UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For
the quarterly period ended June 30, 2015
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For
the transition period from to
Commission
file number: 001-34872
CAMPUS
CREST COMMUNITIES, INC.
(Exact
name of registrant as specified in its charter)
| Maryland |
|
27-2481988 |
| (State or other jurisdiction of |
|
(I.R.S. Employer |
| incorporation or organization) |
|
Identification No.) |
| |
|
|
| 2100 Rexford Road, Suite 414, Charlotte, NC |
|
28211 |
| (Address of principal executive offices) |
|
(Zip Code) |
(704) 496-2500
(Registrant's
telephone number, including area code)
N/A
(Former
name, former address and former fiscal year, if changed since last report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
¨
No x
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes
x
No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting
company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer x |
|
Accelerated filer ¨ |
|
Non-accelerated filer ¨ |
|
Smaller reporting company ¨ |
| |
|
|
|
(Do not check if a 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
Indicate
the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
| |
|
|
| Class |
|
Outstanding at September 28, 2015 |
| Common Stock, $0.01 par value per share |
|
64,756,541 shares |
CAMPUS
CREST COMMUNITIES, INC.
FORM
10-Q
TABLE
OF CONTENTS
PART I.
FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
CAMPUS
CREST COMMUNITIES, INC.
CONSOLIDATED
BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)
| | |
June 30,
2015 | | |
December 31,
2014 | |
| | |
| | |
| |
| ASSETS | |
| | | |
| | |
| Investment in real estate, net: | |
| | | |
| | |
| Student housing properties ($32,875 related to VIE as of December 31, 2014) | |
$ | 1,553,782 | | |
$ | 935,962 | |
| Accumulated depreciation (($318) related to VIE as of December 31, 2014) | |
| (150,912 | ) | |
| (128,121 | ) |
| Land and property held for sale | |
| 15,019 | | |
| 37,163 | |
| Land held for investment | |
| 7,413 | | |
| 7,413 | |
| Investment in real estate, net | |
| 1,425,302 | | |
| 852,417 | |
| Investment in unconsolidated entities | |
| 87,730 | | |
| 259,740 | |
| Cash and cash equivalents ($670 related to VIE as of December 31, 2014) | |
| 15,679 | | |
| 15,240 | |
| Restricted cash | |
| 17,411 | | |
| 5,429 | |
| Student receivables, net of allowance for doubtful accounts of $2,223 and $459, respectively ($36, net of allowance of $9 related to VIE as of December 31, 2014) | |
| 2,070 | | |
| 1,587 | |
| Cost and earnings in excess of construction billings | |
| - | | |
| 3,887 | |
| Intangible assets, net | |
| 9,315 | | |
| - | |
| Other assets ($236 related to VIE as of December 31, 2014) | |
| 32,823 | | |
| 35,742 | |
| Total assets | |
$ | 1,590,330 | | |
$ | 1,174,042 | |
| | |
| | | |
| | |
| LIABILITIES AND EQUITY | |
| | | |
| | |
| Liabilities: | |
| | | |
| | |
| Mortgage and construction loans ($21,170 related to VIE as of December 31, 2014) | |
$ | 600,750 | | |
$ | 300,673 | |
| Line of credit and other debt | |
| 367,680 | | |
| 317,746 | |
| Accounts payable and accrued expenses ($534 related to VIE as of December 31, 2014) | |
| 28,621 | | |
| 53,816 | |
| Construction billings in excess of cost and earnings | |
| - | | |
| 481 | |
| Other liabilities ($607 related to VIE as of December 31, 2014) | |
| 35,025 | | |
| 22,092 | |
| Total liabilities | |
| 1,032,076 | | |
| 694,808 | |
| | |
| | | |
| | |
| 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 June 30, 2015 and December 31, 2014 | |
| 61 | | |
| 61 | |
| Common stock, $0.01 par value, 500,000,000 and 500,000,000 shares authorized, 64,776,220 and 64,742,713 shares issued and outstanding at June 30, 2015 and December 31, 2014, respectively | |
| 648 | | |
| 648 | |
| Additional common and preferred paid-in capital | |
| 781,280 | | |
| 773,998 | |
| Accumulated deficit and distributions | |
| (301,776 | ) | |
| (301,566 | ) |
| Accumulated other comprehensive loss | |
| (3,090 | ) | |
| (2,616 | ) |
| Total Campus Crest Communities, Inc. stockholders' equity | |
| 477,123 | | |
| 470,525 | |
| Noncontrolling interests | |
| 81,131 | | |
| 8,709 | |
| Total equity | |
| 558,254 | | |
| 479,234 | |
| Total liabilities and equity | |
$ | 1,590,330 | | |
$ | 1,174,042 | |
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)
(Unaudited)
| | |
Three Months Ended | | |
Six Months Ended | |
| | |
June 30, | | |
June 30, | | |
June 30, | | |
June 30, | |
| | |
2015 | | |
2014 | | |
2015 | | |
2014 | |
| | |
| | |
| | |
| | |
| |
| Revenues: | |
| | | |
| | | |
| | | |
| | |
| Student housing rental | |
$ | 43,722 | | |
$ | 23,637 | | |
$ | 82,512 | | |
$ | 47,272 | |
| Student housing services | |
| 1,745 | | |
| 1,026 | | |
| 3,055 | | |
| 1,999 | |
| Property management services | |
| 212 | | |
| 327 | | |
| 441 | | |
| 430 | |
| Total revenues | |
| 45,679 | | |
| 24,990 | | |
| 86,008 | | |
| 49,701 | |
| Operating expenses: | |
| | | |
| | | |
| | | |
| | |
| Student housing operations | |
| 19,943 | | |
| 10,747 | | |
| 37,147 | | |
| 21,360 | |
| General and administrative | |
| 10,423 | | |
| 3,649 | | |
| 18,461 | | |
| 7,155 | |
| Severance | |
| 62 | | |
| - | | |
| 570 | | |
| - | |
| Write-off of other assets | |
| 597 | | |
| - | | |
| 1,366 | | |
| - | |
| Transaction costs | |
| 1,640 | | |
| 1,460 | | |
| 3,132 | | |
| 2,045 | |
| Ground leases | |
| 120 | | |
| 120 | | |
| 240 | | |
| 237 | |
| Depreciation and amortization | |
| 27,861 | | |
| 7,253 | | |
| 47,617 | | |
| 14,233 | |
| Total operating expenses | |
| 60,646 | | |
| 23,229 | | |
| 108,533 | | |
| 45,030 | |
| Equity in earnings (losses) of unconsolidated entities | |
| 790 | | |
| (891 | ) | |
| (1,359 | ) | |
| (572 | ) |
| Operating (loss) income | |
| (14,177 | ) | |
| 870 | | |
| (23,884 | ) | |
| 4,099 | |
| | |
| | | |
| | | |
| | | |
| | |
| Nonoperating income (expense): | |
| | | |
| | | |
| | | |
| | |
| Interest expense, net | |
| (9,270 | ) | |
| (2,950 | ) | |
| (17,058 | ) | |
| (6,326 | ) |
| Gain on purchase of Copper Beech | |
| 6,393 | | |
| - | | |
| 28,035 | | |
| - | |
| Gain on sale of land and unconsolidated entities | |
| - | | |
| - | | |
| 7,748 | | |
| - | |
| Other (expense) income | |
| 4 | | |
| 104 | | |
| (51 | ) | |
| 170 | |
| Total nonoperating (expense) income, net | |
| (2,873 | ) | |
| (2,846 | ) | |
| 18,674 | | |
| (6,156 | ) |
| Net loss before income tax benefit | |
| (17,050 | ) | |
| (1,976 | ) | |
| (5,210 | ) | |
| (2,057 | ) |
| Income tax benefit | |
| - | | |
| 210 | | |
| - | | |
| 400 | |
| Loss from continuing operations | |
| (17,050 | ) | |
| (1,766 | ) | |
| (5,210 | ) | |
| (1,657 | ) |
| Income (loss) from discontinued operations | |
| - | | |
| 1,374 | | |
| (1,157 | ) | |
| 2,313 | |
| Net (loss) income | |
| (17,050 | ) | |
| (392 | ) | |
| (6,367 | ) | |
| 656 | |
| Net (loss) income attributable to noncontrolling interests | |
| (4,000 | ) | |
| 12 | | |
| (6,157 | ) | |
| (3 | ) |
| Dividends on preferred stock | |
| 3,050 | | |
| 3,050 | | |
| 6,100 | | |
| 6,100 | |
| Net loss attributable to common stockholders | |
$ | (16,100 | ) | |
$ | (3,454 | ) | |
$ | (6,310 | ) | |
$ | (5,441 | ) |
| | |
| | | |
| | | |
| | | |
| | |
| Per share data - basic and diluted | |
| | | |
| | | |
| | | |
| | |
| Loss from continuing operations attributable to common stockholders | |
$ | (0.25 | ) | |
$ | (0.07 | ) | |
$ | (0.08 | ) | |
$ | (0.12 | ) |
| Income (loss) from discontinued operations attributable to common shareholders | |
| - | | |
| 0.02 | | |
| (0.02 | ) | |
| 0.04 | |
| Net loss per share attributable to common stockholders | |
$ | (0.25 | ) | |
$ | (0.05 | ) | |
$ | (0.10 | ) | |
$ | (0.08 | ) |
| | |
| | | |
| | | |
| | | |
| | |
| Weighted-average common shares outstanding: | |
| | | |
| | | |
| | | |
| | |
| Basic and diluted | |
| 64,741 | | |
| 64,681 | | |
| 64,737 | | |
| 64,588 | |
CAMPUS
CREST COMMUNITIES, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
AND
COMPREHENSIVE INCOME (LOSS) (CONTINUED)
(In thousands, except per share data)
(Unaudited)
| | |
Three Months Ended | | |
Six Months Ended | |
| | |
June 30, | | |
June 30, | | |
June 30, | | |
June 30, | |
| | |
2015 | | |
2014 | | |
2015 | | |
2014 | |
| | |
| | |
| | |
| | |
| |
| Consolidated statements of comprehensive income (loss): | |
| | | |
| | | |
| | | |
| | |
| Net (loss) income | |
$ | (17,050 | ) | |
$ | (392 | ) | |
$ | (6,367 | ) | |
$ | 656 | |
| Foreign currency translation | |
| 98 | | |
| 1,216 | | |
| (553 | ) | |
| 224 | |
| Comprehensive (loss) income | |
| (16,952 | ) | |
| 824 | | |
| (6,920 | ) | |
| 880 | |
| Net (loss) income attributable to noncontrolling interests | |
| (4,000 | ) | |
| 12 | | |
| (6,157 | ) | |
| (3 | ) |
| Foreign currency translation attributable to noncontrolling interest | |
| 14 | | |
| 9 | | |
| (79 | ) | |
| 1 | |
| Dividends on preferred stock | |
| 3,050 | | |
| 3,050 | | |
| 6,100 | | |
| 6,100 | |
| Comprehensive loss attributable to common stockholders | |
$ | (16,016 | ) | |
$ | (2,247 | ) | |
$ | (6,784 | ) | |
$ | (5,218 | ) |
See accompanying notes to consolidated financial
statements.
CAMPUS CREST COMMUNITIES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN
EQUITY
(In thousands)
(Unaudited)
| | |
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 | | |
Loss | | |
Equity | | |
Interests | | |
Equity | |
| Balance at December 31, 2014 | |
$ | 61 | | |
$ | 648 | | |
$ | 773,998 | | |
$ | (301,566 | ) | |
$ | (2,616 | ) | |
$ | 470,525 | | |
$ | 8,709 | | |
$ | 479,234 | |
| Amortization of restricted
stock awards | |
| - | | |
| - | | |
| 1,629 | | |
| - | | |
| - | | |
| 1,629 | | |
| - | | |
| 1,629 | |
| Foreign currency translation | |
| - | | |
| - | | |
| - | | |
| - | | |
| (474 | ) | |
| (474 | ) | |
| (79 | ) | |
| (553 | ) |
| Non-controlling interest
in Copper Beech at Ames | |
| - | | |
| - | | |
| 5,653 | | |
| - | | |
| - | | |
| 5,653 | | |
| (5,653 | ) | |
| - | |
| Non-controlling interest
-OP units | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 71,344 | | |
| 71,344 | |
| Non-controlling interest
-CBTC 8 and 9 | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (29 | ) | |
| (29 | ) |
| Non-controlling interest
-CBTC 29 and IUP BUY | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 12,996 | | |
| 12,996 | |
| Net loss | |
| - | | |
| - | | |
| - | | |
| (210 | ) | |
| - | | |
| (210 | ) | |
| (6,157 | ) | |
| (6,367 | ) |
| Balance at June 30,
2015 | |
$ | 61 | | |
$ | 648 | | |
$ | 781,280 | | |
$ | (301,776 | ) | |
$ | (3,090 | ) | |
$ | 477,123 | | |
$ | 81,131 | | |
$ | 558,254 | |
See accompanying notes to consolidated
financial statements.
CAMPUS CREST COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| | |
Six Months Ended | |
| | |
June 30, | | |
June 30, | |
| | |
2015 | | |
2014 | |
| | |
| | |
| |
| Operating activities: | |
| | | |
| | |
| Net (loss) income | |
$ | (6,367 | ) | |
$ | 656 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | |
| | | |
| | |
| Depreciation and amortization | |
| 47,617 | | |
| 14,233 | |
| Amortization of fair value of debt adjustments | |
| (2,298 | ) | |
| - | |
| Write-off of other assets | |
| 1,366 | | |
| - | |
| Amortization of deferred financing costs and debt discount | |
| 1,799 | | |
| 1,364 | |
| Gain on sale of land and unconsolidated entities | |
| (7,748 | ) | |
| - | |
| Loss on disposal of assets | |
| 52 | | |
| - | |
| Proceeds received for business interruption insurance | |
| - | | |
| 1,325 | |
| Provision for bad debts | |
| 1,781 | | |
| 844 | |
| Gain on purchase of Copper Beech | |
| (28,035 | ) | |
| - | |
| Equity in losses of unconsolidated entities | |
| 1,359 | | |
| 572 | |
| Distributions of earnings from unconsolidated entities | |
| 196 | | |
| 390 | |
| Share based compensation expense | |
| 1,629 | | |
| 800 | |
| Changes in operating assets and liabilities: | |
| | | |
| | |
| Restricted cash | |
| (1,441 | ) | |
| (732 | ) |
| Student receivables | |
| (953 | ) | |
| (1,010 | ) |
| Construction billings | |
| 2,788 | | |
| 18,710 | |
| Accounts payable and accrued expenses | |
| (5,474 | ) | |
| (1,175 | ) |
| Other | |
| (85 | ) | |
| (12,559 | ) |
| Net cash provided by operating activities | |
| 6,186 | | |
| 23,418 | |
| Investing activities: | |
| | | |
| | |
| Investments in developed properties | |
| (9,701 | ) | |
| (77,996 | ) |
| Proceeds received from sales of land | |
| 28,334 | | |
| - | |
| Insurance proceeds received for damaged assets | |
| 474 | | |
| 590 | |
| Investments in student housing properties | |
| (5,525 | ) | |
| (3,309 | ) |
| Acquisition of Copper Beech, net of cash acquired of $5,802 | |
| (56,746 | ) | |
| - | |
| Investments in unconsolidated entities | |
| (2,404 | ) | |
| (46,791 | ) |
| Acquisition of previously unconsolidated entities | |
| - | | |
| (7,661 | ) |
| Proceeds received from sales of previously unconsolidated entities | |
| 978 | | |
| - | |
| Capital distributions from unconsolidated entities | |
| 1,042 | | |
| 6,926 | |
| Corporate capital expenditures | |
| (174 | ) | |
| (3,350 | ) |
| Proceeds received from the sale of corporate aircraft | |
| 3,811 | | |
| - | |
| Change in restricted cash | |
| (38 | ) | |
| 27,716 | |
| Net cash used in investing activities | |
| (39,949 | ) | |
| (103,875 | ) |
| Financing activities: | |
| | | |
| | |
| Proceeds from mortgage and construction loans | |
| 24,079 | | |
| 19,921 | |
| Repayments of mortgage and construction loans | |
| (18,127 | ) | |
| (1,140 | ) |
| Proceeds from line of credit and other debt | |
| 46,000 | | |
| 91,500 | |
| Repayments of line of credit and other debt | |
| (619 | ) | |
| (15,300 | ) |
| Debt issuance costs | |
| (1,213 | ) | |
| (580 | ) |
| Payment of offering costs | |
| - | | |
| (817 | ) |
| Change in restricted cash | |
| (7,002 | ) | |
| - | |
| Dividends paid to common stockholders | |
| (5,830 | ) | |
| (21,337 | ) |
| Dividends paid to preferred stockholders | |
| (3,050 | ) | |
| (6,100 | ) |
| Dividends paid to noncontrolling interest | |
| (36 | ) | |
| (143 | ) |
| Net cash provided by financing activities | |
| 34,202 | | |
| 66,004 | |
| Net change in cash and cash equivalents | |
| 439 | | |
| (14,453 | ) |
| Cash and cash equivalents at beginning of period | |
| 15,240 | | |
| 32,054 | |
| Cash and cash equivalents at end of period | |
$ | 15,679 | | |
$ | 17,601 | |
CAMPUS
CREST COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
(In thousands)
(Unaudited)
| | |
Six Months Ended | |
| | |
June 30, | | |
June 30, | |
| | |
2015 | | |
2014 | |
| Supplemental disclosure of cash flow information: | |
| | | |
| | |
| Cash paid for interest, net of amounts capitalized | |
$ | 15,215 | | |
$ | 3,357 | |
| Cash paid for income taxes | |
| 292 | | |
| 376 | |
| | |
| | | |
| | |
| Non-cash investing and financing activity: | |
| | | |
| | |
| Common and preferred stock dividends declared but not paid | |
| - | | |
| 13,763 | |
| Assumption of mortgage, construction loans and other debt related to purchase of previously unconsolidated entities | |
| 300,706 | | |
| 16,822 | |
| Change in non-controlling interests resulting from ownership change in Copper Beech at Ames | |
| 5,653 | | |
| - | |
| Change in insurance proceeds receivable related to damaged assets | |
| 161 | | |
| 781 | |
| Accounts payable related to capital expenditures | |
| 2,117 | | |
| 9,112 | |
| Increase in other assets and other liabilities for fair value of guarantee obligation and corresponding indemnity related to CBTC 23 | |
| 3,950 | | |
| - | |
| Share-based compensation capitalized to development in process | |
| - | | |
| 383 | |
| The Company acquired substantially all of the remaining ownership in certain Copper Beech properties for approximately $59.0 million | |
| | | |
| | |
| In conjunction with the acquisition liabilities assumed were as follows: | |
| | | |
| | |
| Fair value of assets acquired, net of cash acquired of $5,802 | |
$ | 659,097 | | |
$ | - | |
| Cash paid, net of cash acquired of $5,802 | |
| (56,746 | ) | |
| - | |
| Outstanding liability for purchase of CBTC 8 and CBTC 9 minority interest | |
| (2,275 | ) | |
| - | |
| Change in non-controlling interests resulting from ownership change | |
| (84,311 | ) | |
| - | |
| Company's ownership interest prior to the acquisition | |
| (174,821 | ) | |
| - | |
| Gain recognized on transaction | |
| (28,035 | ) | |
| - | |
| Liabilities assumed | |
| 312,909 | | |
| - | |
| 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 | ) |
| Company's ownership interest prior to the acquisition | |
| - | | |
| (1,915 | ) |
| Liabilities assumed | |
| - | | |
| 17,278 | |
See accompanying 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
the 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 Company’s 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.
The
Company operates its properties under three Separate brands: The Grove, Copper Beech and evo®. As of June
30, 2015, the Company has ownership interests in 44 operating student housing Grove properties containing approximately 9,100
apartment units and 24,700 beds. Thirty-six of the Company’s operating Grove properties are wholly-owned and eight 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”). The Company
also has one wholly owned redevelopment property containing approximately 170 units and 340 beds. As of June 30, 2015, the Company
held a 100% interest in 30 Copper Beech operating properties with approximately 4,500 units and 12,200 beds and varying ownership
interests in 5 operating properties with approximately 1,700 units and 4,300 beds.
| | |
Properties in | |
| | |
Operation | |
| Wholly owned Grove properties | |
| 36 | |
| Joint Venture Grove properties | |
| 8 | |
| Total Grove Properties | |
| 44 | |
| Joint Venture evo properties | |
| 3 | |
| Wholly owned Copper Beech properties | |
| 30 | |
| Joint Venture owned Copper Beech properties(1) | |
| 5 | |
| Total Copper Beech properties | |
| 35 | |
| Total Portfolio(2) | |
| 82 | |
| (1) | The Company holds a 48% ownership interest in 5 unconsolidated properties. See Note 6 for additional
information. |
| (2) | The Company’s 100% owned redevelopment property in Toledo, Ohio, which was acquired in March
2013 is excluded. As of December 31, 2014 and June 30, 2015, this property was classified as 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. Equity interests owned by others in the Operating Partnership 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, which relates to discontinued operations discussed in Note 7.
Interim Financial Statements
The accompanying interim
consolidated financial statements are unaudited, but have been prepared in accordance with U.S. GAAP for interim financial information
and in conjunction with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not
include all disclosures required by U.S. GAAP for complete consolidated financial statements. In the opinion of management,
all adjustments necessary for a fair presentation of the consolidated financial statements of the Company for these interim periods
have been included and are of a normal, recurring nature. Because of the seasonal nature of the Company’s operations,
the results of operations and cash flows for any interim period are not necessarily indicative of results for other interim periods
or for the full year. These consolidated financial statements should be read in conjunction with the consolidated financial
statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31,
2014.
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. Estimates and assumptions are reviewed periodically,
and the effects of such revisions are reflected prospectively in the period in which they occur. Actual results could differ from
those estimates and such differences may be material to the consolidated financial statements.
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 property began operations during the third quarter of 2014. 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. The VIE’s assets and liabilities and the noncontrolling interest are included in
the consolidated balance sheet as of December 31, 2014. On January 30, 2015, in connection with the Copper Beech purchase transaction
(see Note 6), the Company’s ownership interest in Copper Beech at Ames increased to 100%. The acquisition of the noncontrolling
interest in Copper Beech at Ames was accounted for as an equity transaction and did not result in the recognition of a gain or
loss in the consolidated statement of operations and comprehensive income (loss) for the six months ended June 30, 2015.
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. Upon completion, costs are transferred into the applicable asset category
and depreciation commences. There was no interest capitalized during the three and six months ended June 30, 2015, and $2.4 million
and $4.3 million of interest was capitalized during the three and six months ended June 30, 2014, 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, related
loan fees and 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 and office and administrative costs that are clearly associated with
the Company’s development and redevelopment efforts, are capitalized. Indirect costs not clearly related to acquisition,
development, redevelopment and construction activity, including general and administrative expenses, are expensed in the period
incurred. As there were no assets under development during the three and six months ended June 30, 2015, correspondingly there
were no capitalized costs for the period. See the Development and Construction Services section herein for additional discussion.
Capitalized indirect costs associated with the Company’s development activities were $3.6 million and $6.9 million for the
three and six months ended June 30, 2014, respectively. The Company was developing ten properties during the three and six
months ended June 30, 2014. 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 or construction will commence. Because
the Company frequently incurs these pre-development expenditures before a financing commitment and/or required permits and authorizations
have been obtained, the Company bears the risk of loss of these pre-development expenditures if financing cannot ultimately be
arranged on acceptable terms or if 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 expenses any pre-development costs related to projects whose current status
indicates the acquisition or commencement of construction is not probable. No such write-offs were recorded during the three and
six months ended June 30, 2015 and June 30, 2014. As of June 30, 2015 and December 31, 2014, the Company had no pre-development
costs related to development projects, (see Note 4 regarding the Company’s strategic repositioning initiatives). As of June
30, 2015, the Company owned six strategically held land parcels that could be used for the development of phase two properties,
with an aggregate bed count ranging from approximately 1,000 to 1,500, and four land parcels and one property which the Company
intends to divest. The costs associated with the strategically held parcels are included in land held for investment on the accompanying
consolidated balance sheets. The costs associated with the land parcels and additional property in which the Company intends to
divest are included in land and property 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. For assets held and used, 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 economics 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 recognizes
tangible and identified intangible assets and liabilities related to acquired properties 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 over the term of the related mortgage loans using the effective-interest method. 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.
Real Estate Ventures
Campus Crest holds
interests in its properties 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 (i) the equity investors (if any) lack one or more of the essential characteristics
of a controlling financial interest, (ii) the equity investment at risk is insufficient to finance that entity’s activities
without additional subordinated financial support or (iii) 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 (i) the power to direct the activities
that most significantly impact the VIE’s economic performance and (ii) 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 does 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 sheets 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
consolidated balance sheets 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.
Ground Leases
Ground lease expense
is recognized on a straight-line basis over the term of the related lease.
Cash, Cash Equivalents and Restricted
Cash
Campus
Crest considers all highly liquid investments with an original maturity of three months or less when purchased 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. Additionally, during
the quarter ended June 30, 2015, our lenders required us to put $7.0 million into an escrow account to serve as collateral for
the borrowings of debt related to two properties – The Grove at Norman, Oklahoma and the Grove at Fayetteville, Arkansas.
As a result, these amounts are classified in the Consolidated Statement of Cash Flows as changes in restricted cash in financing
activities. See Note 18. The Company’s funds in escrow are typically held in interest bearing accounts covered under FDIC
insurance with applicable limits.
