issue
at a rate of 8.00% per annum of the $25.00 liquidation preference per share (equivalent to the fixed annual rate of $2.00 per share).
Dividends on the Series A Preferred Stock are payable quarterly in arrears on or about the 15th day of January, April, July and
October of each year.
The Company may not redeem
the Series A Preferred Stock prior to February 9, 2017, except in limited circumstances relating to the Company’s ability
to qualify as a REIT. On or after February 9, 2017, the Company may, at its option, redeem the Series A Preferred Stock, in whole
or in part, at any time or from time to time, for cash at a redemption price of $25.00 per share, plus all accrued and unpaid dividends
on such Series A Preferred Stock to, but not including, the date of redemption. The Series A Preferred Stock has no maturity date
and is not subject to mandatory redemption or any sinking fund. Holders of shares of the Series A Preferred Stock will generally
have no voting rights except for limited voting rights if the Company fails to pay dividends for six or more quarterly periods
(whether or not consecutive) and in certain other circumstances.
In February 2012, the
Company completed an underwritten public offering of approximately 2.3 million shares of its Series A Preferred Stock, including
approximately 0.3 million shares issued and sold pursuant to the exercise of the underwriters’ overallotment option in full
to purchase additional shares of the Series A Preferred Stock. The shares of Series A Preferred Stock were issued at
a public offering price of $25.00 per share, resulting in net proceeds of approximately $54.9
million, after deducting the underwriting discount and other estimated offering expenses of approximately $2.6 million.
The Company used the net proceeds to repay approximately $48.9 million of indebtedness outstanding under two construction loans
which had been used as partial funding for the four properties that were delivered for the 2011-2012 academic year. The Company
used the remaining proceeds for general corporate purposes, including funding properties currently under development.
In
October 2013, the Company reopened its Series A Preferred Stock in an underwritten
public offering of 3.8 million shares, including 0.4 million shares issued and sold pursuant to the partial exercise of the underwriters’
option to purchase additional shares of the Series A Preferred Stock. The shares of Series A Preferred Stock were issued at a public
offering price of $25.0611 per share, resulting in net proceeds of approximately $91.3 million, after deducting the underwriting
discount and other estimated offering expenses of approximately $4.0 million. The Company used the net proceeds, as well as the
net proceeds from its issuance of Exchangeable Senior Notes (see Note 9), to repay approximately $46.8 million of indebtedness
outstanding under three construction loans, to pay down the Credit Facility and for general corporate purposes.
Common Shares and OP Units
An OP Unit and a share
of the Company’s common stock have essentially the same economic characteristics as they share equally in the net income
(loss) and distributions of the Operating Partnership. An OP Unit may be tendered for redemption for cash or share of common stock;
however, the Company has sole discretion and must have a sufficient amount of authorized common stock to exchange OP Units for
shares of common stock on a one-for-one basis.
In July 2012, the
Company completed an underwritten public offering of approximately 7.5 million shares of common stock, including approximately
1.0 million shares issued and sold pursuant to the full exercise of the underwriters’ option to purchase additional shares,
resulting in net proceeds of approximately $72.2 million. The net proceeds were used to: (1) acquire the remaining ownership interests
in The Grove at Moscow, Idaho and The Grove at Valdosta, Georgia that the Company did not already own, and to repay the mortgage
debt secured by these properties; and (2) reduce borrowings outstanding under the Credit Facility. Remaining net proceeds were
used for general corporate purposes.
In March 2013, the Company
completed an underwritten public offering of approximately 25.5 million shares of common stock, including approximately 3.3 million
shares issued and sold pursuant to the full exercise of the underwriters’ option to purchase additional shares, resulting
in net proceeds of approximately $299.7 million. The net proceeds were used: (1) to fund the Company’s investment in the
CB Portfolio and related transactional costs, including investment banking advisory fees; and (2) for general corporate purposes,
including the repayment of debt.
In April 2013, the Board
of Directors of the Company approved Articles of Amendment to the Company’s Articles of Amendment and Restatement to increase
the number of authorized shares of the Company to 550 million shares of stock, consisting of 500 million shares of common stock,
$0.01 par value per share, and 50 million shares of preferred stock, $0.01 par value per share.
In June 2013, the Company
implemented an At-The-Market offering program under which the Company may sell at market price up to $100.0 million in shares of
the Company’s common stock over the term of the program. At December 31, 2014, the Company had not issued and sold any shares
under this program.
As of December 31, 2014,
there were approximately 65.1 million OP Units outstanding, of which approximately 64.7 million, or 99.3%, were owned by the Company
and approximately 0.4 million, or 0.7%, were owned by other partners. As of December 31, 2014, the fair market value of the OP
Units not owned by the Company was $2.9 million, based on a market value of $7.31 per unit, which was the closing price per share
of the Company’s common stock on the New York Stock Exchange on December 31, 2014.
The following is
a summary of changes in the shares of the Company’s common stock for the periods shown (in thousands):
| |
For the Year Ended | |
| |
December 31, 2014 | | |
December 31, 2013 | |
Common shares at beginning of period | |
| 64,502 | | |
| 38,558 | |
Issuance of common shares | |
| 33 | | |
| 25,530 | |
Issuance of restricted shares | |
| 357 | | |
| 496 | |
Forfeiture of restricted shares | |
| (150 | ) | |
| (82 | ) |
Common shares at end of period | |
| 64,742 | | |
| 64,502 | |
The following is a summary of changes in the
number of OP Units for the periods shown (in thousands):
| |
For the Year Ended | |
| |
December 31, 2014 | | |
December 31, 2013 | |
OP Units at beginning of period | |
| 434 | | |
| 436 | |
Redemption of OP Units | |
| (33 | ) | |
| (2 | ) |
OP Units at end of period | |
| 401 | | |
| 434 | |
Dividends and Distributions
For the years ended December
31, 2014, 2013 and 2012, the Company declared dividends per common share and OP Unit of $0.585 totaling approximately $38.1 million,
$0.66 totaling approximately $42.9 million, and $0.64 totaling approximately $22.6 million, respectively.
For the years ended December
31, 2014 and 2013, the Company declared dividends per share of Series A Preferred Stock of $2.00 totaling approximately $12.2 million
and $2.00 totaling approximately $6.5 million, respectively.
On December 19, 2014,
the Company’s Board of Directors declared a fourth quarter 2014 dividend of $0.090 per share of common stock and OP Unit.
The dividends were paid on January 29, 2015, to stockholders of record on December 31, 2014. At December 31, 2014, the Company
accrued approximately $5.9 million related to its common stock dividend in accounts payable and accrued expenses in the Company’s
accompanying consolidated balance sheet.
On December 19, 2014,
the Company’s Board of Directors also declared a cash dividend of $0.50 per share of Series A Preferred Stock for the fourth
quarter of 2014. The preferred stock dividend was paid on January 15, 2015, to stockholders of record on December 31, 2014. At
December 31, 2014, the Company accrued approximately $3.1 million related to its preferred stock dividend in accounts payable and
accrued expenses in the Company’s accompanying consolidated balance sheet.
The following is a summary
of the taxable nature of the Company’s dividends paid for the periods shown:
| |
For the Years Ended December 31, | |
| |
2014 | | |
2013 | | |
2012 | |
| |
Per Share | | |
% | | |
Per Share | | |
% | | |
Per Share | | |
% | |
Common Stock: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Ordinary Dividend | |
$ | - | | |
| 0.0 | % | |
$ | 0.097 | | |
| 14.8 | % | |
$ | 0.018 | | |
| 2.8 | % |
Qualified Dividend | |
| - | | |
| 0.0 | % | |
| 0.008 | | |
| 1.2 | % | |
| 0.001 | | |
| 0.2 | % |
Capital Gain | |
| - | | |
| 0.0 | % | |
| - | | |
| 0.0 | % | |
| - | | |
| 0.0 | % |
Unrecaptured Sec. 1250 | |
| - | | |
| 0.0 | % | |
| 0.019 | | |
| 2.9 | % | |
| - | | |
| 0.0 | % |
Return of Capital | |
| 0.660 | | |
| 100.0 | % | |
| 0.531 | | |
| 81.1 | % | |
| 0.621 | | |
| 97.0 | % |
Total | |
$ | 0.660 | | |
| 100.0 | % | |
$ | 0.655 | | |
| 100.0 | % | |
$ | 0.640 | | |
| 100.0 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Preferred Stock: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Ordinary Dividend | |
$ | - | | |
| 0.0 | % | |
$ | 1.565 | | |
| 78.3 | % | |
$ | 1.272 | | |
| 92.7 | % |
Qualified Dividend | |
| - | | |
| 0.0 | % | |
| 0.128 | | |
| 6.4 | % | |
| 0.100 | | |
| 7.3 | % |
Capital Gain | |
| - | | |
| 0.0 | % | |
| - | | |
| 0.0 | % | |
| - | | |
| 0.0 | % |
Unrecaptured Sec. 1250 | |
| - | | |
| 0.0 | % | |
| 0.307 | | |
| 15.3 | % | |
| - | | |
| 0.0 | % |
Return of Capital | |
| 2.000 | | |
| 100.0 | % | |
| - | | |
| 0.0 | % | |
| - | | |
| 0.0 | % |
Total | |
$ | 2.000 | | |
| 100.0 | % | |
$ | 2.000 | | |
| 100.0 | % | |
$ | 1.372 | | |
| 100.0 | % |
The Company
has the right to accumulate and not pay dividends on the Series A Preferred Stock. If dividends on the Series A Preferred Stock
are not paid, holders of our Common Stock will not receive any dividend distributions.
14. Incentive Plans
The Company has adopted
the Amended and Restated Equity Incentive Compensation Plan (the “Incentive Plan”) which permits the grant of incentive
awards to executive officers, employees, consultants and non-employee directors. The aggregate number of awards approved under
the Incentive Plan is 5.3 million. As of December 31, 2014, and December 31, 2013, approximately 2.5 million and 0.3 million shares,
respectively, were available for issuance under the Incentive Plan.
Restricted Stock Awards
Awards to executive officers
and employees 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 vest over a three or five year period and are subject to restriction based upon continued service
on the Board of Directors.
At December 31, 2014,
total unrecognized compensation cost related to restricted stock awards was approximately $2.9 million and is expected to be recognized
over a remaining weighted average period of 1.3 years.
During the year ended
December 31, 2014, the Company recognized stock compensation expense of approximately $4.4 million (net of vesting forfeitures
of approximately $0.2 million) and capitalized stock compensation expense of approximately $1.3 million. Included in this amount
is stock compensation expense associated with accelerated vesting totaling $2.7 million related to severance, of which $2.2 million
is included in severance expense and $0.5 million is included in income (loss) from discontinued operations. During the year ended
December 31, 2013, the Company recognized stock compensation expense of approximately $1.9 million (net of vesting forfeitures
of approximately $0.5 million) and capitalized stock compensation expense of approximately $0.9 million. During the year ended
December 31, 2012, the Company recognized stock compensation expense of approximately $1.0 million (net of vesting forfeitures
of approximately $0.1 million) and capitalized stock compensation expense of approximately $0.6 million.
Restricted OP Units
At December 31, 2014,
the Company had no remaining unrecognized compensation cost related to restricted OP Units. During the year ended December 31,
2013, the Company recognized stock compensation expense related to the vesting of restricted OP Units of approximately $0.2 million
and capitalized stock compensation expense of approximately $0.3 million. There were no forfeitures of restricted OP Units during
2014 and 2013.
The following is a summary of the Company’s
plan activity for the periods shown (in thousands, except weighted average grant price):
| |
Restricted Stock | | |
Restricted OP Unit | | |
Total | | |
Weighted Avg Grant Price | |
Unvested shares at beginning of period (carry-forward) | |
| 648 | | |
| - | | |
| 648 | | |
$ | 11.97 | |
Granted | |
| 357 | | |
| - | | |
| 357 | | |
| 9.01 | |
Vested | |
| (613 | ) | |
| - | | |
| (613 | ) | |
| 8.75 | |
Forfeited | |
| (104 | ) | |
| - | | |
| (104 | ) | |
| 9.66 | |
Unvested shares at December 31, 2014 | |
| 288 | | |
| - | | |
| 288 | | |
| 11.28 | |
15. Related Party Transactions
The
Company leases aircraft from entities in which two of its former executive officers have an ownership interest. For the years ended
December 31, 2014, 2013, and 2012, the Company incurred lease payments related to these entities of approximately $0.4 million,
$0.2 million and $0.2 million, respectively. In addition to the minimum lease payments, the Company incurred related operating
expenses in connection to the running of the aircrafts. For the years ended December
31, 2014, 2013, and 2012, the Company incurred operating costs of $2.5 million, $4.7 million and $3.9 million, respectively.
The Company is party to
an agreement with an initial term of five years with a subsidiary of an entity affiliated with its Executive Chairman and interim
Chief Executive Officer pursuant to which it offers its tenants a program of insurance services and products. Pursuant to the agreement,
the Company received an upfront payment of $100,000 and will receive fees for each tenant it referred that enrolls in the program.
Additionally, the Company remits fees paid by the tenant for insurance services and products to the entity affiliated with its
Executive Chairman and interim Chief Executive Officer. The Company is not the insurer for such insurance services and products
sold. The Company remitted $1.3 million and $0.9 million for the years ended December 31, 2014 and 2013, respectively.
16. Segments
The operating segments
in which management assesses performance and allocates resources are student housing operations and property management services.
The Company’s segments reflect management’s resource allocation and performance assessment in making decisions regarding
the Company. The Company’s student housing rental and student housing services revenues are aggregated within the student
housing operations segment. Upon discontinuation of the construction and development operations of the business, the Company identified
its two segments as student housing operations and property management services. All construction and development activities are
reported in discontinued operations at December 31, 2014.
