UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

 

FORM 10-K

 

xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2014

 

¨TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to                 

 

Commission file number: 001-34872

 

 

 

CAMPUS CREST COMMUNITIES, INC.

(Exact name of registrant as specified in its charter)

 

Maryland   27-2481988
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

 

2100 Rexford Road, Suite 414, Charlotte, NC   28211
(Address of principal executive offices)   (Zip Code)

 

Registrant’s telephone number, including area code: (704) 496-2500

 

Securities registered pursuant to Section 12(b) of the Act:

 

(Title of Each Class)   (Name of Each Exchange on Which Registered)
Common Stock, $0.01 par value   New York Stock Exchange
8% Series A Cumulative Redeemable Preferred Stock, $0.01 par value   New York Stock Exchange

 

Securities registered pursuant to Section 12(g) of the Act:
None

 

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  ¨    No  x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes  ¨    No  x

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report(s)), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer," and smaller reporting companies in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x Accelerated filer ¨
       
Non-accelerated filer ¨ Smaller reporting company ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

 

There were 64,659,415 shares of the registrant’s common stock outstanding with a par value of $0.01 per share as of the close of business on March 26, 2015. The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2014 was approximately $563.1 million.

 

 

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Part II and III of this report incorporate certain information by reference to the registrant’s definitive Proxy Statement to be filed with respect to the 2015 annual meeting of stockholders.

 

 

 

 

 
 

  

FORM 10-K

FOR THE YEAR ENDED DECEMBER 31, 2014

 

TABLE OF CONTENTS

 

  Page No.
PART I 4
Item 1. Business 4
Item 1A. Risk Factors 9
Item 1B. Unresolved Staff Comments 31
Item 2. Properties 31
Item 3. Legal Proceedings 33
   
PART II. 34
Item 4. Mine Safety Disclosures 34
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 34
Item 6. Selected Financial Data 35
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 40
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 63
Item 8. Financial Statements and Supplementary Data 64
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 64
Item 9A. Controls and Procedures 64
Item 9B. Other Information 66
   
PART III. 66
Item 10. Directors, Executive Officers and Corporate Governance 66
Item 11. Executive Compensation 66
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 66
Item 13. Certain Relationships and Related Transactions, and Director Independence 66
Item 14. Principal Accounting Fees and Services 66
   
PART IV. 67
Item 15. Exhibits and Financial Statement Schedules 67
   
SIGNATURES 72

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and include this statement for the purpose of complying with these safe harbor provisions. Forward-looking statements are generally identifiable by use of forward-looking terminology such as "may," "will," "should," "potential," "intend," "expect," "seek," "anticipate," "estimate," "approximately," "believe," "could," "project," "predict," "continue," "plan," “would” or other similar words or expressions. Forward-looking statements are based on certain assumptions, discuss future expectations, describe future plans and strategies, contain financial and operating projections or state other forward-looking information. Our ability to predict results or the actual effect of future events, actions, plans or strategies is inherently uncertain. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in, or implied by, the forward-looking statements. Factors that may cause our actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements include, but are not limited to, the following:

 

·the factors discussed in this report, including those set forth under the headings "Business," "Risk Factors" and "Management’s Discussion of Financial Condition and Results of Operations";

 

·the performance of the student housing industry in general;

 

·decreased occupancy or rental rates at our properties resulting from competition or other factors;

 

·the operating performance of our properties;

 

·the availability of attractive acquisition opportunities in properties that satisfy our investment criteria and the success of our acquisition activities, including satisfaction of conditions to closing for pending acquisitions and, in some cases, the negotiation and execution of definitive documents and satisfaction of the conditions therein;

 

·changes in the admissions or housing policies of the colleges and universities from which we draw student-tenants;

 

·changes in our business and growth strategies and in our ability to consummate acquisitions or dispositions or additional joint venture transactions;

 

·our ability to manage effectively our growth and expansion into new markets, including international markets, or to integrate acquisitions successfully, including our acquisition of the CB Portfolio (as defined herein);

 

·changes in exchange rates for foreign currencies;

 

·our capitalization and leverage level;

 

·our capital expenditures;

 

·the degree and nature of our competition, in terms of developing properties, consummating acquisitions and in obtaining student-tenants to fill our properties;

 

·volatility in the real estate industry, interest rates and spreads, the debt or equity markets, the economy generally or the local markets in which our properties are located, including international markets, whether the result of market events or otherwise;

 

·events or circumstances that undermine confidence in the financial markets or otherwise have a broad impact on financial markets, such as the sudden instability or collapse of large financial institutions or other significant corporations, terrorist attacks, natural or man-made disasters or threatened or actual armed conflicts;

 

·the availability and terms of short-term and long-term financing;

 

·our ability to extend the maturity of or refinance our existing debt, or comply with the financial and other covenants of the agreements that govern our existing debt;

 

·the credit quality of our student-tenants and parental guarantors;

 

·changes in personnel, including the departure of key members of our senior management, and lack of availability of, or our inability to attract and retain, qualified personnel;

 

·unanticipated increases in financing and other costs, including a rise in interest rates;

 

·estimates relating to our ability to make distributions to our stockholders in the future and our expectations as to the form of any such distributions;

 

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·environmental costs, uncertainties and risks, especially those related to natural disasters;

 

·differences in cultures, including adapting practices and strategies that have been successful in our domestic business to international markets;

 

·changes in governmental regulations, accounting treatment, tax rates and similar matters;

 

·legislative and regulatory changes (including changes to laws governing the taxation of real estate investments trusts ("REIT")); and

 

·limitations imposed on our business and our ability to satisfy complex rules in order for us to qualify as a REIT for U.S. federal income tax purposes and the ability of certain of our subsidiaries to qualify as taxable REIT subsidiaries for U.S. federal income tax purposes, and our ability and the ability of our subsidiaries to operate effectively within the limitations imposed by these rules.

 

When considering forward-looking statements, keep in mind the risk factors and other cautionary statements in this report. Readers are cautioned not to place undue reliance on any of these forward-looking statements, which reflect our views as of the date of this report. The matters summarized in this report, including the factors set forth under the headings "Business," "Risk Factors," "Properties" and "Management’s Discussion and Analysis of Financial Condition and Results of Operations," could cause our actual results and performance to differ materially from those set forth in, or implied by, our forward-looking statements. Accordingly, we cannot guarantee future results or performance. Furthermore, except as required by law, we are under no duty to, and we do not intend to, update any of our forward-looking statements after the date of this report, whether as a result of new information, future events or otherwise.

 

PART I

 

Item 1. Business.

 

Our Company

 

Campus Crest Communities, Inc., together with its subsidiaries, referred to herein as the "Company," "we," "us," "our," and "Campus Crest," is a self-managed, self-administered REIT focused on owning and managing a diversified portfolio of high-quality, residence life student housing properties. We were incorporated in the State of Maryland on March 1, 2010. On October 19, 2010, we completed an initial public offering (the "Offering") of our common stock. As a result of the Offering and certain formation transactions entered into in connection therewith (the "Formation Transactions"), we currently own the sole general partner interest and own limited partner interests in Campus Crest Communities Operating Partnership, LP (the "Operating Partnership"). We hold substantially all of our assets, and conduct substantially all of our business, through the Operating Partnership. The Offering and Formation Transactions were designed to (i) continue the operations of Campus Crest Communities Predecessor (the "Predecessor"), (ii) reduce outstanding mortgage and construction loan indebtedness, (iii) enable us to acquire additional interests in certain of our student housing properties, (iv) fund joint venture capital requirements, and (v) establish sufficient working capital for general corporate purposes. The exchange of entities or interests in the Predecessor for units of limited partnership interests in the Operating Partnership ("OP units") has been accounted for as a reorganization of entities under common control. As a result, our assets and liabilities have been reflected at their historical cost basis.

 

In February 2013, we entered into purchase and sale agreements to acquire an approximate 48.0% interest in a portfolio of 35 student housing properties, one undeveloped land parcel and a corporate office building held by the members of Copper Beech Townhome Communities, LLC ("CBTC") and Copper Beech Townhome Communities (PA), LLC (the “CB Portfolio”), and a fully integrated platform and brand with management, development and construction teams, for an initial purchase price of approximately $230.2 million, including the repayment of $106.7 million of debt. The remaining interests in the CB Portfolio are held by certain of the former members of CBTC and CBTC PA, (the “CB Investors”). In September 2013, we entered into an amendment to the above referenced purchase and sale agreements for consideration of $4.0 million whereby we will transfer our 48.0% interest in five properties in the Copper Beech Portfolio back to the CB Investors and defer the acquisition of two development properties as consideration for an additional 19.0% interest in each of the remaining 30 properties in the Copper Beech Portfolio. See Note 6 to the accompanying consolidated financial statements. Subsequent to December 31, 2014, we along with certain of our affiliates completed the acquisition of the Copper Beech Portfolio. See Note 19 to the accompanying consolidated financial statements.

 

During the third quarter of 2014, we began to implement a strategic repositioning which includes, among other things:

 

(1)Simplifying the business model by discontinuing all construction and development and focusing on organic growth;
(2)Reducing the number of joint ventures through planned dispositions of certain assets within our joint ventures to simplify asset ownership structure and reduce exposure to off-balance sheet obligations;
(3)Disposing of land which was previously held for future development (held in land and property held for sale as of December 31, 2014, some of which was disposed of subsequent to the year ended December 31, 2014 (see Note 19 to the accompanying consolidated financial statement) and the rest of which we expect to dispose of during 2015);
(4)Identifying costs savings at our properties and at the corporate office; and

 

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(5)Focusing time and resources on recruiting new members of our management team.

 

During the year ended December 31, 2014, the Company discontinued all construction and development operations (see Note 7 of the accompanying consolidated financial statements).

 

We believe that we are one of the largest owners and managers of high-quality student housing properties in the United States, based on beds owned and under management. As of December 31, 2014, we owned interests in 47 operating student housing The Grove® properties containing approximately 9,700 apartment units and 26,300 beds. Thirty-six of our operating The Grove® properties are wholly-owned and eleven of our The Grove® properties are owned through joint ventures with HSRE. As of December 31, 2014, we also owned interests in 36 operating student housing Copper Beech branded properties containing approximately 6,500 apartment units and 17,300 beds. Our Copper Beech branded properties are owned by the Company and the CB Investors. As of December 31, 2014, we also owned interests in three operating student housing evo® properties containing approximately 1,500 units and 3,000 beds and owned one wholly-owned redevelopment property containing approximately 170 units and 340 beds. As of December 31, 2014, our operating portfolio consisted of the following:

 

   Properties in       Number   Number 
   Operation   Ownership   of Units   of Beds 
Wholly-owned Grove properties(1)   36    100.0%   7,305    19,945 
Joint venture Grove properties:                    
HSRE I   3    63.9%(2)   544    1,508 
HSRE V   3    10.0%   662    1,856 
HSRE VI   3    20.0%   664    1,784 
HSRE X   2    30.0%   468    1,240 
Total Grove properties   47         9,643    26,333 
                     
Joint venture evo properties:                    
CSH Montreal   2    47.0%   1,203    2,223 
HSRE IX   1    30.0%   344    850 
Total evo properties   3         1,547    3,073 
                     
CB Portfolio   36    48.0%(3)   6,461    17,283 
                     
Total Portfolio(4)   86         17,651    46,689 

 

(1)In 2014, we acquired the remaining ownership interest in The Grove at Denton, Texas.
(2)In 2014, we amended and restated our operating agreement with HSRE resulting in our previously held preferred interest in The Grove at San Angelo, Texas, and The Grove at Conway, Arkansas, being converted to additional membership units of HSRE-Campus Crest I, LLC.
(3)As of December 31, 2014, we had an effective interest in the CB Portfolio of 48%. See Note 8 to the accompanying consolidated financial statements.
(4)The redevelopment of our 100% owned property in Toledo, OH, which was acquired in March 2013, is excluded.

 

As of December 31, 2014, the average occupancy for our 47 The Grove® properties was approximately 87.2% and the average monthly total revenue per occupied bed was approximately $527. Our operating properties are located in 23 states, contain modern apartment units with many resort-style amenities, and had an average age of approximately 4.0 years as of December 31, 2014. As of December 31, 2014, the average occupancy for our 36 Copper Beech branded properties was approximately 91.0%, and the average monthly total revenue per occupied bed was approximately $487. Our properties are primarily located in medium-sized college and university markets, which we define as markets located outside of major U.S. cities that have nearby schools generally with overall enrollment of approximately 5,000 to 20,000 students. We believe such markets are underserved and are generally experiencing enrollment growth.

 

We have developed, built and managed substantially all of our wholly-owned properties and several of our unconsolidated joint venture properties, which are based upon a common prototypical residential building design. We believe that our use of this prototypical building design, which we have built more than 700 times at our student housing properties (approximately 15 of such residential buildings comprise one student housing property), allows us to efficiently deliver a uniform and proven student housing product in multiple markets. The majority of our operating properties (other than those in the CB Portfolio, evo® and Toledo) operate under The Grove® brand, and we believe that our brand and the associated lifestyle are effective differentiators that create higher visibility and appeal for our properties within their markets both with the students as well as the universities we serve.

 

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We began building or redeveloping nine new student housing properties in 2013 that commenced operations in August 2014, one of which is owned by a joint venture with HSRE and Brandywine Realty Trust (“Brandywine”) in which we own a 30.0% interest and act as the co-developer, one of which is owned by a joint venture with Beaumont Partners SA (“Beaumont”) in which we owned a 47.0% interest at December 31, 2014, two of which are owned by a joint venture with HSRE in which we own a 30% interest, one of which is a Copper Beech branded property in which our ownership interest is commensurate with the remainder of the CB Portfolio, and four of which are wholly-owned by us. In 2014, we completed the redevelopment of one student housing property which is owned by a joint venture with Beaumont in which we own a 47.0% interest.