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 following is a
summary of the Company’s allowance for doubtful accounts for the six months ended June 30, 2015 (in thousands):
| Balance at December 31, 2014 | |
$ | (459 | ) |
| Bad debt expense | |
| (1,776 | ) |
| Write offs | |
| 12 | |
| Balance at June 30, 2015 | |
$ | (2,223 | ) |
Write offs during the six months ended
June 30, 2014 were immaterial.
Intangible Assets
Campus Crest’s
intangible assets consist of acquired in-place leases and the trademark for the Copper Beech brand name. As previously mentioned,
the acquired in-place leases are amortized on a straight-line basis over the remaining initial term of the respective leases, generally
less than one year. The gross carrying amount, accumulated amortization and net carrying amount of the acquired in-places leases
was $28.8 million, $23.5 million and $5.3 million as of June 30, 2015, respectively. Amortization expense for the three and six
months ended June 30, 2015 was $14.9 million and $23.5 million, respectively. The estimated amortization expense for the remainder
of 2015 is $5.3 million, which includes amortization related to the properties acquired as part of the second Copper Beech closing
which occurred on April 30, 2015, of $0.9 million (see Note 6). The Copper Beech trademark, which is a non-amortizing intangible
asset, has a carrying value of $4.1 million as of June 30, 2015. In accordance with FASB ASC 350, Intangibles - Goodwill and Other,
indefinite-lived intangible assets that are not subject to amortization must be tested for impairment annually or more frequently
if events or circumstances indicate they might be impaired. As such, the Company will perform an impairment test in relation to
the Copper Beech trademark on an annual basis or more frequently, if needed. As described in Note 6, the amount of the acquired
in-place lease intangibles and related amortization and the amount of the Copper Beech brand name intangible are based on preliminary
estimates that may change when the related acquisition accounting valuations are finalized.
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 June 30, 2015 and December 31, 2014
were $12.5 million and $11.7 million, respectively, and accumulated amortization was $5.9 million and $4.8 million as of June 30,
2015 and December 31, 2014, respectively. Upon repayment of the underlying debt, any unamortized costs are charged to earnings.
Deferred financing costs, net of accumulated amortization, are included in other assets, 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. For both the three and six months ended June 30, 2015, net loss
attributable to noncontrolling interests is calculated by including the proportionate amount of OP units held by the CB
Investors during the period multiplied by the Company’s net loss excluding the gain on purchase of Copper Beech.
See also “Consolidated Variable Interest Entity,” in this note herein.
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 for Grove and evo®
properties and 12 months for Copper Beech properties. The lease term for renewing tenants for all properties 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 represent 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. Billings to date on such contracts totaled $0.6 million and $49.3 million as of June 30, 2015 and
December 31, 2014, respectively. During the three months ended June 30, 2015, the Company has billed the costs and estimated earnings
outstanding as of March 31, 2015 and collected those costs as of the time of this filing.
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 $0.6 million and
$1.0 million for the three and six months ended June 30, 2015, respectively, and $0.4 million and $0.7 million for the three and
six months ended June 30, 2014, respectively.
Derivative Instruments and Hedging
Activities
Campus Crest enters
into interest rate cap agreements to manage floating interest rate exposure with respect to amounts borrowed, or forecasted to
be borrowed, under credit facilities. These contracts effectively limit the amount of interest the Company needs to pay should
interest rates exceed contracted levels. The Company had two interest rate caps as of June 30, 2015.
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 June 30, 2015 and December 31, 2014, 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.
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 June 30, 2015 and December 31, 2014, 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 three and six months ended June 30, 2015 and 2014 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 three and
six months ended June 30, 2015, the Company recognized a foreign currency translation gain of $0.1 million and a loss of $0.6 million,
respectively, and a foreign currency translation gain of approximately $1.2 million and $0.2 million for the three and six months
ended June 30, 2014, 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, remediation work and business
interruption relating to a flood at The Grove at San Marcos, Texas during June 2015, 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). The Company recognized $0.1 million of business interruption during both
the three and six months ended June 30, 2015. During the three and six months ended June 30, 2014, the Company recognized $0.5
million and $1.1 million, respectively, of business interruption. As of June 30, 2015 and December 31, 2014, the Company had a
receivable for property damage or remediation work of $6.7 million and $5.5 million, respectively. During the third quarter of
2015, we collected $4.3 million.
Segments
The Company has identified
three reportable business segments: (i) Grove and evo® operations (ii) Copper Beech operations and (iii) 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 three reportable operating segments. Prior to the closing of the Copper Beech transaction in January 2015,
the Company’s segments consisted of student housing operations and property management services. Upon closing of this transaction,
the Company added the Copper Beech operations as a new reportable operating segment. During the first quarter of 2015, the Company’s
chief operating decision maker began reviewing the separate operating results of the three operating segments to make decisions
about resources to be allocated to each segment and assess each segment’s performance.
Immaterial Corrections
Subsequent to the
issuance of the Company’s 2014 consolidated financial statements, the Company became aware of two immaterial corrections
that were necessary to be made to the consolidated financial statements. These errors related to the second, third and fourth quarters
of 2014. The Company has adjusted the prior year consolidated financial statements to reflect the impact of these immaterial corrections.
The total impact of these immaterial corrections increased the previously reported net loss attributable to common stockholders
from $174.9 million to $177.7 million for the year ended December 31, 2014 in the consolidated statement of operations and comprehensive
income (loss). As a result, accumulated deficit and distributions changed from $298.8 million to $301.6 million in the accompanying
consolidated balance sheet as of December 31, 2014. The first immaterial correction related to receivables of $1.9 million included
in other assets, net in the consolidated balance sheet that were determined to be incorrectly recorded and uncollectible in connection
with construction activities associated with the Company’s investment in CSH Montreal, which was included in discontinued
operations for the year ended December 31, 2014 in the consolidated statement of operations and comprehensive income (loss). The
second immaterial correction related to $0.9 million of pre-development costs that were inadvertently excluded from the impairment
of land and pre-development costs recorded in 2014. This correction had the effect of decreasing the carrying value of land and
properties held-for-sale as of December 31, 2014 and increasing the impairment of land and pre-development costs by $0.9 million
for the year ended December 31, 2014 in the consolidated statement of operations and comprehensive income (loss). No changes in
net cash provided by operating activities in the consolidated statement of cash flows resulted from these immaterial corrections.
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 plans to adopt ASU 2015-02
as of January 1, 2016 and is currently evaluating the provisions of this guidance and the impact is not known.
In April 2015, the
FASB issued ASU 2015-03, "Interest-Imputation of Interest (Subtopic 835-30)", which simplifies the presentation of debt
issuance costs. To simplify presentation of debt issuance costs, the amendments in this update require that debt issuance costs
related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that
debt liability, consistent with debt discounts. The amendments in ASU 2015-03 are effective for financial statements issued for
fiscal years beginning after December 15, 2015 and interim periods within those fiscal years, with retrospective application required.
Early adoption of the amendments in ASU 2015-03 is permitted for financial statements that have not been previously issued. The
Company plans to adopt ASU 2015-03 as of January 1, 2016 and is currently evaluating the provisions of this guidance and the impact
is not known.
In May 2014, the FASB
issued ASU 2014-09 "Revenue From Contracts With Customers" which provides a single comprehensive revenue recognition
model for contracts with customers (excluding certain contracts, such as lease contracts) to improve comparability within industries.
ASU 2014-09 requires an entity to recognize revenue to reflect the transfer of goods or services to customers at an amount the
entity expects to be paid in exchange for those goods and services and provide enhanced disclosures, all to provide more comprehensive
guidance for transactions such as service revenue and contract modifications. ASU 2014-09 is effective for interim and annual periods
beginning after December 15, 2017 and may be applied using either a full retrospective or modified approach upon adoption. The
Company is currently evaluating the provisions of this guidance and the impact is not known.
3.
Student Housing Properties
The following is a
summary of the Company’s student housing properties, net for the periods presented (in thousands):
| | |
June 30, | | |
December 31, | |
| | |
2015 | | |
2014 | |
| | |
| | |
| |
| Land | |
$ | 119,236 | | |
$ | 76,043 | |
| Buildings and improvements | |
| 1,333,421 | | |
| 781,739 | |
| Furniture, fixtures and equipment | |
| 101,125 | | |
| 78,180 | |
| | |
| 1,553,782 | | |
| 935,962 | |
| | |
| | | |
| | |
| Less: accumulated depreciation | |
| (150,912 | ) | |
| (128,121 | ) |
| | |
$ | 1,402,870 | | |
$ | 807,841 | |
During the six months
ended June 30, 2015, the Company exercised its option to acquire the remaining interests in 30 Copper Beech properties. See Note
6 for additional information related to the Copper Beech acquisition.
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. The Company settled with its insurance company on a loss of $6.8 million, of which the Company received $2.5 million
in insurance proceeds in 2013 and the remaining $4.3 million in July 2015. The settlement resulted in the write off of $0.3 million
to reduce the receivable to the settled amount. This is included in write off of other assets in the consolidated statements of
operations and comprehensive income (loss).
4.
Strategic Repositioning Initiatives
The Company continues
to execute its strategic repositioning which began during the third quarter of 2014 and 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 (included in land and property
held for sale in the accompanying consolidated balance sheets, some of which were disposed of during the six months ended June
30, 2015 (see Note 7) and the rest of which the Company expects to dispose of during the remainder of 2015); and, |
| (4) | Undergoing a review of strategic alternatives. (See note 18 for additional information) |
On January 16, 2015,
the Company sold a portfolio of six undeveloped land parcels to a leading student housing developer resulting in net sale proceeds
of $28.3 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. (See Note 7). These land parcels were included in the Grove and
evo® Operations segment.
On January 30, 2015,
the Company sold its 10% interest in the joint venture property, The Grove at Stillwater, Oklahoma for net sale proceeds of $1.0
million. Additionally as part of this closing, the Company received $1.9 million in proceeds for a receivable related to renovation
work performed at this property. No gain or loss was recognized.
On March 31, 2015,
the Company sold its interest in the following joint venture properties: The Grove at Lawrence, KS and The Grove at Conway, AR
(see Note 7). These joint ventures were included in the Grove and evo® Operations segment.
The Company
also terminated the employment of certain employees and eliminated positions. In connection with these terminations, the
Company recognized severance expense of $0.1 million and $0.5 million during the three and six months ended June 30, 2015,
respectively, which is included in operating expenses in the consolidated statements of operations and comprehensive income
(loss). Severance expense included $0.0 and $0.4 million for the acceleration of the vesting conditions of restricted shares
for the three and six months ended June 30, 2015, respectively. As of June 30, 2015, there was $2.4 million of accrued
severance included in accounts payable and accrued expenses in the consolidated balance sheet of which $1.0 million and $1.4
million is expected to be paid in the remainder of 2015 and 2016, respectively. Changes to the severance accrual during the
six months ended June 30, 2015 are as follows (in thousands):
| Balance at December 31, 2014 | |
$ | 5,743 | |
| New charges | |
| 184 | |
| Cash payments | |
| (3,476 | ) |
| Balance at June 30, 2015 | |
$ | 2,451 | |
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 it 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):
| |
June 30,
2015 | | |
December 31,
2014 | |
| Deferred tax assets: | |
| | |
| |
| Solar investment tax credit | |
$ | 2,116 | | |
$ | 2,116 | |
| Net operating losses | |
| 2,082 | | |
| 2,284 | |
| Other | |
| 20 | | |
| 22 | |
| Less: valuation
allowance | |
| (3,809 | ) | |
| (4,002 | ) |
| Total deferred
tax assets | |
| 409 | | |
| 420 | |
| Deferred tax liabilities: | |
| | | |
| | |
| Depreciation and
amortization | |
| (409 | ) | |
| (420 | ) |
| Total deferred
tax liabilities | |
| (409 | ) | |
| (420 | ) |
| Net deferred
tax assets | |
$ | - | | |
$ | - | |
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. For the six months
ended June 30, 2015, the valuation allowance decreased by $0.2 million due to the estimated use of certain state net
operating losses. The Company had no unrecognized tax benefits as of June 30, 2015 and December 31, 2014. Because no
material unrecognized tax benefits have been recorded, no related interest or penalties have been calculated.
As
of June 30, 2015 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 the tax years before 2010.
6.
Business Acquisitions
Copper Beech Acquisition
On February 26, 2013,
the Company and subsidiaries of the Operating Partnership entered into a purchase and sale agreement (the “Initial Purchase
Agreement”) with the then members of Copper Beech Townhome Communities, LLC (“CBTC”) and Copper Beech Townhome
Communities (PA), LLC (“CBTC PA” and, together with CBTC, “Copper Beech”) (such former members of CBTC
and CBTC PA, collectively, the “Sellers”). Pursuant to the terms of the Initial Purchase Agreement, the Company initially
acquired a 48% interest in a portfolio of 35 student housing properties and 3 other entities (the “Copper Beech Portfolio”),
for an initial purchase price of $230.6 million. The Initial Purchase Agreement provided the Company with options to acquire the
remaining interests in the Copper Beech Portfolio over time. Subsequent to the Initial Purchase Agreement, the Company formed a
variable interest entity (“VIE”) with the Sellers to develop, construct and manage the Copper Beech at Ames student
housing property. The Company concluded that it was the primary beneficiary of Copper Beech at Ames as the Company funded all of
the equity of the VIE, while holding only a 48% interest in the VIE.
On January 30, 2015,
the Company completed the acquisition (the “First CB Closing”) of (i) substantially all of the Sellers’ remaining
interests in 27 student housing properties, 2 undeveloped land parcels and a corporate office building and (ii) the Sellers’
remaining interests in Copper Beech at Ames pursuant to that certain Second Amendment (the “Second Amendment”) to the
Initial Purchase Agreement.
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. On April 30, 2015 (the "Second CB Closing"),
the Company completed the acquisition of the Sellers’ interests in two of the properties in the Copper Beech Portfolio in
which the Company previously held a 48% interest – Copper Beech San Marcos Phase 1 and Copper Beech IUP Buy.
Following the consummation
of the First CB Closing, the Second CB Closing, and as of June 30, 2015, the Company held a 100% interest in Copper Beech at Ames
and the following interests in the remaining Copper Beech Portfolio:
| · | 100% interest in 29 student housing properties; |
| · | 100% interest in 2 undeveloped land parcels
and 1 corporate office building; |
| · | 48% interest in 5 student housing properties;
and |
| · | no ownership interest in 1 student housing
property (Copper Beech Kalamazoo – Phase I). |
As consideration for
the additional interests acquired in the First CB Closing, the Company paid to the Sellers aggregate cash consideration of $58.9
million and the Operating Partnership issued to the Sellers an aggregate of approximately 10.4 million ($71.3 million) OP Units.
As consideration for the Second CB Closing, the Company paid to the Sellers $1.4 million in cash and the Operating Partnership
issued to the Sellers approximately 2.0 million ($13.0 million) OP Units. The OP Units were valued at the closing price of the
Company’s stock on the respective closing dates. Additionally, the Company surrendered all of its previous 48% ownership
interest in one of the properties (Copper Beech Kalamazoo – Phase I) in the Copper Beech Portfolio as part of the terms of
the Second Amendment. The Company continues to hold a 48% ownership interest in Copper Beech Kalamazoo – Phase II as a result
of not receiving lender consent to reduce its ownership interest to zero.
Although the business
combination was achieved in stages, the Company had negotiated with the Sellers that a significant portion of the Copper Beech
Portfolio would be acquired in its entirety from the agreements that were entered into in 2013. When the Company entered into the
Initial Purchase Agreement, it was the intent of the Company to exercise the purchase options to acquire the remaining interests
in the Copper Beech Portfolio. Given the intent of the Company to exercise the purchase options to acquire the remaining interest
in the Copper Beech Portfolio, the timing of the consideration paid differed from the timing of when the Company obtained its ownership
interests in the Copper Beech Portfolio.
As the timing of the
consideration paid and ownership interests acquired at each stage differed, for purposes of computing how much of the gain to recognize
during the three and six months ended June 30, 2015, the Company allocated the total consideration paid in the First CB Closing
and the Second CB Closing, based on the relative provisional fair values of the assets acquired and liabilities assumed in the
two closings. As a result, a gain of $21.6 million was recognized during the three months ended March 31, 2015 and a gain of $6.4
million was recognized during the three months ended June 30, 2015.
The Company negotiated
the purchase of a significant portion of the Copper Beech Portfolio at the inception of the Initial Purchase Agreement, notwithstanding
the fact that the acquisition of ownership interests occurred in stages. During the year ended December 31, 2014, the Company recognized
a $33.4 million loss on the effect of not exercising the Copper Beech option which correspondingly decreased the Company’s
investment in the Copper Beech Portfolio. This loss resulted from the Company reducing its ownership interest in 28 properties
in the Copper Beech Portfolio, from 67% to 48%. Additionally, there were significant amounts of amortization expense for in-place
lease intangible assets included in the equity in losses recognized during the year ended December 31, 2014 and 2013, which also
decreased the carrying value of our investment in the Copper Beech Portfolio. Primarily as a result of these decreases in our investment
in the Copper Beech Portfolio, at the First CB Closing and Second CB Closing, the Company realized a gain as the provisional fair
value of the assets acquired and liabilities assumed exceeded the consideration of cash paid, OP Units issued and the carrying
value of the investment in the Copper Beech Portfolio for these properties.
The following table
summarizes the provisional fair values of the assets acquired and liabilities assumed from the First and Second CB Closings:
| Assets acquired: | |
| | |
| Land | |
$ | 45,003 | |
| Buildings | |
| 553,866 | |
| Furniture, fixtures and equipment | |
| 21,393 | |
| Intangibles | |
| 32,824 | |
| Other assets, including cash of $5,802 | |
| 11,813 | |
| Total assets acquired | |
$ | 664,899 | |
| | |
| | |
| Liabilities assumed: | |
| | |
| Mortgage, construction loans and other debt | |
$ | 300,706 | |
| Other liabilities | |
| 12,203 | |
| Total liabilities assumed | |
$ | 312,909 | |
| | |
| | |
| Net assets acquired | |
$ | 351,990 | |
Since the First CB
Closing and Second CB Closing, the 29 Copper Beech student housing properties that were acquired and consolidated contributed $25.8
million of revenues and $20.9 million of net loss for the six months ended June 30, 2015 that are included in the accompanying
consolidated statement of operations and comprehensive income (loss). These results include depreciation of $8.2 million and amortization
of in-place intangible assets for the Copper Beech Portfolio of $23.5 million for the period from January 30, 2015 (date of First
CB Closing) through June 30, 2015. In connection with the First CB Closing and Second CB Closing, the Company recognized $2.8 million
of transaction costs for the six months ended June 30, 2015.
The acquired properties’
results of operations have been included in the accompanying consolidated statements of operations and comprehensive income (loss)
since the respective acquisition closing dates. The following pro forma information for the six months ended June 30,
2015 and 2014 presents consolidated financial information for the Company as if the property acquisitions discussed above had occurred
at the beginning of the earliest period presented. Excluded from the pro forma results below are $2.8 million and $0.8 million
of transaction costs for the six months ended June 30, 2015 and 2014, respectively, and $28.0 million of gain on purchase of Copper
Beech for the six months ended June 30, 2015. Additionally, included in the pro forma results below for the six months ended June
30, 2015 and 2014 is $23.5 million and $18.4 million, respectively, of amortization expense of in-place intangible assets. The
pro forma information is provided for informational purposes only and is not indicative of results that would have occurred or
which may occur in the future:
| | |
Pro Forma | | |
Pro Forma | | |
Pro Forma | | |
Pro Forma | |
| | |
Three months | | |
Six months | | |
Three months | | |
Six months | |
| | |
Ended June 30, 2015 | | |
Ended June 30, 2015 | | |
Ended June 30, 2014 | | |
Ended June 30, 2014 | |
| | |
| | |
| | |
| | |
| |
| Total revenues | |
$ | 46,145 | | |
$ | 95,843 | | |
$ | 39,905 | | |
$ | 79,783 | |
| Net loss | |
$ | (22,350 | ) | |
$ | (36,517 | ) | |
$ | (12,143 | ) | |
$ | (23,502 | ) |
| Net loss attributable to common shareholders | |
$ | (20,691 | ) | |
$ | (31,854 | ) | |
$ | (12,876 | ) | |
$ | (25,084 | ) |
The initial accounting
for the business combination is incomplete with respect to the values assigned to tangible and intangible assets acquired with
liabilities assumed and OP Units issued as the Company did not have sufficient time to finalize these respective valuations and,
accordingly, the amounts recognized in these consolidated financial statements are provisional.
On April 30, 2015,
the Company entered into a purchase agreement with The Pennsylvania State University (the “Penn State Seller”) to purchase
the remaining 15% interest in Copper Beech Klondike and its 16% interest in Copper Beech Northbrook for $4.6 million. The closing
occurred on June 25, 2015, with $2.3 million being paid to the Penn State Seller and with the remaining balance of $2.3 million
expected to be paid on September 23, 2015. The transactions to purchase the remaining interests in these two properties were contemplated
and structured as of the date of the First CB Closing. As of June 25, 2015, the Company owned 100% of both Copper Beech Klondike
and Copper Beech Northbrook. As the purchase price of $4.6 million for these interests was known prior to the issuance of the consolidated
financial statements for the three months ended March 31, 2015, the Company used $4.6 million as the estimated amount of the non-controlling
interest for these two properties, which were consolidated as part of the First CB Closing. As a result, the Company did not recognize
any gain during the six months ended June 30, 2015 as part of this transaction. In addition, there were not significant costs incurred
in connection with this transaction.
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 periods presented. These operations were previously included in the development,
construction and management services segment in the prior year’s Form 10-Qs. See Note 16 for additional segment information.
Below is a summary
of the consolidated balance sheets for the construction and development operations as of June 30, 2015 and December 31, 2014 (in
thousands):
| | |
June 30, | | |
December 31, | |
| | |
2015 | | |
2014 | |
| | |
| | |
| |
| Cash | |
$ | 93 | | |
$ | 1,118 | |
| Other assets | |
| 13 | | |
| 634 | |
| Costs and earnings in excess of construction billings | |
| 618 | | |
| 3,887 | |
| Total assets | |
| 724 | | |
| 5,639 | |
| | |
| | | |
| | |
| Accounts payable and accrued expenses | |
| 57 | | |
| 4,711 | |
| Construction billings in excess of cost and earnings | |
| - | | |
| 481 | |
| Total liabilities | |
| 57 | | |
| 5,192 | |
| Total net assets | |
$ | 667 | | |
$ | 447 | |
Below is a summary
of the results of operations for the construction and development operations for all periods presented (in thousands):
| | |
Three Months Ended | | |
Six Months Ended | |
| | |
June 30, | | |
June 30, | | |
June 30, | | |
June 30, | |
| | |
2015 | | |
2014 | | |
2015 | | |
2014 | |
| | |
| | |
| | |
| | |
| |
| Revenue | |
$ | - | | |
$ | 10,295 | | |
$ | - | | |
$ | 17,628 | |
| Construction and development service expense | |
| - | | |
| (8,921 | ) | |
| (1,157 | ) | |
| (15,315 | ) |
| Income (loss) from discontinued operations | |
$ | - | | |
$ | 1,374 | | |
$ | (1,157 | ) | |
$ | 2,313 | |
All construction and
development projects were substantially complete as of December 31, 2014.
On January 16, 2015,
the Company sold a portfolio of six undeveloped land parcels to a leading student housing developer resulting in net sale proceeds
of $28.3 million. The portfolio included parcels located in Alabama, Arizona, California, Florida, Michigan and Washington. 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. As a result of this transaction,
a gain of $3.1 million was recognized during the six months ended June 30, 2015. This gain is included in gain on sale of land
and unconsolidated entities in the accompanying consolidated statements of operations and comprehensive income (loss).
On January 30, 2015,
the Company sold its 10% interest in the joint venture property, The Grove at Stillwater, Oklahoma for net sale proceeds of $1.0
million. Additionally as part of this closing, the Company received $1.9 million in proceeds for a receivable related to renovation
work performed at this property. 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.
On March 31,
2015, the Company sold its 63.9% interest in the joint venture properties, The Grove at Conway, Arkansas and The Grove at Lawrence,
Kansas for net sale proceeds of $1.3 million. The Company recorded a receivable for the $1.3 million in net sale proceeds and subsequently
received the proceeds on April 1, 2015. During 2014, the Company’s investment had been reduced to below zero as the Company
had recorded an obligation of $3.3 million in connection with guarantees of debt of these two properties. As a result, a gain of
$4.6 million was recognized on this transaction. This gain is included in gain on sale of land and unconsolidated entities in the
accompanying consolidated statements of operations and comprehensive income (loss). The Company had no continuing involvement with
these properties, including providing debt guarantees, after March 31, 2015.
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"),
Brandywine and Beaumont that the Company does not consolidate. These joint ventures are engaged primarily in 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 most of its investments with HSRE, Brandywine and Beaumont and earns fees
for property management services. Additionally, for the six months ended June 30, 2014, the Company provided development and construction
services to the ventures with HSRE, Brandywine, Copper Beech and Beaumont and recognized fees as the services were 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). No development and construction services
were provided during the six months ended June 30, 2015.
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
CAD 65 million ($52.0 million at the June 30, 2015 exchange rate). 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
($12.8 million at the June 30, 2015 exchange rate) 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 the
Company 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 fund operating commitments
up to its 47.0% common ownership in the partnership. As
described in Note 18, the Company funded CAD 1.4 million ($1.1 million at the June 30, 2015 exchange rate) which was its proportionate
share of a capital call, the proceeds of which will be used to pay the interest on the construction loan as well as other operating
expenses. Currently, the Company estimates that it will provide no additional capital funding during the balance of 2015.