The following tables set
forth the Company’s segment information for the periods presented (in thousands):
| |
For the Year Ended December 31, | |
| |
2014 | | |
2013 | | |
2012 | |
| |
| | |
| | |
| |
Student Housing Operations: | |
| | | |
| | | |
| | |
Revenues from external customers | |
$ | 105,492 | | |
$ | 91,250 | | |
$ | 74,091 | |
Operating expenses | |
| 75,904 | | |
| 63,351 | | |
| 53,856 | |
Income from wholly-owned student housing operations | |
| 29,588 | | |
| 27,899 | | |
| 20,235 | |
Severance expense | |
| (700 | ) | |
| - | | |
| - | |
Impairment of unconsolidated entities | |
| (57,789 | ) | |
| - | | |
| - | |
Effect of not exercising Copper Beech purchase option | |
| (33,375 | ) | |
| - | | |
| - | |
Equity in earnings (losses) of unconsolidated enitites | |
| (5,510 | ) | |
| (3,727 | ) | |
| 361 | |
Operating income (loss) | |
| (67,786 | ) | |
| 24,172 | | |
| 20,596 | |
Nonoperating expenses | |
| (10,200 | ) | |
| (10,529 | ) | |
| (10,246 | ) |
Net income (loss) | |
| (77,986 | ) | |
| 13,643 | | |
| 10,350 | |
Net income (loss) attributable to noncontrolling interest | |
| (750 | ) | |
| 136 | | |
| 106 | |
Net income (loss) attributable to common stockholders | |
$ | (77,236 | ) | |
$ | 13,507 | | |
$ | 10,244 | |
Depreciation and amortization | |
$ | 28,273 | | |
$ | 22,356 | | |
$ | 20,377 | |
Capital expenditures | |
$ | 188,495 | | |
$ | 142,167 | | |
$ | 111,167 | |
Investment in unconsolidated entities | |
$ | 259,740 | | |
$ | 324,838 | | |
$ | 22,555 | |
Total segment assets at end of period | |
$ | 1,165,523 | | |
$ | 1,132,371 | | |
$ | 691,671 | |
| |
| | | |
| | | |
| | |
Property Management Services: | |
| | | |
| | | |
| | |
Revenues from external customers | |
$ | 1,249 | | |
$ | 820 | | |
$ | 559 | |
Intersegment revenues | |
| 153 | | |
| 272 | | |
| 256 | |
Total revenues | |
| 1,402 | | |
| 1,092 | | |
| 815 | |
Operating expenses | |
| 3,983 | | |
| 2,638 | | |
| 2,107 | |
Operating loss | |
| (2,581 | ) | |
| (1,546 | ) | |
| (1,292 | ) |
Nonoperating expenses | |
| - | | |
| - | | |
| - | |
Net loss | |
| (2,581 | ) | |
| (1,546 | ) | |
| (1,292 | ) |
Net income (loss) attributable to noncontrolling interest | |
| (25 | ) | |
| (15 | ) | |
| (12 | ) |
Net loss attributable to common stockholders | |
$ | (2,556 | ) | |
$ | (1,531 | ) | |
$ | (1,280 | ) |
Depreciation and amortization | |
$ | 96 | | |
$ | 234 | | |
$ | 14 | |
Total segment assets at end of period | |
$ | - | | |
$ | - | | |
$ | - | |
Reconciliations: | |
| | | |
| | | |
| | |
Total segment revenues | |
$ | 106,894 | | |
$ | 92,342 | | |
$ | 74,906 | |
Elimination of intersegment revenues | |
| (153 | ) | |
| (272 | ) | |
| (256 | ) |
Total consolidated revenues | |
$ | 106,741 | | |
$ | 92,070 | | |
$ | 74,650 | |
| |
| | | |
| | | |
| | |
Segment operating income (loss) | |
$ | (70,367 | ) | |
$ | 22,626 | | |
$ | 19,304 | |
Interest expense | |
| (16,156 | ) | |
| (12,969 | ) | |
| (11,545 | ) |
Impairment of land & pre-development costs | |
| (31,927 | ) | |
| - | | |
| - | |
Write-off of corporate other assets | |
| (15,110 | ) | |
| - | | |
| - | |
Severance expense | |
| (5,459 | ) | |
| - | | |
| - | |
Corporate depreciation and amortization | |
| (1,057 | ) | |
| - | | |
| - | |
Net unallocated expenses related to corporate overhead | |
| (13,615 | ) | |
| (11,049 | ) | |
| (7,037 | ) |
Other income (expense) | |
| 42 | | |
| 1,414 | | |
| 6,144 | |
Income (loss) from continuing operations, before income tax benefit (expense) | |
$ | (153,649 | ) | |
$ | 22 | | |
$ | 6,866 | |
| |
| | | |
| | | |
| | |
Total segment assets | |
$ | 1,165,523 | | |
$ | 1,132,371 | | |
$ | 691,671 | |
Unallocated corporate assets and eliminations | |
| 11,288 | | |
| 50,308 | | |
| 4,649 | |
Total assets at end of period | |
$ | 1,176,811 | | |
$ | 1,182,679 | | |
$ | 696,320 | |
17. Commitments and Contingencies
Commitments
In the ordinary course
of business, certain liens related to the construction of the student housing real estate property may be attached to the Company’s
assets by contractors or suppliers. Campus Crest Construction, LLC, a wholly-owned subsidiary of the Company, is responsible as
the general contractor for resolving these liens. There can be no assurance that the Company will not be required to pay amounts
greater than currently recorded liabilities to settle these claims.
The Company has properties
that are subject to long-term ground leases. Typically, these properties are located on the campuses of colleges or universities.
The Company has the right to encumber its leasehold interests with specific property mortgages for the purposes of constructing,
remodeling or making improvements on or to these properties. Title to all improvements paid for and constructed on the land remains
with the Company until the earlier of termination or expiration of the lease, at which time the title of any buildings constructed
on the land will revert to the landlord. Should the Company decide to sell its leasehold interests during the initial term or any
renewal terms, the landlord has a right of first refusal to purchase the interests for the same purchase price under the same terms
and conditions as contained in the Company’s offer to sell its leasehold interests.
Campus Crest leases space
for its corporate headquarters office. Rent is recognized on a straight-line basis. Future minimum payments over the life of the
Company’s corporate office lease and long-term ground leases subsequent to December 31, 2014 are as follows (in thousands):
2015 | |
$ | 1,293 | |
2016 | |
| 1,304 | |
2017 | |
| 1,320 | |
2018 | |
| 1,309 | |
2019 | |
| 1,327 | |
Thereafter | |
| 26,821 | (1) |
Total future minimum lease payments | |
$ | 33,374 | |
| (1) | The Company’s lease obligations total approximately $1.3 million per year through the year
2023. In addition to operating and office leases, the Company has ground leases that average $0.4 million per year through the
year 2081. |
The Company paid rent
related to its corporate headquarters office of $1.2 million, $0.9 million and $0.6 million for the years ended December 31, 2014,
2013 and 2012, respectively.
The Company guarantees
certain mortgage and construction loans and revolving credit facilities related to the Company’s unconsolidated joint ventures.
As of December 31, 2014, the Company guarantees: up to 100% of $32.5 million of debt through May 2015 for HSRE I; up to 50% of
$144.1 million of debt with varying maturity dates from March 2015 through September 2018 for HSRE V, HSRE VI and HSRE X; and up
to 25% of $90.2 million of debt maturing in July 2016 related to HSRE IX. Of the amounts guaranteed for HSRE V, $13.3 million relates
to a property that was sold on January 30, 2015, as described in Note 19. In connection with the guarantee for HSRE I, there is
$3.0 million held in escrow that could be used to satisfy a portion of the amount potentially paid under the guarantee. Should
there be an event of default in connection with this debt, the Company could be required to fund under these guarantees a maximum
amount up to the percentage of the guaranteed amount of the balance of the debt outstanding as of December 31, 2014. The Company
estimated the fair value of the guarantees to be approximately $9.4 million, $3.2 million of which relates to the Company's HSRE
I investment and is netted against its investment and $6.2 million of which relates to the Company's HSRE V investment and is netted
against the value of the investment to the extent the investment is reduced to zero. Following the reduction of the HSRE V investment
to zero, a remaining accrual of $4.5 million is presented in other liabilities in the accompanying consolidated balance sheet as
of December 31, 2014.
In connection with the
Company’s investment in CSH Montreal, the Company provides a guarantee of up to 50% of the outstanding balance of the acquisition
and development credit facility (“CSH Montreal Debt”) of CAD 112.0 million ($96.8 million at December 31, 2014 exchange
rate). As of December 31, 2014, the outstanding balance of the CSH Montreal Debt was CAD 101.8 million ($88.0 million at December
31, 2014 exchange rate), of which the Company guaranteed CAD 50.9 ($44.0 million at December 31, 2014 exchange rate). The term
of the guarantee follows the term of the underlying debt, which matures on January 13, 2016, unless the twelve month extension,
which is subject to lender approval, is exercised. The CSH Montreal debt is secured by, among other things, a first mortgage position
on the real estate and improvements owned by CSH Montreal. The Company has estimated the fair value of this guarantee to be immaterial.
Except as disclosed above,
the Company does not expect that the borrowers will default on the underlying debt arrangements and accordingly the Company does
not expect to be required to perform under the guarantees. In the event that the Company is required to perform under one of the
guarantees, it believes the borrower’s assets collateralizing the debt would be sufficient to cover the maximum potential
amount of future payments under the guarantee.
Contingencies
In the normal course of
business, the Company is subject to claims, lawsuits and legal proceedings. In addition to the matters described below, the Company
is involved in various routine legal proceedings arising in the ordinary course of business. Although the outcomes of such routine
legal proceedings cannot be predicted with certainty, in the opinion of management, the ultimate resolution of such routine matters
will not have a material adverse effect on the Company’s financial position or results of operations.
On July 3, 2012, the Company
and certain of its subsidiaries were named as defendants in a lawsuit filed with the 250th Judicial District Court in
Travis County in Austin, Texas. The case arose from an accident at The Grove at Denton, located in Denton, Texas, in which a balcony
of one of the units broke and three people were seriously injured. The claims in the lawsuit against Campus Crest and certain of
its subsidiaries by the plaintiffs were settled in their entirety on July 29, 2014 without any admission of liability on the part
of Campus Crest or its subsidiaries. The settlement, which is covered by the Company’s existing insurance coverage, did not
have a material adverse effect on the Company’s financial position or results of operations.
On January 21, 2015, the
Company and certain of its subsidiaries were named as defendants in a lawsuit filed in the 7th Division of the Jefferson
Circuit Court in Jefferson County in Louisville, Kentucky. The case arose from an individual who fell to his death at a construction
site located at 2501 South 4th Street, Louisville, Jefferson County, Kentucky. Also named as co-defendants in the case
are three other companies associated with the construction and/or employment of the deceased individual. The plaintiffs allege,
among other things, the Company was negligent and/or allowed a dangerous or hazardous condition to exist on the premises. The plaintiffs’
initial complaint did not specify the amount of damages sought. The Company is presently reviewing the complaint, reviewing applicable
law and venue, and preparing its responsive pleadings. Based upon the totality of the circumstances, including the existence of
insurance coverage and anticipated indemnity from third-parties, the Company does not believe that the lawsuit, if adversely determined,
would have a material adverse effect on the Company’s financial position or results of operation.
The Company is not aware
of any environmental liability with respect to the properties that could have a material adverse effect on the Company’s
business, assets or results of operations. However, there can be no assurance that such a material environmental liability does
not exist. The existence of any such material environmental liability could have an adverse effect on the Company’s financial
position or results of operations and cash flows.
18. Quarterly Financial Information (Unaudited)
The information presented
below represents the consolidated financial results for the periods presented. The results below differ from previously disclosed
quarterly results due to certain reclassifications associated with discontinued operations during the periods presented. The sum
of the quarterly income (loss) per share amounts may not equal the annual income per share amounts due primarily to changes in
the number of common shares outstanding from quarter to quarter (in thousands, except per share data):
| |
Three Months Ended | |
| |
March 31, | | |
June 30, | | |
September 30, | | |
December 31, | |
| |
2014 | | |
2014 | | |
2014 | | |
2014 | |
Total revenues(1) | |
$ | 24,711 | | |
$ | 24,990 | | |
$ | 24,839 | | |
$ | 32,201 | |
| |
| | | |
| | | |
| | | |
| | |
Operating income (loss)(1) | |
| 3,135 | | |
| 878 | | |
| (120,526 | ) | |
| (21,022 | ) |
| |
| | | |
| | | |
| | | |
| | |
Net income (loss)(1) | |
| 953 | | |
| (486 | ) | |
| (130,843 | ) | |
| (33,580 | ) |
Net income (loss) attributable to common stockholders | |
| (2,080 | ) | |
| (3,547 | ) | |
| (133,123 | ) | |
| (36,173 | ) |
| |
| | | |
| | | |
| | | |
| | |
Net income (loss) attributable to common stockholders per share - basic and diluted | |
$ | (0.03 | ) | |
$ | (0.05 | ) | |
$ | (2.06 | ) | |
$ | (0.56 | ) |
| |
Three Months Ended | |
| |
March 31, | | |
June 30, | | |
September 30, | | |
December 31, | |
| |
2013 | | |
2013 | | |
2013 | | |
2013 | |
Total revenues | |
$ | 21,751 | | |
$ | 22,294 | | |
$ | 23,257 | | |
$ | 24,768 | |
| |
| | | |
| | | |
| | | |
| | |
Operating income | |
| 3,608 | | |
| 5,214 | | |
| 6,235 | | |
| (3,480 | ) |
| |
| | | |
| | | |
| | | |
| | |
Net income (loss) | |
| 2,072 | | |
| 3,845 | | |
| 4,758 | | |
| (9,437 | ) |
Net income (loss) attributable to common stockholders | |
| 911 | | |
| 2,676 | | |
| 3,582 | | |
| (12,080 | )(2) |
| |
| | | |
| | | |
| | | |
| | |
Net income (loss) attributable to common stockholders per share - basic and diluted | |
$ | 0.02 | | |
$ | 0.04 | | |
$ | 0.06 | | |
$ | (0.19 | ) |
(1) Total
revenues, operating income (loss) and net income (loss) for the three months ended September 30, 2014 and December 31, 2014
have been adjusted for the Company’s discontinuance of two immaterial non-GAAP policies. Effective August 2014, the
Company recognizes revenue over an 11.5 month period to align with lease terms as opposed to a 12 month period.
Effective August 2014, the Company recognizes turn costs as incurred as opposed to accruing turn costs throughout the
academic year.
(2) The purchase price allocation
for the Company’s Copper Beech acquisition was finalized and all required adjustments are reflected in the Company’s
fourth quarter information.
19. Subsequent Events
In addition to certain
matters discussed elsewhere in these notes, the Company noted the following subsequent events:
Copper Beech Transaction
On January 30, 2015,
the Company and certain of its affiliates completed the acquisition (the “Initial Closing”) of (i) the Sellers’
remaining interests in 29 student housing properties of a portfolio consisting of 36 student housing properties, one undeveloped
land parcel and a corporate office building (the “Copper Beech Portfolio”) and (ii) the Sellers’ remaining interests
in Copper Beech at Ames, Iowa, pursuant to that certain Amendment (the “Second Amendment”) to the Company’s
purchase and sale agreement with the former members (the “Sellers”) of Copper Beech Townhome Communities, LLC (“CBTC”)
and Copper Beech Townhome Communities (PA), LLC (“CBTC PA” and, together with CBTC, “Copper Beech”).
Pursuant to the terms
of the Second Amendment, the Company agreed to acquire the Sellers’ remaining interests in each of the properties comprising
the Copper Beech Portfolio other than Copper Beech Kalamazoo Phase 1, Copper Beech Kalamazoo Phase 2, Copper Beech Morgantown,
Copper Beech Harrisonburg, Copper Beech Greenville and Copper Beech Parkway. Following the consummation of the Initial Closing,
the Company holds a 100% interest in 27 of the properties in the Copper Beech Portfolio, an 85% interest in one property in the
Copper Beech Portfolio, an 86% interest in one property in the Copper Beech Portfolio and a 48% interest in 4 of the properties
in the Copper Beech Portfolio and has no ownership interests in 2 of the properties in the Copper Beech Portfolio and has a 100%
interest in Copper Beech at Ames, Iowa. The Company expects to complete the acquisition of the Sellers’ interests in the
remaining 2 properties in the Copper Beech Portfolio – Copper Beech San Marcos Phase 1 and Copper Beech IUP Buy – at
such time as it obtains the requisite lender consents. The Company expects to obtain all such consents and to complete the acquisition
of Copper Beech San Marco Phase 1 and Copper Beech IUP Buy on or before the end of the first quarter of 2015 (the date of completion
of such acquisition is referred to herein as the “Second Closing Date”).