 

REIT Status and Taxable REIT Subsidiaries

 

We have made an election to qualify, and we believe we are operating so as to qualify, as a REIT under Sections 856 through 859 of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"), commencing with our taxable year ended December 31, 2010. As a REIT, we generally will not be subject to U.S. federal income tax to the extent that we meet the organizational and operational requirements and our distributions equal or exceed 90% of our REIT taxable income. For all periods subsequent to the REIT election, we have met the organizational and operational requirements and distributions have exceeded 90% of our REIT taxable income.

 

We have elected to treat Campus Crest TRS Holdings, Inc. ("TRS Holdings"), our wholly-owned subsidiary, as a taxable REIT subsidiary ("TRS"). TRS Holdings includes the management companies that provide services to entities in which we do not own 100% of the equity interests. As a TRS, the operations of TRS Holdings and its subsidiaries are generally subject to federal, state and local income and franchise taxes.

 

Property Management and Monitoring

 

We maintain an on-site staff at each property, including a General Manager, Sales Manager and Maintenance Supervisor. The on-site staff is responsible for all aspects of the property’s operations, including marketing, leasing administration, customer service, lifestyle, expense control, business administration, ongoing property maintenance, capital projects, residence life and student development. In addition, each property typically has 5 student-tenants that live on-site and work for us on a part-time basis. These individuals act as Community Assistants, or CA's, and Leasing Consultants, or LC’s, that assist in developing lifestyle programming, building community, ensuring the needs of all tenants and guests are taken care of, and pursuing and closing all potential leads for continued leasing efforts. We also have a full time Senior Leasing Consultant that offers support to the Sales Manager and a Maintenance Tech that offers support to the Maintenance Supervisor. We provide oversight to each property on an area basis, with each "area" typically comprised of six to eight properties. Each area is staffed with an Area Manager and Area Sales Manager and our area team is supported by a Regional Manager and Regional Sales Manager respectively. The roles of our various staff members are described in greater detail below.

 

General Managers, Sales Managers and Maintenance Supervisor. The General Manager is responsible for all facets of a property’s operation, including the development and implementation of student lifestyle programs, expense control, collection of rents, administration of accounts payable, customer service, implementation of the annual marketing plan, administration of all leasing and marketing functions, coordination of property maintenance, asset preservation and capital improvement projects. The General Manager also supervises the residence life program and conducts all hiring, termination, and staff development of on-site personnel. The Sales Manager supports the General Manager and focuses on the leasing and lifestyle programs at the property. The Maintenance Supervisor is responsible for coordinating all maintenance activity at the property and serving as a liaison for larger capital projects in concert with our in-house facilities group.

 

Community Assistants and Leasing Consultants. At each property we generally maintain a ratio of 50-70 students per employee living on site. Our CA’s and LC’s are selected by our management based upon a set of criteria, including interpersonal skills, leadership capabilities, responsibility, maturity and willingness to meet the challenges and expectations of the position. We use these positions to interface on a peer basis with our student-tenants and to assist with various duties at the properties. Further, we use this position as a feeder for us, which allows us to evaluate these part-time employees for potential full-time managerial positions with us after they graduate. It is a position that fits well with many students’ academic goals while affording them opportunities for personal growth and leadership development. The CA’s and LC’s perform the duties of their position in exchange for their room and a stipend. CA’s and LC’s are trained to provide support and assistance to our student-tenants on a variety of issues. The CA’s and LC’s act as community facilitators by developing an atmosphere that promotes a sense of belonging, support and affiliation. At all times, our CA’s and LC’s are expected to be role models and maintain the highest standards of personal conduct. Through observation and interaction with the community, the CA’s and LC’s help to identify potential problems and make appropriate referrals so that students may overcome obstacles to their academic achievement. Through their efforts to provide timely, accurate and thorough information in the appropriate format, CA’s and LC’s contribute to the smooth and effective operations of our properties. We believe that these positions are important to the success of our properties.

 

Senior Leasing Consultant. Senior Leasing Consultants support the leasing efforts driven by the Sales Manager. The Senior Leasing Consultants are responsible for achieving sales performance goals for their respective site. They are actively engaged in gaining new prospects, following up with prospects, and closing on sales to meet or exceed set goals. This position also assists in hiring and developing leasing consultants and community assistant personnel. Much like the CA and LC position, the Senior Leasing Consultant position is one developed to be a feeder for us to use at Sales Manager openings within our portfolio.

 

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Area Managers and Area Sales Managers. The Area Manager is responsible for all facets of the operations of properties in his or her area, typically six to eight properties per area. He or she monitors the performance of the properties and the compliance of each of the General Managers with our programs and policies to preserve operational standards across all of the properties in his or her area. The Area Manager is the conduit between centralized planning at our corporate level and decentralized execution at each of the properties. Similar to the property-level Sales Manager, the Area Sales Manager provides support for leasing and lifestyle programming at all the properties in his or her area. As the corporate marketing department’s liaison to area and property operations, the Area Sales Manager monitors the consistency of our brands across the properties and collaborates with the Area Managers and General Managers to market each property effectively.

 

Regional Managers and Regional Sales Managers. The Regional Manager is responsible for all facets of the operations of properties in his or her region, typically 2 areas accounting for 12-16 properties. He or she monitors the performance of his or her area to ensure compliance of all operational standards across their region. The Regional Manager is part of the conduit between the centralized planning at our corporate level and decentralized execution within each of their areas. The Regional Manager is also someone who works on the training and development of each of their Area Managers to improve the performance metrics for the overall company. The Regional Sales Manager, much like the Regional Manager, is responsible to support the leasing and lifestyle planning within each of their respective areas.

 

Leasing and Marketing

 

Student housing properties are typically leased by the bed on an individual lease liability basis, unlike multi-family housing where leasing is by the unit. Individual lease liability limits each student-tenant’s liability to his or her own rent without liability for a roommate’s rent. A parent or guardian is required to execute each lease as a guarantor unless the student-tenant provides adequate proof of income. The number of lease contracts that we administer is therefore equivalent to the number of beds occupied rather than the number of units occupied.

 

Unlike traditional multi-family housing, most of our leases commence and terminate on the same dates each year. In the case of our typical 11.5-month lease, these dates coincide with the commencement of the universities’ fall academic term and typically terminate at the completion of the last summer school session. As such, we must re-lease each property in its entirety each year, resulting in significant turnover in our tenant population from year to year. As a result, we are highly dependent upon the effectiveness of our marketing and leasing efforts during the annual leasing season, which typically begins each October and ends in September of the following year. Approximately 37.6% and 41.7% of our current tenants renewed their lease as of the start of the fall term for the 2014-2015 and 2013-2014 academic years, respectively.

 

Each year we implement a marketing and leasing plan to re-lease each property. We advertise through various media, including print and internet advertising, social media, direct mailers, radio advertising, promotional events and public relation campaigns. We typically compete in the off-campus student housing market on the basis of:

 

·the quality of our facilities, including their proximity to college and university campuses, the size and layout of units and the types of amenities offered;

 

·rental terms, including price, which vary based on the market in which the property is located, and per-bed rental (individual lease liability), which allows individual student-tenants to avoid responsibility for the rental of an entire apartment unit;

 

·community environment, including community facilities, amenities and programming, which is overseen by our staff of CA’s; and

 

·our relationships with colleges and universities, which may result in our properties being recommended or listed in recruiting and admissions literature provided to incoming and prospective students.

 

Student Programming

 

We believe that our success has been driven, in part, by our focus on student lifestyle programming, which enhances the lifestyle of our student-tenants and helps to create an environment that is conducive to academic and social success. We do not approach our properties as simply a place for students to live, but rather we seek to assist our student-tenants in building connections with their fellow student-tenants, their communities and the colleges and universities that they attend. We believe that our focus on student lifestyle programming differentiates us from our competitors and makes our properties more attractive to prospective student-tenants and their parents.

 

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Business Segments

 

We define business segments by their distinct customer base and services provided. We have identified two reportable business segments: (i) student housing operations and (ii) property management services. All construction and development activities are reported in discontinued operations at December 31, 2014. We evaluate the performance of our operating segments based on operating income (loss). All inter-segment sales pricing is based on current market conditions. Unallocated corporate amounts include general expenses associated with managing our two reportable operating segments. See Note 16 to the accompanying consolidated financial statements.

 

Competition

 

Competition from Universities and Colleges

 

We are subject to competition for student-tenants from on-campus housing owned by universities and colleges. On-campus student housing has inherent advantages over off-campus student housing (such as the majority of our properties) in integrating with the academic community, which may cause student-tenants to prefer on-campus housing to off-campus housing. Additionally, colleges and universities may have financial advantages that allow them to provide student housing on more attractive terms than we are able to. For example, colleges and universities can generally avoid real estate taxes and borrow funds at lower interest rates than private, for profit real estate concerns, such as us. Residence halls owned and operated by the primary colleges and universities in the markets in which we operate typically charge lower rental rates but offer fewer amenities than those offered at our properties.

 

Despite the inherent advantages of on-campus housing, most universities are able to house only a small percentage of their overall enrollment, and are therefore highly dependent on the off-campus market to provide housing for their students. High-quality and well run off-campus student housing can therefore be a critical component of an institution’s ability to attract and retain students. Accordingly, universities and colleges often have an interest in encouraging and facilitating the construction of modern off-campus housing alternatives.

 

Competition from Private Owners

 

We also compete with other regional and national owner-operators of off-campus student housing as well as with smaller local owner-operators. Currently, the industry is fragmented with no participant holding a dominant market share. There are a number of student housing properties that are located near or in the same general vicinity of many of our properties and that compete directly with our properties. We believe that a number of other large national companies with substantial financial and marketing resources may be potential entrants in the student housing business. The activities of any of these companies could cause an increase in competition for student-tenants and for the acquisition, development and management of other student housing properties, which could reduce the demand for our properties.

 

Insurance

 

We carry comprehensive liability, fire, extended coverage, terrorism and rental loss insurance covering all of the properties in our portfolio. Our insurance includes coverage for earthquake damage to properties located in seismically active areas, windstorm damage to properties exposed to hurricanes, and terrorism insurance on all of our properties. Our insurance policies are subject to coverage limits and applicable deductibles, and if we suffer a substantial loss, our coverage may be insufficient. All insurance policies are also subject to coverage extensions that we believe are typical for our business. We do not carry insurance for generally uninsured losses such as loss from riots or acts of God.

 

Regulation

 

General

 

Student housing properties are subject to various laws, ordinances and regulations, including regulations relating to common areas. We believe that each of our operating properties has the necessary permits and approvals to operate its business. In addition, apartment community properties are subject to various laws, ordinances and regulations, including regulations relating to recreational facilities, such as swimming pools, activity centers and other common areas.

 

Americans With Disabilities Act

 

Our properties must comply with Title III of the Americans with Disabilities Act of 1990, as amended, or the ADA, to the extent that such properties are "public accommodations" as defined by the ADA. The ADA may require removal of structural barriers to access by persons with disabilities in certain public areas of our properties where such removal is readily achievable.

 

Fair Housing Act

 

The Fair Housing Act, or the FHA, its state law counterparts and the regulations promulgated by the U.S. Department of Housing and Urban Development, or HUD and various state agencies, prohibit discrimination in housing on the basis of race or color, national origin, religion, sex, familial status (including children under the age of 18 living with parents or legal custodians, pregnant women and people securing custody of children under 18) or handicap (disability) and, in some states, on financial capability.

 

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Environmental Matters

 

Some of our properties contain, or may have contained, or are adjacent to or near other properties that have contained or currently contain storage tanks for the storage of petroleum products or other hazardous or toxic substances. These operations create a potential for the release of petroleum products or other hazardous or toxic substances. Third parties may be permitted by law to seek recovery from owners or operators for personal injury or property damages arising from releases from such tanks. Additionally, third parties may be permitted by law to seek recovery from owners or operators for personal injury or property damage associated with exposure to other contaminants that may be present on, at or under the properties, including, but not limited to, petroleum products and hazardous or toxic substances. Also, some of the properties include regulated wetlands on undeveloped portions of such properties and mitigated wetlands on or near our properties. Absent appropriate permits, we can be held responsible for restoring wetlands and be required to pay fines and penalties.

 

When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Concern about indoor exposure to mold has been increasing as exposure to mold may cause a variety of adverse health effects and symptoms, including allergic or other reactions. Some of our properties may contain microbial matter such as mold and mildew. The presence of significant mold at any of our properties could require us to undertake a costly remediation program to contain or remove the mold from the affected property. The presence of significant mold could expose us to liability from student-tenants, employees and others if property damage or health concerns arise.

 

If any property in our portfolio is not properly connected to a water or sewer system, or if the integrity of such systems is breached, microbial matter or other contamination can develop. If this were to occur, we could incur significant remedial costs and we may also be subject to private damage claims and awards, which could be material. If we become subject to claims in this regard, it could materially and adversely affect us and our insurability for such matters in the future.

 

Employees

 

As of December 31, 2014, we had approximately 632 employees. Our employees are not represented by a labor union.

 

Offices and Website

 

Our principal executive offices are located at 2100 Rexford Road, Suite 414, Charlotte, NC 28211. We also have management offices at each of our properties.

 

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

 

Item 1A. Risk Factors.

 

Carefully consider the following risk factors, the occurrence of any of which may materially and adversely affect us. The risks described below are not the only ones we face. Additional risks not presently known to us or that we may currently deem immaterial also may impair our financial condition or operations or otherwise harm us.

 

Risks Related to Our Business and Properties

 

Adverse economic conditions and dislocation in the credit markets have had a material and adverse effect on us and may continue to materially and adversely affect us.