However, if CSH Montreal fails to meet its projected occupancy, and instead maintains its current occupancy, the Company expects
to fund an additional CAD 2.0 million ($1.6 million at the June 30, 2015 exchange rate) during the remainder of 2015, which is
in addition to the $0.8 million that the Company has already funded to date during the year.
In
conjunction with the Holiday Inn Midtown acquisition, CSH Montreal entered into a CAD 112.0 million ($89.6 million at the June
30, 2015 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 following: (i) Canadian Prime
rate, which was 2.85% at June 30, 2015, plus a weighted average spread of 3.39% or (ii) the Canadian Dealer Offered Rate (“CDOR”),
which was 1.29% at June 30, 2015, 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, and previously owned The Grove at Lawrence, Kansas, and The Grove
at Conway, Arkansas. On March 31, 2015, The Grove at Lawrence, Kansas and The
Grove at Conway, Arkansas were sold to third parties (see Note 7).
In February 2013,
the Company entered into purchase and sale agreements to acquire an approximate 48.0% interest in a portfolio of 35 student housing
properties, two undeveloped land parcels and a corporate office building held by the members of the Copper Beech Portfolio for
an initial purchase price of approximately $230.6 million, including the repayment of $106.7 million of debt. The remaining interests
in the Copper Beech Portfolio were held by certain of the former members of CBTC and CBTC PA (the “CB Investors”).
In September 2013, the Company entered into an amendment to the above referenced purchase and sale agreement for consideration
of $4.0 million whereby it transferred its 48.0% interest in five properties in the Copper Beech Portfolio back to the CB Investors
and deferred the acquisition of two development properties as consideration for an additional 19.0% interest in each of the remaining
28 properties in the Copper Beech Portfolio. On August 18, 2014, the Company elected not to exercise the first purchase option
to acquire additional interests in the properties comprising the Copper Beech Portfolio. As a result of this decision, the Company
was entitled to 48.0% of the operating cash flows in the 35 operating properties, one office building and one parcel of land.
On January 30, 2015,
the Company completed the acquisition of substantially all of the remaining interests in 28 student housing properties, 2 undeveloped
land parcels and a corporate office building in the Copper Beech Portfolio. On April 30, 2015, the Company completed the acquisition
of all of the remaining interests in 2 additional student housing properties in the Copper Beech Portfolio. See Note 6 for additional
information.
The Company is the
guarantor of the construction and mortgage debt or credit facilities of its joint ventures with HSRE, Brandywine and Beaumont (see
Note 17). Details of the Company’s unconsolidated investments at June 30, 2015 are presented in the following table (dollars
in thousands):
| | |
| | |
| |
| |
| | |
Debt |
|
| | |
| | |
| |
| |
| | |
| | |
Weighted | | |
|
|
| | |
| | |
| |
Number of | |
| | |
| | |
Average | | |
|
|
| | |
Our | | |
Year | |
Properties In | |
Total | | |
Amount | | |
Interest | | |
|
|
| Unconsolidated Entities | |
Ownership | | |
Founded | |
Operation | |
Investment | | |
Outstanding | | |
Rate | | |
Maturity Date / Range |
|
| HSRE-Campus Crest I, LLC | |
| 63.9 | % | |
2009 | |
1 | |
$ | 3,862 | | |
$ | 11,166 | (4) | |
| 2.69 | %(1) | |
9/30/2015 |
|
| HSRE-Campus Crest V, LLC | |
| 10.0 | % | |
2011 | |
2 | |
| - | | |
| 36,226 | (4) | |
| 2.89 | %(1) | |
7/20/2015 – 9/30/2015 |
(3) |
| HSRE-Campus Crest VI, LLC | |
| 20.0 | % | |
2012 | |
3 | |
| 7,153 | | |
| 51,206 | (4) | |
| 2.49 | %(1) | |
8/07/2015 – 12/19/2015 |
(3) |
| HSRE-Campus Crest IX, LLC | |
| 30.0 | % | |
2013 | |
1 | |
| 19,341 | | |
| 96,187 | (4) | |
| 2.39 | %(1) | |
7/25/2016 |
|
| HSRE-Campus Crest X, LLC | |
| 30.0 | % | |
2013 | |
2 | |
| 7,701 | | |
| 44,692 | (4) | |
| 2.37 | %(1) | |
9/06/2016 – 9/30/2018 |
|
| CB Portfolio | |
| 48.0 | % | |
2013 | |
5 | |
| 45,017 | | |
| 159,842 | (4) | |
| 5.41 | %(2) | |
10/01/2015 – 10/01/2020 |
|
| CSH Montreal | |
| 47.0 | % | |
2013 | |
2 | |
| 4,656 | | |
| 87,848 | (4) | |
| 5.68 | %(1) | |
1/13/2016 |
|
| Total unconsolidated entities | |
| | | |
| |
16 | |
$ | 87,730 | | |
$ | 487,167 | | |
| 4.03 | % | |
|
|
| (1) | Variable interest rates. |
| (2) | Comprised of fixed rate debt. |
| (3) | Loans maturing in July and August of 2015 relate to properties that are part of the property swap
detailed in Note 18. |
| (4) | The amount outstanding for debt represents 100% of the debt outstanding at each of the respective
joint ventures in which the Company has varying ownership percentages. See Note 17 for a discussion of amounts of the outstanding
debt in which the Company guarantees on behalf of certain of these joint ventures. |
The following is a
summary of the combined financial position of the Company’s unconsolidated entities with HSRE, Brandywine and Beaumont in
their entirety, not only the Company’s interest in the entities, for the periods presented (in thousands):
| | |
June 30, | | |
December 31, | |
| | |
2015 | | |
2014 | |
| Assets | |
| | | |
| | |
| Student housing properties, net | |
$ | 489,881 | | |
$ | 437,108 | |
| Development in process | |
| 47 | | |
| 7,429 | |
| Other assets | |
| 15,909 | | |
| 12,947 | |
| Total assets | |
$ | 505,837 | | |
$ | 457,484 | |
| | |
| | | |
| | |
| Liabilities and Equity | |
| | | |
| | |
| Mortgage and construction loans | |
$ | 326,435 | | |
$ | 354,759 | |
| Other liabilities | |
| 14,065 | | |
| 29,364 | |
| Owners' equity | |
| 165,337 | | |
| 73,361 | |
| Total liabilities and owners' equity | |
$ | 505,837 | | |
$ | 457,484 | |
| | |
| | | |
| | |
| Company's share of historical owners' equity | |
$ | 60,102 | | |
$ | 30,481 | |
| Preferred investment(1) | |
| 7,322 | | |
| 7,322 | |
| Net difference in carrying value of investment versus net book value
of underlying net assets(2) | |
| (24,711 | ) | |
| 3,219 | |
| Carrying value of investment in HSRE and other non-Copper Beech entities | |
$ | 42,713 | | |
$ | 41,022 | |
| (1) | As of June 30, 2015, 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 $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. |
| (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, 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 entities, 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 Copper Beech 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 June 30, 2015
and 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 of the Copper Beech entities at 100% basis for the five and 35 student housing properties in
which the Company held a 48% interest as of June 30, 2015 and December 31, 2014, respectively (in thousands):
| | |
June 30, | | |
December 31, | |
| | |
2015 | | |
2014 | |
| Assets | |
| | | |
| | |
| Student housing properties, net | |
$ | 256,895 | | |
$ | 906,614 | |
| Intangible assets | |
| 1,866 | | |
| 7,212 | |
| Other assets | |
| 13,675 | | |
| 14,293 | |
| Total assets | |
$ | 272,436 | | |
$ | 928,119 | |
| | |
| | | |
| | |
| Liabilities and Equity | |
| | | |
| | |
| Mortgage and construction loans | |
$ | 167,930 | | |
$ | 476,985 | |
| Other liabilities | |
| 3,080 | | |
| 15,541 | |
| Owners' equity | |
| 101,426 | | |
| 435,593 | |
| Total liabilities and owners' equity | |
$ | 272,436 | | |
$ | 928,119 | |
| | |
| | | |
| | |
| Company's share of historical owners' equity | |
$ | 48,684 | | |
$ | 199,281 | |
| Net difference in carrying value of investment versus net book value of underlying net assets(1) | |
| (3,667 | ) | |
| 19,437 | |
| Carrying value of investment in unconsolidated entity | |
$ | 45,017 | | |
$ | 218,718 | |
| (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 during the year ended December 31, 2014 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, Brandywine and Beaumont in
their entirety, not only the Company’s interest in the entities. For the three and six months ended June 30, 2015 and the
three and six months ended June 30, 2014, this summary includes results for 11 unconsolidated properties and 14 unconsolidated
properties, respectively (in thousands):
| | |
Three Months Ended | | |
Six Months Ended | |
| | |
June 30, | | |
June 30, | | |
June 30, | | |
June 30, | |
| | |
2015 | | |
2014 | | |
2015 | | |
2014 | |
| | |
| | |
| | |
| | |
| |
| Revenues | |
$ | 9,448 | | |
$ | 6,422 | | |
$ | 18,503 | | |
$ | 12,878 | |
| Expenses: | |
| | | |
| | | |
| | | |
| | |
| Operating expenses | |
| 5,791 | | |
| 3,734 | | |
| 12,759 | | |
| 7,195 | |
| Interest expense | |
| 3,254 | | |
| 1,189 | | |
| 6,148 | | |
| 2,240 | |
| Depreciation and amortization | |
| 3,870 | | |
| 1,835 | | |
| 7,726 | | |
| 3,865 | |
| Other expense | |
| 49 | | |
| - | | |
| 65 | | |
| 46 | |
| Total expenses | |
| 12,964 | | |
| 6,758 | | |
| 26,698 | | |
| 13,346 | |
| Net loss | |
$ | (3,516 | ) | |
$ | (336 | ) | |
$ | (8,195 | ) | |
$ | (468 | ) |
The following is a
summary of the operating results for the Company’s unconsolidated Copper Beech entities in their entirety, not only the Company’s
interest in the entities. For the three and six months ended June 30, 2015 and the three and six months ended June 30, 2014, this
summary includes results for 5 unconsolidated properties and 28 unconsolidated properties, respectively (in thousands):
| | |
Three Months Ended | | |
Six Months Ended | |
| | |
June 30, | | |
June 30, | | |
June 30, | | |
June 30, | |
| | |
2015 | | |
2014 | | |
2015 | | |
2014 | |
| Revenues | |
| | | |
| | | |
| | | |
| | |
| Expenses: | |
$ | 6,576 | | |
$ | 19,028 | | |
$ | 12,803 | | |
$ | 38,293 | |
| Operating expenses | |
| | | |
| | | |
| | | |
| | |
| Interest expense | |
| 2,376 | | |
| 7,271 | | |
| 4,396 | | |
| 14,571 | |
| Depreciation and amortization | |
| 2,214 | | |
| 3,012 | | |
| 4,127 | | |
| 5,952 | |
| Other expenses | |
| 1,127 | | |
| 9,859 | | |
| 2,168 | | |
| 19,636 | |
| Total expenses | |
| 108 | | |
| 287 | | |
| 301 | | |
| 626 | |
| Net income (loss) | |
| 5,825 | | |
| 20,429 | | |
| 10,992 | | |
| 40,785 | |
| | |
$ | 751 | | |
$ | (1,401 | ) | |
$ | 1,811 | | |
$ | (2,492 | ) |
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):
| | |
June 30,
2015 | | |
December 31,
2014 | |
| Fixed-rate mortgage loans (1) | |
$ | 421,113 | | |
$ | 163,341 | |
| Variable-rate mortgage loans | |
| 16,484 | | |
| 16,613 | |
| Construction loans (1) | |
| 163,153 | | |
| 120,719 | |
| Total mortgage and construction loans | |
| 600,750 | | |
| 300,673 | |
| | |
| | | |
| | |
| Line of credit (1) | |
| 263,500 | | |
| 217,500 | |
| Exchangeable senior notes | |
| 97,757 | | |
| 97,419 | |
| Other debt | |
| 6,423 | | |
| 2,827 | |
| Total lines of credit and other debt | |
| 367,680 | | |
| 317,746 | |
| | |
| | | |
| | |
| Total debt | |
$ | 968,430 | | |
$ | 618,419 | |
| (1) | As stated in Note 6, on January 30, 2015, the Company and certain of its affiliates completed the
acquisition of substantially all of the Sellers’ remaining interests in most of the Copper Beech properties. This acquisition
represents $259.1 million of the increase in the fixed-rate mortgage loans, $34.1 million of the increase in the construction loans
and $3.7 million of the increase in other debt related to Copper Beech letters of credit. During January 2015, the Company drew
$46.0 million on its line of credit to fund the First CB Closing. |
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 | | |
Carrying
Value at
6/30/2015 | | |
Carrying
Value at
12/31/2014 | | |
Stated Interest Rate | |
Interest Rate at
6/30/2015 | | |
Maturity Date
(1) | |
Amortization |
|
| Construction
loans | |
| | | |
| | | |
| | | |
| |
| | | |
| |
|
|
| The Grove
at Grand Forks | |
$ | 16,916 | | |
$ | 15,414 | | |
$ | 12,474 | | |
LIBOR + 200 BPS | |
| 2.18 | % | |
2/5/2016 | |
Interest only |
|
| The Grove at Slippery
Rock | |
| 17,961 | | |
| 17,738 | | |
| 16,031 | | |
LIBOR + 215 BPS | |
| 2.33 | % | |
6/21/2016 | |
Interest only |
|
| The Grove at Muncie | |
| 14,567 | | |
| 13,892 | | |
| 13,892 | | |
LIBOR + 225 BPS | |
| 2.43 | % | |
7/3/2016 | |
Interest only |
|
| The Grove at Fort Collins | |
| 19,073 | | |
| 19,073 | | |
| 19,073 | | |
LIBOR + 190 BPS | |
| 2.08 | % | |
7/13/2016 | |
Interest only |
|
| The Grove at Pullman | |
| 16,016 | | |
| 10,886 | | |
| 10,886 | | |
LIBOR + 220 BPS | |
| 2.38 | % | |
9/5/2016 | |
Interest only |
|
| Statesboro, GA Phase II | |
| 9,703 | | |
| 9,255 | | |
| - | (3) | |
LIBOR + 250 BPS | |
| 2.68 | % | |
11/1/2016 | |
30 years |
(4) |
| CMU Phase II—Mount
Pleasant, MI | |
| 10,130 | | |
| 9,101 | | |
| - | (3) | |
LIBOR + 250 BPS | |
| 2.68 | % | |
2/1/2017 | |
30 years |
(4) |
| Auburn, AL | |
| 15,750 | | |
| 15,750 | | |
| - | (3) | |
LIBOR + 200 BPS | |
| 2.18 | % | |
2/6/2017 | |
Interest only |
|
| The Grove at Gainesville | |
| 30,069 | | |
| 25,616 | | |
| 22,836 | | |
LIBOR + 215 BPS | |
| 2.33 | % | |
3/13/2017 | |
Interest only |
|
| Copper Beech at Ames | |
| 23,551 | | |
| 22,051 | | |
| 21,170 | | |
LIBOR + 225 BPS | |
| 2.43 | % | |
5/2/2017 | |
Interest only |
|
| Toledo Vivo | |
| 9,404 | | |
| 4,377 | | |
| 4,357 | | |
LIBOR + 215 BPS | |
| 2.33 | % | |
11/25/2017 | |
Interest only |
|
| Mortgage
loans | |
| | | |
| | | |
| | | |
| |
| | | |
| |
|
|
| IUP Phase II - Indiana | |
| 6,250 | | |
| 5,937 | | |
| - | (3) | |
5.90% | |
| 5.90 | % | |
10/1/2015 | |
30 years |
(2) |
| CMU Phase I - Mount Pleasant,
MI | |
| 20,000 | | |
| 18,183 | | |
| - | (3) | |
5.47% | |
| 5.47 | % | |
10/1/2015 | |
30 years |
(2) |
| Bowling Green Phase I | |
| 13,000 | | |
| 12,227 | | |
| - | (3) | |
5.63% | |
| 5.63 | % | |
10/1/2015 | |
30 years |
(2) |
| Copper Beech I - State
College | |
| 5,250 | | |
| 5,062 | | |
| - | (3) | |
5.61% | |
| 5.61 | % | |
2/11/2016 | |
30 years |
(2) |
| IUP Buy - Indiana | |
| 2,453 | | |
| 2,414 | | |
| - | (3) | |
5.45% | |
| 5.45 | % | |
6/6/2016 | |
30 years |
(2) |
| San Marcos, TX Phase I | |
| 34,786 | | |
| 34,232 | | |
| - | (3) | |
5.45% | |
| 5.45 | % | |
6/6/2016 | |
30 years |
(2) |
| The Grove at Milledgeville | |
| 16,250 | | |
| 15,531 | | |
| 15,640 | | |
6.12% | |
| 6.12 | % | |
10/1/2016 | |
30 years |
(2) |
| Bloomington | |
| 10,860 | | |
| 8,466 | | |
| - | (3) | |
6.22% | |
| 6.22 | % | |
10/1/2016 | |
30 years |
(2) |
| Allendale Phase I | |
| 23,780 | | |
| 23,803 | | |
| - | (3) | |
5.98% | |
| 5.98 | % | |
10/1/2016 | |
30 years |
(2) |
| Columbia, MO | |
| 24,516 | | |
| 24,669 | | |
| - | (3) | |
6.22% | |
| 6.22 | % | |
10/1/2016 | |
30 years |
(2) |
| The Grove at Carrollton
and The Grove at Las Cruces | |
| 29,790 | | |
| 28,472 | | |
| 28,674 | | |
6.13% | |
| 6.13 | % | |
10/11/2016 | |
30 years |
(2) |
| Radford | |
| 12,400 | | |
| 12,464 | | |
| - | (3) | |
5.99% | |
| 5.99 | % | |
11/6/2016 | |
30 years |
(2) |
| The Grove at Denton | |
| 17,167 | | |
| 16,484 | | |
| 16,613 | | |
LIBOR + 215 BPS | |
| 2.33 | % | |
3/1/2017 | |
30 years |
(2) |
| The Grove at Asheville | |
| 14,800 | | |
| 14,201 | | |
| 14,304 | | |
5.77% | |
| 5.77 | % | |
4/11/2017 | |
30 years |
(2) |
| IUP Phase I - Indiana | |
| 6,500 | | |
| 6,500 | | |
| - | (3) | |
2.15% | |
| 2.15 | % | |
6/2/2017 | |
Interest only |
|
| Allendale Phase II | |
| 11,896 | | |
| 12,473 | | |
| - | (3) | |
6.27% | |
| 6.27 | % | |
9/6/2017 | |
30 years |
(2) |
| Columbia, SC Phase I | |
| 36,936 | | |
| 38,545 | | |
| - | (3) | |
6.27% | |
| 6.27 | % | |
9/6/2017 | |
30 years |
(2) |
| Statesboro, GA Phase I | |
| 31,000 | | |
| 32,102 | | |
| - | (3) | |
5.81% | |
| 5.81 | % | |
10/6/2017 | |
30 years |
(2) |
| The Grove at Ellensburg | |
| 16,125 | | |
| 15,727 | | |
| 15,845 | | |
5.10% | |
| 5.10 | % | |
9/1/2018 | |
30 years |
(2) |
| The Grove at Nacogdoches | |
| 17,160 | | |
| 16,729 | | |
| 16,857 | | |
5.01% | |
| 5.01 | % | |
9/1/2018 | |
30 years |
(2) |
| The Grove at Greeley | |
| 15,233 | | |
| 14,817 | | |
| 14,945 | | |
4.29% | |
| 4.29 | % | |
10/1/2018 | |
30 years |
(2) |
| Copper Beech II - State
College | |
| 8,805 | | |
| 9,355 | | |
| - | (3) | |
5.97% | |
| 5.97 | % | |
8/1/2019 | |
30 years |
(2) |
| Columbia, SC Phase II | |
| 6,300 | | |
| 6,557 | | |
| - | (3) | |
5.41% | |
| 5.41 | % | |
8/1/2020 | |
30 years |
(2) |
| Oakwood - State College | |
| 5,750 | | |
| 6,070 | | |
| - | (3) | |
4.99% | |
| 4.99 | % | |
10/1/2020 | |
30 years |
(2) |
| The Grove at Clarksville | |
| 16,350 | | |
| 16,097 | | |
| 16,238 | | |
4.03% | |
| 4.03 | % | |
7/1/2022 | |
30 years |
(2) |
| The Grove at Columbia | |
| 23,775 | | |
| 22,509 | | |
| 22,738 | | |
3.83% | |
| 3.83 | % | |
7/1/2022 | |
30 years |
(2) |
| The
Grove at Statesboro | |
| 18,100 | | |
| 17,971 | | |
| 18,100 | | |
4.01% | |
| 4.01 | % | |
1/1/2023 | |
30 years |
(2) |
| | |
| | | |
$ | 600,750 | | |
$ | 300,673 | | |
| |
| | | |
| |
|
|
| (1) | For the construction loans, the maturity date is the stated maturity date in the respective loan
agreements, some of which can be extended for an additional one to two years, subject to the satisfaction of certain conditions,
depending on the loan. For the loans that will mature during 2015, the Company is actively pursuing an extension or refinancing
of those loans. |
| (2) | Loan requires monthly payments of principal and interest, plus certain reserve and escrows, until
maturity when all principal is due. |
| (3) | As stated in Note 6, on January 30, 2015, the Company and certain of its affiliates completed the
acquisition of substantially all of the Sellers’ remaining interests in 28 of the Copper Beech properties. Accordingly, these
balances were not recognized by the Company as of December 31, 2014. As part of recording the mortgage loans from the First CB
Closing at fair value, the outstanding amount, after giving effect for each loan’s respective provisional fair value adjustment,
could result in an outstanding balance greater than the face amount of the mortgage loan. These fair value adjustments are amortized
to interest expense over the term of the respective mortgage loans. As of April 30, 2015 (the "Second CB Closing"), the
Company completed the acquisition of the Sellers’ interests in two of the properties in the Copper Beech Portfolio in which
the Company previously held a 48% interest – Copper Beech San Marcos Phase 1 and Copper Beech IUP Buy (See Note 6). |
| (4) | Loan required interest only payments until the loan was extended in March of 2015. Thereafter,
principal and interest, plus certain reserves, 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 bear 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 June 30, 2015, the interest rate was 2.70% on
the Revolving Credit Facility borrowings and 2.65% on the Term Loan.
As of June 30, 2015,
the Company had $213.5 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. At June 30, 2015, the Company
had $36.5 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 March 31, 2015 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 20.0%; |
| · | 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, 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.
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 5.53% 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. Although the Indenture dated as of October 9, 2013 (the “Indenture”), by and among the
Operating Partnership, the Company, and U.S. Bank National Association (the “Trustee”) for the Exchangeable Senior
Notes contains a cross-default provision, as of June 30, 2015, no event under any of the Company’s credit facilities
has triggered that cross-default provision (see Note 18).
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 $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 $97.8 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 $2.2 million in additional paid-in-capital,
net of offering costs, in the accompanying consolidated statements of changes in equity. Amortization related to the $2.2 million
in additional paid in capital was $0.2 million and $0.2 million for the three months ended June 30, 2015 and 2014, respectively
and $0.3 million and $0.3 million for the six months ended June 30, 2015 and 2014, respectively.
On
May 21, 2015, the Operating Partnership delivered a notice (the “May 2015 Notice”) to the holders of its 4.75% Exchangeable
Senior Notes, with a copy of such May 2015 Notice to the Trustee, pursuant to the Indenture. The May 2015 Notice provided that
the Company anticipated it would be unable to timely file this Quarterly Report on Form 10-Q for the quarter ended March 31, 2015
by June 2, 2015, which would result in a reporting event of default under the Indenture. The Notice further provided that, pursuant
to Section 6.01(b) of the Indenture, the Operating Partnership elected that the sole remedy for the reporting event of default
would consist exclusively of the right to receive additional interest on the Exchangeable Senior Notes at a rate equal to (i) 0.25%
per annum of the outstanding principal amount of the Exchangeable Senior Notes for the first 90 days of the 180-day period in which
such reporting event of default is continuing, beginning on, and including, the date on which such reporting event of default first
occurs and (ii) 0.50% per annum of the outstanding principal amount of the Exchangeable Senior Notes for the last 90 days of such
180-day period as long as such reporting event of default is continuing, payable subject to and in accordance with the terms and
conditions of the Indenture. Such reporting event of default was cured when the Company filed the Quarterly Report on Form 10-Q
for the quarter ended March 31, 2015 with the SEC on July 24, 2015.
On
August 26, 2015, the Operating Partnership delivered a notice of sole remedy under the Indenture governing the Exchangeable Senior
Notes in connection with the delayed filing by the Company of this Quarterly Report on Form 10-Q for the quarter ended June 30,
2015. See Note 18 for further details.
Other Debt
As stated
in Note 6, on January 30, 2015, the Company, and certain of its affiliates, completed the acquisition of substantially all
of the Sellers’ remaining interests in Copper Beech, which included $3.7 million for CB lines of credit as of June
30, 2015. The interest rate on these lines of credit range from 0.50% to 3.59% and the maturity dates on these lines of
credit are between the dates of September 1, 2015 and July 1, 2017. At the time of filing, the Company was in the process of
re-negotiating the terms for the lines that matured on September 1, 2015.