As consideration for the
additional interests acquired in the Initial Closing, the Company paid to the Sellers aggregate cash consideration of approximately
$58.9 million and the Operating Partnership issued to the Sellers an aggregate of approximately 10.4 million limited partnership
units of the Operating Partnership (“OP Units”). The remaining consideration pursuant to the Second Amendment, consisting
of approximately $1.4 million in cash and approximately 2.0 million in OP Units, will be payable to the Sellers on the Second Closing
Date. As of the date of this filing, the Company is evaluating the financial statement impact of this transaction.
Sale
of Assets
On January 29, 2015, the
Company sold a portfolio of six undeveloped land parcels to a leading student housing developer resulting in net sale proceeds
of $28.4 million. The portfolio included parcels located in Alabama, Arizona, California, Florida, Michigan and Washington. The
sale was a part of the Company's previously announced strategic initiative to improve liquidity and simplify the balance sheet
by selling certain properties previously held for development. The Company disposed of the parcels through a rigorous sale process
which resulted in noticeable demand from a wide spectrum of bidders with numerous offers received – including multiple portfolio
offers. As a result of this transaction, a gain of $4.7 million was recognized during the three months ended March 31, 2015.
On January 30, 2015, the
Company sold its interest in the joint venture property, The Grove at Stillwater, OK for net sale proceeds of $2.9 million. No
gain or loss was recognized.
On February 9, 2015, the
Company completed the sale of the Falcon 900, the corporate aircraft, resulting in net sale proceeds of $3.8 million. This asset
is presented in other assets on the consolidated balance sheet as of December 31, 2014. No gain or loss was recognized.
The Company
expects to complete the sale of its interest in two joint venture properties, The Grove at Conway, AR with a sales price of
$11 million, and The Grove at Lawrence, KS with a sales price of $13 million during the quarter ending June 30, 2015. The Company
expects to recognize a gain on these transactions.
Changes in Management
On February 15, 2015,
the Board of Directors of the Company appointed Aaron S. Halfacre, the Company’s Executive Vice President and Chief Investment
Officer, to the additional role of President of the Company.
On February 20, 2015,
Angel Herrera tendered his resignation as Chief Operating Officer of the Company, effective on February 28, 2015.
Covenant
Renegotiation
On February 25, 2015,
the Company received a unanimously approved waiver under its amended credit facility that provides relief from certain financial
covenants during a relief period that runs from December 31, 2014 until and including September 30, 2015. During the relief period
the following new measurements will apply to covenant tests: Maximum Leverage Ratio of not greater than 0.65:1.00; Maximum Secured
Debt Ratio of not greater than 47.5%; Minimum Fixed Charge Ratio of not less than 1.30:1.00; and a Dividend Payout Ratio of not
more than 105.0% calculated on a pro forma basis that applies the current quarterly dividend of $0.090 on a trailing twelve month
basis.
Although the Company is currently in compliance with the terms
of its Second Amended and Restated Credit Agreement, the Company’s Board has determined, based on an evaluation by management
of the Company’s ability to satisfy all financial covenants in the credit agreement for the next four quarters, not to declare
or pay dividends on its Common Stock or Series A Preferred Stock for the first quarter of 2015. In addition, the Board does not
currently intend to declare or pay dividends on its Common Stock or Series A Preferred Stock for the remainder of 2015 unless
the Company experiences sufficient improvement in its operating results, including successfully completing the sale of certain
assets and enhancing our liquidity position by raising additional capital and/or refinancing its existing credit facilities.
Schedule III — Real Estate and Accumulated
Depreciation as of December 31, 2014
Amounts below are presented in thousands.
| |
| | |
| | |
Total
Costs | | |
| | |
| | |
| | |
| |
| |
Initial
Cost | | |
Costs
Capitalized Subsequent to Development or Acquisition | | |
Land | | |
Student
Housing Properties | | |
Total
(1) (5) | | |
Accum.
Depr. | | |
Encumbrances | | |
Year
Constructed | | |
Year
Placed into Service or Acquired | |
Student Housing Properties | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
The Grove at Asheville, NC | |
$ | 12,604 | | |
$ | 1,240 | | |
$ | 51 | | |
$ | 13,793 | | |
$ | 13,844 | | |
$ | (5,349 | ) | |
$ | (14,304 | ) | |
| 2005 | | |
| 2005 | |
The Grove at Carrollton, GA | |
| 13,294 | | |
| 1,200 | | |
| 1,104 | | |
| 13,390 | | |
| 14,494 | | |
| (5,305 | ) | |
| (14,101 | ) | |
| 2006 | | |
| 2006 | |
The Grove at Las Cruces, NM | |
| 16,025 | | |
| 5,648 | | |
| 1,098 | | |
| 20,575 | | |
| 21,673 | | |
| (6,019 | ) | |
| (14,573 | ) | |
| 2006 | | |
| 2006 | |
The Grove at Milledgeville, GA | |
| 14,543 | | |
| 1,484 | | |
| 942 | | |
| 15,085 | | |
| 16,027 | | |
| (5,808 | ) | |
| (15,640 | ) | |
| 2006 | | |
| 2006 | |
The Grove at Abilene, TX | |
| 16,962 | | |
| 785 | | |
| 1,361 | | |
| 16,386 | | |
| 17,747 | | |
| (6,006 | ) | |
| | (2) |
| | 2007 | |
| | 2007 |
The Grove at Ellensburg, WA | |
| 20,827 | | |
| 532 | | |
| 1,483 | | |
| 19,876 | | |
| 21,359 | | |
| (6,463 | ) | |
| (15,845 | ) | |
| 2007 | | |
| 2007 | |
The Grove at Greeley, CO | |
| 19,971 | | |
| 3,078 | | |
| 1,454 | | |
| 21,595 | | |
| 23,049 | | |
| (5,993 | ) | |
| (14,945 | ) | |
| 2007 | | |
| 2007 | |
The Grove at Mobile I & II | |
| 33,094 | | |
| 1,608 | | |
| 150 | (3) | |
| 34,552 | | |
| 34,702 | | |
| (10,754 | ) | |
| | (2) |
| | 2007 | |
| | 2007 |
The Grove at Nacogdoches, TX | |
| 18,604 | | |
| 1,317 | | |
| 1,188 | | |
| 18,733 | | |
| 19,921 | | |
| (6,146 | ) | |
| (16,857 | ) | |
| 2007 | | |
| 2007 | |
The Grove at Cheney, WA | |
| 18,788 | | |
| 383 | | |
| 1,347 | | |
| 17,824 | | |
| 19,171 | | |
| (5,443 | ) | |
| | (2) | |
| 2008 | | |
| 2008 | |
The Grove at Lubbock, TX | |
| 18,229 | | |
| 640 | | |
| 1,520 | | |
| 17,349 | | |
| 18,869 | | |
| (5,361 | ) | |
| | (2) | |
| 2008 | | |
| 2008 | |
The Grove at Stephenville, TX | |
| 17,100 | | |
| 411 | | |
| 1,250 | | |
| 16,261 | | |
| 17,511 | | |
| (5,355 | ) | |
| | (2) | |
| 2008 | | |
| 2008 | |
The Grove at Troy, AL | |
| 18,248 | | |
| 850 | | |
| 1,433 | | |
| 17,665 | | |
| 19,098 | | |
| (5,637 | ) | |
| | (2) | |
| 2008 | | |
| 2008 | |
The Grove at Waco, TX | |
| 17,566 | | |
| 692 | | |
| 1,094 | | |
| 17,164 | | |
| 18,258 | | |
| (5,549 | ) | |
| | (2) | |
| 2008 | | |
| 2008 | |
The Grove at Murfreesboro, TN | |
| 19,994 | | |
| 865 | | |
| 2,678 | | |
| 18,181 | | |
| 20,859 | | |
| (4,938 | ) | |
| | (2) | |
| 2009 | | |
| 2009 | |
The Grove at San Marcos, TX | |
| 24,126 | | |
| 622 | | |
| 1,791 | | |
| 22,957 | | |
| 24,748 | | |
| (3,687 | ) | |
| | (2) | |
| 2009 | | |
| 2009 | |
The Grove at Moscow, ID | |
| 25,731 | | |
| 269 | | |
| 1,839 | | |
| 24,161 | | |
| 26,000 | | |
| (1,932 | ) | |
| | (2) | |
| 2009 | | |
| 2012 | |
The Grove at Huntsville, TX | |
| 23,444 | | |
| 370 | | |
| 2,157 | | |
| 21,657 | | |
| 23,814 | | |
| (2,233 | ) | |
| | (2) | |
| 2010 | | |
| 2011 | |
The Grove at Statesboro, GA | |
| 25,349 | | |
| 770 | | |
| 1,621 | | |
| 24,498 | | |
| 26,119 | | |
| (2,492 | ) | |
| (18,100 | ) | |
| 2010 | | |
| 2011 | |
The Grove at Clarksville, TN | |
| 21,805 | | |
| 761 | | |
| 1,296 | | |
| 21,270 | | |
| 22,566 | | |
| (2,626 | ) | |
| (16,238 | ) | |
| 2011 | | |
| 2011 | |
The Grove at Ames, IA | |
| 22,834 | | |
| 417 | | |
| 1,919 | | |
| 21,332 | | |
| 23,251 | | |
| (2,669 | ) | |
| | (2) | |
| 2011 | | |
| 2011 | |
The Grove at Fort Wayne, IN | |
| 18,889 | | |
| 324 | | |
| 844 | | |
| 18,369 | | |
| 19,213 | | |
| (2,387 | ) | |
| | (2) | |
| 2011 | | |
| 2011 | |
The Grove at Columbia, MO | |
| 24,551 | | |
| 303 | | |
| 3,611 | | |
| 21,243 | | |
| 24,854 | | |
| (2,694 | ) | |
| (22,738 | ) | |
| 2011 | | |
| 2011 | |
The Grove at Valdosta, GA | |
| 29,381 | | |
| 427 | | |
| 1,562 | | |
| 28,246 | | |
| 29,808 | | |
| (2,385 | ) | |
| | (2) | |
| 2011 | | |
| 2012 | |
The Grove at Denton, TX | |
| 25,624 | | |
| - | | |
| 4,756 | | |
| 20,868 | | |
| 25,624 | | |
| (843 | ) | |
| (16,613 | ) | |
| 2011 | | |
| 2014 | |
The Grove at Auburn, AL | |
| 26,267 | | |
| 249 | | |
| 4,423 | | |
| 22,093 | | |
| 26,516 | | |
| (1,987 | ) | |
| | (2) | |
| 2012 | | |
| 2012 | |
The Grove at Flagstaff, AZ | |
| 34,125 | | |
| 3,613 | | |
| 6,970 | | |
| 30,768 | | |
| 37,738 | | |
| (2,616 | ) | |
| | (2) | |
| 2012 | | |
| 2012 | |
The Grove at Nacogdoches, TX - Phase II | |
| 7,718 | | |
| 163 | | |
| 401 | | |
| 7,480 | | |
| 7,881 | | |
| (617 | ) | |
| - | | |
| 2012 | | |
| 2012 | |
The Grove at Orono, ME | |
| 28,499 | | |
| 1,577 | | |
| 1,373 | | |
| 28,703 | | |
| 30,076 | | |
| (2,199 | ) | |
| | (2) | |
| 2012 | | |
| 2012 | |
The Grove at Toledo, OH (4) | |
| 11,564 | | |
| 2,212 | | |
| 2,855 | | |
| 10,921 | | |
| 13,776 | | |
| (923 | ) | |
| (4,357 | ) | |
| 2013 | | |
| 2013 | |
The Grove at Fort Collins, CO | |
| 35,496 | | |
| (51 | ) | |
| 75 | (3) | |
| 35,370 | | |
| 35,445 | | |
| (1,575 | ) | |
| (19,073 | ) | |
| 2013 | | |
| 2013 | |
The Grove at Muncie, IN | |
| 24,708 | | |
| 160 | | |
| 2,458 | | |
| 22,410 | | |
| 24,868 | | |
| (1,125 | ) | |
| (13,892 | ) | |
| 2013 | | |
| 2013 | |
The Grove at Pullman, WA | |
| 15,622 | | |
| 21,983 | | |
| 1,842 | | |
| 35,763 | | |
| 37,605 | | |
| (805 | ) | |
| (10,886 | ) | |
| 2013 | | |
| 2013 | |
The Grove at Flagstaff II, AZ | |
| 15,407 | | |
| (190 | ) | |
| 3,322 | | |
| 11,895 | | |
| 15,217 | | |
| (481 | ) | |
| | (2) | |
| 2013 | | |
| 2013 | |
The Grove at Grand Forks, ND | |
| 34,476 | | |
| - | | |
| 2,196 | | |
| 32,280 | | |
| 34,476 | | |
| (359 | ) | |
| (12,474 | ) | |
| 2014 | | |
| 2014 | |
The Grove at Mt. Pleasant, MI | |
| 26,838 | | |
| - | | |
| 473 | | |
| 26,365 | | |
| 26,838 | | |
| (311 | ) | |
| | (2) | |
| 2014 | | |
| 2014 | |
The Grove at Slippery Rock, PA | |
| 30,448 | | |
| - | | |
| 1,097 | | |
| 29,351 | | |
| 30,448 | | |
| (330 | ) | |
| (16,031 | ) | |
| 2014 | | |
| 2014 | |
The Grove at Gainesville, FL | |
| 41,293 | | |
| - | | |
| 5,918 | | |
| 35,375 | | |
| 41,293 | | |
| (401 | ) | |
| (22,836 | ) | |
| 2014 | | |
| 2014 | |
Copper Beach at Ames, IA | |
| 31,206 | | |
| - | | |
| 3,091 | | |
| 28,115 | | |
| 31,206 | | |
| (318 | ) | |
| (21,170 | ) | |
| 2014 | | |
| 2014 | |
Total - student
housing properties | |
$ | 881,250 | | |
$ | 54,712 | | |
$ | 76,043 | | |
$ | 859,919 | | |
$ | 935,962 | | |
$ | (128,121 | ) | |
$ | (300,673 | ) | |
| | | |
| | |
| (1) | Depreciable lives range from 5-40 years. |
| (2) | Property is collateral for the Company’s Amended Credit Facility. |
| (3) | Property encumbered by a ground lease. |
| (4) | Property is under re-development. See Note 6 to the accompanying consolidated financial statements. |
| (5) | Total aggregate cost for federal income tax purposes is approximately $994.1 million. |
NOTES TO SCHEDULE III
Schedule III — Real
Estate and Accumulated Depreciation as of December 31, 2014
The changes in the Company’s investment
in real estate and related accumulated depreciation for each of the years ended December 31, 2014, 2013 and 2012 are as follows
(in thousands):
| |
December 31, | |
| |
2014 | | |
2013 | | |
2012 | |
| |
| | |
| | |
| |
Investment in real estate: | |
| | | |
| | | |
| | |
Balance, beginning of year | |
$ | 716,285 | | |
$ | 669,387 | | |
$ | 512,227 | |
Acquisitions | |
| 25,642 | | |
| 13,801 | | |
| - | |
Improvements and development expenditures | |
| 194,795 | | |
| 106,806 | | |
| 158,175 | |
Asset disposals | |
| (760 | ) | |
| (1,283 | ) | |
| (1,015 | ) |
Disposition of student housing properties | |
| - | | |
| (67,702 | ) | |
| - | |
Impairment of student housing properties | |
| - | | |
| (4,724 | ) | |
| - | |
Balance, end of year | |
$ | 935,962 | | |
$ | 716,285 | | |
$ | 669,387 | |
| |
| | | |
| | | |
| | |
Accumulated depreciation: | |
| | | |
| | | |
| | |
Balance, beginning of year | |
$ | 102,356 | | |
$ | 97,820 | | |
$ | 76,164 | |
Depreciation for the year | |
| 26,387 | | |
| 25,183 | | |
| 22,472 | |
Asset disposals | |
| (622 | ) | |
| (933 | ) | |
| (865 | ) |
Disposition of student housing properties | |
| - | | |
| (19,714 | ) | |
| - | |
Other Reclassifications | |
| - | | |
| - | | |
| 49 | |
Balance, end of year | |
$ | 128,121 | | |
$ | 102,356 | | |
$ | 97,820 | |
Development in process | |
| - | | |
| 91,184 | | |
| 50,781 | |
Land held for sale | |
| 38,105 | | |
| - | | |
| - | |
Land held for investment | |
| 7,413 | | |
| - | | |
| - | |
Investment in real estate, net | |
$ | 853,359 | | |
$ | 705,113 | | |
$ | 622,348 | |
Exhibit 10.37
DONALD L. BOBBITT, JR.