 

We experienced unprecedented levels of volatility in the capital markets, a reduction in the availability of credit and intense recessionary pressures, which had an adverse effect on our results of operations and our ability to borrow funds from 2007 through 2010. For example, lenders were generally imposing more stringent lending standards and applying more conservative valuations to properties. This limited the amount of indebtedness we were able to obtain and impeded our ability to develop new properties and to replace construction financing with permanent financing. If these conditions were to develop again in the future, our business and our growth strategy may be materially and adversely affected. Although our business strategy contemplates access to debt financing (including our revolving credit facility and term loans) and working capital requirements, there can be no assurance that we will be able to obtain such financing on favorable terms or at all. As of December 31, 2014, we had approximately $167.5 million outstanding under our revolving credit facility and $50.0 million outstanding under the related term loan. The amounts outstanding under our revolving credit facility and term loan will reduce the amount that we may be able to borrow under this facility for other purposes. We have approximately $50.0 million in borrowing capacity under our revolving credit facility, and amounts borrowed under the facility will be due at its maturity in January 2017 (subject to a one-year extension which we may exercise at our option, provided we comply with certain terms and conditions, including the payment of an extension fee). This indebtedness, as well as our mortgage, construction and other debt of approximately $303.5 million as of December 31, 2014, and the $100.0 million outstanding principal amount of the Operating Partnership’s 4.75% Exchangeable Senior Notes due 2018, will subject us to risks associated with debt financing as described below under "Our indebtedness exposes us to a risk of default and reduces our free cash flow, which could materially and adversely affect us."

 

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A subsequent recession or challenging economic environment may adversely affect us by, among other things, limiting or eliminating our access to financing, which would adversely affect our ability to develop and refinance properties and pursue acquisition opportunities. Significantly more stringent lending standards and higher interest rates may reduce our returns on investment and increase our interest expense, which could adversely affect our financial performance and liquidity. Additionally, limited availability of financing may reduce the value of our properties, limit our ability to borrow against such properties and, should we choose to sell a property, impair our ability to dispose of such property at an attractive price or at all, which could materially and adversely affect our financial condition and results of operations.

 

Certain of our properties may be subject to liens or other claims, which could materially and adversely affect our profitability.

 

We may be subject to liens or claims for materials or labor relating to disputes with subcontractors or other parties that are or were involved in the development and construction process. There can be no assurance that we will not be required to pay amounts greater than currently recorded liabilities in order to settle these claims.

 

We rely on our relationships with the colleges and universities from which our properties draw student-tenants and on the policies and reputations of these schools; any deterioration in our relationships with such schools or changes in the schools’ admissions or residency policies or reputations could materially and adversely affect our results of operations.

 

We rely on our relationships with colleges and universities for referrals of prospective student-tenants or for mailing lists of prospective student-tenants and their parents. The failure to maintain good relationships with these schools could therefore have a material adverse effect on us. Many of these schools own and operate on-campus student housing which competes with our properties for student-tenants, and if schools refuse to provide us with referrals or to make lists of prospective student-tenants and their parents available to us or increase the cost of these lists, the lack of such referrals, lists or increased cost could have a material adverse effect on us.

 

Changes in admission and housing policies could adversely affect us. For example, if a school reduces the number of student admissions or requires that a certain class of students (e.g., freshman) live in on-campus housing, the demand for beds at our properties may be reduced and our occupancy rates may decline. While we may engage in marketing efforts to compensate for any such policy changes, we may not be able to effect such marketing efforts prior to the commencement of the annual lease-up period, or our additional marketing efforts may not be successful, which could reduce the demand for our properties and materially and adversely affect us.

 

It is also important that the schools from which our properties draw student-tenants maintain good reputations and are able to attract the desired number of incoming students. Any degradation in a school’s reputation could inhibit its ability to attract students and reduce the demand for our properties.

 

Competition from other student housing properties, including on-campus housing and traditional multi-family housing located in close proximity to the colleges and universities from which we draw student-tenants may reduce the demand for our properties, which could materially and adversely affect our cash flows, financial condition and results of operations.

 

Our properties compete with properties owned by universities, colleges, national and regional student housing businesses and local real estate concerns. On-campus student housing has inherent advantages over off-campus student housing (such as the majority of our properties), due to its physical location on the campus and integration into the academic community, which may cause student-tenants to prefer on-campus housing to off-campus housing. Additionally, colleges and universities may have financial advantages that allow them to provide student housing on terms more attractive than our terms. For example, colleges and universities can generally avoid real estate taxes and borrow funds at lower interest rates than private, for-profit real estate concerns, such as our company.

 

There are a number of student housing properties located near or in the same general vicinity of many of our properties that compete directly with our properties. Such competing student housing properties may be newer, located closer to campus, charge less rent, possess more attractive amenities, offer more services or offer shorter lease terms or more flexible lease terms than our properties. Competing properties could reduce demand for our properties and materially and adversely affect our rental income.

 

Revenue at a particular property could also be adversely affected by a number of other factors, including the construction of new on-campus and off-campus housing, decreases in the general levels of rents for housing at competing properties, decreases in the number of students enrolled at one or more of the colleges or universities from which the property draws student-tenants and other general economic conditions.

 

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Although we believe no participant in the student housing industry holds a dominant market share, we compete with larger national companies, colleges and universities with greater resources and superior access to capital. Furthermore, a number of other large national companies with substantial financial and marketing resources may enter the student housing business. The activities of any of these companies, colleges or universities could cause an increase in competition for student-tenants and for the acquisition, development and management of other student housing properties, which could reduce the demand for our properties.

 

Our results of operations are subject to risks inherent in the student housing industry, such as an annual leasing cycle and limited leasing period, which could materially and adversely affect us.

 

We generally lease our properties for 11.5-month terms, and the related leases provide for 12 equal monthly payments of rent. Therefore, our properties must be entirely re-leased each year, exposing us to more leasing risk than property lessors that lease their properties for longer terms. Student housing properties are also typically leased during a limited leasing period that generally begins each October and ends in September of the following year. We are therefore highly dependent on the effectiveness of our marketing and leasing efforts and personnel during this leasing period. We will be subject to heightened leasing risk at properties we may acquire in the future due to our lack of experience leasing such properties. Any significant difficulty in leasing our properties would adversely affect our results of operations, financial condition and ability to pay distributions on our securities and would likely have a negative impact on the trading price of our securities. As of the start of the fall term for the 2014-2015 and 2013-2014 academic years, we had approximately 37.6% and 41.7%, respectively, of our current tenants renew their previous lease for the upcoming term.

 

Additionally, student-tenants may be more likely to default on their lease obligations during the summer months, which could further reduce our revenues during this period. Although we typically require a student-tenant’s lease obligations to be guaranteed by a parent, we may have to spend considerable effort and expense in pursuing payment upon a defaulted lease, and our efforts may not be successful.

 

Our future success is substantially dependent on our ability to attract and retain key management executives.

 

Our future success depends in large part upon our ability to attract and retain key management executives and other key employees. In the last year, as part of our strategic repositioning, several members of our senior management team have departed, including our former chief executive officer, our former chief financial officer and other former senior members of our executive management team, and we are actively searching to fill several key roles. Aaron S. Halfacre, our chief investment officer, was recently elevated to the additional role as President, and Scott R. Rochon, chief accounting officer, is serving as our acting chief financial officer. The continued turnover of senior management and the loss of key members of our executive team could have a negative impact on our ability to manage and grow our business effectively. Turnover of executives and senior management can adversely impact our stock price, our results of operations and our client relationships and may make recruiting for future management positions more difficult or may require us to offer more generous executive compensation packages to attract top executives. In addition, we must successfully integrate any newly hired management personnel within our organization in order to achieve our operating objectives. The key initiatives directed by these executives may take time to implement and yield positive results, if at all. If our new executives do not perform up to expectations, we may experience declines in our financial performance or delays in our long-term growth strategy.

 

The current economic environment could reduce enrollments and limit the demand for our properties, which could materially and adversely affect our cash flows, profitability and results of operations.

 

A continuation of ongoing economic conditions that adversely affect household disposable income, such as high unemployment levels, weak business conditions, reduced access to credit, increasing tax rates and high fuel and energy costs, could reduce overall student leasing or cause student-tenants to shift their leasing practices as students may determine to forego college or live at home and commute to college.

 

As a result of general economic weakness, many students may be unable to obtain student loans on favorable terms. In addition, despite the recent economic weakness, tuition and other costs associated with attending college have continued to rise. If student loans are not available or their costs are prohibitively high, enrollment numbers for schools from which we draw student-tenants may decrease, resulting in a decrease in the demand for, and consequently the occupancy rates at and rental revenue from, our properties. Accordingly, the continuation or deterioration of current economic conditions could materially and adversely affect our cash flows, profitability and results of operations.

 

In the past, we have experienced significant net losses; if this trend continues, we could be materially and adversely affected.

 

For the years ended December 31, 2014, 2013, 2010 and 2009, we incurred significant net losses. These results have had a negative impact on our financial condition. While we experienced net income for the years ended December 31, 2012 and 2011, and believe that we are adequately capitalized and able to continue to operate our business, there can be no assurance that our business will be profitable in the future and additional losses will not be incurred. If the trend of incurring significant net losses continues in the future, our financial performance, liquidity and our ability to operate our business as a going concern could be materially and adversely affected.

 

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If we are unable to acquire properties on favorable terms, our future growth could be materially and adversely affected.

 

Our future growth will depend, in part, upon our ability to acquire new properties on favorable terms. Acquisition opportunities may not be available to us on terms that we deem acceptable, and we may be unsuccessful in consummating acquisition opportunities. Our ability to acquire properties on favorable terms and successfully operate them may be adversely affected by:

 

·an inability to obtain financing on attractive terms or at all;

 

·increased purchase prices and decreased expected yields due to competition from other potential acquirers and real estate investors;

 

·the need to make significant and unexpected capital expenditures to improve or renovate acquired properties;

 

·an inability to quickly and efficiently integrate acquisitions, particularly any acquisitions of portfolios of properties, into our existing operations;

 

·market conditions resulting in higher than expected vacancy rates and lower than expected rental rates at acquired properties; and

 

·acquisition of properties subject to liabilities but without any recourse, or with only limited recourse, to the sellers, or with liabilities that are unknown to us, such as liabilities for clean-up of undisclosed environmental contamination, claims by tenants, vendors or other persons dealing with the former owners of our properties.

 

Our failure to identify and consummate property acquisitions on attractive terms or the failure of any acquired properties to meet our expectations could materially and adversely affect our future growth.

 

Our strategy of investing in properties located in medium-sized college and university markets may not be successful, which could materially and adversely affect us.

 

Our business strategy involves investing in properties located in medium-sized college and university markets, which are smaller than larger educational markets. Larger educational markets, such as Boston, Massachusetts or Washington, D.C., often have multiple colleges and universities that have larger enrollments than schools located in medium-sized college and university markets and attract students nationally and internationally. The colleges and universities that our properties draw student-tenants from typically have smaller enrollments than schools in larger educational markets and tend to attract students from within the region in which the school is located. If the schools in our markets experience reduced enrollment, for example due to adverse economic conditions or rising tuition costs, or are unable to attract sufficient students to achieve a desired class size, the pool of prospective student-tenants for our properties will be reduced. This could have the result of reducing our occupancy and lowering the revenue from our properties, which could materially and adversely affect our financial performance and liquidity.

 

Our indebtedness exposes us to a risk of default and reduces our free cash flow, which could materially and adversely affect us.

 

As of December 31, 2014, our total consolidated indebtedness was approximately $618.4 million. Our debt service obligations expose us to the risk of default and reduced cash available to invest in our business or pay distributions that are necessary to qualify and remain qualified as a REIT. Our ability to meet the ongoing payment obligations of our indebtedness depends on our ability to generate significant cash flow in the future. Our ability to generate cash flow, to some extent, is subject to general economic, financial, competitive, legislative and regulatory factors, as well as other factors that are beyond our control. We cannot assure you that our business will generate cash flow from operations, or that capital will be available to us, in amounts sufficient to enable us to meet our payment obligations under our exchangeable senior notes, our credit agreements and our outstanding preferred stock and to fund our other liquidity needs. If we are not able to generate sufficient cash flow to service these obligations, we may need to refinance or restructure our debt, sell assets (which we may be limited in doing in light of the relatively illiquid nature of our properties), reduce or delay capital investments, or seek to raise additional capital. If we are unable to implement one or more of these alternatives, we may not be able to meet these payment obligations, which could materially and adversely affect our liquidity.

 

Our charter does not contain any limitation on the amount of indebtedness that we may incur. In the future, we may incur substantial indebtedness in connection with the development or acquisition of additional properties and for other working capital needs, or to fund the payment of distributions to our stockholders.

 

In addition, a tax protection agreement to which we are a party requires us to maintain a minimum level of indebtedness of $56.0 million throughout a 10-year tax protection period, which ends in October 2020, in order to allow a sufficient amount of debt to be allocable to MXT Capital, LLC, a Delaware limited liability company ("MXT Capital"), which is wholly-owned and controlled by Ted Rollins, our former chief executive officer, and Michael S. Hartnett, our former vice chairman of special projects, and certain members of their families, to avoid certain adverse tax consequences. If we fail to maintain such minimum indebtedness throughout the 10-year tax protection period, we will be required to make indemnifying payments to MXT Capital, in an amount equal to the federal, state and local taxes, if any, imposed on its members as a result of any income or gain recognized by them by reason of such failure. The amount of such taxes will be computed based on the highest applicable federal, state and local marginal tax rates, as well as any "grossed up" taxes imposed on such payments. This requirement may restrict our ability to reduce leverage when we otherwise might wish to do so and generally reduce our flexibility in managing our capital structure.

 

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Our indebtedness and the limitations imposed on us by our indebtedness could have significant adverse consequences, including the following:

 

·we may be unable to borrow additional funds as needed or on favorable terms;

 

·we may be unable to renew, repay or refinance our indebtedness at maturity or the renewal or refinancing terms may be less favorable than the terms of the indebtedness being renewed or refinanced;

 

·we may be forced to dispose of certain of our properties, possibly on disadvantageous terms;

 

·we may default on our payment or other obligations as a result of insufficient cash flow or otherwise, which may result in a cross-default on our other obligations, and the lenders or mortgagees may foreclose on our properties that secure their loans and receive an assignment of rents and leases;

 

·to the extent that we incur unhedged floating rate debt, we will have exposure to interest rate risk; and

 

·foreclosures could create taxable income without accompanying cash proceeds, a circumstance which could hinder our ability to meet the distribution requirements necessary to enable us to qualify and remain qualified for taxation as a REIT.