Schedule of Debt Maturities
Scheduled debt maturities
for the remainder of 2015 and each of the four years subsequent to December 31, 2015 and thereafter, are as follows (in thousands):
| 2015 | |
$ | 85,620 | |
| 2016 | |
| 179,899 | |
| 2017 | |
| 456,440 | |
| 2018 | |
| 164,684 | |
| 2019 | |
| 9,470 | |
| Thereafter | |
| 63,556 | |
| Total outstanding debt | |
| 959,669 | |
| | |
| | |
| Convertible note discount | |
| (2,243 | ) |
| Copper Beech debt fair value adjustment | |
| 11,004 | |
| Outstanding as of June 30, 2015, net of discount and fair value adjustment | |
$ | 968,430 | |
The Copper
Beech debt fair value adjustment relates to the difference between the carrying value and provisional fair value of the
debt assumed by the Company on January 30, 2015 (see Note 6), net of amortization of $1.4 million and $2.3 million for the
three & six months ended June, 30, 2015, respectively. Amortization of deferred financing costs was $0.8 million and
$0.5 million for the three months ended June 30, 2015 and 2014, respectively and $1.5 million and $1.0 million for the six
months ended June 30, 2015 and 2014, respectively.
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 $0.09 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 2015, not to declare or pay dividends on its Common Stock or Series A Preferred Stock for the first or second 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 the Company’s liquidity position by raising additional capital and/or refinancing
its existing credit facilities.
10. Derivative Instruments and Hedging
Activities
The Company used variable
rate debt to finance the construction of student housing properties in 2014 and prior years. 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 $275 million. Both instruments have a strike rate of 2.5% with maturity dates
of July 22, 2015 and January 22, 2016. As of June 30, 2015 and December 31, 2014, the fair value of derivative contracts was insignificant.
The interest rate cap with a maturity date of July 22, 2015 and a notional amount of $100 million expired and was not renewed at
that time.
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 both the three months ended June 30, 2015 and 2014 and the six months ended June 30, 2015
and 2014.
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 June 30, 2015
and December 31, 2014, the Company’s financial assets and liabilities carried at fair value on a recurring basis consisted
of interest rate caps. As of June 30, 2015 and December 31, 2014, 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 4.05% and 3.65% at June
30, 2015 and December 31, 2014, 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 | | |
| |
| June 30, 2015 | |
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
(1) | |
| Fixed-rate mortgage loans | |
$ | - | | |
$ | 414,788 | | |
$ | - | | |
$ | 421,113 | |
| Variable-rate mortgage loans | |
| - | | |
| 16,365 | | |
| - | | |
| 16,484 | |
| Construction loans | |
| - | | |
| 162,214 | | |
| - | | |
| 163,153 | |
| Exchangeable Senior Notes | |
| - | | |
| 101,752 | | |
| - | | |
| 97,757 | |
| Other Debt | |
| - | | |
| 6,561 | | |
| - | | |
| 6,423 | |
| | |
| | | |
| | | |
| | | |
| | |
| December 31, 2014 | |
| | | |
| | | |
| | | |
| | |
| 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 | |
| (1) | See Note 9 where total debt agrees to the face of the financial statements. This schedule
will not agree to the financial statements because the $263.5 million line of credit is not fair valued. |
All of the Company’s
nonrecurring valuations were made in connection with property acquisitions in Note 6 and used significant unobservable inputs and,
therefore, fall under Level 3 of the fair value hierarchy.
Fair
Value Measurements on a Nonrecurring Basis
Assets
measured at fair value on a nonrecurring basis on the accompanying consolidated balance sheet as of December 31, 2014
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 their estimated fair value.
Factors giving rise to the write downs or impairments, 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 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. There were no additional
impairments to these assets during the three and six months ended June 30, 2015. There were no assets or liabilities with
fair value measurements on a nonrecurring basis as of June 30, 2015.
The table below aggregates the fair values
of these assets by their level in the fair value hierarchy as of December 31, 2014 (in thousands):
| | |
As of 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 | ) |
During
the six months ended June 30, 2015, certain assets included in the table above were sold. See Note 7 and 8 for additional
detail. See Notes 7 and 17 for additional information on the fair value of the guarantees.
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):
| | |
Three Months Ended | |
| | |
June 30, 2015 | | |
June 30, 2014 | |
| | |
Income (Loss)
(Numerator) | | |
Shares
(Denominator) | | |
Per Share
Amount | | |
Income (Loss)
(Numerator) | | |
Shares
(Denominator) | | |
Per Share
Amount | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| Loss from
continuing operations | |
$ | (17,050 | ) | |
| | | |
| | | |
$ | (1,766 | ) | |
| | | |
| | |
| Preferred stock dividends | |
| (3,050 | ) | |
| | | |
| | | |
| (3,050 | ) | |
| | | |
| | |
| (Loss)
income from continuing operations attributable to noncontrolling interests | |
| (4,000 | ) | |
| | | |
| | | |
| 22 | | |
| | | |
| | |
| Loss
from continuing operations attributable to common stockholders | |
| (16,100 | ) | |
| | | |
| | | |
| (4,838 | ) | |
| | | |
| | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Income from discontinued
operations | |
| - | | |
| | | |
| | | |
| 1,374 | | |
| | | |
| | |
| (Loss)
from discontinued operations attributable to noncontrolling interests | |
| - | | |
| | | |
| | | |
| (10 | ) | |
| | | |
| | |
| Income
from discontinued operations attributable to common stockholders | |
| - | | |
| | | |
| | | |
| 1,384 | | |
| | | |
| | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Basic
and diluted earnings per share: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Loss from continuing operations
attributable to common stockholders | |
| (16,100 | ) | |
| 64,741 | | |
$ | (0.25 | ) | |
| (4,838 | ) | |
| 64,681 | | |
$ | (0.07 | ) |
| Income
from discontinued operations attributable to common stockholders | |
| - | | |
| 64,741 | | |
| - | | |
| 1,384 | | |
| 64,681 | | |
| 0.02 | |
| Net
loss attributable to common stockholders | |
| (16,100 | ) | |
| 64,741 | | |
$ | (0.25 | ) | |
| (3,454 | ) | |
| 64,681 | | |
$ | (0.05 | ) |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Effect
of Dilutive Securities | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Interest expense on exchangeable
debt | |
| 1,356 | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Incremental
shares from assumed conversion (1) | |
| | | |
| 18,051 | | |
| | | |
| | | |
| 434 | | |
| | |
| Diluted: | |
| (14,744 | ) | |
| 82,792 | | |
| | | |
| (3,454 | ) | |
| 65,115 | | |
| | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| | |
Six Months Ended | |
| | |
June 30, 2015 | | |
June 30, 2014 | |
| | |
Income (Loss)
(Numerator) | | |
Shares
(Denominator) | | |
Per Share
Amount | | |
Income (Loss)
(Numerator) | | |
Shares
(Denominator) | | |
Per Share
Amount | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| (Loss) income from continuing operations | |
$ | (5,210 | ) | |
| | | |
| | | |
$ | (1,657 | ) | |
| | | |
| | |
| Preferred stock dividends | |
| (6,100 | ) | |
| | | |
| | | |
| (6,100 | ) | |
| | | |
| | |
| (Loss) income from continuing
operations attributable to noncontrolling interests | |
| (6,166 | ) | |
| | | |
| | | |
| 13 | | |
| | | |
| | |
| Loss from continuing operations attributable
to common stockholders | |
| (5,144 | ) | |
| | | |
| | | |
| (7,770 | ) | |
| | | |
| | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| (Loss) income from discontinued operations | |
| (1,157 | ) | |
| | | |
| | | |
| 2,313 | | |
| | | |
| | |
| Income (loss) from discontinued
operations attributable to noncontrolling interests | |
| 9 | | |
| | | |
| | | |
| (16 | ) | |
| | | |
| | |
| (Loss) income from discontinued operations
attributable to common stockholders | |
| (1,166 | ) | |
| | | |
| | | |
| 2,329 | | |
| | | |
| | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Basic and diluted earnings per share: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Loss from continuing operations attributable to common stockholders | |
| (5,144 | ) | |
| 64,737 | | |
$ | (0.08 | ) | |
| (7,770 | ) | |
| 64,588 | | |
$ | (0.12 | ) |
| (Loss) income from discontinued operations
attributable to common stockholders | |
| (1,166 | ) | |
| 64,737 | | |
| (0.02 | ) | |
| 2,329 | | |
| 64,588 | | |
| 0.04 | |
| Net loss attributable to common stockholders | |
| (6,310 | ) | |
| 64,737 | | |
$ | (0.10 | ) | |
| (5,441 | ) | |
| 64,588 | | |
$ | (0.08 | ) |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Effect of Dilutive Securities | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Interest expense on exchangeable debt | |
| 2,712 | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Incremental shares
from assumed conversion (1) | |
| | | |
| 18,051 | | |
| | | |
| | | |
| 434 | | |
| | |
| Diluted: | |
| (3,598 | ) | |
| 82,788 | | |
| | | |
| (5,441 | ) | |
| 65,022 | | |
| | |
| (1) | The effect of the inclusion of all potentially dilutive securities for 2015 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 period ended June 30, 2015, 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. Cumulative dividends on the Series A Preferred Stock are payable 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; however, the Company’s Board determined not to declare or pay dividends on its Series A Preferred Stock
for the first or second quarter of 2015 and does not currently intend to declare or pay dividends on its 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 the Company’s liquidity position by raising additional capital and/or
refinancing its existing credit facilities.
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, and except that the Company may at its option redeem the Series A Preferred Stock upon a change of
control of the Company. 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.
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.
On January 30, 2015,
the Company completed the First CB Closing. In addition to cash consideration exchanged for the additional interests acquired,
the Operating Partnership issued to the Sellers an aggregate of 10.4 million OP Units. On April 30, 2015, the Company completed
the Second CB Closing. In addition to cash consideration for the additional interests acquired, the Operating Partnership issued
to the Sellers and additional aggregate of 2.0 million OP Units. See Note 6 for more information related to the First CB Closing
and Second CB Closing.
As of June 30, 2015,
there were 77.6 million common shares and OP Units outstanding, of which 64.8 million, or 83.5%, were owned by the Company and
12.8 million, or 16.5%, were owned by other partners. As of June 30, 2015, the fair market value of the OP Units not owned by the
Company was approximately $70.9 million, based on a market value of $5.54 per unit, which was the closing price per share of the
Company’s common stock on the New York Stock Exchange on June 30, 2015.
The following is a
summary of changes in the shares of the Company’s common stock for the periods shown (in thousands):
| | |
Six Months Ended | |
| | |
June 30, | | |
June 30, | |
| | |
2015 | | |
2014 | |
| Common shares at beginning of period | |
| 64,742 | | |
| 64,502 | |
| Issuance of common shares | |
| 112 | | |
| - | |
| Issuance of restricted shares | |
| 56 | | |
| 320 | |
| Forfeiture of restricted shares | |
| (134 | ) | |
| (75 | ) |
| Common shares at end of period | |
| 64,776 | | |
| 64,747 | |
The following is
a summary of changes in the number of OP Units not owned by the Company for the periods shown (in thousands):
| | |
Six
Months Ended | |
| | |
June 30, | | |
June 30, | |
| | |
2015 | | |
2014 | |
| OP Units at beginning of period | |
| 401 | | |
| 434 | |
| Issuance of OP Units | |
| 12,408 | | |
| - | |
| OP Units at end of period | |
| 12,809 | | |
| 434 | |
Dividends and Distributions
During the first
quarter of 2015, the Company’s Board of Directors 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. The Company’s Board of Directors made the
same determination for the second quarter of 2015, and 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 enhancing its liquidity position by raising additional capital and/or refinancing its existing credit facility. As these
dividends were not declared at June 30, 2015, the Company has not accrued them but has included the preferred stock dividends
in the calculation of net income (loss) attributable to common shareholders in the accompanying statement of operations and comprehensive
income (loss).
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 6.5 million. Total shares available for issuance under the Incentive Plan were 5.0 million and 5.1 million
as of June 30, 2015 and December 31, 2014, respectively.
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 June 30, 2015,
total unrecognized compensation cost related to restricted stock awards was $0.8 million and is expected to be recognized over
a remaining weighted average period of 1.2 years.
During the three
months ended June 30, 2015, the Company recognized stock compensation of approximately $0.6 million (net of immaterial vesting
forfeitures). During the three months ended June 30, 2014, the Company recognized stock compensation expense of approximately
$0.5 million (net of immaterial forfeitures) and capitalized stock compensation expense of approximately $0.4 million.
During the six months
ended June 30, 2015, the Company recognized stock compensation of approximately $1.6 million (net of immaterial vesting forfeitures),
of which $0.4 million was related to the First CB Closing and is included in the transaction costs on the consolidated statement
of operations and comprehensive income (loss). During the six months ended June 30, 2014, the Company recognized stock compensation
expense of approximately $0.8 million (net of vesting forfeitures of approximately $0.2 million) and capitalized stock compensation
expense of approximately $0.8 million.
The
following is a summary of the Company’s plan activity for the periods shown (in thousands, except weighted average grant
price):
| | |
Restricted
Stock | | |
Weighted
Average
Grant Price | |
| Unvested shares at December 31, 2014 | |
| 288 | | |
$ | 11.28 | |
| Granted | |
| 56 | | |
| 7.70 | |
| Vested | |
| (67 | ) | |
| 7.60 | |
| Forfeited | |
| (43 | ) | |
| 7.82 | |
| Unvested shares at June 30, 2015 | |
| 234 | | |
| 7.71 | |
15. Related Party Transactions
The Company leases
aircraft from entities in which two of its former executive officers have an ownership interest. For the three and six months
ended June 30, 2015, the Company incurred lease payments related to these entities of $0.1 million and $0.2 million, respectively.
For the three and six months ended June 30, 2014, the Company incurred travel costs to these entities of an immaterial amount.
In addition to the minimum lease payments, the Company incurred related operating expenses in connection with the running of the
aircraft. For the three months ended June 30, 2015 and 2014, the Company incurred operating costs of $0.3 million and $0.5
million, respectively. For the six months ended June 30, 2015 and 2014, the Company incurred operating costs, exclusive of the
lease expenses of $0.4 million and $1.1 million, respectively. During June 2015 the Company terminated the employment of the three
pilots and one mechanic, incurring a severance obligation of $0.1 million, the vast majority of which will be paid during the
third quarter of 2015. Commensurate with its intention to no longer use the aircraft, the company modified the insurance policies
to cover ground risk and maintenance flights only. The Company is in active discussions to terminate the leases.
The Company is party
to an agreement with an initial term of five years with a subsidiary of an entity affiliated with one of the Company’s directors
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 $0.1 million 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.
The Company is not the insurer for such insurance services and products sold. The Company remitted $0.3 million and $0.3 million
for the three months ended June 30, 2015 and 2014, respectively and $0.7 million and $0.6 million for the six months ended June
30, 2015 and 2014, respectively.
The Company is party
to an arrangement with an entity, CB Townhome Communities, LLP (“CBTC, LLP”), in which a nominee for the Company’s
board of directors, Dr. John R. McWhirter, has an ownership interest. Historically, the Copper Beech properties have paid CBTC,
LLP for the use of a plane owned by another entity in which Dr. McWhirter has an ownership interest, Blackberry Aviation, LLC
(“Blackberry”). CBTC, LLP operates the plane which is owned by Blackberry and, based upon estimated expenses to operate
the plane (including pilots, fuel, storage, debt service, taxes, and other related operating expenses) determines a cost per flight
hour for the upcoming fiscal year. The Copper Beech properties collectively purchase a certain number of hours of flight time
and allocate the aggregate cost to the Copper Beech properties based upon the number of beds at each property relative to the
total number of beds in the Copper Beech Portfolio. The fiscal year for this arrangement runs from August 1 through July 31 and
for year beginning August 1, 2014, the Copper Beech entities agreed to purchase 70 flight hours with a cost of $0.4 million which
will be incurred ratably throughout the year. Subsequent to June 30, 2015, the Company notified Dr. McWhirter that it does not
intend to renew this relationship for the period beginning August 1, 2015 and accordingly, will not incur any charges after July
2015.
In connection with
the consummation of the acquisition of additional membership interests in the Copper Beech Portfolio, the Company and the Operating
Partnership entered into a tax protection agreement with certain of the Sellers, including one or more entities in which Dr. John
R. McWhirter, a nominee for election as director of the Company, has an ownership interest. Pursuant to the tax protection agreement,
unless the Company and the Operating Partnership indemnify the applicable Sellers for certain resulting tax liabilities, the Company
and the Operating Partnership have agreed not to sell or otherwise to dispose of in a taxable exchange during the 7-year tax protection
period, any of the seventeen protected properties set forth in the tax protection agreement. Further, the Company and the Operating
Partnership also agreed to allocate to the Sellers, during the 7-year tax protection period, an aggregate amount of at least $100
million of debt of the Operating Partnership (which amount decreases ratably as the number of OP Units held by the Sellers decreases)
without any requirement that any Seller guarantee or directly bear the risk for such indebtedness and, after the end of the 7-year
period, to use commercially reasonable efforts to permit the Sellers to enter into guarantees of “qualifying” debt
or agreements to return a portion of their deficit capital account so as to permit the Sellers to avoid certain adverse tax consequences.
In connection with the acquisition of additional membership interests in the Copper Beech Portfolio, the Company also entered
into a registration rights agreement with certain of the Sellers, including one or more entities in which Dr. John R. McWhirter
has an ownership interest, pursuant to which the Company agreed to file a shelf registration statement no later than December
31, 2015, covering resales of shares of the Company’s common stock, issuable upon redemption of the OP Units issued to the
Sellers as consideration for the acquisition. In addition, the Company agreed to use commercially reasonable efforts to have the
registration statement declared effective as soon as practicable after filing and to keep the registration statement effective
until such time as the Sellers no longer own any OP Units or shares of the Company’s common stock issued upon conversion
of the OP Units. Additionally, as of June 30, 2015, one or more entities in which Dr. McWhirter has an ownership interest owned
an interest in joint ventures with the Company and the other Sellers, which own 5 of the Copper Beech Portfolio properties (see
Note 1).
The unimproved real
property located in Charlotte, North Carolina and owned by Copper Beech Townhome Communities Thirty One, LLC serves as collateral
for a loan in the original principal amount of $1.5 million which was extended by Clearfield Bank & Trust Company to John
R. McWhirter and Jeanette D. McWhirter on December 23, 2008. This loan has a current outstanding principal balance of $1.5
million and as a condition of the Copper Beech transaction, the Company assumed financial responsibility for the loan. It
is considered to be a related party transaction, because the Company did not legally assume the loan, but rather Mr. and Mrs.
McWhirter remain the borrowers and the Company makes the debt service payments on their behalf.
The Company is party
to another arrangement with CBTC, LLP whereby CBTC, LLP employs all but one of the people who directly operate the Company’s
Copper Beech properties (at the property level and in the Company’s State College, PA satellite office). The individual
who has direct responsibilities related to the Company’s Copper Beech properties who is not an employee of CBTC, LLP is
a party to a consulting agreement with one of the Company’s wholly-owned entities. CBTC, LLP does not earn any profit as
a result of this arrangement as there is no mark-up of the direct costs associated with the employment of the CBTC, LLP personnel.
As described in Notes
1, 6 and 7, the Company retains a noncontrolling interest in several Copper Beech entities in which Dr. John McWhirter also holds
an interest.
As of June 30, 2015
the Company has net payables of $1.4 million related to borrowings between properties that were consolidated into the Company’s
balance sheet upon acquisition. These net payables are a result of a combination of amounts due to other non-consolidated Copper
Beech entities and entities in which Dr. John McWhirter has an ownership interest, but in which Campus Crest has no ownership
interest. Additionally, the Company’s balance sheet includes $2.6 million of outstanding amounts due to certain CB Investors,
which related to amounts funded prior to Campus Crest’s involvement with Copper Beech. Both the $1.4 million and $2.6 million
are currently the subject of on-going negotiations with certain of the CB Investors, the result of which may decrease the amount
payable to the CB Investors, thereby potentially increasing the gain on the purchase of Copper Beech.
16. Segments
The Company has identified
three reportable business segments: (i) Grove and evo® operations (ii) Copper Beech operations and (iii) 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 three reportable operating segments. Prior to the First CB Closing in January 2015, the Company’s segments
consisted of student housing operations and property management services. Upon the First CB Closing, the Company added the Copper
Beech operations as a new reportable operating segment. Beginning with the first quarter of 2015, the Company’s chief
operating decision maker began reviewing the separate operating results of the three operating segments to make decisions about
resources to be allocated to each segment and assess each segment’s performance. Prior to the three months ended September
30, 2014, the Company reported construction and development service as part of the property management segment. Upon discontinuation
of the construction and development operations, all construction and development activities are reported in discontinued operations.
The following tables
set forth the Company’s segment information for the periods presented (in thousands):
| | |
Three Months Ended June
30, | | |
Six Months Ended June
30, | |
| | |
2015 | | |
2014 | | |
2015 | | |
2014 | |
| | |
| | |
| | |
| | |
| |
| Grove and evo Operations: | |
| | | |
| | | |
| | | |
| | |
| Revenues from external customers | |
$ | 30,706 | | |
$ | 24,663 | | |
$ | 61,607 | | |
$ | 49,271 | |
| Operating expenses | |
| 21,422 | | |
| 17,841 | | |
| 43,149 | | |
| 35,341 | |
| Income from wholly-owned student housing operations | |
| 9,284 | | |
| 6,822 | | |
| 18,458 | | |
| 13,930 | |
| Severance expense | |
| (62 | ) | |
| - | | |
| (570 | ) | |
| - | |
| Equity in earnings (losses) of unconsolidated entities | |
| (1,069 | ) | |
| 168 | | |
| (2,441 | ) | |
| 419 | |
| Operating income | |
$ | 8,153 | | |
$ | 6,990 | | |
$ | 15,447 | | |
$ | 14,349 | |
| Depreciation and amortization | |
$ | 7,520 | | |
$ | 6,974 | | |
$ | 15,237 | | |
$ | 13,744 | |
| Capital expenditures | |
$ | 12,812 | | |
$ | 51,087 | | |
$ | 14,188 | | |
$ | 81,305 | |
| Investment in unconsolidated entities | |
$ | 42,713 | | |
$ | 104,714 | | |
$ | 42,713 | | |
$ | 104,714 | |
| Total segment assets at end of period | |
$ | 895,568 | | |
$ | 963,666 | | |
$ | 895,568 | | |
$ | 963,666 | |
| | |
| | | |
| | | |
| | | |
| | |
| Copper Beech Operations: | |
| | | |
| | | |
| | | |
| | |
| Revenues from external customers | |
$ | 14,761 | | |
$ | - | | |
$ | 23,960 | | |
$ | - | |
| Operating expenses (excluding amortization of in place leases) | |
| 10,866 | | |
| - | | |
| 17,053 | | |
| - | |
| Intangible amortization of in place leases | |
| 14,864 | | |
| - | | |
| 23,525 | | |
| - | |
| Income from wholly-owned student housing operations | |
| (10,969 | ) | |
| - | | |
| (16,618 | ) | |
| - | |
| Equity in earnings (losses) of unconsolidated entities | |
| 1,859 | | |
| (1,059 | ) | |
| 1,082 | | |
| (991 | ) |
| Operating loss | |
$ | (9,110 | ) | |
$ | (1,059 | ) | |
$ | (15,536 | ) | |
$ | (991 | ) |
| Depreciation and amortization | |
$ | 19,569 | | |
$ | - | | |
$ | 31,103 | | |
$ | - | |
| Capital expenditures | |
$ | 700 | | |
$ | - | | |
$ | 1,038 | | |
$ | - | |
| Investment in unconsolidated entities | |
$ | 45,017 | | |
$ | 265,824 | | |
$ | 45,017 | | |
$ | 265,824 | |
| Total segment assets at end of period | |
$ | 688,560 | | |
$ | 265,824 | | |
$ | 688,560 | | |
$ | 265,824 | |
| | |
| | | |
| | | |
| | | |
| | |
| Property Management Services: | |
| | | |
| | | |
| | | |
| | |
| Revenues from external customers | |
$ | 212 | | |
$ | 327 | | |
$ | 441 | | |
$ | 430 | |
| Intersegment revenues | |
| 93 | | |
| 105 | | |
| 215 | | |
| 163 | |
| Total revenues | |
| 305 | | |
| 432 | | |
| 656 | | |
| 593 | |
| Operating expenses | |
| 449 | | |
| 617 | | |
| 682 | | |
| 982 | |
| Operating loss | |
$ | (144 | ) | |
$ | (185 | ) | |
$ | (26 | ) | |
$ | (389 | ) |
| Depreciation and amortization | |
$ | 449 | | |
$ | 24 | | |
$ | 637 | | |
$ | 25 | |
| Total segment assets at end of period | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
| | |
| | | |
| | | |
| | | |
| | |
| Reconciliations: | |
| | | |
| | | |
| | | |
| | |
| Total segment revenues | |
$ | 45,772 | | |
$ | 25,095 | | |
$ | 86,223 | | |
$ | 49,864 | |
| Elimination of intersegment revenues | |
| (93 | ) | |
| (105 | ) | |
| (215 | ) | |
| (163 | ) |
| Total consolidated revenues | |
$ | 45,679 | | |
$ | 24,990 | | |
$ | 86,008 | | |
$ | 49,701 | |
| | |
| | | |
| | | |
| | | |
| | |
| Segment operating income (loss) | |
$ | (1,101 | ) | |
$ | 5,746 | | |
$ | (115 | ) | |
$ | 12,969 | |
| Interest expense , net | |
| (9,270 | ) | |
| (2,950 | ) | |
| (17,058 | ) | |
| (6,326 | ) |
| Transaction costs | |
| (1,640 | ) | |
| (1,460 | ) | |
| (3,132 | ) | |
| (2,045 | ) |
| Gain on purchase of Copper Beech | |
| 6,393 | | |
| - | | |
| 28,035 | | |
| - | |
| Gain on sale of land and unconsolidated joint ventures | |
| - | | |
| - | | |
| 7,748 | | |
| - | |
| Corporate depreciation and amortization | |
| (323 | ) | |
| (255 | ) | |
| (640 | ) | |
| (464 | ) |
| Net unallocated expenses related to
corporate overhead(1) | |
| (10,516 | ) | |
| (3,161 | ) | |
| (18,631 | ) | |
| (6,361 | ) |
| Write off of other assets | |
| (597 | ) | |
| - | | |
| (1,366 | ) | |
| - | |
| Other income (expense) | |
| 4 | | |
| 104 | | |
| (51 | ) | |
| 170 | |
| Loss from continuing operations, before income tax benefit | |
$ | (17,050 | ) | |
$ | (1,976 | ) | |
$ | (5,210 | ) | |
$ | (2,057 | ) |
| | |
| | | |
| | | |
| | | |
| | |
| Total segment assets | |
$ | 1,584,128 | | |
$ | 1,229,490 | | |
$ | 1,584,128 | | |
$ | 1,229,490 | |
| Unallocated corporate assets and eliminations | |
| 6,202 | | |
| 43,146 | | |
| 6,202 | | |
| 43,146 | |
| Total assets at end of period | |
$ | 1,590,330 | | |
$ | 1,272,636 | | |
$ | 1,590,330 | | |
$ | 1,272,636 | |
| (1) | The net unallocated expenses
related to corporate overhead primarily consists of $10.4 million and $18.5 million of
general and administrative costs for the three and six months ended June 30, 2015 respectively.