SEPARATION AGREEMENT
Donnie, this Agreement (the “Agreement”) will confirm
the arrangements we have discussed concerning your separation from Campus Crest Communities, Inc. (the “Company” or
“we” or “us”) as a result of the termination of your employment effective November 4, 2014. It constitutes
our entire understanding regarding the terms of your separation.
| 1. | Separation of Employment. Your last day of employment with the Company will be November 4,
2014 (your “Separation Date”). As of your Separation Date, you will be relieved of all further duties and responsibilities
and are no longer authorized to transact business or incur any expenses, obligations, or liabilities on behalf of the Company.
However, for two years following your Separation Date, you agree to be available to respond to occasional inquiries or reasonable
requests for assistance from us related to matters arising during your employment with the Company. From November 5, 2014 through
March 5, 2015, you agree to be available to consult with the Company upon request (with reasonable advance notice) on a per diem
basis. The Company will pay you a per diem amount of $875 for each full day of consulting services. These services
will be performed by you as an independent contractor consultant. We will make available for your use in performance of such
consulting services your current office to the extent practicable. |
| 2. | Post-Separation Benefits. In exchange for your executing this Agreement and abiding by its terms, the Company will provide
you with the following benefits: |
| · | The sum of $640,000.00 (two times your current annual base salary of $320,000.00) to be paid in equal
installments on the Company’s regular paydays for the payment of base salary to executives, less payroll deductions, for
a period of 24 months commencing no later than 60 days following your Separation Date, with the exact commencement of payments
to be determined in the sole discretion of the Company; except that the first payment shall include any payments that would already
have been paid had payments commenced on November 5, 2014; |
| · | The sum of $717,478.00 (two times the bonus provided to you in 2014 for your work in 2013), to be paid in equal installments
on the Company’s regular paydays for the payment of base salary to executives, less payroll deductions, for a period of 24
months commencing no later than 60 days following your Separation Date, with the exact commencement of payments to be determined
in the sole discretion of the Company; except that the first payment shall include any payments that would already have been paid
had payments commenced on November 5, 2014; |
| · | An amendment to your restricted stock award dated April 22, 2013 (the “Performance Award”) that will waive the
requirement that you must be employed with the Company on the date on which the performance condition specified in Section 2(b)
of the Performance Award is satisfied in order to vest in such award and an amendment to your outstanding restricted stock awards
other than the Performance Award that provides that the vesting of such awards will be accelerated to become fully vested on the
Separation Date; and |
| · | If you elect to extend your health insurance coverage under the Consolidated Omnibus Budget Reconciliation Act (“COBRA”),
the Company will pay you in a lump sum the amount of eighteen (18) months of COBRA payments for your current level of coverage. |
The Company shall have the right to offset against
any sums payable to you under this Agreement that are exempt from section 409A of the Internal Revenue Code of 1986, as amended,
any amounts you owe the Company as a result of expense account indebtedness, failure to return Company property, or other advances
or debts due.
You acknowledge that the payments
and benefit described above and all other benefits and consideration contained herein are given to you in exchange for your executing
this Agreement and abiding by its terms. You further acknowledge that the payment described above is not required by your Employment
Agreement or the Company’s policies and procedures and constitutes value to which you are not already entitled.
Regardless of whether you sign this
Agreement, you will receive your regular base salary through your Separation Date and payment for unused vacation accrued through
your Separation Date in accordance with normal Company policies for payment upon termination of employment.
You will not be eligible to accrue
vacation, participate in any retirement or savings plan, or receive any other employment benefits after your Separation Date. No
further amounts shall be due or owed to you from the Company for or in any way relating to or connected with your employment with
us, except as set forth above.
| 3. | Release of Claims. Except for any claims you may have for workers’ compensation benefits, unemployment compensation
benefits, vested pension or retirement benefits, or nonforfeitable health care, disability, or other similar welfare benefits (which
are not released by this Agreement) and in further consideration of the benefits we have agreed to provide you, you do hereby release
and forever discharge the Company and its affiliates, subsidiaries, parent companies, predecessors, successors, and assigns, and
all of their present and former officers, directors, benefit plans and programs, agents, representatives, shareholders, attorneys,
trustees, and employees (hereinafter collectively referred to as the “Releasees”) from any and all claims, actions,
causes of action, suits, entitlements, liabilities, agreements, damages, losses, or expenses (including attorney’s fees and
costs actually incurred) of any nature whatsoever, whether known or unknown (hereinafter “Claim” or “Claims”),
that you have, may have had, or may later claim to have had against any of them for personal injuries, losses or damage to personal
property, breach of contract (express or implied), breach of any covenant of good faith (express or implied), or any other losses
or expenses of any kind (whether arising in tort or contract or by statute) resulting from anything that has occurred prior to
the date you execute this Agreement. This release includes, but is not limited to, any Claims for back pay, liquidated damages,
compensatory damages, or any other losses or other damages to you or your property resulting from any claimed violation of local,
state, or federal law, including, for example (but not limited to), claims arising under Title VII of the Civil Rights Act of 1964,
42 U.S.C. § 2000e et seq. (prohibiting discrimination on account of race, color, religion, sex, or national
origin); 42 U.S.C. § 1981; the Age Discrimination in Employment Act (the “ADEA”), 29 U.S.C. § 621 et
seq. (prohibiting discrimination on account of age); the Americans with Disabilities Act of 1990, 42 U.S.C. § 12101
et seq. (prohibiting discrimination on account of disabilities); the Uniformed Services Employment and Reemployment
Rights Act of 1994, 38 U.S.C. § 4301 et seq.; the Employee Retirement Income Security Act of 1974, 29 U.S.C.
§ 1001 et seq.; the Worker Adjustment and Retraining Notification Act, 29 U.S.C. § 2101 et
seq.; Title II of the Genetic Information Nondiscrimination Act of 2008, 42 U.S.C. § 2000ff et seq.;
the North Carolina Equal Employment Practices Act, N.C. Gen. Stat. § 143-422.1 et seq.; the North Carolina
Persons With Disabilities Protection Act, N.C. Gen. Stat. § 168A-1 et seq.; the Occupational Safety and Health
Act of North Carolina, N.C. Gen. Stat. § 95-151; the North Carolina Wage and Hour Act, N.C. Gen. Stat. § 95-25.1 et
seq.; any other Claims under federal, state, or local statutory or common law; or any claim under any Employment Agreement
between you and the Company. The foregoing release of Claims expressly includes a waiver of any right to recovery for the Claims
released herein in any and all private causes of action and/or charges and/or in any and all complaints filed with, or by, any
governmental agency and/or other person or tribunal. This Agreement does not, however, waive rights or claims that may arise after
the date you sign it below. |
You expressly acknowledge that this Agreement is intended
to include in its effect, without limitation, all Claims which you do not know or suspect to exist in your favor at the time you
sign this Agreement, and that this Agreement contemplates the extinguishment of any such Claim or Claims. Thus, in order to effectuate
a full and complete release and discharge of the Released Parties, you expressly waive and relinquish all rights and benefits which
you may have under any state or federal statute or common law principle that would otherwise limit the effect of this Agreement
to Claims known or suspected prior to the date you sign this Agreement, and do so understanding and acknowledging the significance
and consequences of such specific waiver.
| 4. | Affirmations. You affirm that you have not filed, caused to be filed, or are not presently a party to any claim, complaint,
or action against the Company in any forum or form. You furthermore affirm that you have no known workplace injuries or occupational
diseases and have been provided and/or have not been denied any leave requested under the Family and Medical Leave Act. You further
affirm that you are not aware of any wrongful, tortious, or criminal action committed by the Company or its agents. If it is proven
at any time hereafter that any of the above affirmations was false when made, you agree that you shall be found in breach of the
terms of this Agreement. |
| 5. | Covenant Not to Sue. You agree that, except to the extent such right may not be waived by law,
you will not commence any legal action or lawsuit or otherwise assert any legal claim seeking relief for any Claim released or
waived under the Release of Claims provision above. This “covenant not to sue” does not, however, prevent or prohibit
you from seeking a judicial determination of the validity of your Release of Claims under the Age Discrimination in Employment
Act (“ADEA”). In addition, this “covenant not to sue” does not prevent or prohibit you from filing any
administrative complaint or charge against the Releasees (or any of them) with any federal, state, or local agency, including,
for instance, the U.S. Equal Employment Opportunity Commission or the U.S. Department of Labor, but you understand that by signing
this Agreement, you will have no right to recover monetary damages or obtain individual relief of any kind in such proceeding with
respect to Claims released or waived by this Agreement. |
| 6. | Non-Admission. This Agreement shall not in any way be construed as an admission by the Company
that it has acted wrongfully with respect to you or any other person, or that you have any rights whatsoever against the Company. |
| 7. | Return of Property. You represent that you have returned or agree that you will return to the
Company on or before the Effective Date of this Agreement any and all Company property in your possession or control, including,
but not limited to all keys, credit cards, computers, cellular telephones, and other personal items or equipment provided to you
by the Company for use during your employment, together with all written or recorded materials, documents, computer discs, plans,
records, notes, files, drawings, or papers, and any copies thereof, relating to the affairs of the Company, including all notes
or records relating to clients of the Company. Any severance benefits payable under this Agreement will not be paid until after
you have returned all Company property in your possession. |
| 8. | Confidentiality. You agree that you will keep the terms, amount, and fact of this Agreement
completely confidential, and that, except as required by law, as necessary for the enforcement of this Agreement, or as authorized
in writing by the Company, you will not hereafter disclose any information concerning this Agreement to anyone other than your
immediate family and professional representatives who will be informed by you of, and must agree to be bound by, this confidentiality
clause before you disclose any information about this Agreement to them. |
| 9. | The parties agree that the Confidentiality and Noncompetition Agreement that you entered into effective October 19, 2010 remains
in effect and is incorporated herein by reference with the following modifications: |
| · | Section 1(d) is deleted. |
| · | The following language is added to Section 1: |
(d) “Competitive Business” shall mean
the development, construction, acquisition, sale, marketing or management of facilities whose primary function and purpose is student
housing and/or the provision of third party student housing services to providers of student housing.
and
(j) “Services” shall mean (a) providing
managerial, operational or executive-level oversight, (b) providing strategic guidance, (c) providing any additional services of
the type that Executive performed for Company. You acknowledge and agree that these are the services that you performed for the
Company.
| · | Section 4 is amended to read as follows: |
You covenant and agree that during the Restricted Period,
in any State of the United States of America in which the Company conducts business, has purchased or is under contract to purchase
real estate to conduct business, or has identified specific sites as potential future development opportunities, you shall not,
directly or indirectly whether individually or as a principal, partner, officer, director, consultant contractor, employee, stockholder
or manager of any person, partnership, corporation limited liability company or any other entity provide Services for a Competitive
Business.
| · | The following language is added as the last sentence of Section 5: |
This provision (ii) applies to those persons, concerns,
or entities that were actual or potential customers or suppliers of the Company during the time period of Executive’s employment
with the Company and with which Executive or those he supervised had contact on behalf of the Company.
Except as otherwise provided in this Agreement, the
Employment Agreement that you and the Company entered into effective October 19, 2010 is hereby superseded and shall be null and
void, effective immediately.
| 10. | Non-Disparagement. You agree not to make any oral or written statement or take any other action that disparages or criticizes
the Company or its management or practices, that damages the Company’s good reputation, or that impairs its normal operations.
You understand that this nondisparagement provision does not apply on occasions when you are subpoenaed or ordered by a court or
other governmental authority to testify or give evidence and must, of course, respond truthfully, to conduct otherwise protected
by the Sarbanes-Oxley Act, or to conduct or testimony in the context of enforcing the terms of this Agreement or other rights,
powers, privileges, or claims not released by this Agreement. You also understand that the foregoing nondisparagement provision
does not apply on occasions when you provide truthful information in good faith to any federal, state, or local governmental body,
agency, or official investigating an alleged violation of any antidiscrimination or other employment-related law or otherwise gathering
information or evidence pursuant to any official investigation, hearing, trial, or proceeding. Nothing in this nondisparagement
provision is intended in any way to intimidate, coerce, deter, persuade, or compensate you with respect to providing, withholding,
or restricting any communication whatsoever to the extent prohibited under 18 U.S.C. §§ 201, 1503, or 1512 or under any
similar or related provision of state or federal law. |
| 11. | Expenses. You agree that you have been reimbursed by the Company for all reasonable and necessary out-of-pocket travel
and other business expenses incurred by you in accordance with the Company’s policies. |
| 12. | Consequences of Breach. You agree that you will indemnify and hold the Releasees harmless from
any loss, cost, damage, or expense (including attorneys’ fees) incurred by them arising out of your breach of any portion
of this Agreement. You also understand that your entitlement to and retention of the benefits we have agreed to provide you herein
are expressly conditioned upon your fulfillment of your promises herein, and you agree, to the extent permitted or required by
law, immediately to return or repay the amounts you have received from us pursuant to this Agreement in excess of $100.00 upon
your breach of any provision of this Agreement. For the purposes of this paragraph, a subsequent legal challenge to the validity
of your release of claims under the ADEA in this Agreement will not be considered a breach of this Agreement. However, the severance
benefits paid to you under this Agreement may serve as restitution, recoupment, and/or setoff in the event you prevail on the merits
of such claim. |
| 13. | Choice of Law and Entire Agreement. This Agreement shall be governed by the laws of the State of North Carolina, without
regard to conflict of laws principles. This Agreement represents the entire understanding between you and the Company and supersedes
any prior agreement or plan regarding its contents. Any alteration or modification of this Agreement shall not be valid unless
in writing and signed by all parties. |
| 14. | Arbitration. Any and all disputes relating to your employment with the Company, the termination
of that employment, and the parties’ compliance with or alleged breach of this Agreement are subject to arbitration by both
you and the Company in accordance with the arbitration provisions set forth in Paragraphs 12 and 17 of the Employment Agreement
between you and the Company entered into on January 1, 2013, which paragraphs are hereby incorporated by reference. |
| 15. | Severability. The provisions of this Agreement are severable, and if any term of this Agreement
is held to be illegal, invalid, or unenforceable by a court of competent jurisdiction, the remaining terms shall remain in full
force and effect. |
| 16. | Consideration Period. Because the arrangements discussed in this Agreement affect important rights and obligations,
we advise you to consult with an attorney before you agree to the terms set forth herein. You have twenty-one (21) days from the
date you receive this Agreement within which to consider it, and you may take as much of that time as you wish before signing.