 

Compliance with the provisions of our debt agreements, including financial and other covenants, such as the maintenance of specified financial ratios, could limit our flexibility, and a default under these agreements could result in a requirement that we repay indebtedness, which could severely affect our liquidity and increase our financing costs, which could materially and adversely affect our business, financial condition and results of operations.

 

In addition to our consolidated indebtedness, we are guarantor on construction and mortgage debt of our ventures with Harrison Street Real Estate Capital (“HSRE”) and Beaumont Partners SA (“Beaumont”), as described below in Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Off-Balance Sheet Arrangements.

 

Our failure to comply with the financial and other covenants of the agreements that govern our existing debt could have a material adverse effect on our financial condition.

 

The documents that govern our outstanding indebtedness contain customary negative covenants and other financial and operating covenants that, among other things:

 

·restrict our ability to incur certain additional indebtedness;

 

·restrict our ability to make certain investments;

 

·restrict our ability to effect certain mergers;

 

·restrict our ability to make distributions to stockholders; and

 

·require us to maintain certain financial coverage ratios.

 

Pursuant to the terms of our credit facility, we may not pay distributions that exceed the greater of (i) 95.0% of our funds from operations, or (ii) the minimum amount required for us to qualify and maintain our status as a REIT. If a default or event of default occurs and is continuing, we also may be precluded from making certain distributions (other than those required to allow the Company to qualify and maintain its status as a REIT). These limitations restrict our ability to engage in some business activities, which could adversely affect our financial condition, results of operations, cash flow and the per share trading price of our securities. In addition, if we fail to comply with any of these covenants, including the financial coverage ratios, this could result in our having to seek an amendment or waiver from our lenders to avoid an event of default and/or the acceleration of some or all of our indebtedness, which would have a material adverse effect on us. From time to time, we have sought and received waivers of certain of these provisions, but there can be no guarantee that we will be able to obtain waivers of these provisions in future periods.

 

In April 2013, as a result of the CB Portfolio Acquisition, we received a waiver from our lender group allowing for increased distributions of our funds from operations for the remainder of 2013. In February 2013, we amended our amended credit facility to provide for certain exclusions related to our investments in joint ventures as well as the treatment of certain other investments within the compliance calculation of our secured debt ratio and certain negative covenants. In June 2013, in connection with our investment in a joint venture with Beaumont to acquire a property in Montreal, Quebec, Canada, we received a waiver from our lender group allowing us to guarantee debt incurred by our subsidiary, Campus Crest at Montreal I, LLC, to fund such investment. On September 30, 2014, we received a waiver with respect to the distribution payout ratio for each distribution payout date through the end of 2015. The waiver was expressly conditioned on the following: (i) no default or event of default shall have occurred and be continuing and (ii) as of each test date during 2015, the payout ratio shall be equal to or less than (A) 105% or (B) such greater amount as may be required by applicable law for us to maintain our status as a REIT. On February 25, 2015, we received a waiver under our amended credit facility that provides relief from certain financial covenants during a relief period that runs from December 31, 2014 until and including September 30, 2015. During the relief period the following new measurements will apply to covenant tests: Maximum Leverage Ratio of not greater than 0.65:1.00; Maximum Secured Debt Ratio of not greater than 47.5%; Minimum Fixed Charge Ratio of not less than 1.30:1.00; and a Dividend Payout Ratio of not more than 105.0% calculated on a pro forma basis that applies the current quarterly dividend of $0.090 on a trailing twelve month basis.

 

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The cost of our obtaining an amendment or waiver in the future could be significant, and further, there can be no assurance that we would be able to obtain an amendment or waiver if necessary in the future. If our lenders were unwilling to enter into an amendment or provide a waiver, all amounts outstanding under our credit facility could become immediately due and payable. Furthermore, the documents that govern our outstanding indebtedness contain certain cross-default provisions with respect to specified other indebtedness, giving the lenders the right to declare a default if we are in default under other loans in some circumstances.

 

We may be unable to satisfy our debt obligations upon a change of control of us.

 

Under the documents that govern our indebtedness, if we experience a change of control, we could be required to repay the entire principal balance of our outstanding indebtedness. Under our Exchangeable Senior Notes indenture, if we experience a fundamental change, as defined in the indenture, we must offer to purchase the notes at 100% of their principal amount, plus accrued interest. As defined in the indentures, fundamental change includes, among other things, the acquisition of more than 50% of our voting securities by any person or group, or the failure of a majority of the members of our board of directors to be continuing directors whose nomination or election were approved by the majority of the board. Under the credit agreement that governs our revolving credit facility, if we experience a change of control, as defined in the credit agreement, the lenders may declare an event of default and accelerate payment of the entire principal balance of the facility. As defined in the credit agreement, a change of control includes, among other things, the acquisition of more than 35% of our voting securities by any person or group, or a change in the majority of the members of our board of directors unless the new members were elected or nominated for election by a majority of the board. We might not have sufficient funds to repay the amounts due under the revolving credit facility or pay the required price for the notes following a change of control.

 

Variable rate debt is subject to interest rate risk.

 

As of December 31, 2014, approximately $354.8 million of our aggregate indebtedness (approximately 57.4% of total indebtedness) was subject to variable interest rates. In addition, we may incur additional variable rate debt in the future. While we have entered into arrangements that hedge the risk of rising interest rates, there can be no assurance that such arrangements will adequately protect against rising interest rates or that we will be able to enter into interest rate hedging arrangements in the future. If we are unable to enter into arrangements that hedge the risk of rising interest rates, increases in interest rates on variable rate debt would increase our interest expense, which would adversely affect net income and cash available for payment of our debt obligations and distributions to stockholders.

 

Joint venture investments could be materially and adversely affected by our lack of decision-making authority, our reliance on our co-venturers’ financial condition and disputes between our co-venturers and us.

 

Our properties located in Lawrence, Kansas, San Angelo, Texas, and Conway, Arkansas, comprising approximately 3.2% of our beds, are held in a joint venture with HSRE, in which we own a 63.9% interest. Our properties located in Fayetteville, Arkansas, Laramie, Wyoming and Stillwater, Oklahoma, comprising approximately 4.0% of our beds, are held in a joint venture with HSRE, in which we own a 10.0% interest. Our properties located in Indiana, Pennsylvania, State College, Pennsylvania and Norman, Oklahoma, comprising approximately 3.8% of our beds, are held in a joint venture with HSRE, in which we own a 20.0% interest. Our properties located in Louisville, Kentucky and Greensboro, North Carolina, comprising approximately 2.7% of our beds, are held in a joint venture with HSRE, in which we own a 30.0% interest. Our property located in Philadelphia, Pennsylvania, comprising 1.8% of our beds, is held in a joint venture with HSRE and Brandywine, in which we own a 30.0% interest with completion targeted for the 2014-2015 academic year. Our properties located in Montreal, Quebec, comprising 4.8% of our beds, are held in a joint venture with Beaumont Partners, in which we own a 47.0% interest as a limited partner. In addition, at December 31, 2014, we held an effective 48.0% investment in the CB Portfolio, comprising 37.0% of our beds, and, pursuant to the terms of the agreements governing this investment, share decision making authority with the CB Investors, though as of January 30, 2015, we increased our ownership to 100% for many of the properties in the CB Portfolio.

 

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We may not have a controlling interest in a joint venture and may share responsibility with our co-venturer for managing the property held by the joint venture. Under such circumstances, we may not have sole decision-making authority regarding the joint venture’s property. With regard to our joint venture in Canada with Beaumont Partners, we are a limited partner with no general partner representation and limited control rights. Investments in joint ventures, under certain circumstances, involve risks not present when we invest in a property without the involvement of a third party. For example, our co-venturer may have economic or other business interests or goals that are inconsistent with our business interests or goals, and may be in a position to take actions contrary to our preferences, policies or objectives. Additionally, it is possible that our co-venturer might become bankrupt, fail to fund its share of required capital contributions or block or delay decisions that we believe are necessary. With regard to our joint venture in Canada with Beaumont Partners, our co-venturer may take, or fail to take, actions that could result in a loan default, which may further result in a cross-default of our other indebtedness. Joint venture investments may also have the potential risk of impasses on decisions, such as sales, because neither we nor our co-venturers may have full control over the joint venture. Disputes between us and our co-venturer may result in litigation or arbitration that would increase our expenses and divert the attention of our officers and directors from other aspects of our business. Consequently, actions by or disputes with our co-venturers might result in subjecting properties owned by the joint venture to additional risk. In addition, we may in certain circumstances be liable for the actions of our third-party co-venturers. Any of the foregoing factors could materially and adversely affect the financial condition and results of operations of our joint-venture investments.

 

In addition, our operating agreements with our co-venturers contain provisions that upon the occurrence of various triggering events could allow our co-venturers to remove us from management control of the properties held by the venture, sell those properties without our consent at prices determined by our co-venturer, and acquire our interest in the venture at values that could be disadvantageous to us. These triggering events could include, among other things, a material breach of the terms of the operating agreement or other venture agreements, or change in control of the Company (in the case of certain of our ventures with HSRE) or of the Operating Partnership or of our various subsidiaries which are involved with such ventures. The agreements governing the ventures also contain various mutual covenants as to competition within a prescribed territory near the properties operated by the venture. We are guarantor on construction and mortgage debt of our ventures with HSRE, as described below in Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Off-Balance Sheet Arrangements, and those guarantees would continue in effect under most circumstances even if we are removed from management of the venture. As guarantor, if a property realizes proceeds upon sale that are insufficient to pay off the underlying debt, we could be obligated to pay off the remaining balance. For the reasons described in this paragraph, the removal of the Company from management or ownership of an interest in any venture, or the sale of any venture property at disadvantageous prices, could thus have a material adverse effect on us if it impacts any material number of properties which we currently manage. The terms of our operating agreements and the complexities of our venture arrangements may impact any potential third party acquisition proposal for us or delay, defer or prevent a change in control.

 

We could be negatively impacted by the condition of Fannie Mae or Freddie Mac.

 

Fannie Mae and Freddie Mac are a major source of secured financing to the student housing industry and we have used Freddie Mac for a portion of our financing needs. In February 2011, the U.S. Treasury along with the U.S. Department of Housing and Urban Development released a report calling for the winding down of the role that Fannie Mae and Freddie Mac play in the mortgage market. In February 2012, the Federal Housing Finance Agency delivered a strategic plan to Congress to wind down Fannie Mae and Freddie Mac over the next several years. This proposal includes building a new infrastructure for the secondary mortgage market, continuing to shrink Fannie Mae’s and Freddie Mac’s operations by eliminating the direct funding of mortgages and shifting mortgage credit risk to private investors. In addition, in August 2012, the U.S. Treasury announced further steps to expedite the winding down of Fannie Mae and Freddie Mac by accelerating the rate at which Fannie Mae’s and Freddie Mac’s investment portfolios will be reduced to target levels agreed to with the U.S. Treasury. Pursuant to these steps, Fannie Mae’s and Freddie Mac’s investment portfolios must be reduced to the agreed target four years earlier than previously scheduled. A final decision by the government to eliminate Fannie Mae or Freddie Mac or reduce their acquisitions or guarantees of student housing property loans may adversely affect interest rates, capital availability, and the value of student housing properties. If we are unable to react effectively and quickly to changes in the mortgage industry, our business could be harmed.

 

We have a limited operating history as a REIT and as a publicly traded company and may not be able to successfully operate as a REIT or a publicly traded company.

 

We have a limited operating history as a REIT and as a publicly traded company. We cannot assure you that the past experience of our senior management team will be sufficient to successfully operate our company as a REIT or a publicly traded company, including the requirements to timely meet disclosure requirements of the SEC and comply with the Sarbanes-Oxley Act of 2002. Since our initial public offering, we have been subject to various requirements related to REITs and publicly traded companies, including requirements to develop and implement control systems and procedures in order to qualify and maintain our qualification as a REIT and satisfy our periodic and current reporting requirements under applicable SEC regulations and comply with New York Stock Exchange ("NYSE") listing standards. Our continued compliance with these requirements could place a significant strain on our management systems, infrastructure and other resources. Failure to operate successfully as a public company or qualify and maintain our qualification as a REIT would have an adverse effect on our financial condition, results of operations, cash flow and the per share trading price of our securities.

 

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The material weakness in our internal control over financial reporting may adversely impact our business and financial results.

 

Effective internal and disclosure controls are necessary for us to provide reliable financial reports and effectively prevent fraud and to operate successfully as a public company. If we cannot provide reliable financial reports or prevent fraud, our reputation and operating results would be harmed. As part of our ongoing monitoring of internal controls we may discover material weaknesses or significant deficiencies in our internal controls. As a result of weaknesses that may be identified in our internal controls, we may also identify certain deficiencies in some of our disclosure controls and procedures that we believe require remediation. If we discover weaknesses, we will make efforts to improve our internal and disclosure controls. However, there is no assurance that we will be successful.

 

In connection with management’s evaluation of the effectiveness of the Company’s internal control over financial reporting, management identified a material weakness in the Company’s internal control over financial reporting as of December 31, 2014, which related to our control environment, risk assessment process, information and communication components and process-level controls. See “Part II—Item 9A—Controls and Procedures” for a discussion of our internal control over financial reporting, including a discussion of the material weakness. If the new controls being implemented to address the material weakness and to strengthen the overall internal control over financial reporting are not designed or do not operate effectively, if we are unsuccessful in implementing or following these new processes or are otherwise unable to remediate this material weakness, this may result in untimely or inaccurate reporting of our financial condition or results of operations.

 

Any failure to maintain effective controls or timely effect any necessary improvement of our internal and disclosure controls could harm operating results or cause us to fail to meet our reporting obligations, which could affect the eligibility of our stock to remain listed on the NYSE. Ineffective internal and disclosure controls could also cause investors to lose confidence in our reported financial information, which would likely have a negative effect on the per share trading price of our securities.

 

Breaches of our data security could materially harm our business and reputation.