For the three and six months ended June 30, 2015, these amounts include $2.4 million
of costs associated with the ongoing strategic repositioning and restructuring initiatives. |
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 adjacent to campuses and leased from entities
affiliated with the respective campus. 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 June 30, 2015 are as follows (in thousands):
| 2015 | |
$ | 1,460 | |
| 2016 | |
| 2,469 | |
| 2017 | |
| 2,143 | |
| 2018 | |
| 1,513 | |
| 2019 | |
| 1,327 | |
| Thereafter | |
| 26,821 | (1) |
| Total future minimum lease payments | |
$ | 35,733 | |
| (1) | The Company’s lease
obligations average $1.2 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 for its corporate headquarters office of $0.3 million and $0.2 million for the three months ended June 30, 2015 and 2014,
respectively and $0.6 million and $0.4 million for the six months ended June 30, 2015 and 2014, respectively.
The Company guarantees
certain mortgage and construction loans and revolving credit facilities related to the Company’s unconsolidated joint ventures.
As of June 30, 2015, the Company guarantees: up to 100% of $11.2 million of debt through September 2015 for HSRE I; up to 50%
of $139.5 million of debt with varying maturity dates from July 2015 through January 2016 for Montreal, HSRE V and HSRE VI; and
up to 25% of $80.5 million of debt maturing from September 2015 through September 2018 related to HSRE V, HSRE VI and HSRE X.
Certain loans which will mature in 2015 are in the process of being refinanced as of the date of this filing. In connection with
the guarantee for HSRE I, there was $3.0 million held in escrow that could be used to satisfy a portion of the amount potentially
paid under the guarantee. During the quarter ended June 30, 2015, this escrow amount was returned to the Company as a condition
of the sale of The Grove at Conway and The Grove at Lawrence. 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 June 30, 2015. The Company estimated the fair value of the guarantees to be $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 $5.5 million is presented in other liabilities
in the accompanying consolidated balance sheet as of June 30, 2015 and December 31, 2014. The estimated fair value of these guarantees
was the amount of the Company’s obligation to fund the excess of the joint ventures’ indebtedness over the estimated
fair value of the collateral of the joint ventures’ indebtedness, which is the underlying value of the properties.
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 ($90.6 million at the June
30, 2015 exchange rate). As of June 30, 2015, the outstanding balance of the CSH Montreal Debt was CAD 108.6 million ($87.8 million
at the June 30, 2015 exchange rate), of which the Company guaranteed CAD 54.3 million ($43.9 million at the June 30, 2015 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.
The Company does
not expect to be required to perform under any of the guarantees discussed above. 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, except as disclosed above.
See Note 18 for a
discussion of guarantees related to a Copper Beech entity under which the Company expects that it may be required to perform.
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 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 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 has filed 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 operations.
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. Subsequent
Events
In addition to certain
matters discussed elsewhere in these notes, the Company noted the following subsequent events:
Notice of Sole Remedy under Indenture
for 4.75% Exchangeable Senior Notes due 2018
On August 26, 2015,
the Operating Partnership delivered a notice (the “Notice”) to the holders of its 4.75% Exchangeable Senior Notes
due 2018 (the “Exchangeable Senior Notes”), with a copy of such Notice to the Trustee, pursuant to the Indenture dated
as of October 9, 2013 (the “Indenture”), by and among the Operating Partnership, the Company, and U.S. Bank National
Association (the “Trustee”), The Notice provided that the Company anticipated it would be unable to timely file this
Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 by September 1, 2015, which would result in a reporting event
of default under the Indenture. The Notice further provided that, pursuant to Section 6.01(b) of the Indenture, the Operating
Partnership elected that the sole remedy for the reporting event of default would consist exclusively of the right to receive
additional interest on the Exchangeable Senior Notes at a rate equal to (i) 0.25% per annum of the outstanding principal amount
of the Exchangeable Senior Notes for the first 90 days of the 180-day period in which such reporting event of default is continuing,
beginning on, and including, the date on which such reporting event of default first occurs and (ii) 0.50% per annum of the outstanding
principal amount of the Exchangeable Senior Notes for the last 90 days of such 180-day period as long as such reporting event
of default is continuing, payable subject to and in accordance with the terms and conditions of the Indenture.
Communications with Lenders Related
to Certain Debt Obligations
Although the Company
no longer has an equity interest in the Kalamazoo Phase 1 property owned by Copper Beech Townhome Communities Twenty Three, LLC
("CBTC 23"), the Company and the Operating Partnership have a non-recourse carve-out guaranty and a 10% principal repayment
guaranty (the “CBTC 23 Guaranty”) and the Operating Partnership was required to deliver a $1.0 million irrevocable
standby letter of credit on behalf of CBTC 23 for the benefit of the lender (the “CBTC 23 Letter of Credit”). The
Company has received a copy of a notice of default addressed to CBTC 23 dated June 26, 2015, from the special servicer of the
CBTC 23 loan, and although the special servicer has not made a demand under the CBTC 23 Guaranty, the Company believes that such
a demand may be forthcoming. The default on the CBTC 23 loan does not create a default by the Company under any of its outstanding
indebtedness. The purchase and sale agreement with the then members of Copper Beech Townhome Communities, LLC (“CBTC”)
and Copper Beech Townhome Communities (PA), LLC (“CBTC PA” and, together with CBTC, “Copper Beech”) (such
former members of CBTC and CBTC PA, collectively, the “Sellers”) requires the Sellers to indemnify the Company and
the Operating Partnership for all indemnifiable losses related to the CBTC 23 Guaranty and the CBTC 23 Letter of Credit, with
a maximum indemnity amount of $4.0 million for the 10% principal repayment portion of the CBTC 23 Guaranty (expected to result
in a payment obligation of less than $3.0 million) and the CBTC 23 Letter of Credit and with no maximum indemnity amount for the
non-recourse carve-out portion of the CBTC 23 Guaranty. The Company intends to enforce the indemnity in the Copper Beech purchase
and sale agreement if the CBTC 23 Guaranty and/or the CBTC 23 Letter of Credit is called by the servicers for the CBTC 23 loan.
As of June 30, 2015, the Company has recorded a liability of $4.0 million included in other liabilities in the accompanying consolidated
balance sheet for the estimated fair value of these guarantees and a receivable for the indemnification assets of $4.0 million
included in other assets in the accompanying consolidated balance sheet. On August 11, 2015, the Company received a request to
draw the CBTC Letter of Credit, and in response cash-funded the $1.0 million obligation, thereby extinguishing the outstanding
CBTC Letter of Credit. On August 19, 2015 the Company sent a demand letter to Dr. McWhirter requesting that the Sellers perform
under the indemnity included in the Copper Beech Purchase and Sale Agreement. As of September 29, 2015, the Sellers have not reimbursed
the Company for the $1.0 million funded under the CBTC Letter of Credit.
Campus Crest Communities,
Inc. and Campus Crest Operating Partnership, LP are guarantors under a credit agreement dated January 14, 2014, related to the
CSH Montreal Debt (the “Montreal Credit Agreement”). Section 10.4(2) of the Montreal Credit Agreement requires CSH
Montreal to provide monthly reports within 45 days of each month end. On April 15, 2015, the parties to the Montreal Credit
Agreement executed a Fourth Amendment to the Montreal Credit Agreement, which waived compliance with the provisions of Section
10.4(2) until April 15, 2015. The Fourth Amendment also deleted some of the monthly reporting requirements in Section 10.4(2)
of the Montreal Credit Agreement. The failure to deliver the monthly reports under Section 10.4(2) did not constitute an event
of default under the Montreal Credit Agreement because the Fourth Amendment was executed before the applicable notice and cure
period lapsed. Section 10.4(3) of the Montreal Credit Agreement requires CSH Montreal to provide quarterly reports within
45 days of each fiscal quarter end. On June 22, 2015, the parties to the Montreal Credit Agreement executed a Fifth Amendment
to the Montreal Credit Agreement, which waived compliance with the provisions of Section 10.4(3) until July 31, 2015. The
Fifth Amendment also modified Section 10.4(3) of the Montreal Credit Agreement as it relates to the 45-day reporting requirement
for the fiscal quarter ended June 30, 2015 to extend that period from 45 days to 60 days. The Company delivered the internally
prepared financial statements and compliance certificate required by the Montreal Credit Agreement and, accordingly, believes
it is in compliance with the Montreal Credit Agreement.
As described in Note
9, in January 2013, the Company (the “Borrower”) 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 $50.0 million term loan (the “Term Loan”, together
with the “Revolving Credit Facility”, the “Amended Credit Facility”). On May 15, 2015, the parties
to this Amended Credit Facility executed a waiver of the reporting requirements, specifically the waiver states: “(a) for
purposes of the calendar quarter ending in March 2015, (1) the Borrower shall deliver quarterly financials in accordance with
Section 5.03(c) of the Credit Agreement on or before July 31, 2015, and (2) the Borrower shall deliver the quarterly Borrowing
Base Certificate in accordance with clause (i) of Section 5.03(d) of the Credit Agreement on or before July 31, 2015; and (b)
for purposes of the calendar quarter ending in June 2015, (1) the Borrower shall deliver quarterly financials in accordance with
Section 5.03(c) of the Credit Agreement within sixty (60) days after the end of such quarter, and (2) the Borrower shall deliver
the quarterly Borrowing Base Certificate in accordance with clause (i) of Section 5.03(d) of the Credit Agreement within sixty
(60) days after the end of such quarter.”
Because
the Company was unable to complete its Form 10-Q for the quarter ended June 30, 2015 within the 60-day period granted by
the May 15, 2015 waiver, the parties to the Amended Credit Facility executed a waiver dated as of August 28, 2015 that
extended the filing deadline under the reporting covenant in the Amended Credit Facility for this Form 10-Q for the period
ended June 30, 2015 until September 30, 2015. As a consequence of executing this waiver the Company believes it is in
compliance with the Amended Credit Facility. The Company agreed to pay a deferred fee of $0.3 million to the other parties to
the Amended Credit Facility as a condition of this waiver, which fee shall be payable upon the earlier of (i) the closing of
a proposed sale transaction for all of the equity in, or all or substantially all of the assets of the Company (a
“Proposed Sale Transaction”) and (ii) December 31, 2015. Pursuant to the waiver, if the Company has not
entered into an agreement (a “Sale Agreement”) for a Proposed Sale Transaction by September 30, 2015, then
beginning on September 30, 2015 and on the thirtieth day of each calendar month thereafter, the Company has agreed to prepay
an aggregate amount under the Amended Credit Facility equal to the amount of the Company’s unrestricted cash, if any,
on such date. The waiver defines unrestricted cash as the difference (if positive) of (i) cash and cash equivalents that are
not subject to any pledge, lien or control agreement, less (ii) the sum of (a) $15.0 million and (b) amounts that have been
placed with third parties as deposits or security for contractual obligations. These prepayments under the Amended Credit
Facility will not be refundable, and the Company’s obligation to continue such prepayments will terminate on the date
that a Sale Agreement is executed. If the Company has not entered into a Sale Agreement by November 15, 2015, the lenders
shall receive a security interest in the equity of the subsidiary guarantors under the Amended Credit Facility. Further, in
connection with the extension of the waiver, the Company agreed that, unless all of the lenders under the Amended Credit
Facility otherwise agree, the Company will not request any further advances under the Amended Credit Facility other than
advances under outstanding letters of credit.
HSRE Portfolio Changes
On May 1,
2015, the Company entered into a nonbinding membership interest purchase and sale agreement with HSRE which will result in
(i) HSRE acquiring all of the ownership interests in the entities which own The Grove at Norman, Oklahoma and The Grove at
Louisville, Kentucky, and (ii) the Company acquiring all of the ownership interests in the entities which own The Grove at
Fayetteville, Arkansas, The Grove at Indiana, Pennsylvania and The Grove at Greensboro, North Carolina. This membership
interest purchase and sale agreement is based upon the original amount of equity contributed to each of these properties.
The Company has placed $5.0 million in a restricted cash account related to the closing of this transaction, an amount in
excess of the net proceeds needed for the closing of this transaction. On August 7, 2015, the Company completed the purchase
of HSRE’s interest in The Grove at Fayetteville, for which the Company paid $1.0 million and concurrent with the
purchase transaction, the mortgage was refinanced, which required a $5.0 million principal reduction, which was funded by the
Company. On August 7, 2015, the Company also completed the sale of its interest in The Grove at Norman to HSRE for $1.6
million plus reimbursement by HSRE of $0.5 million of a mortgage principal paydown that was made earlier in 2015. Concurrent
with the Norman transaction, the mortgage was refinanced which extinguished the Company’s guarantee obligation related
to that loan. As of the date of the filing, the Company cannot estimate the financial statement effects of these
transactions.
CSH Montreal Agreement Buyout
In June of
2015, the Company entered into an agreement with Beaumont, CSH Montreal and certain other entities related to a potential
buyout of the Company's ownership interests in CSH Montreal and the termination of all service agreements with affiliates of
the Company related to the two evo® Montreal properties. As part of the closing, the current credit facility will
be paid in full, thereby releasing the Company from all guaranty and indemnity obligations associated with the credit
facility currently in place for the two evo® Montreal properties. As of August 31, 2015, the aforementioned
agreement with Beaumont, CSH Montreal and certain other entities had expired. As a condition of entering into the
contract, Beaumont was required to post CAD 0.2 million ($0.2 million at the June 30, 2015 exchange rate) with an escrow
agent. Upon the expiration of the agreement the Company made demand for the CAD 0.2 million and received the funds on
September 8, 2015. On September 1, 2015 the Company funded CAD 1.4 million ($1.1 million at the June 30, 2015 exchange
rate) which was its proportionate share of a capital call, the proceeds of which will be used to pay the interest on the
construction loan as well as other operating expenses. Currently, the Company estimates that it will provide no
additional capital funding during the balance of 2015. However, if CSH Montreal fails to meet its projected occupancy at both
of its properties, and instead maintains its current occupancy, the Company expects to fund an additional CAD 2.0 million
($1.6 million at the June 30, 2015 exchange rate) during the remainder of 2015, which is in addition to the $0.8 million that
the Company has already funded to date during the year, exclusive of the funding on September 1, 2015. At the time of
filing, the Company is concurrently pursuing: (i) a sale of its interest in CSH Montreal to its joint venture partner coupled
with a refinancing of the construction loan; and (ii) a sale of the properties to a third party.
San Angelo Sale
On June 15, 2015,
the Company entered into a purchase and sale agreement with a third party that would result in the sale of 100% of the Company’s
ownership interest in The Grove at San Angelo, Texas. This transaction closed on September 10, 2015. As of the date of this filing,
the Company cannot estimate the financial statement effects of this transaction.
Fire at Copper Beech at IUP
On August
16, 2015, a fire broke out at the Copper Beech property at Indiana University of Pennsylvania (“IUP”). There were
no injuries, but one unit was destroyed, two units suffered water damage and two additional units suffered smoke
damage. Additionally, the entire building in which these units are situated suffered cable and utility outages. The Company
is working to repair the damage including working with our insurance carriers to address our claims. At the time of this
filing, the Company cannot estimate the financial statement effects of this event.
Settlement of Pullman insurance claim
On July 21, 2015,
the Company received $4.3 million as the final settlement of its property damage claim related to a 2013 fire at The Grove in
Pullman, Washington.
Resolution of Bellingham, Washington Development
In October 2013,
Campus Crest entered into certain agreements and instruments with Mr. Derek Stebner, Langstan Management,
LLC (“Langstan”), a Montana limited liability company, and Lincoln Street Retail, LLC (“LSR”), a
Delaware limited liability company, to develop a property in Bellingham, Washington. The development was to include
multifamily housing, student housing and retail space, though Campus Crest was to only have an economic interest in the
student housing portion of the development. Site preparation and infrastructure work was initiated and vertical construction
began on the retail portion of the development, but ultimately Campus Crest elected not to proceed with the construction of
student housing and, accordingly as part of the strategic repositioning announced in late 2014 recorded an impairment charge
of $2.6 million related to this asset. In January of 2015, Campus Crest sold its portion of the real estate as part of a
portfolio of six undeveloped land parcels. Campus Crest concluded its involvement with Mr. Stebner, Langstan and LSR through
an agreement and mutual release executed on August 3, 2015 pursuant to which Campus Crest conveyed its interest in LSR to
Langstan and concurrently terminated various agreements related to the development of the project. As consideration for the
foregoing, Campus Crest refunded a deposit in the amount of $0.1 million to Langstan and additionally, remitted $0.7 million
into an escrow account for the purpose of funding the completion of certain ongoing work at the site.
Copier Lease
On August 10,
2015, the Company entered into an agreement with Canon Solutions American, Inc. (CSA) to lease copier equipment, which
resulted in a capital lease obligation of $1.4 million. The Company previously had lease agreements with various finance
companies to lease Xerox copiers which, over the next five years require an aggregate of $0.8 million in payments. The
company expects to recognize this $0.8 million as expense during the three months ended September 30, 2015.
CSA’s agreement included a payment to the Company in the amount of $0.9 million upon installation and testing of the
CSA equipment which is intended to cover the cost of exiting the prior leases. The Company will recognize the $0.9 million
payment from CSA in other liabilities in its consolidated balance sheet as of September 30, 2015 and will amortize it on a
straight-line basis over the five year lease agreement. The company received $0.9 million from CSA on August 21, 2015. The
Company is in active discussions with the finance companies for the Xerox copiers to negotiate early terminations of those
leases.
Corvallis, Oregon Land Purchase Agreement
The
Company recently extended to September 24, 2015 its ability to purchase approximately 90 acres in Corvallis, Oregon that
was recently approved for student housing development. The purchase price is $3.0 million plus estimated closing costs. Given
the decision to exit the development and construction business in 2014, the Company has assigned the contract to an
unrelated party (the “Assignee”), and the Assignee acquired the subject property on September 24, 2015 and
executed a promissory note in favor of the Company in the amount of $2.25 million (the “Loan”). The promissory
note is (i) due and payable in full on November 15, 2015 and (ii) secured by a pledge of 100% of the membership interests in
the Assignee. Upon repayment of the Loan by the Assignee, the Company will have been reimbursed in full for all expenses
related to its pursuit of the subject property.
ITEM 2. 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.
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 our Annual Report on Form 10-K for the year ended December 31, 2014,
and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2015, 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 and close on acquisitions,
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, reporting and other covenants of the agreements that govern our existing debt; |
| · | our
failure to prepare and file timely our periodic reports with the SEC, which may make
it more difficult for us to access the public markets to raise debt or equity capital; |
| · | 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.
Overview
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.
On February 26, 2013,
the Company and subsidiaries of the Operating Partnership entered into a purchase and sale agreement (the “Initial Purchase
Agreement”) with the then members of Copper Beech Townhome Communities, LLC (“CBTC”) and Copper Beech Townhome
Communities (PA), LLC (“CBTC PA” and, together with CBTC, “Copper Beech”) (such former members of CBTC
and CBTC PA, collectively, the “Sellers”). Pursuant to the terms of the Initial Purchase Agreement, the Company initially
acquired a 48% interest in a portfolio of 35 student housing properties and 3 other entities (the “Copper Beech Portfolio”),
for an initial purchase price of $230.6 million. The Initial Purchase Agreement provided the Company with options to acquire the
remaining interests in the Copper Beech Portfolio over time. Subsequent to the Initial Purchase Agreement, the Company formed
a variable interest entity (“VIE”) with the Sellers to develop, construct and manage the Copper Beech at Ames student
housing property. The Company concluded that it was the primary beneficiary of Copper Beech at Ames as the Company funded all
of the equity of the VIE, while holding only a 48% interest in the VIE.
On January 30,
2015, the Company completed the acquisition (the “First CB Closing”) of (i) substantially all of the
Sellers’ remaining interests in 27 student housing properties, two undeveloped land parcels and a corporate office
building and (ii) the Sellers’ remaining interests in Copper Beech at Ames pursuant to that certain Second Amendment
(the “Second Amendment”) to the Initial Purchase Agreement.
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. On April 30, 2015 (the "Second CB Closing"),
the Company completed the acquisition of the Sellers’ interests in two of the properties in the Copper Beech Portfolio in
which the Company previously held a 48% interest – Copper Beech San Marcos Phase 1 and Copper Beech IUP Buy.
Following the consummation
of the First CB Closing, the Second CB Closing, and as of June 30, 2015, the Company held a 100% interest in Copper Beech at Ames
and the following interests in the remaining Copper Beech Portfolio:
| · | 100%
interest in 29 student housing properties; |
| · | 100%
interest in two undeveloped land parcels and one corporate office building; |
| · | 48%
interest in five student housing properties; and |
| · | no
ownership interest in one student housing property (Copper Beech Kalamazoo – Phase
I). |
As consideration
for the additional interests acquired in the First CB Closing, the Company paid to the Sellers aggregate cash consideration of
$58.9 million and the Operating Partnership issued to the Sellers an aggregate of approximately 10.4 million ($71.3 million) OP
Units. As consideration for the Second CB Closing, the Company paid to the Sellers $1.4 million in cash and the Operating Partnership
issued to the Sellers approximately 2.0 million ($13.0 million) OP Units. The OP Units were valued at the closing price of the
Company’s stock on the respective closing dates. Additionally, the Company surrendered all of its previous 48% ownership
interest in one of the properties (Copper Beech Kalamazoo – Phase I) in the Copper Beech Portfolio as part of the terms
of the Second Amendment. The Company continues to hold a 48% ownership interest in Copper Beech Kalamazoo – Phase II as
a result of not receiving lender consent to reduce its ownership interest to zero.
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 June 30, 2015, we owned interests in 44 operating student housing The Grove® properties
containing approximately 9,100 apartment units and 24,700 beds. Thirty-six of our operating The Grove® properties
are wholly-owned and eight of our The Grove® properties are owned through joint ventures with HSRE. As of
June 30, 2015, we also owned interests in 35 operating student housing Copper Beech branded properties containing approximately
6,200 apartment units and 16,500 beds. Thirty of our operating Copper Beech branded properties are wholly-owned and 5 of our Copper
Beech branded properties are owned through joint ventures with the CB Investors. As of June 30, 2015, we also owned interests
in three operating student housing evo® properties containing approximately 1,500 units and 3,100
beds and owned one wholly-owned redevelopment property containing approximately 170 units and 340 beds. As of June 30, 2015 our
operating portfolio consisted of the following:
| | |
Properties in | | |
| | |
Number | | |
Number | |
| | |
Operation | | |
Ownership | | |
of Units | | |
of Beds | |
| Wholly-owned Grove poperties
(1) | |
| 36 | | |
| 100.0 | % | |
| 7,305 | | |
| 19,945 | |
| Joint venture Grove properties: | |
| | | |
| | | |
| | | |
| | |
| HSRE I | |
| 1 | | |
| 63.9 | % | |
| 192 | | |
| 504 | |
| HSRE V | |
| 2 | | |
| 10.0 | % | |
| 456 | | |
| 1,244 | |
| HSRE VI | |
| 3 | | |
| 20.0 | % | |
| 664 | | |
| 1,784 | |
| HSRE X | |
| 2 | | |
| 30.0 | % | |
| 468 | | |
| 1,240 | |
| Total Grove properties | |
| 44 | | |
| | | |
| 9,085 | | |
| 24,717 | |
| | |
| | | |
| | | |
| | | |
| | |
| 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 (2) | |
| | | |
| | | |
| | | |
| | |
| Wholly-owned Copper Beech properties | |
| 30 | | |
| 100.0 | % | |
| 4,473 | | |
| 12,156 | |
| Joint venture Copper Beech properties: | |
| | | |
| | | |
| | | |
| | |
| Campus Crest & CB Investors | |
| 5 | | |
| 48.0 | % | |
| 1,732 | | |
| 4,343 | |
| Total Copper Beech properties | |
| 35 | | |
| | | |
| 6,205 | | |
| 16,499 | |
| | |
| | | |
| | | |
| | | |
| | |
| Total Portfolio
(3) | |
| 82 | | |
| | | |
| 16,837 | | |
| 44,289 | |
| (1) | 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. |
| (2) | As of June 30, 2015 we
had an effective interest in the CB Portfolio for the following properties: 100% for
30 properties and 48% for 5 properties. See Note 6 to the accompanying consolidated financial
statements. |
| (3) | The redevelopment of our
100% owned property in Toledo, OH, which was acquired in March 2013, is excluded. |
Strategic Repositioning
The Company continues
to execute its strategic repositioning which began during the third quarter of 2014 and 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 were disposed of during the quarter ended March 31, 2015 (see Note
7 to the accompanying consolidated financial statements) and the remaining of which the
Company expects to dispose of during the remainder of 2015); and, |
| (4) | Undergoing a review of strategic
alternatives. |
Joint Venture Partners
We are a party to
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 and medical office space.