If you decide to accept the benefits offered herein, you must sign this Agreement on or before the expiration of the twenty-one
(21)-day period and return it promptly to Brandon Parise at the Company at brandon.parise@campuscrest.com, whose address is Campus
Crest Real Estate Management, 2100 Rexford Road, #414, Charlotte, NC 28211. If you do not wish to accept the terms of this Agreement,
you do not have to do anything. |
| 17. | Revocation Rights. For a period of up to and including seven (7) days after the date you sign this Agreement, you may
revoke it entirely. No rights or obligations contained in this Agreement shall become enforceable before the end of the seven-day
revocation period. If you decide to revoke the Agreement, you must deliver to Mr. Parise at the contact address described in Paragraph
16 above a signed notice of revocation on or before the last day of this seven-day period. Upon delivery of a notice of revocation
to the Company, this Agreement shall be canceled and void, and neither you nor the Company shall have any rights or obligations
arising under it. |
| 18. | Effective Date. This Agreement shall become effective (the “Effective Date”) eight (8) days after the date
you execute it below and have returned all Company property in your possession, unless it is earlier revoked by you pursuant to
the provisions set forth in the “Revocation Rights” section of this Agreement. |
| 19. | Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the Company and its respective
successors and assigns, and upon you and any of your heirs, personal representatives and assigns, except that my duties hereunder
may not be delegated. |
| 20. | Interpretation. The language used in this Amended Agreement shall not be construed in favor of or against either of
the Parties, but shall be construed as if both of the Parties prepared this Amended Agreement. The language used in this Amended
Agreement shall be deemed to be the language chosen by the Parties to express their mutual intent, and no rule of strict construction
shall be applied against any such Party. |
| 21. | Section 409A. This Agreement is intended comply with the requirements of Code Section 409A of the Internal Revenue Code
of 1986, as amended, and the Department of Treasury guidance thereunder (“Section 409A”). This Agreement shall be interpreted
and administered to maximize the exemptions from Section 409A for the compensation payable pursuant to this Agreement and, to the
extent the Agreement provides for compensation that is subject to Section 409A, to comply with Section 409A and to avoid the imposition
of tax, interest and/or penalties upon you under Section 409A. The Company does not, however, assume any economic burdens associated
with Section 409A. In particular, the Company will not be liable to you for any tax, interest, or penalties you may owe as a result
of this Agreement. Each of your rights to installment payments under the first and second bullets of Section 2 shall be treated
as a right to a series of separate payments for purposes of Section 409A. Each such payment that is made within 2-½ months
following the end of the year that contains the Effective Date is intended to be exempt from Section 409A as a short-term deferral
within the meaning of the final regulations under Section 409A. Each such payment that is made later than 2-½ months following
the end of the year that contains the Effective Date is intended to be exempt from Section 409A under the two-times exception of
Treasury Reg. § 1.409A-1(b)(9)(iii) (the “Two-Times Exception”), up to the limitation on the availability of the
Two-Times Exception specified in the regulation. Each payment that is made after the Two-Times Exception ceases to be available
shall be subject to the six-month delay, as necessary, as specified below. To the extent necessary to comply with Section 409A,
in no event shall you, directly or indirectly, designate the taxable year of any payment under this Agreement. In particular, with
respect to any payment that is conditioned upon your executing and not revoking the release of claims as specified herein, if the
designated payment period for such payment begins in one taxable year and ends in the next taxable year, the payment will be made
in the later taxable year. To the extent necessary to comply with Section 409A, references in this Agreement to “termination
of employment” or “terminates employment” (and similar references) shall have the same meaning as “separation
from service” within the meaning of Section 409A (a “Separation from Service”), and no payment subject to Section
409A that is payable upon a termination of employment shall be paid unless and until (and not later than applicable in compliance
with Section 409A) you incur a Separation from Service. In addition, if you are a “specified employee” within the meaning
of Section 409A(a)(2)(B)(i) at the time of your Separation from Service, any payment subject to Section 409A that would otherwise
have been payable on account of, and within the first six months following, your Separation from Service will become payable on
the first business day after six months following the Separation Date or, if earlier, the date of your death. |
| 22. | Acknowledgments. If the terms of this Agreement correctly set forth our agreement, please so indicate by signing in
the appropriate space below. Your signature will be an acknowledgment that no other promise or agreement of any kind has been made
to you by the Company to cause you to execute this Agreement, that you had twenty-one (21) days to review this Agreement and to
consult with an attorney or other person of your choosing about its terms before signing it, that the only consideration for your
signature is as indicated above, that you fully understand and accept this Agreement, that you are not coerced into signing it,
and that you signed it knowingly and voluntarily because it is satisfactory to you. |
CAMPUS CREST COMMUNITIES, INC. |
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By: |
/s/ Richard Kahlbaugh |
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Richard Kahlbaugh |
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Interim Chief Executive Officer |
|
I have carefully read the above Confidential Separation Agreement
and General Release, understand the meaning and intent thereof, and voluntarily agree to its terms this 13th day of November, 2014.
/s/ Donald L. Bobbitt, Jr.
Donald L. Bobbitt, Jr.
Exhibit 10.38
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT
(this “Agreement”) is made and entered into as of the 31st day of July, 2014 (the “Effective Date”),
by and between Campus Crest Communities, Inc. (the “Company”), and Aaron Halfacre, an individual (“Employee”)
(the Company and Employee are hereinafter sometimes collectively referred to as the “Parties”).
RECITALS
A. The Company desires
to employ Employee as Executive Vice President – Capital Markets of the Company on the terms and conditions hereinafter set
forth.
B. Employee desires
to accept such employment on the terms and conditions hereinafter set forth.
NOW, THEREFORE, in
consideration of the foregoing and the mutual covenants and agreements of the Parties hereinafter set forth, and for other good
and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Parties hereto, intending to be legally
bound, hereby agree as follows:
1. Employment.
The Company hereby employs Employee as Executive Vice President – Capital Markets of the Company, and Employee hereby accepts
such employment, upon the terms and conditions hereinafter set forth. Employee shall be responsible for investor relations interactions,
earnings preparation, financial planning and analysis, capital markets transactions executions, investor strategies, improving
and delivering consistent messaging to the public, participating in Company growth strategies, and shall have such other duties
and authority as are customary for such position and as shall from time to time be assigned to Employee by the Chief Financial
Officer, the Chief Executive Officer and the Board of Directors (“Board”) of the Company in their discretion.
Employee shall faithfully and to the best of his ability fulfill such duties and shall devote his full business time, attention,
skill and efforts with undivided loyalty to the performance of such duties. Employee shall abide by all of the rules, regulations
and policies established or promulgated (whether communicated in writing, electronically or orally) by the Company from time to
time. Employee agrees that so long as he is an employee of the Company he shall not, without obtaining the express prior approval
in writing of the Chief Executive Officer and the Board of the Company, engage in any employment, consulting activity or business
other than for the Company. Notwithstanding the other provisions of this Section 1, Employee is authorized to make and manage
personal business investments of his choice, including, without limitation, the management of family-owned companies and investments,
subject to the limitations set forth in the Confidentiality and Noncompetition Agreement (as defined below) and provided that such
activities do not materially interfere with the performance of the Employee’s duties under the Agreement.
2. Compensation
and Benefits. During his employment under this Agreement, Employee shall receive the compensation and benefits more particularly
described on Exhibit A attached hereto and made a part hereof. In the event the Company terminates the Incentive Compensation
Plan provided for in Exhibit A hereto, the Company shall establish a new plan or such other arrangement as shall be mutually
agreeable to the Company and Employee which shall provide Employee with substantially similar economic benefits to those provided
under the Incentive Compensation Plan. Furthermore, no amendment or modification to the Incentive Compensation Plan during a performance
cycle shall reduce the potential benefits to be provided thereunder as established at the beginning of such performance cycle without
the consent of Employee. Any payments referenced hereunder shall be subject to applicable taxes and other withholdings.
3. Term.
This Agreement shall be for an initial term of two years, expiring on the second anniversary of the date hereof; provided, however,
it shall automatically renew for additional one year terms on each anniversary date hereof unless notice of expiration is given
in writing at least 90 days prior to expiration of the then current term. For the sake of clarity, notification of a non-renewal
by the Company within the prescribed 90 day period shall not be considered a "termination" by the Company and as such,
shall not invoke the Payment Upon Termination provisions described in Section 3(B), below, which are only applicable for a termination
of employment occurring during the term.
The Company may terminate this Agreement
at any time for Cause or without Cause (as defined below). Employee may terminate this Agreement at any time with or without Good
Reason (as defined below) upon delivery to the Company of thirty (30) days written notice. Termination of this Agreement shall
terminate completely Employee’s employment with the Company, including, but not limited to, his role as an officer. If Employee
is serving as a member of the Company’s Board, Employee agrees to resign from the Board effective immediately upon termination
of this Agreement.
(A) Termination
Date. The date which the Board of the Company designates as the termination date or, if Employee terminates this Agreement,
the date designated by Employee as stated in the written notice delivered to the Company, shall be referred to herein as the “Termination
Date.”
(B) Payment Upon
Termination.
(i) Termination
By Employee. In the event Employee terminates this Agreement, the Company shall be obligated to pay Employee that pro-rata
portion of his current bi-weekly Base Salary payment, as adjusted for any increase thereto, which is earned but unpaid as of the
Termination Date, any earned but unpaid incentive compensation, any accrued but unpaid paid time off (“PTO”)
due to him through the Termination Date and any unreimbursed expenses. Employee will not be entitled to, nor will he receive, any
type of severance payment, unless he has Good Reason, as defined below, to terminate this Agreement. If Employee has Good Reason
then he shall receive the severance outlined in subsection (B)(ii)(b) below addressing Termination by the Company without Cause,
subject to its requirements for receipt of such payment. If Employee terminates Employee’s employment pursuant to this subsection
(B)(i), then the Company, at its option, may require Employee to cease providing services during the thirty (30) day notice period
required therein; provided, however, for purposes of calculating payment upon termination under this Agreement, Employee shall
be treated as if he was employed during such thirty (30) day period. “Good Reason” shall mean (1) a material
involuntary reduction in Employee’s duties, authority, reporting responsibility or function by the Company, (2) a material
reduction in Employee’s compensation package other than as mutually agreed, (3) Employee’s involuntary relocation to
a principal place of work more than thirty (30) miles from Charlotte, North Carolina or (4) a material breach by the Company of
its obligations hereunder, provided that, upon the occurrence of any of these acts or omissions, Employee gives the Company notice
of his belief that he has Good Reason to terminate this Agreement and the Company fails to cure within thirty (30) business days
of receipt of Employee’s notice, and the Employee resigns within thirty (30 days after the end of such thirty (30) day cure
period.
(ii) Termination
By Company.
(a) Cause.
The Company may terminate this Agreement for Cause effective immediately upon written notice to Employee stating the facts
constituting such Cause. If Employee is terminated for Cause, the Company shall be obligated to pay Employee that pro-rata portion
of his current bi-weekly Base Salary payment, as adjusted for any increase thereto, which is earned but unpaid as of the Termination
Date, any earned but unpaid incentive compensation, any accrued but unpaid PTO due to him through the Termination Date and any
unreimbursed expenses. Employee will not be entitled to, nor will he receive, any type of severance payment. The term “Cause”
shall mean: (1) Employee’s act of gross negligence or misconduct that has the effect of injuring the business of the Company
or its parent, subsidiaries or affiliates, taken as a whole, in any material respect, (2) Employee’s conviction or plea of
guilty or nolo contendere to the commission of a felony by Employee, (3) the commission by Employee of an act of fraud or
embezzlement against the Company, its parent, subsidiary or affiliates, or (4) Employee’s willful breach of any material
provision of this Agreement or that certain Confidentiality and Noncompetition Agreement between Employee and the Company which
shall be entered into contemporaneously with this Agreement (the “Confidentiality and Noncompetition Agreement”).
(b) Without Cause.
The Company may terminate this Agreement without Cause effective immediately upon notice to Employee. In the event the Company
terminates this Agreement without Cause, the Company shall pay to Employee in addition to the amounts under the first sentence
of Subsection B(i) above, a cash payment equal to two times the sum of: (i) Employee’s then current annual Base Salary,
as adjusted for any increase thereto and (ii) an amount equal to the bonus paid to Employee for the prior year (provided
that, if no incentive bonus was paid in the prior year the amount shall be 50% of the “target amount” as defined in
the Company’s Incentive Compensation Plan for the year in which notice is given). Any amounts payable under this subparagraph
shall be paid in equal monthly installments over a period of 24 months commencing no later than sixty (60) days following Employee’s
Termination Date, shall be subject to applicable withholdings and shall be subject to Employee signing a Release (as defined below)
on or before the sixtieth (60th) day following Employee’s Termination Date and all revocation periods applicable
to such Release having expired on or prior to the sixtieth (60th) day following Employee’s Termination Date. Such
payments will commence within sixty (60) days following Executive’s termination, with the exact commencement of payments
to be determined in the sole discretion of the Company, provided that if such sixty (60) day period commences in one calendar year
and ends in the next, the payments will commence in the second calendar year with the first payment to include all payment that
would have otherwise been made but for the provisions of this sentence. For the avoidance of doubt, Employee shall not be entitled
to any severance and bonus payments if the Employee has not signed the Release, and if all revocation period applicable to the
Release have not expired on or prior to the sixtieth (60th) day following Employee’s Termination Date. In addition,
the severance and bonus payments outlined in this Section are contingent on Employee fully complying with the terms of the Confidentiality
and Noncompetition Agreement signed contemporaneously herewith. If Employee fails to so comply, Employee agrees that the Company
has the right to cease making the payments described in this Section and that the Company is entitled to recover from Employee
any payments it has already made to Employee.