 

We collect and retain certain personal information provided by our student-tenants and employees. While we have implemented a variety of security measures to protect the confidentiality of this information and periodically review and improve our security measures, there can be no assurance that we will be able to prevent unauthorized access to this information. Any breach of our data security measures and loss of this information may result in legal liability and costs (including damages and penalties), as well as damage to our reputation, that could materially and adversely affect our business and financial performance.

 

Our investment in properties subject to ground leases with unaffiliated third parties exposes us to the potential loss of such properties upon the expiration or termination of the ground leases, and the realization of such loss could materially and adversely affect us. Our properties at the University of South Alabama and Colorado State University are also subject to a right of first refusal that may inhibit our ability to sell them.

 

Our properties located near the campuses of the University of South Alabama and Colorado State University are subject to ground leases with unaffiliated third parties. In addition, we may invest in additional properties that are subject to ground leases with unaffiliated third parties. As the lessee under a ground lease with an unaffiliated third party, we are exposed to the possibility of losing our leasehold interest in the land on which our buildings are located. A ground lease may not be renewed upon the expiration of its current term or may be terminated by the lessor pursuant to the terms of the lease if we do not meet our obligations thereunder.

 

In the event of an unsecured default under any of our existing ground leases, the lessor may terminate our leasehold interest in the land on which our buildings are located. Any termination of our existing ground leases with unaffiliated third parties, unless in conjunction with the exercise of a purchase option, would also result in termination of our management agreement relating to the property. If we lose the leasehold interest in any of our properties, we could be materially and adversely affected.

 

Our properties located at the University of South Alabama and Colorado State University are also subject to a right of first refusal pursuant to which the ground lessor entity related to the land has a right to purchase our leasehold interest in the relevant property in the event we decide to accept an offer to sell either property to a third party. This may inhibit our ability to sell these properties. Further, our right to transfer one of the on-campus properties is subject to the consent of the ground lessor, which consent may not be unreasonably withheld.

 

We may incur losses on hedging arrangements, which could materially and adversely affect our financial condition and results of operations.

 

We currently use, and may in the future enter into, hedging agreements. Although these agreements may partially protect against rising interest rates, they also may reduce the benefits to us if interest rates decline. If an arrangement is not indexed to the same rate as the indebtedness that is hedged, we may be exposed to losses to the extent the rate governing the indebtedness and the rate governing the hedging arrangement change independently of each other. Finally, nonperformance by the other party to the arrangement may subject us to increased credit risks. The occurrence of any of the foregoing could materially and adversely affect our financial condition and results of operations.

 

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Our inability to pass-through increases in taxes or other real estate costs to our student-tenants could materially and adversely affect our financial performance and liquidity.

 

Each of our properties is subject to real and personal property taxes. These taxes may increase as tax rates change and as the properties are assessed or reassessed by taxing authorities. We generally are not able to pass through to our student-tenants under existing leases any increases in taxes, including real estate and income taxes, or other real estate related costs, such as insurance or maintenance. Consequently, unless we are able to off-set any such increases with sufficient revenues, we may be materially and adversely affected by any such increases.

 

The prior performance of our properties may not be indicative of our future performance.

 

All of our properties have been acquired or developed by us and/or our predecessor entities within the past ten years and have limited operating histories. Consequently, the historical operating results of our properties and the financial data we have disclosed may not be indicative of our future performance. The operating performance of the properties may decline and we could be materially and adversely affected.

 

Reporting of on-campus crime statistics required of colleges and universities may negatively impact our properties.

 

Federal and state laws require colleges and universities to publish and distribute reports of on-campus crime statistics, which may result in negative publicity and media coverage associated with crimes occurring in the vicinity of, or on the premises of, our on-campus properties. Reports of crime or other negative publicity regarding the safety of the students residing on, or near, our properties may have an adverse effect on both our on-campus and off-campus properties.

 

We may be subject to liabilities from litigation, which could materially and adversely affect our financial condition or results of operations.

 

We have been involved in legal proceedings in connection with our business, and may become involved in additional legal proceedings, including consumer, employment, tort or commercial litigation that, if decided adversely to or settled by us and not adequately covered by insurance, could result in liabilities that could materially and adversely affect our financial condition or results of operations.

 

We face risks associated with land holdings.

 

We hold land for future development and may in the future acquire additional land holdings. The risks inherent in owning or purchasing and developing land increase as demand for student housing, or rental rates, decrease. As a result, we hold certain land and may in the future acquire additional land in our development pipeline at a cost we may not be able to recover fully or on which we cannot build and develop into a profitable student housing project. In addition, real estate markets are highly uncertain and, as a result, the value of undeveloped land has fluctuated significantly and may continue to increase as a result of changing market conditions. Further, carrying costs associated with land holdings can be significant and can result in losses or reduced margins in a poorly performing project. Under current market conditions, we may have impairments of our land held for sale.

 

Our issuance of common stock under our At-The-Market offering program may be dilutive, and there may be future dilution of our common stock.

 

After giving effect to the issuance of common stock under our At-The-Market offering program and the receipt of the expected net proceeds and the use of those proceeds, there may be a dilutive effect on our estimated earnings per share and funds from operations per share in years during which an offering is ongoing. The actual amount of potential dilution cannot be determined at this time and will be based on numerous factors. Additionally, we are not restricted by our organizational documents, contractual arrangements or otherwise from issuing additional common stock or preferred stock, including any securities that are convertible into or exchangeable or exercisable for, or that represent the right to receive, common stock or preferred stock or any substantially similar securities in the future. The market price of our common stock could decline as a result of issuances of a large number of shares of our common stock after this offering or the perception that such issuances could occur.

 

Our management will have broad discretion with respect to the use of the proceeds resulting from the issuance of common stock under our At-The-Market offering program.

 

Our management has significant flexibility in applying the net proceeds we expect to receive from the issuance of common stock under the Equity Distribution Agreements. We intend to use the net proceeds from this offering for general corporate purposes, which may include repaying debt, including our revolving credit facility. However, because the net proceeds are not required to be allocated to any specific investment or transaction, investors cannot determine at the time of issuance the value or propriety of our application of the net proceeds, and investors may not agree with our decisions. In addition, our use of the net proceeds from the offering may not yield a significant return or any return at all. The failure by our management to apply these funds effectively could have an adverse effect on our financial condition, results of operations or the trading price of our common stock.

 

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Our Canadian exposure may subject us to different or greater risk from those associated with our domestic operations, and we may recognize additional asset impairment charges with respect to our Canadian real estate assets in the future.

 

We hold interests in two joint venture properties that operate in Canada. International development and ownership activities carry risks that are different from those we face with our domestic properties and operations. These risks include:

 

·adverse effects of changes in exchange rates for foreign currencies;

 

·changes in foreign political and economic environments, regionally, nationally, and locally;

 

·costs associated with complying with a wide variety of foreign laws including corporate governance, operations, taxes, and litigation;

 

·difficulties in managing international operations, including difficulties that arise from ambiguities in contracts written in foreign languages and difficulties that arise in enforcing such contracts;

 

·differing lending practices;

 

·uncertainties in estimating potential tax liabilities;

 

·differing employment and labor issues;

 

·changes in applicable laws and regulations in the United States that affect foreign operations;

 

·obstacles to the repatriation of earnings and cash;

 

·obstacles to hiring appropriately trained staff; and

 

·differences in cultures including adapting practices and strategies that have been successful in the U.S. student housing business to retail needs and expectations in new markets.

 

Management assesses whether there has been impairment in the value of our investment in real estate whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The estimation of expected future undiscounted cash flows is inherently uncertain and relies on assumptions regarding current and future economics and market conditions. During the year ended December 31, 2014, we recorded an impairment of $26.5 million related to our investment in CSH Montreal LP (“CSH Montreal”), as discussed in Note 11 of the accompanying consolidated financial statements. As a result of the uncertainty in the valuation, and in the stability of, the cash flows, discount rates and other factors related to such assets, we may be required to recognize additional asset impairment charges in the future.

 

Although our international activities currently are a relatively small portion of our business, these risks could increase in significance which in turn could adversely affect our results of operations and financial condition.

 

A currently threatened proxy contest and any other actions of activist stockholders could have a negative effect on our business.

 

On March 5, 2015, a shareholder that currently holds approximately 1.4% of our common stock filed a preliminary proxy statement with the SEC to nominate four alternative director nominees for election to our board of directors at the Company's 2015 annual meeting of shareholders. Our board of directors has not endorsed such shareholder’s director nominees. If a proxy contest or any other dissident stockholder activity ensues, then our business could be adversely affected because responding to proxy contests, litigation and other actions by dissident stockholders can be costly and time-consuming, disrupt our operations and divert the attention of management and our employees. In addition, perceived uncertainties as to our future direction may result in the loss of potential business opportunities and harm our ability to attract new investors, employees and clients. If the Company’s current directors cease to constitute a majority of our board of directors due to the currently threatened proxy contest or otherwise, it may adversely affect our ability to effectively and timely implement our current initiatives, retain and attract experienced executives and employees, and execute on our long-term strategy, and, under certain circumstances, could require us to repay our outstanding indebtedness prior to maturity. See the Risk Factor entitled “We may be unable to satisfy our debt obligations upon a change of control of us.” Also, we may experience a significant increase in legal fees, administrative and associated costs incurred in connection with responding to a proxy contest or related action. These actions could also cause our stock price to experience periods of volatility or stagnation.

 

We may not make distributions to our stockholders or be able to maintain our current distribution rate, and we may be required to fund the minimum distribution necessary to qualify for taxation as a REIT from sources that could reduce our cash flows.

 

Our ability to fund any distributions will depend, in part, upon continued successful leasing of our existing portfolio and successful management services. To the extent these sources are insufficient, we may use our working capital or borrowings under our revolving credit facility to fund distributions, if and to the extent then permitted under the terms of our credit facility. If we need to fund future distributions with borrowings under our revolving credit facility or from working capital, or if we reduce our distribution rate, our stock price may be adversely affected. In addition, to the extent that we fund any distributions with borrowings under our revolving credit facility or from working capital, our cash available for investment in our business, including for property development and acquisition purposes, will decrease.

 

In addition, in order to qualify for taxation as a REIT, among other requirements, we must make distributions to stockholders aggregating annually to at least 90% of our REIT taxable income, excluding net capital gains. To the extent that, in respect of any calendar year, cash available for distribution to our stockholders is less than our REIT taxable income, we would be required to fund the minimum distribution necessary to qualify for taxation as a REIT from other sources, which could include asset sales or borrowings. Funding a distribution through asset sales or borrowings could reduce our cash flow from operations, increase our interest expense and decrease our cash available for investment in our business. We may also choose to meet this distribution requirement by distributing a combination of cash and shares of our common stock. See "Federal Income Tax Risk Factors—We may pay taxable dividends of our common stock and cash, in which case stockholders may sell shares of our common stock to pay tax on such dividends, placing downward pressure on the market price of our common stock."

 

Any distributions in excess of our current and accumulated earnings and profits will not be taxable to a holder to the extent that they do not exceed the holder’s adjusted basis in the shares of stock in respect of which the distributions were made, but rather, will reduce the adjusted basis of these shares. To the extent that such distributions exceed the adjusted basis of a stockholder’s shares, they will generally be included in income as capital gains.

 

We have the right to accumulate and not pay dividends on the Series A Preferred Stock. If dividends on the Series A Preferred Stock are not paid, holders of our Common Stock will not receive any dividend distributions. If we have REIT taxable income during 2015, and we do not distribute at least 90% of our REIT taxable income, excluding net capital gains, then we will not be taxed as a REIT during calendar year 2015, which could have a material adverse effect on us and on the value of our securities.

 

Risks Related to the Real Estate Industry

 

Our performance and the value of our properties are subject to risks associated with real estate and with the real estate industry, which could materially and adversely affect our cash flows, financial condition and results of operations.

 

Our ability to make distributions to our stockholders depends on our ability to generate cash revenues in excess of our expenses, including expenses associated with our development activities, indebtedness and capital expenditure requirements. The occurrence of certain events and conditions that are generally applicable to owners and operators of real estate, many of which are beyond our control, could materially and adversely affect us. These events and conditions include:

 

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·adverse national, regional and local economic conditions;

 

·rising interest rates;

 

·oversupply of student housing in our markets, increased competition for student-tenants or reduction in demand for student housing;

 

·inability to collect rent from student-tenants;

 

·vacancies at our properties or an inability to lease our properties on favorable terms;

 

·inability to finance property development and acquisitions on favorable terms;

 

·increased operating costs, including insurance premiums, utilities and real estate taxes;

 

·the need for capital expenditures at our properties;

 

·costs of complying with changes in governmental regulations;

 

·the relative illiquidity of real estate investments; and

 

·civil unrest, acts of God, including earthquakes, floods, hurricanes and other natural disasters, which may result in uninsured losses, and acts of war or terrorism.

 

In addition, periods of economic slowdown or recession, such as the one the global economy experienced from 2007 through 2011, rising interest rates or declining demand for real estate, or the public perception that any of these events may occur, could result in a general decline in occupancy rates and rental revenue or an increased incidence of defaults under our existing leases, which could impair the value of our properties or reduce our cash flow.

 

Illiquidity of real estate investments could significantly impede our ability to sell our properties or otherwise respond to adverse changes in the performance of our properties, which could materially and adversely affect us.

 

From time to time, we may determine that it is in our best interest to sell one or more of our properties. However, because real estate investments are relatively illiquid, we may encounter difficulty in finding a buyer in a timely manner should we desire to sell one of our properties, especially if market conditions are poor at such time. Selling real estate has been difficult recently, since the availability of credit has become more limited, and as lending standards have become more stringent. As a result, potential buyers have experienced difficulty in obtaining financing necessary to purchase a property. In addition, our properties are specifically designed for use as student housing, which could limit their marketability or affect their values for alternative uses. Consequently, should we desire to sell one or more of our properties, our ability to do so promptly or on terms that we deem to be acceptable may be limited, which could materially and adversely affect our cash flows, financial condition, results of operations and ability to pay distributions on our securities and would likely have a negative impact on the trading price of our securities.