As of June 30, 2015, we hold eight operating joint venture properties with HSRE which include Grove properties. In January 2013,
we entered into a joint venture with HSRE and Brandywine to develop and operate evo® at Cira Centre South, which opened
in August 2014 for the 2014-2015 academic year. We also have a joint venture with Beaumont which owns two high rise student housing
properties in downtown Montreal, Quebec, Canada. Additionally, we are partners in five joint ventures with the CB Investors.
We own varying equity
interests in these joint ventures, ranging from 10% to 63.9%.
Critical Accounting Policies
Set forth below is
the accounting policy that management believes requires additional disclosures from those listed in our Annual Report on Form
10-K for the year ended December 31, 2014, filed with the SEC on April 1, 2015 (“2014 Form 10-K”) that are critical
to the preparation of the consolidated financial statements for the six months ended June 30, 2015. Refer to the Company’s
2014 Form 10-K for a discussion of all of our critical accounting policies that 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. The estimates used in the valuations of our property acquisition of the CB Portfolio we believe are critical
in nature for the results of operations for the three and six months ended June 30, 2015 which is discussed in more detail below.
The preparation of
the consolidated 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 consolidated 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 our critical accounting policies 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.
Property Acquisitions
The
price that the Company pays to acquire a property is impacted by many factors, including the condition of the buildings and improvements,
the occupancy of the building, favorable or unfavorable financing, and numerous other factors. 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. This
includes, among other items, determining the value of the buildings and improvements, land, in-place tenant leases, tax incentive
arrangements, and any debt assumed from the seller. Each of these estimates requires significant judgment and some of the estimates
involve complex calculations. These allocation assessments have a direct impact on our results of operations because if we were
to allocate more value to land there would be no depreciation with respect to such amount or if we were to allocate more value
to the buildings as opposed to allocating to the value of in-place tenant leases, this amount would be recognized as an expense
over a much longer period of time since the amounts allocated to buildings are depreciated over the estimated lives of the buildings
whereas amounts allocated to in-place tenant leases are amortized over the remaining terms of the leases (generally less than
one year).
Additionally,
inputs and assumptions included in the determination of fair value include expectations of projected net operating income
to be earned and capital expenditures to be incurred at the underlying properties and capitalization rates based on
the marketability of each of the properties and the extent to which the operations of those properties have stabilized.
To estimate the fair value of the property level mortgage debt assumed in property acquisitions, the difference between
the market terms and contract terms are analyzed and the actual debt service payments are discounted at a current market
yield rate to determine the fair value of the debt assumed. These valuation techniques involve Level 3 inputs in the fair
value hierarchy and are subjective in nature. Should different assumptions have been used, the gain of $28.0 million on
the consolidation of the CB Portfolio recognized in the consolidated statement of operations and comprehensive income (loss)
for the six months ended June 30, 2015 could have been materially different. The $28.0 million gain was based on
preliminary estimates.
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 Company runs background checks on prospective occupants and credit
checks on the party which is ultimately financially responsible for the payment of rent and other costs, which in the vast
majority of cases is the parent or other guarantor. The number of lease contracts that we administer is therefore similar
to the number of beds occupied rather than the number of units.
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 (except for current tenants who have renewed their lease) 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 39.1% and
41.7%, respectively, of our current tenants renew their lease for the upcoming academic year.
Results of Operations
Our Business Segments
Management
evaluates operating performance through the analysis of results of operations of three business segments: (i) Grove
and evo® operations (ii) Copper Beech operations and (iii) property management services. Management evaluates
each segment’s performance by reference to net operating income, which is a non-GAAP measure, as defined below. The
accounting policies of our reportable business segments are described in more detail in the summary of significant accounting
policies (Note 2 to our accompanying consolidated financial statements). Intercompany fees are reflected at the contractually
stipulated amounts, as adjusted to reflect our proportionate ownership of unconsolidated entities.
Grove & evo® and Copper
Beech Operations
Our Grove &
evo® and Copper Beech Operations are comprised of rental and other service revenues, such as application fees, pet fees
and late payment fees. 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 net
operating income (“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 and excluding expenses not
specifically attributable to a property. 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 factors such as lease structure, lease rates and tenant base, which vary
by locality, have on our financial performance. To help make comparisons of NOI between periods more meaningful, we
distinguish NOI from our properties that are wholly-owned and that were in service throughout each period presented (that is,
our "same store" properties) from NOI from our other wholly-owned properties.
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, interest expense, equity in loss of unconsolidated entities, preferred stock dividends, depreciation and amortization,
ground lease expense, general and administrative expense, property management services expenses, other expense, loss from discontinued
operations, impairment of unconsolidated entities, write off of other assets and transaction costs. The following income or gains
are then deducted from net income (loss) attributable to common stockholders, adjusted for add backs of expenses or charges: equity
in earnings of unconsolidated entities, gain of purchase of Copper Beech, gain on sale of land and unconsolidated entities, income
tax benefit, other income, income from discontinued operations, and property management services revenues.
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 distributions.
Management Services
In addition to our
wholly-owned properties, 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.
Comparison of the Three and Six
Months Ended June 30, 2015 and 2014
As of June 30, 2015,
our property portfolio consisted of 66 consolidated operating properties, containing 11,778 apartment units and 32,101 beds, and
16 operating properties held in seven unconsolidated joint ventures, containing 5,059 apartment units and 12,188 beds.
As of June 30, 2014,
our property portfolio consisted of 32 consolidated operating properties, containing 6,288 apartment units and 17,173 beds, and
37 operating properties held in four unconsolidated joint ventures, containing 6,917 apartment units and 18,325 beds.
The following table
presents our results of operations for the three months ended June 30, 2015 and 2014, and the amount of change in these results
between the periods (in thousands):
| | |
Three
Months Ended | | |
| |
| | |
June 30, | | |
June 30, | | |
| |
| | |
2015 | | |
2014 | | |
Change ($) | |
| Revenues: | |
| | | |
| | | |
| | |
| Student housing rental | |
$ | 43,722 | | |
$ | 23,637 | | |
$ | 20,085 | |
| Student housing services | |
| 1,745 | | |
| 1,026 | | |
| 719 | |
| Property management services | |
| 212 | | |
| 327 | | |
| (115 | ) |
| Total revenues | |
| 45,679 | | |
| 24,990 | | |
| 20,689 | |
| Operating expenses: | |
| | | |
| | | |
| | |
| Student housing operations | |
| 19,943 | | |
| 10,747 | | |
| 9,196 | |
| General and administrative | |
| 10,423 | | |
| 3,649 | | |
| 6,774 | |
| Severance | |
| 62 | | |
| - | | |
| 62 | |
| Write-off of other assets | |
| 597 | | |
| - | | |
| 597 | |
| Transaction costs | |
| 1,640 | | |
| 1,460 | | |
| 180 | |
| Ground leases | |
| 120 | | |
| 120 | | |
| - | |
| Depreciation and amortization | |
| 27,861 | | |
| 7,253 | | |
| 20,608 | |
| Total operating expenses | |
| 60,646 | | |
| 23,229 | | |
| 37,417 | |
| Equity in earnings (losses) of unconsolidated entities | |
| 790 | | |
| (891 | ) | |
| 1,681 | |
| Operating income
(loss) | |
| (14,177 | ) | |
| 870 | | |
| (15,047 | ) |
| | |
| | | |
| | | |
| | |
| Nonoperating income (expense): | |
| | | |
| | | |
| | |
| Interest expense, net | |
| (9,270 | ) | |
| (2,950 | ) | |
| (6,320 | ) |
| Gain on purchase of Copper Beech | |
| 6,393 | | |
| - | | |
| 6,393 | |
| Other income (expense) | |
| 4 | | |
| 104 | | |
| (100 | ) |
| Total nonoperating
expense, net | |
| (2,873 | ) | |
| (2,846 | ) | |
| (27 | ) |
| Net loss before income tax benefit | |
| (17,050 | ) | |
| (1,976 | ) | |
| (15,074 | ) |
| Income tax benefit | |
| - | | |
| 210 | | |
| (210 | ) |
| Loss from continuing operations | |
| (17,050 | ) | |
| (1,766 | ) | |
| (15,284 | ) |
| Income from discontinued operations | |
| - | | |
| 1,374 | | |
| (1,374 | ) |
| Net loss | |
| (17,050 | ) | |
| (392 | ) | |
| (16,658 | ) |
| Net income (loss) attributable to noncontrolling interest | |
| (4,000 | ) | |
| 12 | | |
| (4,012 | ) |
| Dividends on preferred stock | |
| 3,050 | | |
| 3,050 | | |
| - | |
| Net loss attributable to common stockholders | |
$ | (16,100 | ) | |
$ | (3,454 | ) | |
$ | (12,646 | ) |
The following table
presents our results of operations for the six months ended June 30, 2015 and 2014, and the amount of change in these results
between the periods (in thousands):
| | |
Six
Months Ended | | |
| |
| | |
June 30, | | |
June 30, | | |
| |
| | |
2015 | | |
2014 | | |
Change ($) | |
| Revenues: | |
| | | |
| | | |
| | |
| Student housing rental | |
$ | 82,512 | | |
$ | 47,272 | | |
$ | 35,240 | |
| Student housing services | |
| 3,055 | | |
| 1,999 | | |
| 1,056 | |
| Property management services | |
| 441 | | |
| 430 | | |
| 11 | |
| Total revenues | |
| 86,008 | | |
| 49,701 | | |
| 36,307 | |
| Operating expenses: | |
| | | |
| | | |
| | |
| Student housing operations | |
| 37,147 | | |
| 21,360 | | |
| 15,787 | |
| General and administrative | |
| 18,461 | | |
| 7,155 | | |
| 11,306 | |
| Severance | |
| 570 | | |
| - | | |
| 570 | |
| Write-off of other assets | |
| 1,366 | | |
| - | | |
| 1,366 | |
| Transaction costs | |
| 3,132 | | |
| 2,045 | | |
| 1,087 | |
| Ground leases | |
| 240 | | |
| 237 | | |
| 3 | |
| Depreciation and amortization | |
| 47,617 | | |
| 14,233 | | |
| 33,384 | |
| Total operating expenses | |
| 108,533 | | |
| 45,030 | | |
| 63,503 | |
| Equity in losses of unconsolidated entities | |
| (1,359 | ) | |
| (572 | ) | |
| (787 | ) |
| Operating income
(loss) | |
| (23,884 | ) | |
| 4,099 | | |
| (27,983 | ) |
| | |
| | | |
| | | |
| | |
| Nonoperating income (expense): | |
| | | |
| | | |
| | |
| Interest expense, net | |
| (17,058 | ) | |
| (6,326 | ) | |
| (10,732 | ) |
| Gain on purchase of Copper Beech | |
| 28,035 | | |
| - | | |
| 28,035 | |
| Gain on sale of land and unconsolidated joint ventures | |
| 7,748 | | |
| - | | |
| 7,748 | |
| Other income (expense) | |
| (51 | ) | |
| 170 | | |
| (221 | ) |
| Total nonoperating
income (expense), net | |
| 18,674 | | |
| (6,156 | ) | |
| 24,830 | |
| Net loss before income tax benefit | |
| (5,210 | ) | |
| (2,057 | ) | |
| (3,153 | ) |
| Income tax benefit | |
| - | | |
| 400 | | |
| (400 | ) |
| Loss from continuing operations | |
| (5,210 | ) | |
| (1,657 | ) | |
| (3,553 | ) |
| Income (loss) from discontinued operations | |
| (1,157 | ) | |
| 2,313 | | |
| (3,470 | ) |
| Net income (loss) | |
| (6,367 | ) | |
| 656 | | |
| (7,023 | ) |
| Net loss attributable to noncontrolling interest | |
| (6,157 | ) | |
| (3 | ) | |
| (6,154 | ) |
| Dividends on preferred stock | |
| 6,100 | | |
| 6,100 | | |
| - | |
| Net loss attributable to common stockholders | |
$ | (6,310 | ) | |
$ | (5,441 | ) | |
$ | (869 | ) |
Student Housing Operations
Student housing operations
revenues (which include student housing rental and student housing services revenues) were $45.5 million and $24.7 million for
the three months ended June 30, 2015 and 2014, respectively. Excluding the $14.8 million of revenues attributable to the Copper
Beech acquisition, revenues increased by $6.0 million, primarily due to the 2014 deliveries of 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. Student housing operations expenses were $19.9 million and $10.7 million for the three months ended June 30, 2015
and 2014, respectively. Excluding the $6.2 million in expenses attributable to the Copper Beech acquisition, expenses increased
by $3.0 million, which were primarily attributable to the 2014 deliverables mentioned above.
Student housing operations
revenues (which include student housing rental and student housing services revenues) were $85.6 million and $49.3 million for
the six months ended June 30, 2015 and 2014, respectively. Excluding the $24.0 million of revenues attributable to the Copper
Beech acquisition, revenues increased by $12.3 million, primarily due to the 2014 deliveries of 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. Student housing operations expenses were $37.1 million and $21.4 million for the six months ended June 30, 2015
and 2014, respectively. Excluding the $9.5 million in expenses attributable to the Copper Beech acquisition, expenses increased
by $6.2 million, which were primarily attributable to the 2014 deliverables mentioned above.
New Property Operations.
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 $2.1 million
($4.3 million of revenues and $2.2 million of student housing operations expenses) and $4.1 million ($8.6 million of revenues
and $4.5 million of student housing operations expenses) of NOI for the three and six months ended June 30, 2015, respectively,
as compared to no contribution for the three and six months ended June 30, 2014. In January 2014, we acquired the remaining ownership
interests in The Grove at Denton, Texas, which contributed $0.6 million ($1.1 million of revenues and $0.5 million in operating
expenses) and $1.3 million ($2.2 million of revenues and $0.9 million in operating expenses) of NOI for the three and six months
ended June 30, 2015, respectively, compared to a contribution of $0.5 million and $1.0 million of NOI for the three and six months
ended June 30, 2014, respectively. The Grove at Denton, Texas is included in “New Property Operations” as we did not
have ownership for the full six months ended June 30, 2014.
"Grove
Same-Store" Property Operations. Our 30 "same-store” properties contributed $13.5 million ($23.9
million of revenues and $10.4 million of operating expenses) and $27.1 million ($47.9 million of revenues and $20.8 million
of operating expenses) of NOI for the three and six months ended June 30, 2015, respectively, as compared to $12.6 million
and $25.4 million of NOI for the three and six months ended June 30, 2014. The Grove at Pullman, Washington, which previously
experienced a fire and The Grove at Toledo, Ohio, under re-development, contributed $0.8 million ($1.4 million of revenues
and $0.6 million of operating expenses) and $1.5 million ($2.9 million of revenues and $1.4 million of operating expenses) of
NOI for the three and six months ended June 30, 2015, respectively, as compared to $0.8 million and $1.5 million of NOI for
the three and six months ended June 30, 2014.
“Wholly
Owned Copper Beech” Property Operations. In a series of closings occurring in January, April and June, 2015 , we exercised
our option to acquire the remaining interests in 30 properties bringing our interest to a 100% ownership (see Note 6 in the accompanying
consolidated financial statements). The Copper Beech properties contributed $8.6 million ($14.8 million of revenues and $6.2 million
of operating expenses) and $14.5 million ($24.0 million of revenues and $9.5 million of operating expenses) of NOI for the three
and six months ended June 30, 2015, respectively, as compared to no contribution for the three and six months ended June 30, 2014.
The following is
a reconciliation of our net income (loss) attributable to common stockholders to NOI for the periods presented, including our
same store and new properties (in thousands):
| | |
Three Months Ended | | |
Six Months Ended | |
| | |
June 30, | | |
June 30, | | |
June 30, | | |
June 30, | |
| | |
2015 | | |
2014 | | |
2015 | | |
2014 | |
| Net loss attributable to common stockholders | |
$ | (16,100 | ) | |
$ | (3,454 | ) | |
$ | (6,310 | ) | |
$ | (5,441 | ) |
| Net income (loss) attributable to noncontrolling interests | |
| (4,000 | ) | |
| 12 | | |
| (6,157 | ) | |
| (3 | ) |
| Preferred stock dividends | |
| 3,050 | | |
| 3,050 | | |
| 6,100 | | |
| 6,100 | |
| Income tax benefit | |
| - | | |
| (210 | ) | |
| - | | |
| (400 | ) |
| Severance | |
| 62 | | |
| - | | |
| 570 | | |
| - | |
| Gain on purchase of Copper Beech | |
| (6,393 | ) | |
| - | | |
| (28,035 | ) | |
| - | |
| Gain on sale of land and unconsolidated entities | |
| - | | |
| - | | |
| (7,748 | ) | |
| - | |
| Other (income) expense | |
| (4 | ) | |
| (104 | ) | |
| 51 | | |
| (170 | ) |
| (Income) loss from discontinued operations | |
| - | | |
| (1,374 | ) | |
| 1,157 | | |
| (2,313 | ) |
| Interest expense, net | |
| 9,270 | | |
| 2,950 | | |
| 17,058 | | |
| 6,326 | |
| Equity in (earnings) losses of unconsolidated entities | |
| (790 | ) | |
| 891 | | |
| 1,359 | | |
| 572 | |
| Depreciation and amortization | |
| 27,861 | | |
| 7,253 | | |
| 47,617 | | |
| 14,233 | |
| Ground lease expense | |
| 120 | | |
| 120 | | |
| 240 | | |
| 237 | |
| General and administrative expense | |
| 10,423 | | |
| 3,649 | | |
| 18,461 | | |
| 7,155 | |
| Write-off of other assets | |
| 597 | | |
| - | | |
| 1,366 | | |
| - | |
| Transaction costs | |
| 1,640 | | |
| 1,460 | | |
| 3,132 | | |
| 2,045 | |
| Property management services revenues | |
| (212 | ) | |
| (327 | ) | |
| (441 | ) | |
| (430 | ) |
| Total NOI | |
$ | 25,524 | | |
$ | 13,916 | | |
$ | 48,420 | | |
$ | 27,911 | |
| Grove same store properties NOI | |
$ | 13,496 | | |
$ | 12,633 | | |
$ | 27,098 | | |
$ | 25,447 | |
| Copper Beech NOI | |
$ | 8,601 | | |
$ | - | | |
$ | 14,485 | | |
$ | - | |
| New properties NOI | |
$ | 2,658 | | |
$ | 530 | | |
$ | 5,347 | | |
$ | 952 | |
| Grove Pullman and Toledo NOI | |
$ | 769 | | |
$ | 753 | | |
$ | 1,490 | | |
$ | 1,512 | |
Property Management Services
Property management
services revenues decreased by $0.1 million for the three months ended June 30, 2015 compared to the same periods in 2014 primarily
as a result of three properties that moved to a third party management company (The Grove at Louisville, Kentucky, The Grove at
Laramie, Wyoming and The Grove at Norman, Oklahoma) during the second quarter of 2015.
Property management
services revenues experienced an insignificant increase for the six months ended June 30, 2015 compared to the same period in
2014 primarily as a result of five new property management contracts that came on line 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, and evo® à Sherbrooke, Montreal, Quebec, Canada), almost entirely
offset by three properties that moved to a third party management company (The Grove at Louisville, Kentucky, The Grove at Laramie,
Wyoming and The Grove at Norman, Oklahoma) during the second quarter of 2015.
General and Administrative
While the Company
operations included development and construction functions, certain corporate costs related to these functions were capitalized
as they related directly to the development and construction of student housing properties. While a substantial portion of the
previously capitalized costs were eliminated as a result of the strategic repositioning initiated during the third quarter of
2014, (as more fully described in Note 4 to the accompanying consolidated financial statements) certain costs which were previously
capitalized could not be eliminated and are now expensed and reflected in the reported General and Administrative expense line
item on our Consolidated Statements of Operations and Comprehensive Income (Loss). The change in the treatment of these costs
explains a portion of the year over year increase in our general and administrative expenses. Additionally, during 2015 the Company
has incurred professional fees, contract staffing fees and other expenses, as more fully described below, which exceed the amounts
incurred during 2014 for similar services.
General and administrative
expenses were $10.4 million and $3.6 million for the three months ended June 30, 2015 and 2014, respectively. Excluding the effect
of $0.4 million related to Copper Beech, as well as the effect of capitalizing certain corporate costs to the construction and
development segments of our business in 2014 of $2.1 million, general and administrative expenses increased by approximately $4.3
million. This increase is primarily related to increased professional fees of approximately $2.3 million due to strategic repositioning,
increased legal expenses of $0.9 million, facilities and IT expenses of approximately $0.3 million, and other various items aggregating
approximately $0.8 million.
General and administrative
expenses were $18.5 million and $7.2 million for the six months ended June 30, 2015 and 2014, respectively. Excluding the effect
of $0.8 million related to Copper Beech, as well as the effect of capitalizing certain corporate costs to the construction and
development segments of our business in 2014 of $4.3 million, general and administrative expenses increased by approximately $6.2
million. This increase is primarily related to increased professional fees of approximately $2.6 million due to strategic repositioning,
increased legal costs of $0.9 million, employee compensation of $1.3 million, facilities and IT expenses of approximately $0.6
million, and other various items aggregating approximately $0.8 million.
Severance Costs
Severance costs for
the three and six months ended June 30, 2015 was $0.1 million and $0.6 million respectively. The $0.1 million incurred during
the three months ended June 30, 2015 related to the termination of three pilots and one mechanic associated with aircraft currently
leased and previously owned. The remaining $0.5 million related to severance expense for a former executive.
Write-off of Other Assets
Write-off of other
assets was $0.6 million for the three months ended June 30, 2015, which was related to a write off of various receivables related
to our two evo® Montreal properties.
Write-off of other
assets was $1.4 million for the six months ended June 30, 2015, $0.3 million of which was related to our final settlement for
the Pullman insurance claim, in which we settled for $0.3 million less than we had originally estimated. We received
the remaining $4.3 million of insurance proceeds during the third quarter of 2015. The remaining $1.1 million is the write off
of various receivables related to our two evo® Montreal properties.
Transaction Costs
Transaction costs
were $1.6 million for the three months ended June 30, 2015, primarily attributable to consents, professional fees and other related
costs related to the Copper Beech acquisition.
Transaction costs
were $3.1 million for the six months ended June 30, 2015, primarily attributable to consents, professional fees and other related
costs totaling $2.8 million related to the Copper Beech acquisition, with the remaining $0.3 million related to various other
costs associated with the Montreal transaction and our strategic alternative process.
Depreciation and Amortization
Depreciation and
amortization expense was $27.9 million and $7.3 million for the three months ended June 30, 2015 and 2014, respectively. Excluding
the $19.6 million attributable to the Copper Beech acquisition ($14.8 million of amortization expense of in-place lease intangible
assets and $4.8 million of depreciation expense), depreciation and amortization increased by $1.0 million, primarily attributable
to the 2014 deliveries of 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.
Depreciation and
amortization expense was $47.6 million and $14.2 million for the six months ended June 30, 2015 and 2014, respectively. Excluding
the $31.1 million attributable to the Copper Beech acquisition ($23.5 million of amortization expense of in-place lease intangible
assets and $7.6 million of depreciation expense), depreciation and amortization increased by $2.3 million, primarily attributable
to the 2014 deliveries of 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.
Equity in Earnings (Losses) of Unconsolidated
Entities
Equity in earnings
of unconsolidated entities, which represents our share of the net income from entities in which we have a non-controlling interest
was $0.8 million for the three months ended June 30, 2015, versus equity in losses of $0.9 million for the three months ended
June 30, 2014. This increase in income of $1.7 million is primarily due to Copper Beech equity in earnings of $0.4 million for
the second quarter of 2015 compared to equity in losses of $1.1 million for the same period in 2014.
Equity in losses
of unconsolidated entities, which represents our share of the net loss from entities in which we have a non-controlling interest
was $1.4 million and $0.6 million for the six months ended June 30, 2015 and 2014, respectively. This increase in losses
of $0.8 million is primarily due to losses of $2.6 million (compared to equity in earnings of $0.5 million for the same period
in 2014) resulting from our Montreal operations as well as Copper Beech equity in earnings of $1.1 million (compared to equity
in losses of $1.0 million for the same period in 2014).
Interest Expense
Interest expense
was $9.3 million and $3.0 million for the three months ended June 30, 2015 and 2014, respectively. Excluding the $2.4 million
increase attributable to the Copper Beech acquisition, interest expense increased by $3.9 million. This increase was primarily
attributable to capitalized interest of $2.4 million during the first quarter of 2014 (compared to none during the second quarter
of 2015) and higher debt balances, primarily associated with additional amounts outstanding on the Company’s line of credit.