(iii) Change
in Control. In the event, within 24 months following a Change in Control of the Company: (A) Employee is terminated
without Cause by the Company, or (B) Employee terminates his employment for Good Reason, in lieu of the severance payment outlined
in (b) above, Employee will receive, in addition to the amounts under the first sentence of Subsection B(i) above,
a cash payment equal to two times the sum of (i) Employee’s then current Base Salary, as adjusted for any increase thereto
and (ii) an amount equal to Employee’s previous year’s Incentive Compensation Plan payment. In the event Employee did
not receive an Incentive Compensation Plan payment the previous year, the incentive amount shall be 50% of the “target amount”
as defined in the Company’s Incentive Compensation Plan for the year in which termination occurs. Any amounts payable under
this subparagraph shall be paid in a lump sum within 60 days of the Termination Date subject to subsection 3(C) hereof, shall
be subject to applicable withholdings and shall be subject to Employee signing a Release on or before the sixtieth (60th)
day following Employee’s Termination Date and all revocation periods applicable to such Release having expired on or prior
to the sixtieth (60th) day following Employee’s Termination Date. Such payments will commence within sixty (60)
days following Executive’s termination, with the exact commencement of payments to be determined in the sole discretion of
the Company, provided that if such sixty (60) day period commences in one calendar year and ends in the next, the payments will
commence in the second calendar year with the first payment to include all payment that would have otherwise been made but for
the provisions of this sentence. For the avoidance of doubt, Employee shall not be entitled to any severance and bonus payments
if the Employee has not signed the Release, and if all revocation period applicable to the Release have not expired on or prior
to the sixtieth (60th) day following Employee’s Termination Date. “Change in Control” means
“a change in the ownership of the corporation,” “a change in effective control of the corporation,” or
“a change in the ownership of a substantial portion of the assets of the corporation” within the meaning of Section 1.409A-3(i)(5)
of the Treasury Regulations. The payments to Employee outlined in this Section are contingent on Employee fully complying with
the terms of the Confidentiality and Noncompetition Agreement signed contemporaneously herewith. If Employee fails to so comply,
Employee agrees that the Company has the right to cease making the payments described in this Section and that the Company is entitled
to recover from Employee any payments it has already made to Employee.
In the event it shall
be determined that any payment or distribution to or for the benefit of Employee under this subsection (iii) or the acceleration
thereof (the "Triggering Payment") would be subject to the excise tax imposed by Section 4999 of the Internal
Revenue Code of 1986, as amended (the “Code”), or any interest or penalties with respect to such excise tax
(collectively, such excise tax, together with any such interest or penalties, the "Excise Tax") (all such payments
and benefits, including any cash severance payments payable pursuant to any other plan, arrangement or agreement, hereinafter referred
to as the "Total Payments"), then, after taking into account any reduction in the Total Payments provided by reason
of Section 280G of the Code in such other plan, arrangement or agreement, the cash severance payments shall be reduced to the extent
necessary so that no portion of the Total Payments is subject to the Excise Tax but only if (A) the net amount of such Total Payments,
as so reduced (and after subtracting the net amount of federal, state and local income taxes on such reduced Total Payments and
after taking into account the phase out of itemized deductions and personal exemptions attributable to such reduced Total Payments)
is greater than or equal to (B) the net amount of such Total Payments without such reduction (but after subtracting the net amount
of federal, state and local income taxes on such Total Payments and the amount of Excise Tax to which Employee would be subject
in respect of such unreduced Total Payments and after taking into account the phase out of itemized deductions and personal exemptions
attributable to such unreduced Total Payments). All determinations required to be made under this subsection (iii) shall be
made in writing within ten (10) business days of the receipt of notice from Employee that there has been a Triggering Payment by
the independent accounting firm then retained by the Company in the ordinary course of business (which firm shall provide detailed
supporting calculations to the Company and Employee) and such determinations shall be final and binding on the Company and Employee.
Any fees incurred as a result of work performed by any independent accounting firm hereunder shall be paid by the Company.
(iv) Vesting.
In the event of: (i) a termination by the Company without Cause, (ii) a termination by Employee for Good Reason, (iii) a Change
in Control, or (iv) the voluntary retirement of the Employee subsequent to reaching the age of 63, occurring prior to Employee
fully vesting in any options or restricted equity, then the vesting schedule shall be accelerated so that Employee will be deemed
fully vested with respect to such options or restricted equity.
(v) Disability.
The Company may terminate Employee’s employment upon Employee’s total disability. Employee shall be deemed to be totally
disabled for purposes of this Agreement if he is unable to perform his essential job duties under
this Agreement by reason of a mental or physical illness or condition lasting for a period of 120 consecutive days or more, taking
into consideration any reasonable accommodations under the Americans with Disabilities Act, if applicable. The determination as
to whether Employee is totally disabled shall be made by a licensed physician selected by the Company. Whether Employee is entitled
to receive his Base Salary during the period he is unable to work prior to termination hereunder is contingent on other Company
policies and the amount of leave Employee has available to him under those policies. Upon termination by reason of Employee’s
disability, the Company’s sole and exclusive obligation will be to pay Employee that pro-rata portion of his current bi-weekly
Base Salary payment, as adjusted for any increase thereto, which is earned but unpaid as of the Termination Date, any earned but
unpaid bonus and any accrued but unpaid PTO due to him through the Termination Date.
(vi) Death.
This Agreement shall terminate immediately and without any action on the part of the Company if Employee dies. In such an event,
Employee’s estate shall receive from the Company, in a single lump sum, an amount equal to (i) that pro-rata portion
of his current bi-weekly Base Salary payment, as adjusted for any increase thereto, which is earned but unpaid as of the date of
Employee’s death unless earlier terminated due to disability as set forth in subsection 3(B)(v) above and (ii) any bonus
compensation earned by Employee but unpaid prior to Employee’s death, plus other death benefits, if any, generally applicable
to the Company’s employees.
(C) The following
rules shall apply with respect to the distribution of payments and benefits, if any, to be provided to Employee under Section 3(B)
of this Agreement, as applicable:
(i) Notwithstanding
anything to the contrary contained herein, no payments shall be made to Employee upon Employee’s termination of employment
from the Company under this Agreement unless such termination of employment is a “separation from service” within the
meaning of Section 409A of the Code. For purposes of determining the timing of payments under this Section 3 only, “Termination
Date” shall be deemed to mean the date on which Employee experiences a “separation from service” within the meaning
of Section 409A of the Code.
(ii) It is intended
that each installment of the payments and benefits provided under this Section 3(B)(ii)(b), if any, shall be treated as a separate
“payment” for purposes of Section 409A of the Code.
(iii) Notwithstanding
anything herein to the contrary, in the event that Employee is deemed to be a "specified employee" for purposes of Section
409A(a)(2)(B)(i) of the Code, any payments to Employee hereunder that are subject to the provisions of Section 409A of the Code
shall not be made prior to the six-month anniversary of Employee’s Termination Date. Thereafter, any payment that would
otherwise have been made during the six-month period beginning on Employee’s Termination Date will be paid, together with
interest at an annual rate (compounded monthly) equal to the federal short-term rate (as in effect under Section 1274(d) of the
Code on the termination date), to Employee immediately following such six-month anniversary and no later than thirty (30) days
following such anniversary.
(iv) The amount
of taxable expenses eligible for reimbursement during one calendar year shall not affect the expenses eligible for reimbursement
during any subsequent calendar year. Reimbursement of expenses for a given calendar year shall be made on or before the last day
of the immediately following calendar year. The right to reimbursement hereunder is not subject to liquidation or exchange for
another benefit.
4. Release.
Employee agrees that payment by the Company of the amounts set out above (in the event of a termination by the Company Without
Cause, termination by Employee for Good Reason or due to a Change in Control) is contingent upon Employee executing a mutual release,
acceptable to the Company and Employee (the “Release”) which shall recite that such payment is in full and final
settlement of any and all actions, causes of actions, suits, claims, demands and entitlements whatsoever which Employee has or
may have against the Company or which the Company may have against Employee, their respective affiliates and any of their respective
directors, officers, employees, shareholders, representatives, successors and assigns arising out of Employee’s hiring, his
employment and the termination of his employment or this Agreement.
5. Expenses.
The Company shall reimburse Employee for all necessary and reasonable out-of-pocket travel and other business expenses incurred
by Employee, which relate to Employee’s duties hereunder, in accordance with the Company’s relevant policies in effect
from time to time.
6. Survival Of
Certain Provisions. Any provisions hereof that, by their nature, would survive the termination hereof shall not be discharged
or dissolved upon, but shall survive the termination of the employment of Employee with the Company.
7. Representations
And Warranties Of Employee. As of the date hereof and at all times during the term hereof, Employee represents and warrants
to the Company that (a) Employee has not entered into and is not bound by any agreement, understanding or restriction (including,
without limitation, any covenant restricting competition or solicitation or agreement relating to trade secrets or confidential
information) with any third party that in any way limits, restricts or would prevent the employment of him by the Company under
this Agreement or the full and complete performance by him of all his duties and obligations hereunder; and (b) the execution of
this Agreement by him and the employment of him by the Company under this Agreement will not result in, or constitute a breach
of, any term or condition of any other agreement, instrument, arrangement or understanding between him and any third party, or
constitute (or, with notice or lapse of time, or both, would constitute) a default, breach or violation of any such agreement,
instrument, arrangement or understanding, or which would accelerate the maturity of any duty or obligation of him thereunder.
8. Indemnity.
Employee acknowledges that the Company has relied upon the representations contained in Section 7 hereof. Employee agrees
to indemnify and hold the Company, its directors, officers, employees, agents, representatives, affiliates, parent, subsidiary
and related companies, representatives and consultants and their insurers and attorneys harmless against any and all claims, liabilities,
losses, damages, costs, fees or expenses including, without limitation, reasonable legal fees and costs incurred by the Company,
its directors, officers, employees, agents, representatives, affiliates, parent, subsidiary and related companies, representatives
and consultants and their insurers by reason of an alleged violation by Employee of any of the representations contained in Section
7 hereof.
9. Notices.
All notices and other communications under this Agreement shall be in writing and shall be deemed given upon receipt if delivered
personally, or when sent if mailed by registered or certified mail (return receipt requested) to the Parties at the following addresses
(or at such other address for a party as shall be specified by like notice):
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If to the Company |
Campus Crest Communities, Inc. |
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2100 Rexford Road, Suite 414 |
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Charlotte, NC 28211 |
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Attention: Donald L. Bobbitt Jr. |
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With copy to |
Dawn H. Sharff, Esq. |
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Bradley Arant Boult Cummings LLP |
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One Federal Place |
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1819 Fifth Avenue North |
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Birmingham, AL 35203 |
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If to Employee |
Aaron Halfacre |
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4415 Saint Davids Street |
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Philadelphia, Pennsylvania 19127 |
10. Enforceability
and Reformation; Severability. The Parties intend for all provisions of this Agreement to be enforced to the fullest extent
permitted by law. Accordingly, in the event that any provision or portion of this Agreement is held to be illegal, invalid or unenforceable,
in whole or in part, for any reason, under present or future law, such provision shall be severable and the remainder thereof shall
not be invalidated or rendered unenforceable or otherwise adversely affected. Without limiting the generality of the foregoing,
if a court or arbitrator should deem any provision of this Agreement to create a restriction that is unreasonable as to scope,
duration or geographical area, the Parties agree that the provisions of this Agreement shall be enforceable in such scope, for
such duration and in such geographic area as such court or arbitrator may determine to be reasonable.
11. Benefit.
The rights, obligations and interests of Employee hereunder may not be sold, assigned, transferred, pledged or hypothecated. Employee
shall have no right to commute, encumber or dispose of the right to receive payments hereunder, which payments and the right thereto
are non-assignable and non-transferable, and any attempted assignment or transfer shall be null and void and without effect. This
Agreement and its obligations shall inure to the benefit of and be binding and enforceable by the successors and assigns of the
Company, including, without limitation, any purchaser of the Company, regardless of whether such purchase takes the form of a merger,
a purchase of all or substantially all of the Company’s assets or a purchase of a majority of the outstanding capital stock
of the Company.
12. Dispute Resolution.
All controversies, claims, issues and other disputes (collectively, “Disputes”) arising out of or relating to
this Agreement or Employee’s employment hereunder shall be subject to the applicable provisions of this Section.
(A) Arbitration.
Except for actions seeking relief for violations of the Confidentiality and Noncompetition Agreement, all Disputes shall be settled
exclusively by final and binding arbitration in Charlotte, North Carolina, before a neutral arbitrator in an arbitration proceeding
administered by the American Arbitration Association (“AAA”) according to the National Rules for the Resolution
of Employment Disputes of AAA or, alternatively, upon mutual agreement, to an arbitrator selected by Employee and the Company.
Any dispute regarding whether a Dispute is subject to arbitration shall be resolved by arbitration.
(B) Interstate
Commerce. The Parties hereto acknowledge that (i) they have read and understood the provisions of this Section regarding arbitration
and (ii) performance of this Agreement will be in interstate commerce as that term is used in the Federal Arbitration Act, 9 U.S.C.
§ 1 et seq., and the parties contemplate substantial interstate activity in the performance of this Agreement including,
without limitation, interstate travel, the use of interstate phone lines, the use of the U.S. mail services and other interstate
courier services.
(C) Waiver of
Jury Trial. If any Dispute is not arbitrated for any reason, the parties desire to avoid the time and expense relating to a
jury trial of such Dispute. Accordingly, the parties, for themselves and their successors and assigns, hereby waive trial by jury
of any Dispute. The Parties acknowledge that this waiver is knowingly, freely, and voluntarily given, is desired by all Parties
and is in the best interests of all Parties.
13. Amendment.
This Agreement may not be amended, modified or changed, in whole or in part, except by a written instrument signed by a duly authorized
officer of the Company and by Employee.
14. Waiver.
No failure or delay by either of the Parties in exercising any right, power, or privilege under this Agreement shall operate as
a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise
of any other right, power, or privilege.
15. Access To
Counsel. Employee acknowledges that he has had full opportunity to review this Agreement and has had access to independent
legal counsel of his choice to the extent deemed necessary to interpret the legal effect hereof.
16. Governing
Law. This Agreement shall be interpreted, construed and governed according to the laws of the State of North Carolina. For
any claims for relief which are excepted from the arbitration provision as set out above, the Parties submit to the service and
exclusive personal jurisdiction of the federal or state courts of Charlotte, North Carolina and irrevocably waive all defenses
inconsistent with the terms of this Section.
17. Fees And
Costs. If either Party initiates any action or proceeding (whether by arbitration or court proceeding) to enforce any of its
rights hereunder or to seek damages for any violation hereof, then, the Parties shall bear their respective costs and expenses
of any such action or proceeding; provided, that, in addition to all other remedies that may be granted, the prevailing Party shall
be entitled to recover its reasonable attorneys’ fees and all other costs that it may sustain in connection with such action
or proceeding. If a dispute is arbitrated, all costs and fees of the arbitrator(s) shall be paid by the Company.
18. Offset.
The Company shall have the right to offset against any sums payable to Employee, any amounts owing to the Company as a result of
expense account indebtedness, failure to return Company property, or other advances or debts due.
19. Counterparts.
This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together
shall constitute one and the same instrument. Execution and delivery by facsimile shall constitute good and valid execution and
delivery unless and until replaced or substituted by an original executed instrument.
20. Interpretation.
The language used in this Agreement shall not be construed in favor of or against either of the Parties, but shall be construed
as if both of the Parties prepared this Agreement. The language used in this Agreement shall be deemed to be the language chosen
by the Parties to express their mutual intent, and no rule of strict construction shall be applied against any such Party.
21. Execution
of Further Documents. The Parties covenant and agree that they shall, from time to time and at all times, do all such further
acts and execute and deliver all such further documents and assurances as shall be reasonably required in order to fully perform
and carry out the terms of this Agreement.
22. Successors
and Assigns. This Agreement shall inure to the benefit of and be binding upon the Company, its successors and assigns, including,
without limitation, any entity which may acquire all or substantially all of the Company’s assets and business or into which
the Company may be consolidated or merged, and Employee, his heirs, executors, administrators and legal representatives. Employee
may not assign any of his obligations under this Agreement.