 

We also may be required to expend funds to correct defects or to make improvements before a property can be sold. We cannot assure you that we will have funds available to correct any such defects or to make any such improvements. In connection with any future property acquisitions, we may agree to provisions that materially restrict our ability to sell the property for a period of time or impose other restrictions, such as a limitation on the amount of debt that can be secured by or repaid with respect to such property.

 

In addition, our ability to sell properties may be limited by our need to avoid the 100% prohibited transactions tax that is imposed on gain recognized by a REIT from the sale of property characterized as dealer property. Any such limitation may cause us to incur losses, thereby reducing our cash flows. See "Federal Income Tax Risk Factors—The tax imposed on REITs engaging in ‘prohibited transactions’ may limit our ability to engage in transactions which would be treated as sales for federal income tax purposes." These factors and any others that would impede our ability to respond to adverse changes in the performance of any of our properties or a need for liquidity could materially and adversely affect our cash flows, financial condition, results of operations and ability to pay distributions on our securities and would likely have a negative impact on the trading price of our securities.

 

We could incur significant costs related to government regulation and private litigation over environmental matters, which could materially and adversely affect our financial condition and results of operations.

 

Under various environmental laws, including the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), a current or previous owner or operator of real estate may be liable for contamination resulting from the release or threatened release of hazardous or toxic substances or petroleum at that property. Additionally, an entity that arranges for the disposal or treatment of a hazardous or toxic substance or petroleum at another property may be held jointly and severally liable for the cost of investigating and cleaning up such property or other affected property. Such parties are known as potentially responsible parties ("PRPs"). These environmental laws often impose liability regardless of whether the PRP knew of, or was responsible for, the presence of the contaminants, and the costs of any required investigation or cleanup of these substances can be substantial. PRPs may also be liable to parties who have claims for contribution in connection with any such contamination, such as other PRPs or state and federal governmental agencies. The liability is generally not limited under such laws and therefore could easily exceed the property’s value and the assets of the liable party.

 

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The presence of contamination, hazardous materials or environmental issues, or the failure to remediate such conditions, at a property may expose us to third-party liability for personal injury or property damage, remediation costs or adversely affect our ability to sell, lease or develop the property or to borrow using the property as collateral, which could materially and adversely affect our financial condition and results of operations.

 

Environmental laws also impose ongoing compliance requirements on owners and operators of real estate. Environmental laws potentially affecting us address a wide variety of matters, including, but not limited to, asbestos-containing building materials ("ACBMs"), storage tanks, storm water and wastewater discharges, lead-based paint, radon, wetlands and hazardous wastes. Failure to comply with these laws could result in fines and penalties or expose us to third-party liability, which could materially and adversely affect us. Some of our properties may have conditions that are subject to these requirements and we could be liable for such fines or penalties or could be liable to third parties.

 

The conditions at some of our properties may expose us to liability and remediation costs related to environmental matters, which could materially and adversely affect us.

 

Certain of our properties may contain, or may have contained, ACBMs. Environmental laws require that ACBMs be properly managed and maintained, and regulators may impose fines and penalties on building owners and operators for failure to comply with these requirements. Also, some of our properties may contain, or may have contained, or are adjacent to or near other properties that may contain or may have contained storage tanks for the storage of petroleum products or other hazardous or toxic substances. Any of these conditions create the potential for the release of these contaminants. Third parties may be permitted by law to seek recovery from owners or operators for personal injury or property damage arising from such tanks. Additionally, third parties may be permitted by law to seek recovery from owners or operators for personal injury or property damage associated with exposure to these or other contaminants that may be present on, at or under the properties. Furthermore, some of our properties include regulated wetlands on undeveloped portions of such properties and mitigated wetlands on or near our properties, the existence of which can delay or impede development or require costs to be incurred to mitigate the impact of any disturbance. Absent appropriate permits, we can be held responsible for restoring wetlands and be required to pay fines and penalties, which could materially and adversely affect our cash flows, financial condition, results of operations and ability to pay distributions on our securities.

 

Over the past several years there have been an increasing number of lawsuits against owners and operators of properties alleging personal injury and property damage caused by the presence of mold in real estate. Mold growth can occur when excessive moisture accumulates in buildings or on building materials, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Concern about indoor exposure to mold has been increasing as some molds have been shown to produce airborne toxins and irritants and exposure to these and other types of molds may lead to adverse health effects and symptoms, including allergic or other reactions. Some of our properties may contain microbial matter such as mold and mildew. The presence of significant mold at any of our properties could require us to undertake a costly remediation program to contain or remove the mold from the affected property and could expose us to liability from student-tenants, employees and others if property damage or health concerns arise, which could materially and adversely affect our cash flows, financial condition, results of operations and ability to pay distributions on our securities.

 

If any of our properties are not properly connected to a water or sewer system, or if the integrity of such systems is breached, microbial matter or other contamination can develop. If this were to occur, we could incur significant remedial costs and we could also be subject to private damage claims and awards, which could be material. If we become subject to claims in this regard, it could materially and adversely affect our business and our insurability for such matters in the future.

 

Independent environmental consultants have conducted Phase I environmental site assessments on all of our properties. These Phase I environmental site assessments are intended to evaluate information regarding the environmental condition of the surveyed property and surrounding properties based generally on visual observations, interviews and the review of publicly available information. These assessments do not typically take into account all environmental issues including, but not limited to, testing of soil or groundwater, a comprehensive asbestos survey or an invasive inspection for the presence of lead-based paint, radon or mold contamination. As a result, these assessments may have failed to reveal all environmental conditions, liabilities, or other compliance issues affecting our properties. Material environmental conditions, liabilities, or compliance issues may have arisen after the assessments were conducted or may arise in the future.

 

In addition, future laws, ordinances or regulations may impose material additional environmental liabilities. We cannot assure you that the cost of future environmental compliance or remedial measures will not affect our ability to make distributions to our stockholders or that such costs or other remedial measures will not be material to us.

 

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We may incur significant costs complying with the Americans with Disabilities Act, the Fair Housing Act and similar laws, which could materially and adversely affect us.

 

Under the Americans with Disabilities Act (“ADA”), all public accommodations must meet various federal requirements related to access and use by disabled persons. Compliance with the ADA’s requirements may require modifications to our properties, such as the removal of access barriers or restrict our ability to renovate or develop our properties in the manner we desire. Additional federal, state and local laws may also require us to make similar modifications or impose similar restrictions on us. For example, the Fair Housing Act (“FHA”) requires apartment properties first occupied after March 13, 1990 to be accessible to the handicapped.

 

We have not conducted an audit or investigation of all of our properties to determine our compliance with present requirements of the ADA, FHA or any similar laws. Noncompliance with any of these laws could result in us incurring significant costs to make substantial modifications to our properties or in the imposition of fines or an award or damages to private litigants. We cannot predict the ultimate amount of the cost of compliance with the ADA, FHA or other legislation. If we incur substantial costs to comply with the ADA, FHA or any other legislation, our results of operations, financial condition and our ability to make distributions on our securities could be materially and adversely affected.

 

We may incur significant costs complying with other regulatory requirements, which could materially and adversely affect us.

 

Our properties are subject to various federal, state and local regulatory requirements, such as state and local fire and life safety requirements. If we fail to comply with these various requirements, we might incur governmental fines or private damage awards. Furthermore, existing requirements could change and require us to make significant unanticipated expenditures, which could materially and adversely affect our results of operations or financial condition and our ability to make distributions on our securities.

 

Uninsured losses or losses in excess of insured limits could materially and adversely affect us.

 

We carry comprehensive liability, fire, extended coverage, terrorism and rental loss insurance covering all of the properties in our portfolio. Our insurance includes coverage for earthquake damage to properties located in seismically active areas, windstorm damage to properties exposed to hurricanes, and terrorism insurance on all of our properties. Our insurance policies are subject to coverage limits and applicable deductibles, and if we suffer a substantial loss, our coverage may be insufficient. All insurance policies are also subject to coverage extensions that we believe are typical for our business. We do not carry insurance for generally uninsured losses such as loss from riots or other acts of God.

 

In the event we experience a loss which is uninsured or which exceeds our policy limits, we could lose the capital invested in the damaged property as well as the anticipated future cash flows from such property. In addition, we might nevertheless remain obligated for any mortgage debt or other financial obligations related to the property. Inflation, changes in building codes and ordinances, environmental considerations and other factors might also keep us from using insurance proceeds to replace or renovate a property after it has been damaged or destroyed. Under such circumstances, the insurance proceeds we receive might be inadequate to restore our economic position with respect to the damaged or destroyed property. Furthermore, in the event of a substantial loss at one or more of our properties that is covered by one or more policies, the remaining insurance under these policies, if any, could be insufficient to adequately insure our other properties. In such event, securing additional insurance policies, if possible, could be significantly more expensive than our current policies. Any loss of these types may materially and adversely affect our business, financial condition and results of operations.

 

Future terrorist attacks in the United States or an increase in incidents of violence on college campuses could reduce the demand for, and the value of, our properties, which could materially and adversely affect us.

 

Future terrorist attacks in the United States, such as the attacks that occurred in New York and Washington, D.C. on September 11, 2001, and acts of war, or threats of the same, could reduce the demand for, and the value of, our properties. Any such event in any of the markets in which our properties are located would make it difficult for us to maintain the affected property’s occupancy or to re-lease the property at rates equal to or above historical rates, which could materially and adversely affect our results of operations and the market price of our capital stock and could also materially adversely affect our ability to make distributions on our securities.

 

Incidents of violence on college campuses could pose similar problems, if such an incident were to occur on a college campus in one of our markets. Such an event in any of our markets could not only adversely affect our occupancy rates, but would also likely lead to increased operating expenses for such properties due to increased security costs, which would likely be necessary to reassure our student-tenants in the wake of such an incident. Any such increase in operating expenses may have a material adverse effect on the results of operations of the affected property.

 

In addition, terrorist attacks or violent incidents could directly impact the value of our properties through damage, destruction or loss and the availability of insurance for such acts may be limited or prohibitively expensive. If we receive casualty proceeds, we may not be able to reinvest such proceeds profitably or at all, and we may be forced to recognize taxable gain on the affected property, which could materially and adversely affect our business, financial condition and results of operations.

 

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Risks Related to Our Company and Structure

 

Provisions of our charter allow our board of directors to authorize the issuance of additional securities, which may limit the ability of a third party to acquire control of us through a transaction that our stockholders believe to be in their best interest.

 

Our charter authorizes our board of directors to issue up to 500,000,000 shares of common stock and up to 50,000,000 shares of preferred stock. In addition, subject to the rights of holders of Series A Preferred Stock to approve the classification or issuance of any class or series of stock ranking senior to the Series A Preferred Stock, our board of directors may, without stockholder approval, amend our charter to increase the aggregate number of our shares or the number of shares of any class or series that we have the authority to issue and to classify or reclassify any unissued common stock or preferred stock and to set the preferences, rights and other terms of the classified or reclassified stock. As a result, our board of directors may authorize the issuance of additional stock or establish a series of common or preferred stock that may have the effect of delaying, deferring or preventing a change in control of us, including through a transaction at a premium over the market price of our securities, even if our stockholders believe that a change in control through such a transaction is in their best interest.

 

Provisions of Maryland law may limit the ability of a third party to acquire control of us, which, in turn, may negatively affect our stockholders’ ability to realize a premium over the market price of our securities.

 

Certain provisions of the Maryland General Corporation Law (the "MGCL") may have the effect of inhibiting a third party from making a proposal to acquire us or of impeding a change in control under circumstances that otherwise could provide our stockholders with the opportunity to realize a premium over the market price of our securities, including:

 

·The Maryland Business Combination Act, which, subject to limitations, prohibits certain business combinations between us and an "interested stockholder" (defined generally as any person who beneficially owns 10% or more of the voting power of our voting capital stock) or an affiliate of any interested stockholder for five years after the most recent date on which the stockholder becomes an interested stockholder, and thereafter imposes special appraisal rights and special stockholder voting requirements on these combinations; and

 

·The Maryland Control Share Acquisition Act, which provides that our "control shares" (defined as shares which, when aggregated with other shares controlled by the stockholder, entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a "control share acquisition" (defined as the direct or indirect acquisition of ownership or control of "control shares") have no voting rights except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares.

 

By resolution of our board of directors, we have opted out of the business combination provisions of the MGCL and provided that any business combination between us and any other person is exempt from the business combination provisions of the MGCL, provided that the business combination is first approved by our board of directors (including a majority of directors who are not affiliates or associates of such persons). Pursuant to a provision in our bylaws, we have opted out of the control share provisions of the MGCL. However, our board of directors may by resolution elect to opt into the business combination provisions of the MGCL and we may, by amendment to our bylaws, opt into the control share provisions of the MGCL in the future.

 

Additionally, Title 3, Subtitle 8 of the MGCL permits our board of directors, without stockholder approval and regardless of what is currently provided in our charter or bylaws, to implement certain takeover defenses, such as a classified board, some of which we do not yet have. These provisions may have the effect of inhibiting a third party from making an acquisition proposal for us or of delaying, deferring or preventing a change in control of us that otherwise could provide our stockholders with the opportunity to realize a premium over the market price of our securities.

 

The ownership limitations in our charter may restrict or prevent you from engaging in certain transfers of our securities, which may delay or prevent a change in control of us that our stockholders believe to be in their best interest.

 

In order for us to qualify as a REIT, no more than 50% in value of the outstanding shares of our capital stock may be owned, directly or indirectly, by five or fewer individuals (as defined in the federal income tax laws to include various kinds of entities) during the last half of any taxable year. Attribution rules in the Internal Revenue Code determine if any individual or entity actually or constructively owns our capital stock under this requirement. Additionally, at least 100 persons must beneficially own shares of our capital stock during at least 335 days of each taxable year. To assist us in qualifying as a REIT, our charter contains a stock ownership limit which provides that, subject to certain exceptions, no person or entity may beneficially own, or be deemed to own by virtue of the applicable constructive ownership provisions of the Internal Revenue Code, more than 9.8% by vote or value, whichever is more restrictive, of either our outstanding common stock or our outstanding capital stock in the aggregate. In addition, the Series A Preferred Stock articles supplementary provide generally that no person may own, or be deemed to own by virtue of the attribution provisions of the Internal Revenue Code, more than 9.8% in value or in number of shares, whichever is more restrictive, of our outstanding Series A Preferred Stock. Generally, any of our shares of capital stock owned by affiliated owners will be added together for purposes of the stock ownership limits.