Interest expense
was $17.1 million and $6.3 million for the six months ended June 30, 2015 and 2014, respectively. Excluding the $3.7 million increase
attributable to the Copper Beech acquisition, interest expense increased by $7.1 million. This increase was primarily attributable
to capitalized interest of $4.3 million during the first half of 2014 (compared to none during the first half of 2015) and higher
debt balances, primarily associated with additional amounts outstanding on the Company’s line of credit.
Gain on purchase of Copper Beech
For the
three months ended June 30, 2015, a preliminary gain of $6.4 million was recognized in connection with the Second CB Closing
on April 30, 2015, a business combination in which we acquired a 100% interest in two additional Copper Beech properties (Copper
Beech San Marcos Phase I and Copper Beech IUP Buy).
For the six months
ended June 30, 2015, a preliminary gain of $28.0 million was recognized in connection with the First CB Closing, a business combination
in which we acquired a significant portion of the Copper Beech Portfolio with the transaction closing on January 30, 2015 as well
as the Second CB Closing, a business combination in which we acquired a 100% interest in two additional Copper Beech properties,
with the transaction closing on April 30, 2015. See Note 6 of the accompanying consolidated financial statements for further details.
Gain on sale of land and unconsolidated
joint ventures
In connection with
the previously announced strategic repositioning, we recognized a $3.1 million gain from the sale of a portfolio of six undeveloped
land parcels. We also recognized a $4.6 million gain from the sale of The Grove at Lawrence, Kansas and The Grove at Conway, Arkansas.
See Note 7 to the accompanying consolidated financials for further discussion of both of these transactions.
Income (Loss) from Discontinued
Operations
In September 2014,
we discontinued 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 accompanying consolidated statements of operations
and comprehensive income (loss) for the periods presented.
For the six months
ended June 30, 2015, we recorded a loss of $1.2 million due to the wind down of our construction and development operations.
No construction and development revenues were recorded during the six months ended June 30, 2015. For the six months ended June
30, 2014, we recorded revenue from our construction and development operations of $17.6 million and expenses of $15.3 million
resulting in income of $2.3 million.
Dividends on Preferred Stock
Dividends on preferred
stock for the three and six months ended June 30, 2015 were $3.1 million and $6.1 million, respectively, with no change from the
three and six months ended June 30, 2014. The Company did not declare dividends on its preferred stock during the three and six
months ended June 30, 2015. Although not declared, these dividends have been included in the calculation of net income (loss)
attributable to common shareholders in the consolidated statements of operations and comprehensive income (loss). These dividends
will accumulate at the effective annual rate of $2.00 per share until paid.
Net income (loss) attributable to
noncontrolling interests
Net loss
attributable to noncontrolling interests was $4.0 million and $6.2 million for the three and six months ended June 30, 2015,
respectively and was primarily related to loss allocated to Copper Beech Investors who received OP Units as part of the First
and Second CB Closing. For both the three and six months ended June 30, 2015, net loss attributable to noncontrolling
interests is calculated by including the proportionate amount of OP units held by the CB Investors during the period
multiplied by the Company’s net loss excluding the gain on purchase of Copper Beech.
Cash Flows
Net cash
provided by operating activities was $6.2 million for the six months ended June 30, 2015 as compared to $23.4 million for the
six months ended June 30, 2014, a decrease of $17.2 million. Net income adjusted for non-cash items provided $11.4 million
for the six months ended June 30, 2015 as compared to $20.2 million for the six months ended June 30, 2014, a decrease of
$8.8 million. Approximately $5.2 million was used for working capital purposes for the six months ended June 30, 2015 as
compared to $3.2 million provided for the six months ended June 30, 2014, a decrease of $8.4 million. This primarily relates
to the decreased collections on construction billings due to the discontinuation of construction activity.
Net
cash used in investing activities totaled $40.0 million for the six months ended June 30, 2015 as compared to $103.9
million for the six months ended June 30, 2014, a decrease of $63.9 million. Investments in properties under development was
$68.3 million less for the six months ended June 30, 2015 compared to the same period last year due to the decrease in
construction activity; in 2015, we continued paying vendors for the finalization of payables related to 2014 new property
deliveries. During the six months ended June 30, 2015, the Company received $28.3 million from the sale of six undeveloped
land parcels (see Note 7 of the accompanying consolidated financial statements). Additionally, during the six months ended
June 30, 2015, we paid $56.7 million, net of cash acquired, related to the Copper Beech acquisition (see Note 6 of the
accompanying consolidated financial statements). During the six months ended June 30, 2014, we invested $31.9 million into
our investment in CSH Montreal.
Net cash provided
by financing activities totaled $34.2 million for the six months ended June 30, 2015 as compared to $66.0 million for the six
months ended June 30, 2014, a decrease of $31.8 million. This decrease is comprised of several items. Proceeds from mortgage and
construction loans, net of repayments, decreased by $12.8 million and proceeds from the line of credit and other debt, net of
repayments, decreased by $30.8 million from the previous period. Additionally, dividends paid to common and preferred stockholders
decreased by $18.6 million. We also increased our restricted cash by $7.0 million in order to refinance the mortgage loans on
two of our unconsolidated entities during the second quarter of 2015.
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. Additionally, we intend to make distributions that exceed these requirements. We may need to obtain financing to meet
our distribution requirements because:
| · | our
income may not be matched by our related expenses at the time the income is considered
received for purposes of determining taxable income; and |
| · | non-deductible
capital expenditures, creation of reserves or debt service requirements may reduce available
cash but not taxable income. |
In these circumstances,
we may be forced to obtain third-party financing on terms we might otherwise find unfavorable, and we cannot 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.
Principal Capital Resources
In January 2013,
we entered into a credit agreement (the "Second Amended and Restated Credit Agreement") with Citibank, N.A. and certain
other parties. The Second Amended and Restated Credit Agreement provides for a senior unsecured credit facility (the "Revolving
Credit Facility") of up to $250.0 million, with sub-limits of $30.0 million for swing line loans and $15.0 million for letters
of credit. The Second Amended and Restated Credit Agreement also provides for a term loan of $50.0 million (the "Term Loan"
and, together with the Revolving Credit Facility, the "Amended Credit Facility").
As of June 30, 2015,
we had $213.5 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 of $3.4 million, will
reduce the amount that we may be able to borrow under this facility for other purposes. As of June 30, 2015, we had $36.5 million
in borrowing capacity under our Revolving Credit Facility, and amounts borrowed under the facility are 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. At June 30, 2015, the interest rate on the Revolving Credit Facility borrowings
and Term Loan was 2.70% and 2.65% respectively.
Our ability to borrow
under the Amended Credit Facility is subject to our ongoing compliance with a number of customary financial covenants, 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%. |
On February 25, 2015,
we amended the Amended Credit Facility to address a default with regard to certain financial covenants (see Note 9 of the accompanying
consolidated financial statements). In such amendment, 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) and the leverage ratio, secured debt ratio and fixed charge coverage ratio covenants
were modified for a relief period beginning on December 31, 2014 and ending on September 30, 2015.
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.
As of June 30, 2015,
after receipt of waivers and amendments, 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. Although the Amended Credit
Facility contains a cross-default provision, as of June 30, 2015, there were no defaults under any of the Company’s other
credit facilities that triggered an event of default under the Amended Credit Facility.
As of August 28,
2015, we executed an extension of the existing waiver under the Amended Credit Facility to allow the Company until September 30,
2015 to file this Quarterly Report on Form 10-Q for the quarter ending June 30, 2015. As a result of this extension of the waiver
the Company is in compliance with the reporting covenants under the Amended Credit Facility. The Company agreed to pay a deferred
fee in the amount of $.3 million to obtain this extension, which fee shall be payable upon the earlier of (i) the closing of a
proposed sale transaction for all of the equity in, or all or substantially all of the assets of, the Company (a “Proposed
Sale Transaction”) and (ii) December 31, 2015. Pursuant to the waiver, if the Company has not entered into an agreement
(a “Sale Agreement”) for a Proposed Sale Transaction by September 30, 2015, then beginning on September 30, 2015 and
on the thirtieth day of each calendar month thereafter, the Company has agreed to prepay an aggregate amount under the Amended
Credit Facility equal to the amount of the Company’s unrestricted cash, if any, on such date. The waiver defines unrestricted
cash as the difference (if positive) of (i) cash and cash equivalents that are not subject to any pledge, lien or control agreement,
less (ii) the sum of (a) $15 million and (b) amounts that have been placed with third parties as deposits or security for contractual
obligations. These prepayments under the Amended Credit Facility will not be refundable, and the Company’s obligation to
continue such prepayments will terminate on the date that a Sale Agreement is executed. If the Company has not entered into a
Sale Agreement by November 15, 2015, the lenders shall receive a security interest in the equity of the subsidiary guarantors
under the Amended Credit Facility. In connection with the extension of the waiver, the Company agreed that, unless all of the
lenders under the Amended Credit Facility otherwise agree, the Company will not request any further advances under the Amended
Credit Facility other than advances under outstanding letters of credit. .
Short-Term Liquidity Needs
Through the end of
2015, 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 the sale of assets to fund our business operations, cash dividends and distributions, debt amortization,
and recurring capital expenditures.
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 develop or acquire, or renovations
necessary to comply with the Americans with Disabilities Act or other regulatory requirements. In the future, we may seek additional
long-term secured and unsecured debt, including 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 provide any assurance that this will be the
case, especially in difficult market conditions.
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 $0.09 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 2015, not to declare or pay dividends on its Common Stock or Series A Preferred Stock for the first or second 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.
Commitments
The following table
summarizes our contractual commitments as of June 30, 2015 (including future interest payments) (in thousands):
| Contractual
Obligations (1) | |
Total | | |
2015 | | |
2016-2017 | | |
2018-2019 | | |
Thereafter | |
| | |
| | |
| | |
| | |
| | |
| |
| Long-Term Debt Obligations | |
$ | 959,669 | | |
$ | 85,620 | | |
$ | 636,338 | | |
$ | 174,155 | | |
$ | 63,556 | |
| Interest Payments on Outstanding Debt Obligations | |
| 90,985 | | |
| 24,640 | | |
| 48,037 | | |
| 11,737 | | |
| 6,571 | |
| Operating Lease Obligations | |
| 35,733 | | |
| 1,460 | | |
| 4,612 | | |
| 2,840 | | |
| 26,821 | |
| Purchase Obligations | |
| 1,145 | | |
| 746 | | |
| 399 | | |
| - | | |
| - | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Total (2) | |
$ | 1,087,532 | | |
$ | 112,466 | | |
$ | 689,386 | | |
$ | 188,732 | | |
$ | 96,948 | |
| (1) | See Note 9 to the accompanying
consolidated financial statements for a break out of fixed versus variable debt. |
| (2) | Excludes joint venture
debt of $36.2 million that matures in July 2015 and September 2015, of which we are a
10.0% owner; $51.2 million that matures in August 2015 and December 2015, of which we
are a 20.0% owner; $140.9 million that matures in July 2016, September 2016 and September
2018, of which we are a 30.0% owner; $87.8 million that matures in January 2016, of which
we are a 47.0% owner; $159.8 million that matures in October 2015 and October 2020, of
which we are a 48.0% owner; and $11.2 million that matures in September 2015, of which
we are 63.9% owner. We are the guarantor of these debt obligations. See footnote 8 to
the accompanying consolidated financial statements. |
Off-Balance Sheet Arrangements
Joint Ventures
We have investments
in real estate ventures with the CB Investors, HSRE, Brandywine and Beaumont that 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 and revolving credit facilities of our ventures with HSRE and Beaumont. Detail of our unconsolidated
investments at June 30, 2015 is presented in the following table (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
Debt |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
| |
|
|
|
|
|
|
Number
of |
|
|
|
|
|
|
|
Average |
|
|
|
|
| |
|
Our |
|
|
Year |
|
Properties
In |
|
Net
Total |
|
|
Amount |
|
|
Interest |
|
|
|
|
| Unconsolidated
Entities |
|
Ownership |
|
|
Founded |
|
Operation |
|
Investment |
|
|
Outstanding |
|
|
Rate |
|
|
Maturity Date
/ Range |
|
| HSRE-Campus Crest I,
LLC |
|
|
63.9 |
% |
|
2009 |
|
1 |
|
$ |
3,862 |
|
|
$ |
11,166 |
(4) |
|
|
2.69 |
%(1) |
|
9/30/2015 |
|
| HSRE-Campus Crest V, LLC |
|
|
10.0 |
% |
|
2011 |
|
2 |
|
|
- |
|
|
|
36,226 |
(4) |
|
|
2.89 |
%(1) |
|
7/20/2015
– 9/30/2015 |
(3) |
| HSRE-Campus Crest VI, LLC |
|
|
20.0 |
% |
|
2012 |
|
3 |
|
|
7,153 |
|
|
|
51,206 |
(4) |
|
|
2.49 |
%(1) |
|
8/07/2015
– 12/19/2015 |
(3) |
| HSRE-Campus Crest IX, LLC |
|
|
30.0 |
% |
|
2013 |
|
1 |
|
|
19,341 |
|
|
|
96,187 |
(4) |
|
|
2.39 |
%(1) |
|
7/25/2016 |
|
| HSRE-Campus Crest X, LLC |
|
|
30.0 |
% |
|
2013 |
|
2 |
|
|
7,701 |
|
|
|
44,692 |
(4) |
|
|
2.37 |
%(1) |
|
9/06/2016
– 9/30/2018 |
|
| CB Portfolio |
|
|
48.0 |
% |
|
2013 |
|
5 |
|
|
45,017 |
|
|
|
159,842 |
(4) |
|
|
5.41 |
%(2) |
|
10/01/2015
– 10/01/2020 |
|
| CSH Montreal |
|
|
47.0 |
% |
|
2013 |
|
2 |
|
|
4,656 |
|
|
|
87,848 |
(4) |
|
|
5.68 |
%(1) |
|
1/13/2016 |
|
| Total unconsolidated
entities |
|
|
|
|
|
|
|
16 |
|
$ |
87,730 |
|
|
$ |
487,167 |
|
|
|
4.03 |
% |
|
|
|
| (1) | Variable interest rates. |
| (2) | Comprised of fixed rate
debt. |
| (3) | Loans maturing in July
and August of 2015 relate to properties that are part of the property swap detailed in
Note 18 of the accompanying consolidated financial statements. |
| (4) | The amount outstanding
for debt represents 100% of the debt outstanding at each of the respective joint ventures
in which the Company has varying ownership percentages. See Note 17 of the accompanying
consolidated financial statements for a discussion of amounts of the outstanding debt
in which the Company guarantees on behalf of certain of these joint ventures. |
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 U.S. GAAP, excluding extraordinary items as defined under U.S. GAAP and gains or losses from sales of previously depreciated
operating real estate assets, plus specified non-cash items, such as real estate asset depreciation and amortization, and after
adjustments for unconsolidated partnerships and joint ventures. 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 present FFO attributable
to common stockholders 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 securities analysts, investors, and other interested parties 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 included in this Form 10-Q. FFO attributable to common
stockholders should not be considered as an alternative to net income (loss) (computed in accordance with U.S. GAAP) as an indicator
of our properties’ financial performance or to cash flow from operating activities (computed in accordance with U.S. GAAP)
as an indicator of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to pay
dividends or make distributions.
The following table
presents a reconciliation of our FFO attributable to common stockholders to our net income (loss) attributable to common stockholders
for the periods presented (in thousands):
| | |
Three Months Ended | | |
Six Months Ended | |
| | |
June 30, | | |
June 30, | | |
June 30, | | |
June 30, | |
| | |
2015 | | |
2014 | | |
2015 | | |
2014 | |
| | |
| | |
| | |
| | |
| |
| Net income (loss) attributable to common
stockholders | |
$ | (16,100 | ) | |
$ | (3,454 | ) | |
$ | (6,310 | ) | |
$ | (5,441 | ) |
| Real estate related depreciation and amortization | |
| 26,942 | | |
| 6,908 | | |
| 46,196 | | |
| 13,585 | |
| Real estate related depreciation and amortization from
unconsolidated entities | |
| 2,675 | | |
| 7,264 | | |
| 6,045 | | |
| 14,597 | |
| Gain
on purchase of Copper Beech(1) | |
| (6,393 | ) | |
| - | | |
| (28,035 | ) | |
| - | |
| Gain
on sale of assets(2) | |
| - | | |
| - | | |
| (7,748 | ) | |
| - | |
| FFO
attributable to common stockholders(3) | |
$ | 7,124 | | |
$ | 10,718 | | |
$ | 10,148 | | |
$ | 22,741 | |
| (1) | Includes purchase of remaining interests
in Copper Beech properties. (See Note 6 of the accompanying consolidated financial statements.) |
| (2) | Includes sale of land parcels and
ownership interests in HSRE I and HSRE V. (See Note 7 of the accompanying consolidated
financial statements.) |
| (3) | The fair value debt and purchase accounting
adjustments included in equity in earnings related to Copper Beech were $3.1 million
and $3.8 million for the three and six months ended June 30, 2015, and $1.8 million and
$3.5 million for the three and six months ended June 30, 2014, respectively. |
In addition to FFO
attributable to stockholders, we believe it is also a meaningful measure of our performance to adjust FFO attributable to stockholders
to exclude the transaction costs (including those within equity in earnings) and fair value of debt adjustments within our investment
in Copper Beech. Also excluded are write-offs, severance expense, and discontinued operations. Excluding these items adjusts FFO
attributable to stockholders 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 attributable to stockholders.
| | |
Three Months Ended | | |
Six Months Ended | |
| | |
June 30, | | |
June 30, | | |
June 30, | | |
June 30, | |
| | |
2015 | | |
2014 | | |
2015 | | |
2014 | |
| | |
| | |
| | |
| | |
| |
| FFO attributable to common stockholders | |
| 7,124 | | |
| 10,718 | | |
| 10,148 | | |
| 22,741 | |
| Elimination
of transaction costs(4) | |
| 1,640 | | |
| 1,460 | | |
| 3,132 | | |
| 2,045 | |
| Elimination
of fair value debt and purchase accounting adjustments at our investment in Copper Beech(5) | |
| (3,128 | ) | |
| (1,765 | ) | |
| (3,766 | ) | |
| (3,519 | ) |
| Elimination
of write-off of other assets(6) | |
| 597 | | |
| - | | |
| 1,366 | | |
| - | |
| Elimination
of severance(7) | |
| 62 | | |
| - | | |
| 570 | | |
| - | |
| Elimination
of discontinued operations(8) | |
| - | | |
| (1,374 | ) | |
| 1,157 | | |
| (2,313 | ) |
| | |
| | | |
| | | |
| | | |
| | |
| Funds from
operations adjusted (FFOA) attributable to common stockholders | |
$ | 6,295 | | |
$ | 9,039 | | |
$ | 12,607 | | |
$ | 18,954 | |
| (4) | Includes costs incurred in connection
with Copper Beech and CSH Montreal including our proportional share of costs incurred
within the ventures. |
| (5) | Includes our proportionate share of
non-cash fair value debt and other purchase accounting adjustments in our investment
in Copper Beech accounted for under the equity method, as well as the fair value of debt
adjustments for those Copper Beech properties consolidated during the six months ended
June 30, 2015. |
| (6) | During the three and six months ended
June 30, 2015, the Company recorded $0.6 million and $1.4 million of impairments of other
assets related to various balance sheet adjustments. |
| (7) | We recognized severance expense of
$0.6 million, of which $0.4 million relates to the acceleration of restricted shares. |
| (8) | In connection with the Company’s
strategic repositioning initiatives, we discontinued all construction and development
operations, which resulted in no income or loss, and a loss of $(1.2) million from discontinued
operations for the three and six months ended June 30, 2015 and income of $1.4 million
and $2.3 million from discontinued operations for the three and six months ended June
30, 2014. |
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 3.
Quantitative and Qualitative Disclosures about Market Risk
As of June 30, 2015,
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 for borrowing under the Revolving Credit Facility
ranges from 1.75% to 2.50% for Eurodollar Rate based borrowing and from 0.75% to 1.50% for Base Rate borrowings, and the spread
for the Term Loan ranges from 1.70% to 2.45% for Eurodollar Rate based borrowing and from 0.70% to 1.45% for Base Rate based borrowings.
At June 30, 2015, the spread on our Revolving Credit Facility and Term Loan was 2.70% and 2.65%, respectively.
We are exposed to
market risk from changes in interest rates. We seek to limit the impact of interest rate changes on earnings and cash flows and
to lower the overall borrowing costs by closely monitoring our variable rate debt and converting such debt to fixed rates when
we deem such conversion advantageous. As of June 30, 2015, $447.2 million of our aggregate indebtedness (46.2% 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 $4.5 million, assuming that the amount outstanding under our variable rate debt remains at $447.2
million, the balance as of June 30, 2015.
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 4.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As required by SEC
Rule 13a-15(b), we have carried out an evaluation, under the supervision of and with the participation of management, including
our Interim Chief Executive Officer and Interim Chief Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our management
concluded that our disclosure controls and procedures for the periods covered by this report were not effective, as of June 30,
2015, because of the material weaknesses in internal control over financial reporting described in Part II, Item 9A of our Annual
Report on Form 10-K for the year ended December 31, 2014, filed with the SEC on April 1, 2015 (the “2014 Form 10-K”).
Management has concluded that the material weaknesses that were present at December 31, 2014 and March 31, 2015 were also present
at June 30, 2015.
Notwithstanding the
assessment that our internal controls over financial reporting were not effective and that there were material weaknesses as identified
in the 2014 Form 10-K, we believe that our financial statements contained in our Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 2015, fairly present our financial condition, results of operations and cash flows in all material respects.
Remediation Plan
As previously disclosed
in the 2014 Form 10-K, to remediate the material weaknesses described under the subheading “Management’s Annual Report
on Internal Control Over Financial Reporting” in Part II, Item 9A of the 2014 Form 10-K, we plan to implement the remediation
initiatives described under the subheading “Plan for Remediation of Material Weaknesses” in Part II, Item 9A of the
2014 Form 10-K and will continue to evaluate the remediation and may in the future implement additional measures.
In connection
with these efforts, in April 2015 our Board of Directors engaged Alvarez & Marsal North America, LLC (“Alvarez
& Marsal”), a leading management consulting firm, and appointed David Coles and John Makuch, both Managing
Directors at Alvarez & Marsal, as our interim Chief Executive Officer and our interim Chief Financial Officer,
respectively. At the time of filing, we are in the process of hiring a third party to provide an internal audit function and
provide additional support to the management team and the Audit Committee with respect to the internal control remediation
initiatives. Our management believes the remediation measures described in the 2014 Form 10-K will remediate the identified
material weaknesses and strengthen our internal control over financial reporting. As management continues to evaluate and
work to improve our internal control over financial reporting, it may be determined that additional measures must be taken to
address the material weaknesses identified in Part II, Item 9A of the 2014 Form 10-K, or it may be determined that we need to
modify certain of the remediation measures described in the 2014 Form 10-K.
Changes in Internal Control over Financial Reporting
We plan to take actions
to remediate the material weaknesses related to our internal control over financial reporting, as described above. However, there
were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rules
13a-15 and 15d-15 under the Exchange Act that occurred during the quarter ended June 30, 2015 that have materially affected, or
are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1.
Legal Proceedings
In the normal course
of business, we are subject to claims, lawsuits and legal proceedings. In addition to the matter 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 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 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 have filed 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 operations.
Item 1A.
Risk Factors
For a discussion
of our potential risks and uncertainties, see the section entitled "Risk Factors" beginning on page 9 of our Annual
Report on Form 10-K for the year ended December 31, 2014. In addition to those risk factors, we have identified the following
new or updated risk factors based on our further evaluation and developments subsequent to the filing of the Form 10-K:
Our failure to prepare and file
timely our periodic reports with the SEC may make it more difficult for us to access the public markets to raise debt or equity
capital and may result in noncompliance with the reporting covenants of the agreements that govern our existing debt.
We did not file our
Annual Report on Form 10-K for the year ended December 31, 2014, the Quarterly Report on Form 10-Q for the quarter ended March
31, 2015 or this Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 within the time frame required by the SEC.
As a result of our failure to file our Annual Report and such Quarterly Reports by the filing date required by the SEC (including
the grace period permitted by Rule 12b-25 under the Exchange Act), we are not eligible to file a Form S-3 registration statement
to conduct public offerings until our filings with the SEC have been timely made for a full year. Our ineligibility to use Form
S-3 during this time period may have a negative impact on our ability to quickly access the public capital markets because we
would be required to file a long-form registration statement and wait for the SEC to declare such registration statement effective.
This may limit our ability to access the public markets to raise debt or equity capital. Our limited ability to access the public
markets could prevent us from pursuing transactions or implementing business strategies that we believe would be beneficial to
our business.
In addition, the
documents that govern our outstanding indebtedness contain customary reporting requirements. If we are unable to timely file reports
with the SEC, we may be required to seek further waivers of reporting covenants from our lender group. 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. Our failure to comply with the reporting covenants of the agreements that govern
our existing debt could have a material adverse effect on our financial condition.
Our indebtedness exposes us to a
risk of default and reduces our free cash flow, which could materially and adversely affect us.
As of June 30, 2015,
our total consolidated indebtedness was approximately $968.4 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.