23. Entire Agreement.
This Agreement and the Exhibit attached hereto represent the entire understanding and agreement between the Parties with respect
to the subject matter hereof and shall supersede any prior agreements and understanding between the Parties with respect to that
subject matter.
24. Compliance
with Section 409A of the Code. This Agreement is intended to comply with, or otherwise be exempt from Section 409A of the Code,
and any regulations and Treasury guidance promulgated thereunder and all ambiguities shall be interpreted in a manner consistent
with such intent.
IN WITNESS WHEREOF,
each of the Parties has executed this Agreement as of the date first above written.
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CAMPUS CREST COMMUNITIES, INC. |
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By: /s/ Donnie Bobbitt |
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Name: Donnie Bobbitt |
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Title: Chief Financial Officer |
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EMPLOYEE: |
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/s/ Aaron Halfacre |
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AARON HALFACRE |
Exhibit A
Compensation and Benefits
(A) Employee’s
employment with the Company shall become effective on July 31, 2014. Within thirty days of the Effective Date, Employee shall receive
a signing bonus of $50,000, payable in shares of the Company, with the number of shares determined by the price of Company shares
at the close of trading on the Effective Date. If Employee voluntarily terminates his employment with the Company prior to the
one year anniversary of the Effective Date, he will forfeit to the Company the shares prior to his last day of employment. The
Company shall reimburse Employee up to $20,000 toward the costs of his relocation to Charlotte, North Carolina, upon the receipt
of appropriate moving transaction receipts. If Employee voluntarily terminates his employment with the Company prior to the one
year anniversary of the Effective Date, he must repay to the Company the amount of the reimbursed relocation expenses, prior to
his last day of employment.
(B) On the Effective
Date, Employee shall be granted 30,000 Company restricted shares under the Company’s Amended and Restated Equity Incentive
Plan (the “EICP”), which shares shall be eligible to vest over a three year period following the Effective Date
and which shares shall be subject to the terms and conditions of separate award agreement. Any unvested Company restricted shares
will immediately vest at the time of a Change in Control. If the Employee is terminated by the Company without Cause, the Employee
terminates for Good Reason, the Employee dies or the Employee is terminated due to his disability as set forth in Section 3(B)(v)
of the Agreement, any unvested Company restricted shares will immediately vest.
(C) On the Effective
Date, Employee shall be granted 50,000 Company performance shares under the EICP which shall be eligible to vest as follows and
which performance shares shall be subject to the terms and conditions of a separate award agreement:
(i) 10,000 Company
performance shares shall vest, and fully vested Company common shares shall promptly thereafter be delivered to Employee, upon
the Company's common share price closing at or above $9.00 per share;
(ii) 15,000 Company
performance shares shall vest, and fully vested Company common shares shall promptly thereafter be delivered to Employee, upon
the Company's common share price closing at or above $10.00 per share;
(iii) 15,000 Company
performance shares shall vest, and fully vested Company common shares shall promptly thereafter be delivered to Employee, upon
the Company's common share price closing at or above $11.50 per share; and
(iv) 10,000 Company
performance shares shall vest, and fully vested Company common shares shall promptly thereafter be delivered to Employee, upon
the Company's common share price closing at or above $13.00 per share.
(v) Notwithstanding
the foregoing or anything in Section 3(B)(iv) of the Agreement to the contrary, the performance shares shall not vest any earlier
than the first anniversary of the Effective Date and if the applicable share price thresholds are satisfied prior to the first
anniversary of the Effective Date, the relevant portion of the Company performance shares shall not vest, and Company common shares
shall not be delivered, until the first anniversary of the Effective Date, provided the Employee remains in service until such
date. If prior to the first anniversary of the Effective Date but after a time when the Company’s common share price equals
or exceeds one or more of the share price thresholds above, the Employee is terminated by the Company without Cause, the Employee
terminates for Good Reason, the Employee dies or the Employee is terminated due to his disability as set forth in Section 3(B)(v)
of the Agreement, the portion of the performance shares for which the share price thresholds have been satisfied shall immediately
vest and the Company common shares shall promptly be delivered to the Employee. Notwithstanding anything in the EICP or the Agreement
to the contrary, in no event shall any of the performance shares vest if Employee’s employment is terminated for any reason
prior to the attainment of the applicable share price thresholds.
(vi) If the share
prices set forth above are not achieved prior to the third anniversary of the Effective Date, the grants referenced in this Section
(C) shall be immediately forfeited.
(vii) Until such
time as the Company performance shares may be forfeited, the Employee will be paid an amount in dividends each quarter on the unvested
Company performance shares.
(viii) Notwithstanding
anything in the EICP to the contrary, any unvested Company performance shares will immediately vest at the time of a Change in
Control, and fully vested Company common shares shall promptly thereafter be delivered to Employee, only if the share price thresholds
have been satisfied prior to the Change in Control.
(D) Employee shall
initially receive a base salary of $275,000 per year (as such base salary may hereafter from time to time be adjusted as provided
herein, the “Base Salary”). Thereafter, Employee’s Base Salary shall be reviewed annually by the Company’s
Compensation Committee and the Board of the Company and may be adjusted upward in its sole discretion. The Base Salary shall be
paid during the period of employment, by direct deposit according to the Company’s current standard pay practice of 26 pay
periods per year (bi-weekly) or in accordance with the Company’s relevant policies and practices in effect from time to time,
including normal payroll practices. The Base Salary and all other payments hereunder shall be subject to all applicable employment
and withholding taxes.
(E) In addition
to the Base Salary, Employee is eligible to participate in the Company’s Incentive Compensation Plan (the “Plan”)
with an initial target potential bonus equal to seventy five percent (75%) of his Base Salary, with the potential to achieve one
hundred (100%) of Base Salary if stretch performance targets are achieved. This plan shall be approved annually by the Compensation
Committee and approved by the Board of the Company, which may include adjustment in the target and stretch performance bonus amounts.
Employee’s eligibility for or entitlement to any payments under the Plan shall be subject to the terms of the Plan.
(F) In accordance
with its terms, Employee is eligible to participate in the Company’s EICP with an annual target equity award with a value
equal to seventy five percent (75%) of his Base Salary, with the potential to achieve one hundred (100%) of Base Salary if stretch
performance targets are achieved. The annual target shall be adjusted annually by the Compensation Committee and approved by the
Board of the Company. Employee’s eligibility for or entitlement to any payments under the EICP shall be subject to the terms
of the EICP.
(G) Contingent upon
Board of Directors approval, you will be eligible for an annual Long Term Incentive Plan grant equal to seventy five percent (75%)
of Base Salary each year. Subject to the approval of the Board of Directors, such plan will provide for a three year rolling performance
period pursuant to which bonuses can be earned based upon the performance of the Company as measured by Funds From Operations per
share growth and other shareholder value creation measurements, as determined by the Board of Directors.
(H) Subject to,
and in accordance with, their terms, Employee shall be entitled to participate in any plans, insurance policies or contracts maintained
by the Company relating to retirement, health, disability, auto, and other related benefits, as they may be amended from time to
time. These currently include health, dental and life insurance, and 401K. Employee’s rights and entitlements with respect
to any such benefits shall be subject to the provisions of the relevant plans, contracts or policies providing such benefits. In
addition, Employee shall be entitled to participate in the executive life insurance, disability and non-qualified deferred compensation
plans of the Company, as they may be amended from time to time. In addition, Employee shall accrue vacation and other paid time
off benefits in accordance with the terms of the applicable Company policy, as it may be amended from time to time. Nothing contained
herein or in any employment offer shall be deemed to impose any obligation on the Company to maintain or adopt any such plans,
policies or contracts or to limit the Company’s right to modify or eliminate such plans, policies or contracts in its sole
discretion.
(I) Employee hereby
acknowledges and agrees that, except as set forth in this Exhibit, he shall not be entitled to receive any other compensation,
payments or benefits in connection with his employment under this Agreement.
Exhibit 12.1
CAMPUS CREST COMMUNITIES, INC. AND
CAMPUS CREST COMMUNITIES PREDECESSOR
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
| |
The
Company | | |
Predecessor | |
| |
| | |
| | |
| | |
| | |
Period October 19, | | |
Period January 1, | |
| |
Year Ended | | |
Year Ended | | |
Year Ended | | |
Year Ended | | |
2010 through | | |
2010 through | |
| |
December 31, | | |
December 31, | | |
December 31, | | |
December 31, | | |
December 31, | | |
October 18, | |
(dollars in thousands) | |
2014 | | |
2013 | | |
2012 | | |
2011 | | |
2010(1) | | |
2010(1) | |
Earnings: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Income (loss) from continuing operations
before taxes, noncontrolling interests and equity in earnings (losses) of unconsolidated entities | |
$ | (148,139 | )(2) | |
$ | 3,749 | | |
$ | 6,505 | (3) | |
$ | 1,122 | (4) | |
$ | (1,253 | )(5) | |
$ | (19,563 | ) |
Add: Fixed charges | |
| 34,669 | | |
| 22,424 | | |
| 18,044 | | |
| 8,838 | | |
| 2,324 | | |
| 19,464 | |
Add: Distributions of earnings of unconsolidated
entities | |
| 502 | | |
| 17 | | |
| 766 | | |
| - | | |
| - | | |
| - | |
Add: Amortization of capitalized interest(6) | |
| 257 | | |
| 191 | | |
| 113 | | |
| 53 | | |
| 1 | | |
| 113 | |
Less: Capitalized interest | |
| (6,313 | ) | |
| (3,272 | ) | |
| (2,385 | ) | |
| (1,950 | ) | |
| (175 | ) | |
| (85 | ) |
Total earnings (loss) | |
$ | (119,024 | ) | |
$ | 23,109 | | |
$ | 23,043 | | |
$ | 8,063 | | |
$ | 897 | | |
$ | (71 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Combined fixed charges and preferred stock dividends: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest expense | |
$ | 16,156 | | |
$ | 12,969 | | |
$ | 11,545 | | |
$ | 6,888 | | |
$ | 2,149 | | |
$ | 19,379 | |
Capitalized interest | |
| 6,313 | | |
| 3,272 | | |
| 2,385 | | |
| 1,950 | | |
| 175 | | |
| 85 | |
Dividends on preferred stock(7) | |
| 12,200 | | |
| 6,183 | | |
| 4,114 | | |
| - | | |
| - | | |
| - | |
Combined fixed charges
and preferred stock dividends | |
$ | 34,669 | | |
$ | 22,424 | | |
$ | 18,044 | | |
$ | 8,838 | | |
$ | 2,324 | | |
$ | 19,464 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Ratio of earnings to combined fixed charges
and preferred stock dividends(8) | |
| 0 | x | |
| 1.03 | x | |
| 1.28 | x | |
| 0.91 | x | |
| 0.39 | x | |
| 0 | x |
| (1) | The Company’s initial public offering was completed October 19, 2010. |
| (2) | Includes impairments of pre-development costs, unconsolidated joint ventures, and other assets
of approximately $104.8 million, severance of approximately $6.2 million, and non-cash loss of approximately $33.4 million in connection
with not exercising the Copper Beech purchase option, which if excluded would result in a ratio of earnings to fixed charges of
0.73x. |
| (3) | Includes non-cash gain of approximately $6.6 million recognized in connection with the acquisition
of the Company’s joint venture partner's interest in The Grove at Moscow and The Grove at Valdosta, which if excluded would
result in a ratio of earnings to fixed charges of 0.91x. |
| (4) | Includes non-cash gain of approximately $3.2 million recognized in connection with the acquisition
of the Company’s joint venture partner's interest in The Grove at Huntsville and The Grove at Statesboro, which if excluded
would result in a ratio of earnings to fixed charges of 0.61x. |
| (5) | Includes non-cash gain of approximately $0.6 million recognized in connection with the acquisition
of The Company’s joint venture partner's interest in The Grove at San Marcos, which if excluded would result in a ratio of
earnings to fixed charges of 0.53x. |
| (6) | Represents an estimate based on the Company's and the Predecessor's established depreciation policies
and an analysis of capitalized interest. |
| (7) | The Company issued preferred stock in February 2012 and October 2013. |
| (8) | The shortfall of earnings to combined fixed charges and preferred stock dividends for the year
ended December 31, 2014 was approximately $153.7 million. The shortfall of earnings to combined fixed charges and preferred stock
dividends for Campus Crest Communities, Inc. for the period October 19, 2010 through December 31, 2010 was approximately $1.4 million
and for the Company’s Predecessor for the period January 1, 2010 through October 18, 2010 it was approximately $19.5 million. |
Exhibit 21.1
LIST OF THE SUBSIDIARIES OF CAMPUS CREST
COMMUNITIES, INC.