 

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If anyone transfers shares of our stock in a way that would violate the stock ownership limits or prevent us from qualifying as a REIT under the federal income tax laws, those shares instead will be transferred to a trust for the benefit of a charitable beneficiary and will be either redeemed by us or sold to a person whose ownership of the shares will not violate the stock ownership limits or we will consider the transfer to be null and void from the outset, and the intended transferee of those shares will be deemed never to have owned the shares. Anyone who acquires securities in violation of the stock ownership limits or the other restrictions on transfer in our charter bears the risk of suffering a financial loss when the shares are redeemed or sold if their market price falls between the date of purchase and the date of redemption or sale.

 

The constructive ownership rules under the Internal Revenue Code are complex and may cause stock owned actually or constructively by a group of related individuals or entities to be owned constructively by one individual or entity. As a result, the acquisition of less than 9.8% of our stock (or the acquisition of an interest in an entity that owns, actually or constructively, our stock) by an individual or entity, could nevertheless cause that individual or entity, or another individual or entity, to own constructively in excess of 9.8% of our outstanding stock and therefore would subject the individual or entity to the stock ownership limits. However, under certain circumstances, our charter provides that our board of directors shall make an exception to this limitation if our board determines that such exception will not jeopardize our tax status as a REIT.

 

In addition, the stock ownership limits and the other restrictions on transfer in our charter may have the effect of delaying, deferring or preventing a third party from acquiring control of us, whether such a transaction involved a premium price for our securities or otherwise was in the best interest of our stockholders.

 

Our rights and the rights of our stockholders to take action against our directors and officers are limited, which could limit the recourse available in the event actions are taken that are not in the best interest of our stockholders.

 

Maryland law provides that a director has no liability in connection with the director’s management of the business and affairs of a corporation if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in the best interests of the corporation and with the care that an ordinarily prudent person in a like position would use under similar circumstances. In addition, our charter exculpates our directors and officers from liability to us and our stockholders for money damages except for liability resulting from actual receipt of an improper benefit in money, property or services or active and deliberate dishonesty established by a final judgment and which is material to the cause of action. Our charter authorizes us to indemnify our directors and officers for actions taken by them in those capacities to the maximum extent permitted by Maryland law. Our bylaws require us to indemnify each director or officer, to the maximum extent permitted by Maryland law, in the defense of any proceeding to which he or she is made, or threatened to be made, a party by reason of his or her service to us. In addition, we may be obligated to fund the defense costs incurred by our directors and officers. As a result, we and our stockholders may have more limited rights against our directors and officers, which could limit the recourse available in the event actions are taken that are not in our stockholders’ best interest.

 

Our charter contains provisions that make removal of our directors difficult, which could make it difficult for our stockholders to effect changes to our management that our stockholders believe to be in their best interest.

 

Our charter provides that a director may be removed only for cause (as defined in our charter) and then only by the affirmative vote of at least two-thirds of the votes entitled to be cast generally in the election of directors. Our charter also provides that vacancies on our board of directors may be filled only by a majority of the remaining directors in office, even if less than a quorum. These requirements prevent stockholders from removing directors except for cause and with a substantial affirmative vote and from replacing directors with their own nominees. As a result, a change in our management that our stockholders believe is in their best interest may be delayed, deferred or prevented.

 

Our board of directors has approved very broad investment guidelines for us and does not review or approve each investment decision made by our management team.

 

Our management team is authorized to follow broad investment guidelines and, therefore, has great latitude in determining which investments are proper for us, as well as in making the individual investment decisions. Our management team may make investments with lower rates of return than those anticipated under current market conditions and/or may make investments with greater risks to achieve those anticipated returns.

 

The ability of our board of directors to change some of our policies without the consent of our stockholders may lead to the adoption of policies that are not in the best interest of our stockholders.

 

Our major policies, including our policies with respect to investments, leverage, financing, growth, debt and capitalization, are determined by our board of directors or those committees or officers to whom our board of directors may delegate such authority. Our board of directors also establishes the form, timing and/or amount of any dividends or distributions that we may pay to our stockholders. Our board of directors or the committees or officers to which such decisions may be delegated have the ability to amend or revise these and our other policies at any time without stockholder vote. Accordingly, our stockholders may not have control over changes in our policies, and we may adopt policies that may not prove to be in the best interests of our stockholders.

 

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Members of our board of directors may in the future be holders of OP units, and the interests of holders of OP units may differ from those of our stockholders.

 

Currently no members of our board of directors are holders of OP Units. However, members of our board of directors may in the future be direct or indirect holders of OP units. For example, the former members (the “Sellers”) of Copper Beech Townhome Communities, LLC (“CBTC”) and Copper Beech Townhome Communities (PA), LLC (“CBTC PA” and, together with CBTC, “Copper Beech”) are holders of OP units and may receive additional OP units in connection with a second closing for the Copper Beech acquisition (see Note 19 in the accompanying consolidated financial statements for additional information regarding the Copper Beech acquisition). Pursuant to agreements with the Sellers in connection with the Copper Beech acquisition, we agreed to nominate John R. McWhirter, one of the Sellers who holds OP Units, for election to our board of directors at our 2015 annual meeting of stockholders. Accordingly, if Dr. McWhirter is elected to our board of directors at our 2015 annual meeting of stockholders, one of the members of our board of directors will be a holder of OP Units. However, if Dr. McWhirter is not elected to our board of directors at the 2015 annual meeting of stockholders, we have no further obligation to nominate Dr. McWhirter to the board of directors.

 

As holders of OP units board members may have conflicting interests with our stockholders. For example, board members with OP units may have different tax positions from our stockholders, which could influence their decisions regarding whether and when to dispose of assets, whether and when to incur new indebtedness or refinance existing indebtedness and how to structure future transactions. As a result, if one or more of our board members are holders of OP units, our board of directors may implement policies or make decisions that are not in the best interest of our stockholders.

 

We have entered into employment agreements with certain of our executive officers that require us to make payments in the event such officer’s employment is terminated by us without cause or by such officer for good reason. This may make it difficult for us to effect changes to our management or limit the ability of a third party to acquire control of us when it would otherwise be in the best interest of our stockholders.

 

The employment agreements that we entered into with certain of our executive officers provide benefits under certain circumstances that could make it more difficult for us to terminate these officers. Therefore, even if we sought to replace these officers, it may not be economically viable for us to do so. Furthermore, because an acquiring company would likely seek to replace these officers with their own personnel, these employment agreements could have the effect of delaying, deterring or preventing a change in control of us that would otherwise be in the best interest of our stockholders.

 

Our primary assets are our general partnership interest in the Operating Partnership and OP units and, as a result, we depend on distributions from the Operating Partnership to pay dividends and expenses.

 

We are a holding company and have no material assets other than our general partnership interest and OP units. We intend to cause the Operating Partnership to make distributions to its limited partners, including us, in an amount sufficient to allow us to qualify as a REIT for federal income tax purposes and to pay all our expenses. To the extent we need funds and the Operating Partnership is restricted from making distributions under applicable law, agreement or otherwise, or if the Operating Partnership is otherwise unable to provide such funds, the failure to make such distributions could adversely affect our liquidity and financial condition and our ability to make distributions to our stockholders.

 

We operate through a partnership structure, which could materially and adversely affect us.

 

Our primary property-owning vehicle is the Operating Partnership, of which we are the sole general partner. Our acquisition of properties through the Operating Partnership in exchange for OP units may permit certain tax deferral advantages to the sellers of those properties. If properties contributed to the Operating Partnership have unrealized gain attributable to the difference between the fair market value and adjusted tax basis in such properties prior to contribution, then the sale of such properties could cause material and adverse tax consequences to the partners who contributed such properties. Although we, as the sole general partner of the Operating Partnership, generally have no obligation to consider the tax consequences of our actions to any limited partner, in connection with our formation transactions, we agreed to indemnify MXT Capital for certain tax consequences related to our properties. We also have a tax indemnification agreement with Copper Beech. There can be no assurance that the Operating Partnership will not acquire properties in the future subject to material restrictions designed to minimize the adverse tax consequences to the partners who contribute such properties. Such restrictions could result in significantly reduced flexibility to manage our properties, which could materially and adversely affect our business, financial condition and results of operations.

 

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We have fiduciary duties as the sole general partner of the Operating Partnership which may result in conflicts of interest in representing your interests as our stockholders.

 

Conflicts of interest could arise in the future as a result of the relationship between us, on the one hand, and the Operating Partnership or any partner thereof, on the other. We, as the sole general partner of the Operating Partnership, have fiduciary duties to the other limited partners in the Operating Partnership under Delaware law. At the same time, our directors and officers have duties to us and our stockholders under applicable Maryland law in connection with their management of us. Our duties as the sole general partner of the Operating Partnership may come in conflict with the duties of our directors and officers to us and our stockholders. For example, those persons holding OP units will have the right to vote on certain amendments to the partnership agreement (which require approval by a majority in interest of the limited partners, including us) and individually to approve certain amendments that would adversely affect their rights. These voting rights may be exercised in a manner that conflicts with the interests of our stockholders. We are unable to modify the rights of limited partners to receive distributions as set forth in the partnership agreement in a manner that adversely affects their rights without their consent, even though such modification might be in the best interest of our stockholders. Our partnership agreement provides that if there is a conflict between the interests of our stockholders, on one hand, and the interests of the limited partners, on the other, we will endeavor in good faith to resolve the conflict in a manner not adverse to either our stockholders or the limited partners; provided, however, that for so long as we own a controlling interest in the Operating Partnership, we have agreed to resolve any conflict that cannot be resolved in a manner not adverse to either our stockholders or the limited partners in favor of our stockholders.

 

Changes in accounting rules, assumptions and/or judgments could materially and adversely affect us.

 

Accounting rules and interpretations for certain aspects of our operations are highly complex and involve significant assumptions and judgment. These complexities could lead to a delay in the preparation and public dissemination of our financial statements. Furthermore, changes in accounting rules and interpretations or in our accounting assumptions and/or judgments, such as those described in our summary of significant accounting policies in the notes to the consolidated and combined financial statements, could significantly impact the actual results included in our financial statements. Under any of these circumstances, our financial condition and results of operations could be materially and adversely affected.

 

We may not make distributions to our stockholders or be able to maintain our current distribution rate, and we may be required to fund the minimum distribution necessary to qualify for taxation as a REIT from sources that could reduce our cash flows.

 

Our ability to fund any distributions will depend, in part, upon continued successful leasing of our existing portfolio and successful management services. To the extent these sources are insufficient, we may use our working capital or borrowings under our revolving credit facility to fund distributions, if and to the extent then permitted under the terms of our credit facility. If we need to fund future distributions with borrowings under our revolving credit facility or from working capital, or if we reduce our distribution rate, our stock price may be adversely affected. In addition, to the extent that we fund any distributions with borrowings under our revolving credit facility or from working capital, our cash available for investment in our business, including for property development and acquisition purposes, will decrease.

 

In addition, in order to qualify for taxation as a REIT, among other requirements, we must make distributions to stockholders aggregating annually to at least 90% of our REIT taxable income, excluding net capital gains. To the extent that, in respect of any calendar year, cash available for distribution to our stockholders is less than our REIT taxable income, we would be required to fund the minimum distribution necessary to qualify for taxation as a REIT from other sources, which could include asset sales or borrowings. Funding a distribution through asset sales or borrowings could reduce our cash flow from operations, increase our interest expense and decrease our cash available for investment in our business. We may also choose to meet this distribution requirement by distributing a combination of cash and shares of our common stock. See "Federal Income Tax Risk Factors—We may pay taxable dividends of our common stock and cash, in which case stockholders may sell shares of our common stock to pay tax on such dividends, placing downward pressure on the market price of our common stock."

 

Any distributions in excess of our current and accumulated earnings and profits will not be taxable to a holder to the extent that they do not exceed the holder’s adjusted basis in the shares of stock in respect of which the distributions were made, but rather, will reduce the adjusted basis of these shares. To the extent that such distributions exceed the adjusted basis of a stockholder’s shares, they will generally be included in income as capital gains.

 

We have the right to accumulate and not pay dividends on the Series A Preferred Stock. If dividends on the Series A Preferred Stock are not paid, holders of our Common Stock will not receive any dividend distributions. If we have REIT taxable income during 2015, and we do not distribute at least 90% of our REIT taxable income, excluding net capital gains, then we will not be taxed as a REIT during calendar year 2015, which could have a material adverse effect on us and on the value of our securities.

 

The market price of our securities may be volatile due to numerous circumstances, some of which are beyond our control.

 

The market price of our securities may be highly volatile and subject to wide fluctuations. Our financial performance, government regulatory action, tax laws, interest rates and market conditions in general could have a significant impact on the market price of our securities. Some of the factors that could negatively affect the market price or result in fluctuations in the market price of our securities include:

 

·actual or anticipated variations in our quarterly operating results;

 

·changes in our financial performance or earnings estimates;

 

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·increases in market interest rates (which, among other consequences, may lead purchasers of our securities to require a higher dividend yield to make or maintain an investment);

 

·changes in market valuations of similar companies;

 

·adverse market reaction to any indebtedness we incur in the future;

 

·additions or departures of key personnel;

 

·actions by our stockholders;

 

·speculation in the press or investment community;

 

·general market, economic and political conditions, including the recent economic slowdown and dislocation in the global credit markets;

 

·our issuance of additional shares of common stock or other securities;

 

·activist or proxy contests;

 

·availability of outstanding shares of our common stock, including sales of a substantial number of shares of our common stock in the public market (including shares held by our directors, officers or their affiliates);

 

·the performance of other similar companies;

 

·changes in accounting principles;

 

·passage of legislation or other regulatory developments that adversely affect us or our industry; and

 

·the potential impact of the recent economic slowdown on the student housing industry and related budgets of colleges and universities.