In connection with
the consummation of the acquisition of additional membership interests in the Copper Beech portfolio, we also entered into a tax
protection agreement with certain of the selling unitholders participating in the transaction (the “CB Unitholders”),
including one or more entities in which Dr. McWhirter has an ownership interest. Pursuant to the tax protection agreement, unless
we indemnify the applicable CB Unitholders for certain resulting tax liabilities, we have agreed not to sell or otherwise to dispose
of in a taxable exchange during the 7-year tax protection period, any of the seventeen protected properties set forth in the tax
protection agreement. Further, we also agreed to allocate to the CB Unitholders, during the 7-year tax protection period, an aggregate
amount of at least $100 million of debt of the Operating Partnership (which amount decreases ratably as the number of OP Units
held by the CB Unitholders decreases) without any requirement that any CB Unitholder guarantee or directly bear the risk for such
indebtedness and, after the end of the 7-year period, to use commercially reasonable efforts to permit the CB Unitholders to enter
into guarantees of “qualifying” debt or agreements to return a portion of their deficit capital account so as to permit
the CB Unitholders to avoid certain adverse tax consequences.
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 above in Management’s Discussion
and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Off-Balance Sheet
Arrangements. We also have a non-recourse carve-out guaranty and a 10% principal repayment guaranty and were required to deliver
a $1.0 million irrevocable standby letter of credit on behalf of Copper Beech Townhome Communities Twenty Three, LLC (“CBTC
23”) relating to the CBTC 23 loan on the Copper Beech Kalamazoo Phase I property (in which we no longer have an equity interest).
We received a copy of a notice of default addressed to CBTC 23 dated June 26, 2015, from the special servicer of the CBTC 23 loan,
and on August 11, 2015 we received notification from Citibank that the special servicer had presented a request to draw the letter
of credit. We elected to cash-fund the $1.0 million and on August 19, 2015 made a demand under an indemnification provision of
the Copper Beech Purchase and Sale Agreement, to be reimbursed on or before August 28, 2015. As of September 15, 2015 the Sellers
have not reimbursed us for the $1.0 million funded under the CBTC Letter of Credit. Although the special servicer has not made
a demand under our guaranty with respect to such loan, we believe that such a demand may be forthcoming.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3.
Defaults Upon Senior Securities
None.
Item 4.
Mine Safety Disclosures
Not applicable.
Item 5.
Other Information
None.
Item 6.
EXHIBITS
Exhibit
Number |
|
Description
of Document |
| |
|
|
| 10.1 |
|
Agreement, dated March 31, 2015, between
Campus Crest Communities, Inc. and Scott R. Rochon (incorporated by reference to Exhibit 10.1 to the registrant’s current
report on Form 8-K filed on April 6, 2015) |
| |
|
|
| 10.2 |
|
Agreement dated May 3, 2015 between Campus
Crest Communities, Inc. and Clinton Relational Opportunity Master Fund, L.P. (incorporated by reference to Exhibit 10.1 to
the registrant’s current report on Form 8-K filed on May 4, 2015) |
| |
|
|
| 10.3 |
|
Engagement letter dated as of April 21,
2015 between Campus Crest Communities, Inc. and Alvarez & Marsal North America, LLC (incorporated by reference to Exhibit
10.2 to the registrant’s current report on Form 8-K filed on May 4, 2015) |
| |
|
|
| 10.4 |
|
Amended and Restated Employment Agreement,
dated June 12, 2015, between Campus Crest Communities, Inc. and Aaron S. Halfacre (incorporated by reference to Exhibit 10.1
to the registrant’s current report on Form 8-K filed on June 18, 2015) |
| |
|
|
| 10.5 |
|
Confidentiality and Noncompetition Agreement,
dated as of June 12, 2015, between Campus Crest Communities, Inc. and Aaron S. Halfacre (incorporated by reference to Exhibit
10.2 to the registrant’s current report on Form 8-K filed on June 18, 2015) |
| |
|
|
| 10.6* |
|
Waiver Extension of Required Lenders and
Administrative Agent, dated as of August 28, 2015, by and among Campus Crest Communities Operating Partnership, LP, the Company,
Citibank, N.A. and the other parties thereto |
| |
|
|
| 31.1* |
|
Certification of Interim Chief Executive
Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
|
|
| 31.2* |
|
Certification of Interim Chief Financial
Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
|
|
| 32.1** |
|
Certification of Interim Chief Executive
Officer and Interim Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. |
| |
|
|
| 101* |
|
The following materials from Campus Crest
Communities, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 formatted in XBRL (eXtensible
Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations and
Comprehensive Income (Loss), (iii) the Consolidated Statement of Changes in Equity, (iv) the Consolidated Statements
of Cash Flows, and (v) related notes to the Consolidated Financial Statements. |
SIGNATURES
Pursuant to the requirements of the
Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Dated:
September 29, 2015
| |
CAMPUS CREST COMMUNITIES,
INC. |
|
| |
|
|
| |
By: |
/s/
John Makuch |
|
| |
|
John Makuch |
|
| |
|
Interim Chief Financial Officer |
|
Exhibit Index
Exhibit
Number |
|
Description of Document |
| |
|
|
| 10.1 |
|
Agreement, dated
March 31, 2015, between Campus Crest Communities, Inc. and Scott R. Rochon (incorporated by reference to Exhibit 10.1 to the
registrant’s current report on Form 8-K filed on April 6, 2015) |
| |
|
|
| 10.2 |
|
Agreement dated
May 3, 2015 between Campus Crest Communities, Inc. and Clinton Relational Opportunity Master Fund, L.P. (incorporated by reference
to Exhibit 10.1 to the registrant’s current report on Form 8-K filed on May 4, 2015) |
| |
|
|
| 10.3 |
|
Engagement letter dated as of April 21,
2015 between Campus Crest Communities, Inc. and Alvarez & Marsal North America, LLC (incorporated by reference to Exhibit
10.2 to the registrant’s current report on Form 8-K filed on May 4, 2015) |
| |
|
|
| 10.4 |
|
Amended and Restated Employment Agreement,
dated June 12, 2015, between Campus Crest Communities, Inc. and Aaron S. Halfacre (incorporated by reference to Exhibit 10.1
to the registrant’s current report on Form 8-K filed on June 18, 2015) |
| |
|
|
| 10.5 |
|
Confidentiality and Noncompetition Agreement,
dated as of June 12, 2015, between Campus Crest Communities, Inc. and Aaron S. Halfacre (incorporated by reference to Exhibit
10.2 to the registrant’s current report on Form 8-K filed on June 18, 2015) |
| |
|
|
| 10.6* |
|
Waiver Extension of Required Lenders and
Administrative Agent, dated as of August 28, 2015, by and among Campus Crest Communities Operating Partnership, LP, the Company,
Citibank, N.A. and the other parties thereto |
| |
|
|
| 31.1* |
|
Certification of Interim Chief Executive
Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
|
|
| 31.2* |
|
Certification of Interim Chief Financial
Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
|
|
| 32.1** |
|
Certification of Interim Chief Executive
Officer and Interim Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. |
| |
|
|
| 101* |
|
The following materials from Campus Crest
Communities, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 formatted in XBRL (eXtensible
Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations and
Comprehensive Income (Loss), (iii) the Consolidated Statement of Changes in Equity, (iv) the Consolidated Statements
of Cash Flows, and (v) related notes to the Consolidated Financial Statements. |
Exhibit 10.6
WAIVER EXTENSION
OF REQUIRED LENDERS AND ADMINISTRATIVE AGENT
THIS
WAIVER EXTENSION OF REQUIRED LENDERS AND ADMINISTRATIVE AGENT (this “Waiver”), dated as of August 28,
2015, is executed and delivered by the Administrative Agent, each of the Lender signatories hereto (collectively, the “Required
Lenders”), Campus Crest Communities Operating Partnership, LP, a Delaware limited partnership (the “Borrower”),
Campus Crest Communities, Inc., a Maryland corporation (the “Parent Guarantor”) and the entities listed
on the signature pages hereof as the subsidiary guarantors (together with any Additional Guarantors (as defined in the Credit Agreement
(as hereinafter defined)) acceding thereto pursuant to Section 5.01(j) or 7.05 of the Credit Agreement, as amended hereby,
the “Subsidiary Guarantors” and, together with the Parent Guarantor, the “Guarantors”)
in connection with and pursuant to that certain Second Amended and Restated Credit Agreement dated as of January 8, 2013 (the “Original
Credit Agreement”), as amended by that certain First Amendment to Second Amended and Restated Credit Agreement dated
as of February 22, 2013 (the “First Amendment”) and by that Second Amendment to Second Amended and Restated
Credit Agreement dated as of February 25, 2015 (the “Second Amendment”; and the Original Credit Agreement,
as amended by the First Amendment and the Second Amendment and as further amended, amended and restated, supplemented and/or modified
and in effect from time to time, the “Credit Agreement”; capitalized terms used herein but undefined
shall have the respective meanings ascribed to them in the Credit Agreement or, if not therein defined, the respective meanings
ascribed to them in the May 2015 Waiver (as defined below)) among the Borrower; the Parent Guarantor; the Subsidiary Guarantors;
the banks, financial institutions and other institutional lenders listed on the signature pages thereof as the initial lenders
(the “Initial Lenders”); the Swing Line Bank; Citibank, N.A. (“Citibank”),
as the initial issuer of Letters of Credit (the “Initial Issuing Bank”); and Citibank, as administrative
agent (together with any successor administrative agent appointed pursuant to Article VIII, the “Administrative
Agent”) for the Lender Parties.
WITNESSETH:
WHEREAS, the Required
Lenders hold more than fifty and 00/100 percent (50.00%) of the sum of (a) the aggregate unpaid principal amount of the Advances
currently outstanding, (b) the aggregate Available Amount of all Letters of Credit currently outstanding, and (c) the aggregate
Unused Revolving Credit Commitments currently in effect;
WHEREAS, the Administrative
Agent, the Required Lenders, the Borrower and the Guarantors entered into that certain Waiver of Required Lenders and Administrative
Agent dated as of May 15, 2015 (the “May 2015 Waiver”) whereby certain reporting deadlines under the
Credit Agreement were extended as more particularly set forth therein and subject to the terms thereof (the “Extended
Reporting Dates”); and
WHEREAS, pursuant to
the request of the Parent Guarantor, the Required Lenders and the Administrative Agent hereby wish to grant to the Parent Guarantor
a further extension of certain of the Extended Reporting Dates, on the terms and subject to the conditions described herein.
NOW, THEREFORE, the
parties hereto hereby agree as follows:
1. Notwithstanding
anything to the contrary in the Credit Agreement or the May 2015 Waiver, the Required Lenders and the Administrative Agent hereby
agree that, for purposes of the calendar quarter ending in June 2015, (a) the Borrower shall deliver quarterly financials for such
quarter in accordance with Section 5.03(c) of the Credit Agreement not later than September 30, 2015, and (b) the Borrower shall
deliver the quarterly Borrowing Base Certificate for such quarter in accordance with clause (i) of Section 5.03(d) of the Credit
Agreement not later than September 30, 2015.
2. In
consideration of the waiver extension granted in Section 1 above, and notwithstanding any provision in the Credit Agreement to
the contrary, the Borrower agrees as follows:
(a) From
and after the date of the execution and delivery of this Waiver by the Borrower (the “Execution Date”),
until all Lenders otherwise agree, the Borrower will not request any Advance or any issuance of a Letter of Credit under Article
II of the Credit Agreement; provided, however, that Letter of Credit Advances with respect to any Letters of Credit
that have been issued and remain outstanding as of the Execution Date shall be permitted.
(b) If
on or prior to September 30, 2015 the Parent Guarantor (or a Subsidiary thereof) has not entered into a purchase agreement or a
merger agreement setting forth the terms and conditions whereby all of the Equity Interests in the Parent Guarantor, or all or
substantially all of the assets of the Parent Guarantor, would be sold (a “Sale Agreement”) pursuant
to the proposed transaction disclosed by the Parent Guarantor during its earnings call held on July 16, 2015 (the “Proposed
Sale Transaction”) to the purchaser (or a subsidiary thereof) with whom the Parent Guarantor has been discussing
the Proposed Sale Transaction, or an alternative purchaser approved by the Board of Directors of the Parent Guarantor (in either
case, the “Proposed Purchaser”), then commencing on September 30, 2015 and on the thirtieth (30th)
day of each calendar month thereafter, the Borrower shall prepay an aggregate amount of the Term Loan, the Revolving Credit Advances
comprising part of the same Borrowings, the Swing Line Advances and the Letter of Credit Advances in an aggregate amount equal
to all of the Unrestricted Cash (as defined below), if any, of the Parent Guarantor and its Subsidiaries on such date. To the extent
that the Unrestricted Cash of the Parent Guarantor and its Subsidiaries on such date exceeds the aggregate outstanding amount of
the Term Loan, the Revolving Credit Advances, the Swing Line Advances and the Letter of Credit Advances, then the Borrower shall
make a deposit into the L/C Cash Collateral Account in an amount equal to such excess. Amounts prepaid pursuant to this clause
(b) shall be applied in accordance with Section 2.06(b)(iii) of the Loan Agreement and shall not be refundable once paid. The Borrower’s
obligation to make such prepayments shall terminate on the date that a Sale Agreement is entered into by the Parent Guarantor (or
a Subsidiary of the Parent Guarantor) and the Proposed Purchaser in connection with the Proposed Sale Transaction. For purposes
hereof, “Unrestricted Cash” means, on any date of determination, the difference (if positive) of (i)
Cash and Cash Equivalents that are not on such date subject to any pledge, lien or control agreement, less the (ii) the sum of
(x) $15,000,000 and (y) amounts that as of such date have been placed with third parties as deposits or security for contractual
obligations.
(c) If
on or prior to November 15, 2015 the Parent Guarantor (or a Subsidiary thereof) has not entered into a Sale Agreement, then the
Borrower and the Parent Guarantor will provide (or cause to be provided) on such date to the Administrative Agent, for the benefit
of the Lender Parties, first priority perfected security interests in the Equity Interests in each Subsidiary Guarantor to secure
the Obligations of the Loan Parties under the Loan Documents, pursuant to pledge and security agreements in form and substance
reasonably satisfactory to the Administrative Agent, together with opinions of counsel to the Loan Parties with respect to the
enforceability of such pledge agreements and the perfection of the security interests created thereby, in each case form and substance
reasonably satisfactory to the Administrative Agent.
3. For
the avoidance of doubt, the parties hereto confirm that the Relief Period (as defined in the Second Amendment) includes the Test
Date occurring on September 30, 2015, notwithstanding that the financial reports with respect to such Test Date shall be delivered
after such date pursuant to Section 5.03(c) of the Credit Agreement.
4. The
Borrower agrees that it shall pay to the Administrative Agent a waiver fee, due and payable on the earlier of (a) the date of closing
of the Proposed Sale Transaction and (b) December 31, 2015, equal to 0.10% of the sum of the outstanding principal amount of the
Advances, as of the date hereof, of those Lenders that have executed and delivered to the Administrative Agent a signature page
to this Waiver, which fee shall be for the ratable benefit of such Lenders.
5. This
Waiver shall constitute one of the Loan Documents.
6. Each
Loan Party hereby represents and warrants that as of the date hereof and after giving effect to this Waiver, (x) the representations
and warranties contained in each Loan Document are true and correct in all material respects (except to the extent that such representations
and warranties specifically refer to an earlier date, in which case they are true and correct as of such earlier date) and (y)
to the best of its knowledge, no Event of Default has occurred and is continuing, and no Event of Default will occur as a result
of the execution, delivery and performance by the Loan Parties of this Waiver.
7. Except
as expressly and specifically provided in Section 1 above of this Waiver, the execution, delivery and effectiveness of this Waiver
shall not operate as a waiver of any right, power or remedy of the Initial Lenders, the Administrative Agent, Citibank or the Initial
Issuing Bank under the Loan Documents, or any other documents, instruments or agreement executed and/or delivered in connection
therewith.
8. Each
Loan Party acknowledges that, except as expressly and specifically provided in this Waiver, nothing herein shall be construed to
waive any covenant (including financial) or other provision of the Loan Documents, or obligation of such Loan Party under any Loan
Document.
9. Each
Loan Party hereby ratifies and confirms as of the date hereof that all of the terms, covenants, indemnifications and provisions
of the Credit Agreement and the other Loan Documents are and shall remain in full force and effect without change except as otherwise
expressly waived by this Waiver.
10. This
Waiver shall be governed by, and construed and interpreted in accordance with, the laws of the State of New York.
11. This
Waiver may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when
so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Delivery
of an executed counterpart to this Waiver by facsimile, .pdf or other electronic means of communication shall be effective as delivery
of a manually executed counterpart of this Waiver.
[SIGNATURE PAGES FOLLOW]
IN WITNESS WHEREOF, the parties hereto have
caused this Waiver to be duly executed by their duly authorized representatives, all as of the day and year first above written.
| |
ADMINISTRATIVE AGENT: |
| |
|
| |
CITIBANK, N.A. |
| |
|
| |
By: |
/s/ Michael Chlopak |
| |
|
Name: Michael Chlopak |
| |
|
Title: Vice President |
| |
|
| |
REQUIRED LENDERS: |
| |
|
| |
CITIBANK, N.A. |
| |
|
|
| |
By: |
/s/ Michael Chlopak |
| |
|
Name: Michael Chlopak |
| |
|
Title: Vice President |
[Signatures continue on next page]
| |
BARCLAYS BANK PLC |
| |
|
|
| |
By: |
/s/ Luke Syme |
| |
|
Name: Luke Syme |
| |
|
Title: Assistant Vice President |
[Signatures continue on next
page]
| |
RAYMOND JAMES BANK, N.A. |
| |
|
|
| |
By: |
/s/ H. Fred Coble, Jr. |
| |
|
Name: H. Fred Coble, Jr. |
| |
|
Title: Senior Vice President |
[Signatures continue on next page]
| |
ROYAL BANK OF CANADA |
| |
|
|
| |
By: |
/s/ Rina Kansagra |
| |
|
Name: Rina Kansagra |
| |
|
Title: Authorized Signatory |
[Signatures continue on next page]
| |
BANK OF AMERICA, N.A. |
| |
|
|
| |
By: |
/s/ Kurt Mathison |
| |
|
Name: Kurt Mathison |
| |
|
Title: SVP |
[Signatures continue on next page]
| |
BANK OF THE WEST, |
| |
a California banking corporation |
| |
|
|
| |
By: |
/s/ Jeffrey C. Jones |
| |
|
Name: Jeffrey C. Jones |
| |
|
Title: Managing Director |
| |
|
|
| |
By: |
/s/ Chuck Weerasooriya |
| |
|
Name: Chuck Weerasooriya |
| |
|
Title: Managing Director |
| |
|
|
[Signatures continue on next page]
| |
COMPASS BANK |
| |
|
|
| |
By: |
/s/ Brian Tuerff |
| |
|
Name: Brian Tuerff |
| |
|
Title: Senior Vice-President |
[Signatures continue on next page]
| |
CAPITAL ONE, NATIONAL ASSOCIATION |
| |
|
|
| |
By: |
/s/ Kevin S. Christman |
| |
|
Name: Kevin S. Christman |
| |
|
Title: Senior Vice-President |
[Signatures continue on next page]
| |
NATIONAL BANK OF ARIZONA, |
| |
a national banking association |
| |
|
|
| |
By: |
/s/ Mark Stebbings |
| |
|
Name: Mark Stebbings |
| |
|
Title: Executive Vice-President |
[Signatures continue on next page]
| |
PNC BANK, NATIONAL ASSOCIATION |
| |
|
|
| |
By: |
/s/ Andrew T. White |
| |
|
Name: Andrew T. White |
| |
|
Title: Senior Vice-President |
[Signatures continue on next page]
| |
CITIZENS BANK OF PENNSYLVANIA |
| |
|
|
| |
By: |
/s/ Diane Mullan-Cromwell |
| |
|
Name: Diane Mullan-Cromwell |
| |
|
Title: Senior Vice-President |
[Signatures continue on next page]
| |
BORROWER: |
| |
|
| |
CAMPUS CREST COMMUNITIES OPERATING |
| |
PARTNERSHIP, LP |
| |
|
| |
By: |
Campus Crest Communities GP, LLC, |
| |
|
Its General Partner |
| |
|
|
| |
|
By: |
Campus Crest Communities, Inc. |
| |
|
|
Its Sole Member |
| |
|
|
By: |
/s/ John Makuch |
| |
|
|
|
Name: John Makuch |
| |
|
|
|
Title: Chief Financial Officer |
| |
PARENT GUARANTOR: |
| |
|
| |
CAMPUS CREST COMMUNITIES, INC. |
| |
|
|
| |
By: |
/s/ John Makuch |
| |
|
Name: John Makuch |
| |
|
Title: Chief Financial Officer |
[Signatures continue on next page]
| |
SUBSIDIARY GUARANTORS: |
| |
|
| |
CAMPUS CREST AT STEPHENVILLE, LP |
| |
CAMPUS CREST AT LUBBOCK, LP |
| |
CAMPUS CREST AT WACO, LP |
| |
CAMPUS CREST AT SAN MARCOS, LP |
| |
CAMPUS CREST AT ABILENE, LP |
| |
CAMPUS CREST AT NACOGDOCHES II, LP |
| |
By: |
Campus Crest GP II, LLC |
| |
|
General Partner of each of the above limited partnerships |
| |
|
|
| |
By: |
Campus Crest Properties, LLC |
| |
|
Its Manager |
| |
By: |
/s/ Aaron S. Halfacre |
| |
|
Name: Aaron S. Halfacre |
| |
|
Title: Manager |
[Signatures continue on next page]
| |
CAMPUS CREST AT CHENEY, LLC |
| |
CAMPUS CREST AT TROY, LLC |
| |
CAMPUS CREST AT MURFREESBORO, LLC |
| |
CAMPUS CREST STEPHENVILLE LESSOR, LLC |
| |
CAMPUS CREST WACO LESSOR, LLC |
| |
CAMPUS CREST CHENEY LESSOR, LLC |
| |
CAMPUS CREST TROY LESSOR, LLC |
| |
CAMPUS CREST MURFREESBORO LESSOR, LLC |
| |
CAMPUS CREST AT MOBILE PHASE II, LLC |
| |
CAMPUS CREST AT MOBILE, LLC |
| |
CAMPUS CREST AT AMES, LLC |
| |
CAMPUS CREST AT FORT WAYNE, LLC |
| |
CAMPUS CREST AT MOSCOW, LLC |
| |
CAMPUS CREST AT VALDOSTA, LLC |
| |
CAMPUS CREST AT TOLEDO I, LLC |
| |
CAMPUS CREST AT FLAGSTAFF II, LLC |
| |
CAMPUS CREST AT AUBURN, LLC |
| |
CAMPUS CREST AT FLAGSTAFF, LLC |
| |
CAMPUS CREST AT MT. PLEASANT, LLC |
| |
CAMPUS CREST AT ORONO, LLC |
| |
By: |
Campus Crest Properties, LLC |
| |
|
Manager of each of the above limited liability companies |
| |
By: |
/s/ Aaron S. Halfacre |
| |
|
Name: Aaron S. Halfacre |
| |
|
Title: Manager |
[Signatures continue on next page]
| |
CAMPUS CREST AT HUNTSVILLE I, LP |
| |
|
|
| |
By: |
Campus Crest at Huntsville I GP, LLC |
| |
|
Its General Partner |
| |
|
|
| |
By: |
Campus Crest Properties, LLC |
| |
|
Its Manager |
| |
By: |
/s/ Aaron S. Halfacre |
| |
|
Name: Aaron S. Halfacre |
| |
|
Title: Manager |
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COPPER BEECH TOWNHOME COMMUNITIES SEVENTEEN, LLC |
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COPPER BEECH TOWNHOME COMMUNITIES THIRTY FIVE, LLC |
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MCWHIRTER LIBERTY SQUARE, L.L.C. |
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By: |
Copper Beech Townhome Communities, LLC |
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Manager of each of the above limited liability companies |
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By: |
CB-Campus Crest, LLC |
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Its Manager |
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By: |
Campus Crest Properties, LLC, |
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Its Manager |
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By: |
/s/ Aaron S. Halfacre |
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Name: Aaron S. Halfacre |
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Title: Manager |
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COPPER BEECH TOWNHOME COMMUNITIES SIX, LLC |
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By: |
Copper Beech Townhome Communities, LLC |
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Its Manager |
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By: |
CB-Campus Crest PA, LLC |
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Its Manager |
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By: |
Campus Crest Properties, LLC |
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Its Manager |
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By: |
/s/ Aaron S. Halfacre |
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Name: Aaron S. Halfacre |
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Title: Manager |
Exhibit 31.1
Certification
Of Interim Chief Executive Officer Pursuant To Section 302 Of The Sarbanes-Oxley Act Of 2002
I,
David Coles, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of Campus Crest Communities, Inc.; |
| 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 us 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 (or 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: September 29, 2015 |
By: |
/s/ David Coles |
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David Coles |
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Interim Chief Executive Officer |
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Exhibit 31.2
Certification
Of Interim Chief Financial Officer Pursuant To Section 302 Of The Sarbanes-Oxley Act Of 2002
I,
John Makuch, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of Campus Crest Communities, Inc.; |
| 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 us 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 (or 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: September 29, 2015 |
By: |
/s/ John Makuch |
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John Makuch |
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Interim Chief Financial Officer |
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Exhibit 32.1
Certification
of Interim Chief Executive Officer and Interim 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 Quarterly Report on Form 10-Q of Campus Crest Communities, Inc. (the "Company") for the period ended
June 30, 2015 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned
officers of the Company certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, 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: September 29, 2015 |
By: |
/s/ David Coles |
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Name: |
David Coles |
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Title: |
Interim Chief Executive Officer |
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By: |
/s/ John Makuch |
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Name: |
John Makuch |
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Title: |
Interim Chief Financial Officer |
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