Name |
State
and Form of Organization |
1. Campus Crest Communities GP, LLC |
Delaware — Limited Liability Company |
2. Campus Crest Communities LP, LLC |
Delaware — Limited Liability Company |
3. Campus Crest Communities Operating Partnership, LP |
Delaware — Limited Partnership |
4. Campus Crest Group, LLC |
North Carolina — Limited Liability Company |
5. Campus Crest at Asheville, LLC |
Delaware — Limited Liability Company |
6. Campus Crest at Carrollton, LLC |
Delaware — Limited Liability Company |
7. Campus Crest at Las Cruces, LLC |
Delaware — Limited Liability Company |
8. Campus Crest at Milledgeville, LLC |
Delaware — Limited Liability Company |
9. Campus Crest at Abilene, LP |
Delaware — Limited Partnership |
10. Campus Crest at Ellensburg, LLC |
Delaware — Limited Liability Company |
11. Campus Crest at Greeley, LLC |
Delaware — Limited Liability Company |
12. Campus Crest at Mobile, LLC |
Delaware — Limited Liability Company |
13. Campus Crest at Mobile Phase II, LLC |
Delaware — Limited Liability Company |
14. Campus Crest at Nacogdoches, LP |
Delaware — Limited Partnership |
15. Campus Crest at Cheney, LLC |
Delaware — Limited Liability Company |
16. Campus Crest at Lubbock, LP |
Delaware — Limited Partnership |
17. Campus Crest at Stephenville, LP |
Delaware — Limited Partnership |
18. Campus Crest at Troy, LLC |
Delaware — Limited Liability Company |
19. Campus Crest at Waco, LP |
Delaware — Limited Partnership |
20. Campus Crest at Murfreesboro, LLC |
Delaware — Limited Liability Company |
21. Campus Crest at San Marcos, LP |
Delaware — Limited Partnership |
22. Campus Crest GP, LLC |
Delaware — Limited Liability Company |
23. The Grove Student Properties, LLC |
North Carolina — Limited Liability Company |
24. Campus Crest Construction, LLC |
North Carolina — Limited Liability Company |
25. Campus Crest Development, LLC |
North Carolina — Limited Liability Company |
26. Campus Crest Lease, LLC |
Delaware — Limited Liability Company |
27. Campus Crest at San Marcos GP, LLC |
Delaware — Limited Liability Company |
28. Campus Crest Properties, LLC |
North Carolina — Limited Liability Company |
29. Campus Crest Ventures III, LLC |
Delaware — Limited Liability Company |
30. HSRE-Campus Crest I, LLC |
Delaware — Limited Liability Company |
31. Campus Crest Springing Member, LLC |
Delaware — Limited Liability Company |
32. Campus Crest Milledgeville Manager, LLC |
Delaware — Limited Liability Company |
33. Campus Crest at Lawrence, LLC |
Delaware — Limited Liability Company |
34. Campus Crest at Moscow, LLC |
Delaware — Limited Liability Company |
35. Campus Crest at Statesboro, LLC |
Delaware — Limited Liability Company |
36. Campus Crest at Conway, LLC |
Delaware — Limited Liability Company |
37. Campus Crest at San Angelo, LP |
Delaware — Limited Partnership |
38. HSRE-Campus Crest GP I, LLC |
Delaware — Limited Liability Company |
39. The Grove Student Properties, Inc. |
Delaware — Corporation |
40. Campus Crest Construction, Inc. |
Delaware — Corporation |
41. Campus Crest Development, Inc. |
Delaware — Corporation |
42. Campus Crest Asheville Manager, LLC |
Delaware — Limited Liability Company |
43. Campus Crest Carrollton Manager, LLC |
Delaware — Limited Liability Company |
44. Campus Crest Las Cruces Manager, LLC |
Delaware — Limited Liability Company |
45. Campus Crest at Orono, LLC |
Delaware — Limited Liability Company |
46. Campus Crest at Denton, LP |
Delaware — Limited Partnership |
47. Campus Crest at Clarksville, LLC |
Delaware — Limited Liability Company |
48. Campus Crest at Fort Collins, LLC |
Delaware — Limited Liability Company |
49. Campus Crest at Fort Wayne, LLC |
Delaware — Limited Liability Company |
Name |
State
and Form of Organization |
50. Campus Crest at Valdosta, LLC |
Delaware — Limited Liability Company |
51. Campus Crest at Ames, LLC |
Delaware — Limited Liability Company |
52. Campus Crest Springing Member II, LLC |
Delaware — Limited Liability Company |
53. Campus Crest GP II, LLC |
Delaware — Limited Liability Company |
54. Campus Crest Springing Partner, LLC |
Delaware — Limited Liability Company |
55. Campus Crest Troy Lessor, LLC |
Delaware — Limited Liability Company |
56. Campus Crest Cheney Lessor, LLC |
Delaware — Limited Liability Company |
57. Campus Crest Murfreesboro Lessor, LLC |
Delaware — Limited Liability Company |
58. Campus Crest Waco Lessor, LLC |
Delaware — Limited Liability Company |
59. Campus Crest Stephenville Lessor, LLC |
Delaware — Limited Liability Company |
60. Campus Crest TRS Holdings, Inc. |
Delaware — Corporation |
61. Campus Crest IV, LLC |
Delaware — Limited Liability Company |
62. Campus Crest at Denton GP, LLC |
Delaware — Limited Liability Company |
63. Campus Crest at Columbia, LLC |
Delaware — Limited Liability Company |
64. Campus Crest at San Angelo II, LP |
Delaware — Limited Partnership |
65. Campus Crest at San Angelo II GP, LLC |
Delaware — Limited Liability Company |
66. Campus Crest at Auburn, LLC |
Delaware — Limited Liability Company |
67. Campus Crest at Flagstaff, LLC |
Delaware — Limited Liability Company |
68. Campus Crest at Flagstaff II, LLC |
Delaware — Limited Liability Company |
69. Campus Crest at Huntsville I, LP |
Delaware — Limited Partnership |
70. Campus Crest at Huntsville II, LP |
Delaware — Limited Partnership |
71. Campus Crest Springing Member III, LLC |
Delaware — Limited Liability Company |
72. CCP NEWCO, LLC |
Delaware — Limited Liability Company |
73. Campus Crest at Huntsville I GP, LLC |
Delaware — Limited Liability Company |
74. Campus Crest at Huntsville II GP, LLC |
Delaware — Limited Liability Company |
75. HSRE-Campus Crest V, LLC |
Delaware — Limited Liability Company |
76. Campus Crest at Fayetteville, LLC |
Delaware — Limited Liability Company |
77. Campus Crest at Laramie, LLC |
Delaware — Limited Liability Company |
78. Campus Crest Aviation, LLC |
North Carolina — Limited Liability Company |
79. HSRE-Campus Crest VI, LLC |
Delaware — Limited Liability Company |
80. HSRE-Campus Crest IX, LLC |
Delaware — Limited Liability Company |
81. Campus Crest at Indiana, LLC |
Delaware — Limited Liability Company |
82. Campus Crest at State College, LLC |
Delaware — Limited Liability Company |
83. Campus Crest at Norman, LLC |
Delaware — Limited Liability Company |
84. Chestnut Venture, LLC |
Delaware — Limited Liability Company |
85. Campus Crest at Ames II, LLC |
Delaware — Limited Liability Company |
86. Campus Crest at California, LLC |
Delaware — Limited Liability Company |
87. Campus Crest at Grand Forks, LLC |
Delaware — Limited Liability Company |
88. Campus Crest at Muncie, LLC |
Delaware — Limited Liability Company |
89. Campus Crest at Philadelphia, LLC |
Delaware — Limited Liability Company |
90. Campus Crest at Pullman, LLC |
Delaware — Limited Liability Company |
91. Campus Crest at Pullman II, LLC |
Delaware — Limited Liability Company |
92. Campus Crest at Slippery Rock, LLC |
Delaware — Limited Liability Company |
93. Campus Crest at State College II, LLC |
Delaware — Limited Liability Company |
94. Campus Crest at Statesboro II, LLC |
Delaware — Limited Liability Company |
95. CC PA Holdco, LLC |
Delaware — Limited Liability Company |
96. CC Philadelphia GP, LLC |
Delaware — Limited Liability Company |
97. CC Philadelphia LP, LLC |
Delaware — Limited Liability Company |
98. Campus Crest at Nacogdoches II, LP |
Delaware — Limited Partnership |
99. Campus Crest at San Marcos II, LP |
Delaware — Limited Partnership |
100. Campus Crest Student Properties Canada ULC |
Canada – Corporation |
101. CB Campus Crest Services, LLC |
Delaware — Limited Liability Company |
102. Campus Crest SB Services, LLC |
Delaware — Limited Liability Company |
103. 7A Travel, LLC |
Delaware — Limited Liability Company |
104. Campus Crest at Auburn II, LLC |
Delaware — Limited Liability Company |
Name |
State
and Form of Organization |
105. Campus Crest at Clarksville Wall, LLC |
Delaware — Limited Liability Company |
106. Campus Crest at Grand Forks II, LLC |
Delaware — Limited Liability Company |
107. Campus Crest at Mt. Pleasant, LLC |
Delaware — Limited Liability Company |
108. Campus Crest at Mt. Pleasant II, LLC |
Delaware — Limited Liability Company |
109. Campus Crest at Toledo I, LLC |
Delaware — Limited Liability Company |
110. Campus Crest at Toledo II, LLC |
Delaware — Limited Liability Company |
111. Campus Crest at Toledo III, LLC |
Delaware — Limited Liability Company |
112. CB at Ames, LLC |
Delaware — Limited Liability Company |
113. CB-Campus Crest, LLC |
Delaware — Limited Liability Company |
114. CB-Campus Crest PA, LLC |
Delaware — Limited Liability Company |
115. CBTC Collateral, LLC |
Delaware — Limited Liability Company |
116. CBTC PA Collateral, LLC |
Delaware — Limited Liability Company |
117. CB Student Properties, LLC |
Delaware — Limited Liability Company |
118. Copper Beech GP, LLC |
Delaware — Limited Liability Company |
119. Devcon, LLC |
Delaware — Limited Liability Company |
120. Campus Crest Canada, LLC |
Delaware — Limited Liability Company |
121. Campus Crest at Montreal I, LLC |
Delaware — Limited Liability Company |
122. Copper Beech Townhome Communities (PA), LLC |
Delaware — Limited Liability Company |
123. Copper Beech Townhome Communities, LLC |
Delaware — Limited Liability Company |
124. Copper Beech Townhomes, LLC |
Pennsylvania—Limited Liability Company |
125. Copper Beech Townhomes II, LLC |
Pennsylvania—Limited Liability Company |
126. Copper Beech Townhome Communities Three, LLC |
Pennsylvania—Limited Liability Company |
127. Copper Beech Townhome Communities Four, LLC |
Pennsylvania—Limited Liability Company |
128. Copper Beech Townhome Communities Six, LLC |
Delaware—Limited Liability Company |
129. Copper Beech Townhome Communities Nineteen, LLC |
Pennsylvania—Limited Liability Company |
130. Copper Beech Townhome Communities Nine, LLC |
Pennsylvania—Limited Liability Company |
131. Copper Beech Townhome Communities One, LP |
Pennsylvania—Limited Partnership |
132. CBTC One LP Management, LLC |
Delaware—Limited Liability Company |
133. Copper Beech Townhome Communities Seven, LLC |
Delaware—Limited Liability Company |
134. Copper Beech Townhome Communities Eleven, LLC |
Delaware—Limited Liability Company |
135. Copper Beech Townhome Communities Twelve, LLC |
Delaware—Limited Liability Company |
136. Copper Beech Townhome Communities Thirteen, LLC |
Delaware—Limited Liability Company |
137. Copper Beech Townhome Communities Fourteen, LLC |
Pennsylvania—Limited Liability Company |
138. Copper Beech Townhome Communities Fifteen, LLC |
Delaware—Limited Liability Company |
139. Copper Beech Townhome Communities Sixteen, LLC |
Delaware—Limited Liability Company |
140. Copper Beech Townhome Communities Seventeen, LLC |
Delaware—Limited Liability Company |
141. Copper Beech Townhome Communities Twenty, LLC |
Delaware—Limited Liability Company |
142. Copper Beech Townhome Communities Twenty One, LLC |
Delaware—Limited Liability Company |
143. Copper Beech Townhome Communities Twenty Two, LLC |
Delaware—Limited Liability Company |
144. Copper Beech Townhome Communities Twenty Four, LLC |
Delaware—Limited Liability Company |
145. Copper Beech Townhome Communities Twenty Five, LLC |
Delaware—Limited Liability Company |
146. Copper Beech Townhome Communities Thirty One, LLC |
Pennsylvania—Limited Liability Company |
147. Copper Beech Townhome Communities Thirty Two, LLC |
Delaware—Limited Liability Company |
148. Copper Beech Townhome Communities Thirty Three, LLC |
Pennsylvania—Limited Liability Company |
149. Copper Beech Townhome Communities Thirty Five, LLC |
Pennsylvania—Limited Liability Company |
150. Copper Beech Townhome Communities Thirty Six, LLC |
Pennsylvania—Limited Liability Company |
151. Copper Beech Townhome Communities Thirty Eight, LLC |
Pennsylvania—Limited Liability Company |
152. CB Commercial Allendale, LLC |
Pennsylvania—Limited Liability Company |
153. Mcwhirter Liberty Square, L.L.C. |
Delaware—Limited Liability Company |
154. Copper Beech Townhome Communities Eight, LLC |
Delaware—Limited Liability Company |
Exhibit 23.1
Consent of Independent Registered Public
Accounting Firm
The Board of Directors
Campus Crest Communities, Inc.:
We consent to the incorporation by reference
in the registration statements on Form S-3, as amended, (Nos. 333-177648, 333-177646, 333-188144, and 333-192413) and on Form S-8
(No. 333-169958) of Campus Crest Communities, Inc. of our reports dated March 31, 2015, with respect to the consolidated balance
sheets of Campus Crest Communities, Inc. and subsidiaries as of December 31, 2014 and 2013, and the related consolidated statements
of operations and comprehensive income (loss), changes in equity, and cash flows for each of the years in the three-year period
ended December 31, 2014, and related financial statement Schedule III, real estate and accumulated depreciation, and the effectiveness
of internal control over financial reporting as of December 31, 2014, which reports appear in the December 31, 2014 annual report
on Form 10-K of Campus Crest Communities, Inc. Our report refers to a change in the method for reporting discontinued operations.
Our report dated March 31, 2015, on the effectiveness
of internal control over financial reporting as of December 31, 2014, expresses our opinion that Campus Crest Communities, Inc.
did not maintain effective internal control over financial reporting as of December 31, 2014 because of the effect of material
weaknesses on the achievement of the objectives of the control criteria and contains an explanatory paragraph that states:
| · | The Company did not maintain an effective
control environment and risk assessment and information and communication processes. |
| · | The Company did not design and maintain
effective process-level controls over the completeness and accuracy of accrued property taxes; the completeness, existence, and accuracy
of the Company’s investments in and equity in earnings of the Company’s unconsolidated entities and transactions between
the Company and its investees; the completeness, existence, accuracy, valuation and presentation of non-routine transactions; the
authorization of cash expenditures in accordance with the Company’s expenditure authorization matrix; the completeness and
accuracy of stock compensation expense and disclosures; the recognition and measurement of other assets processed by manual journal
entries. And the Company did not maintain effective information technology systems access controls supporting the processing and
recording of student housing revenue and accounts receivables. |
/s/ KPMG LLP
Charlotte, North Carolina
March 31, 2015
Exhibit 31.1
Certification Of Principal Executive Officer
Pursuant To Section 302 Of The Sarbanes-Oxley
Act Of 2002
I, Aaron S. Halfacre, certify that:
| 1. | I have reviewed this annual report on Form 10-K of Campus Crest Communities, Inc., (the “Company”); |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant
as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f), for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures
to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to the Company by others within those entities, particularly during the period in which this report
is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented
in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s
Board of Directors for persons performing the equivalent functions: |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize
and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting. |
Dated: March 31, 2015 |
|
By: /s/ Aaron S. Halfacre |
|
|
Aaron S. Halfacre |
|
|
President and Chief
Investment Officer |
Exhibit 31.2
Certification Of Acting Chief Financial Officer
and Chief Accounting Officer
Pursuant To Section 302 Of The Sarbanes-Oxley
Act Of 2002
I, Scott R. Rochon, certify that:
| 1. | I have reviewed this annual report on Form 10-K of Campus Crest Communities, Inc., (the “Company”); |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant
as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f), for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures
to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to the Company by others within those entities, particularly during the period in which this report
is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented
in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s
Board of Directors for persons performing the equivalent functions: |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize
and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting. |
Dated: March 31, 2015 |
|
By: /s/ Scott R. Rochon |
|
|
Scott R. Rochon |
|
|
Acting Chief Financial Officer and Chief Accounting Officer |
Exhibit 32.1
Certification of Principal Executive Officer
and Acting Chief Financial Officer
Pursuant To 18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of The Sarbanes-Oxley Act of
2002
In connection with the
Annual Report on Form 10-K of Campus Crest Communities, Inc. (the “Company”) for the fiscal year ended December 31,
2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned officers
of the Company certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
| 1. | the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange
Act of 1934, as amended; and |
| 2. | the information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company. |
Date: March 31, 2015 |
|
By: |
/s/ Aaron S. Halfacre |
|
|
|
Name: Aaron S. Halfacre
Title: President and Chief
Investment Officer |
|
|
|
|
|
|
By: |
/s/ Scott R. Rochon |
|
|
|
Name: Scott R. Rochon
Title: Acting Chief Financial Officer and Chief Accounting Officer |
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