 

Future offerings of debt securities, which would be senior to our common stock upon liquidation, or equity securities, which would dilute our existing stockholders and may be senior to our common stock for the purposes of distributions, may limit our operating and financial flexibility and adversely affect the market price of our securities.

 

Our common stock is ranked junior to our Series A Preferred Stock. Our outstanding Series A Preferred Stock also has a preference upon our dissolution, liquidation or winding up in respect of assets available for distribution to our stockholders. Holders of our common stock are not entitled to preemptive rights or other protections against dilution. In the future, we may attempt to increase our capital resources by making additional offerings of debt or equity securities, including commercial paper, medium-term notes, senior or subordinated notes and classes of preferred or common stock. Upon liquidation, holders of our debt securities and shares of preferred stock and lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of our common stock. Additional equity offerings may dilute the holdings of our existing stockholders or reduce the market price of our securities or both. In addition, it is possible that these securities or indebtedness will be governed by an indenture or other instrument containing covenants restricting our operating flexibility and limiting our ability to make distributions to our stockholders. Because our decision to issue debt or equity securities in any future offering or otherwise incur indebtedness will depend on then-current market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings or financings. Thus, our stockholders bear the risk of our future offerings reducing the market price of our securities and diluting their proportionate ownership.

 

Our lack of a formal enterprise risk management framework could adversely affect our profitability, business, financial condition or results of operations.

 

In the course of our senior management’s efforts to identify, assess and manage our risks, they currently do not have the benefit of a formal enterprise risk management program to facilitate their efforts. While many of the risks that we monitor and manage are described in this section of this report, our business operations could also be affected by additional factors that are not presently described or known to us or that we currently consider immaterial to our operations. Without a formal enterprise risk management framework, we may not be able to effectively manage and mitigate the risks to which we are subject or effectively minimize any losses stemming from such risks. Even with a formal enterprise risk management framework, our efforts to identify, monitor and manage risks may not be fully effective. Failure to identify, prioritize and appropriately manage or mitigate these risks could adversely affect our profitability or our ability to retain or grow business and could adversely affect our business, financial condition or results of operations.

 

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Federal Income Tax Risk Factors

 

Our failure to remain qualified as a REIT could have a material and adverse effect on us and on the value of our securities.

 

We intend to continue to operate in a manner that will allow us to continue to qualify as a REIT for U.S. federal income tax purposes under the Internal Revenue Code. If we lose our qualification as a REIT, we will face significant adverse tax consequences that would substantially reduce the funds available for distribution to our stockholders for each of the years involved because:

 

·we would not be allowed a deduction for distributions to stockholders in computing our taxable income and we would be subject to U.S. federal income tax at regular corporate rates;

 

·we also could be subject to the U.S. federal alternative minimum tax and possibly increased state and local taxes; and

 

·unless we are entitled to relief under applicable statutory provisions, we could not elect to be taxed as a REIT for four taxable years following a year during which we were disqualified.

 

In addition, if we lose our qualification as a REIT, we will not be required to make distributions to stockholders, and all distributions to our stockholders will be subject to tax as regular corporate dividends to the extent of our current and accumulated earnings and profits. This means that our U.S. stockholders that are individuals would be taxed on our dividends at the current maximum U.S. federal income tax rate currently of 20%, and our corporate stockholders generally would be entitled to the dividends received deduction with respect to such dividends, subject, in each case, to applicable limitations under the Internal Revenue Code.

 

Qualification as a REIT involves the application of highly technical and complex Internal Revenue Code provisions and regulations promulgated thereunder for which there are only limited judicial and administrative interpretations. Even a technical or inadvertent violation could jeopardize our ability to qualify as a REIT. The complexity of these provisions and of the applicable U.S. Treasury Department regulations ("Treasury Regulations") that have been promulgated under the Internal Revenue Code is greater in the case of a REIT that, like us, holds its assets through a partnership. The determination of various factual matters and circumstances not entirely within our control may affect our ability to qualify as a REIT. In order to continue to qualify as a REIT, we must satisfy a number of requirements on a continuing basis, including requirements regarding the composition of our assets, sources of our gross income and stockholder ownership. Also, we must make distributions to stockholders aggregating annually at least 90% of our REIT taxable income, excluding net capital gains.

 

As a result of these factors, our failure to continue to qualify as a REIT could materially and adversely affect us and the market price of our securities.

 

To remain qualified as a REIT, we will likely rely on the availability of equity and debt capital to fund our business.

 

To remain qualified as a REIT, we generally must distribute to our stockholders at least 90% of our REIT taxable income each year, excluding net capital gains, and we will be subject to regular corporate income taxes to the extent that we distribute less than 100% of our REIT taxable income each year. In addition, we will be subject to a 4% nondeductible excise tax on the amount, if any, by which distributions paid by us in any calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income and 100% of our undistributed income from prior years. Because of REIT distribution requirements, we may be unable to fund capital expenditures, such as our developments, future acquisitions or property upgrades or renovations from operating cash flow. Therefore, we may be dependent on the public equity and debt capital markets and private lenders to fund our growth and other capital expenditures. However, we may not be able to obtain this capital on favorable terms or at all. Our access to third-party sources of capital depends, in part, on:

 

·general market conditions;

 

·our current debt levels and the number of properties subject to encumbrances;

 

·our current performance and the market’s perception of our growth potential;

 

·our cash flow and cash dividends; and

 

·the market price of our securities.

 

If we cannot obtain capital from third-party sources, we may not be able to acquire or develop properties when strategic opportunities exist, satisfy our debt service obligations or make the cash distributions to our stockholders, including those necessary to maintain our qualification as a REIT, which could materially and adversely affect us.

 

Even if we remain qualified as a REIT, we may face other tax liabilities that have a material and adverse effect on us.

 

Even if we continue to qualify for taxation as a REIT, we may be subject to certain federal, state and local taxes on our income and assets, including taxes on any undistributed income, taxes on income from some activities conducted as a result of a foreclosure, and state or local income, property and transfer taxes. Any of these taxes would cause our operating costs to increase, and therefore our business, financial condition and results of operations could be materially and adversely affected.

 

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In particular, various services provided at our properties generally cannot be provided directly by the property owner, but must be provided through TRSs that are treated as fully taxable corporations.

 

To remain qualified as a REIT, we may be forced to limit the activities of our TRSs, which could materially and adversely affect our business and results of operations.

 

To remain qualified as a REIT, no more than 25% of the value of our total assets may consist of the securities of one or more TRSs. Certain of our activities, such as our third-party development, construction, management and leasing services, must be conducted through our TRSs for us to qualify or remain qualified as a REIT. In addition, certain non-customary services must be provided by a TRS or an independent contractor. If the revenues from such activities create a risk that the value of our TRSs, based on revenues or otherwise, approaches the 25% threshold, we will be forced to curtail such activities or take other steps to remain under the 25% threshold. Since the 25% threshold is based on value, it is possible that the IRS could successfully contend that the value of our TRSs exceeds the 25% threshold even if our TRSs account for less than 25% of our consolidated revenues, income or cash flow. Our third-party services generally are performed by our TRSs. Consequently, income earned from our third-party services and non-customary services will be subject to regular federal income taxation and state and local income taxation where applicable, thus reducing the amount of cash available for distribution to our stockholders.

 

A TRS is not permitted to directly or indirectly operate or manage a "hotel, motel or other establishment more than one-half of the dwelling units in which are used on a transient basis." We previously have been advised by counsel that the method of operating our TRSs will not be considered to constitute such an activity. However, future Treasury Regulations or other guidance interpreting the applicable provisions might adopt a different approach, or the IRS might disagree with the conclusion of our counsel. In such event we might be forced to change our method of operating our TRSs, or one or more of the TRSs could fail to qualify as a TRS, which could cause us to fail to qualify as a REIT. Any of the foregoing circumstances could materially and adversely affect our business, financial condition and results of operations.

 

If the Operating Partnership fails to qualify as a partnership for federal income tax purposes, we would cease to qualify as a REIT and we could be materially and adversely affected.

 

We believe that the Operating Partnership qualifies to be treated as a partnership for federal income tax purposes. As a partnership, the Operating Partnership is not subject to federal income tax on its income. Instead, each of its partners, including us, is required to pay tax on its allocable share of the Operating Partnership’s income. No assurance can be provided, however, that the IRS, will not challenge its status as a partnership for federal income tax purposes, or that a court would not sustain such a challenge. If the IRS were successful in treating the Operating Partnership as a corporation for tax purposes, we would fail to meet the gross income tests and certain of the asset tests applicable to REITs and, accordingly, cease to qualify as a REIT. The failure of the Operating Partnership to qualify as a partnership would also cause it to become subject to federal state and corporate income tax, which would reduce significantly the amount of cash available for debt service and for distribution to its partners, including us.

 

Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends, which could materially and adversely affect the market price of our securities.

 

The maximum tax rate applicable to "qualified dividend income" payable to U.S. stockholders that are taxed at individual rates is 20%. Dividends payable by REITs, however, generally are not eligible for the reduced rates on qualified dividend income. Although this does not adversely affect the taxation of REITs or dividends payable by REITs, the more favorable rates applicable to regular corporate qualified dividends could cause investors taxed at individual rates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could materially and adversely affect the market price of the stock of REITs, including our securities.

 

We may pay taxable dividends in the form our common stock and cash, in which case stockholders may sell shares of our common stock to pay tax on such dividends, placing downward pressure on the market price of our common stock.

 

We may distribute taxable dividends that are payable in cash and common stock at the election of each stockholder. The IRS has issued private letter rulings to other REITs treating certain distributions that are paid partly in cash and partly in stock as taxable dividends that would satisfy the REIT annual distribution requirement and qualify for the dividends paid deduction for federal income tax purposes. Those rulings may be relied upon only by taxpayers to whom they were issued, but we could request a similar ruling from the IRS. Accordingly, it is unclear whether and to what extent we will be able to make taxable dividends payable in cash and common stock.

 

If we made a taxable dividend payable in cash and common stock, taxable stockholders receiving such dividends will be required to include the full amount of the dividend as ordinary income to the extent of our current and accumulated earnings and profits, as determined for federal income tax purposes. As a result, stockholders may be required to pay income tax with respect to such dividends in excess of the cash dividends received. If a U.S. stockholder sells the common stock that it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our common stock at the time of the sale. Furthermore, with respect to certain non-U.S. stockholders, we may be required to withhold federal income tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in common stock. If we made a taxable dividend payable in cash and our common stock and a significant number of our stockholders determine to sell shares of our common stock in order to pay taxes owed on such dividends, it may be viewed as economically equivalent to a dividend reduction and put downward pressure on the trading price of our common stock. We do not currently intend to pay taxable dividends in the form of our common stock and cash, although we may choose to do so in the future.

 

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Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities, which could materially and adversely affect our financial condition and results of operations.

 

The REIT provisions of the Internal Revenue Code substantially limit our ability to hedge our liabilities. Any income from a hedging transaction we enter into to manage risk of interest rate changes with respect to borrowings made or to be made to acquire or carry real estate assets will not constitute "gross income" for purposes of the 75% gross income test or the 95% gross income test, if certain requirements are not met. To the extent that we enter into other types of hedging transactions, the income from those transactions is likely to be treated as non-qualifying income for purposes of both of the gross income tests. As a result, we might have to limit our use of advantageous hedging techniques or implement those hedges through a TRS. This could increase the cost of our hedging activities because a domestic TRS would be subject to tax on gains or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear. In addition, losses in our TRSs will generally not provide any tax benefit, except for being carried forward against future taxable income in the respective TRS. These increased costs could materially and adversely affect our financial condition and results of operations.

 

The tax imposed on REITs engaging in "prohibited transactions" may limit our ability to engage in transactions which would be treated as sales or otherwise as taxable dispositions for federal income tax purposes.

 

A REIT’s net income from prohibited transactions is subject to a 100% penalty tax. In general, prohibited transactions are sales or other dispositions of property, other than foreclosure property, held in inventory primarily for sale to customers in the ordinary course of business. Although we do not intend to hold any properties that would be characterized as inventory held for sale to customers in the ordinary course of our business, subject to certain statutory safe harbors, such characterization is a factual determination and no guarantee can be given that the IRS would agree with our characterization of our properties or that we will always be able to make use of the available safe harbors.

 

Re-characterization of sale-leaseback transactions may cause us to lose our REIT status.

 

We may purchase properties and lease them back to the sellers of such properties. While we will use our best efforts to structure any such sale-leaseback transaction so that the lease will be characterized as a "true lease," thereby allowing us to be treated as the owner of the property for federal income tax purposes, the IRS could challenge such characterization. In the event that any sale-leaseback transaction is challenged and re-characterized as a financing transaction or loan for federal income tax purposes, deductions for depreciation and cost recovery relating to such property would be disallowed. If a sale-leaseback transaction were so re-characterized, we might fail to satisfy the REIT qualification "asset tests" or the "income tests" and, consequently, lose our REIT status effective with the year of re-characterization. Alternatively, the amount of our REIT taxable income could be recalculated, which might also cause us to fail to meet the distribution requirement for a taxable year.

 

Liquidation of assets may jeopardize our REIT status.

 

To continue to qualify as a REIT, we must comply with requirements regarding our assets and our sources of income. If we are compelled to liquidate our investments to satisfy our obligations to our lenders, we may be unable to comply with these requirements, ultimately jeopardizing our status as a REIT, or we may be subject to a 100% tax on any resultant gain if we sell assets treated as dealer property or inventory.

 

Complying with REIT requirements may cause us to liquidate otherwise attractive investments or to forgo otherwise attractive investment opportunities, which could materially and adversely affect our business, financial condition and results of operations.

 

To continue to qualify as a REIT for U.S. federal income tax purposes, we continually must satisfy tests concerning, among other things, the sources of our income, the type and diversification of our assets, the amounts we distribute to our stockholders and the ownership of our stock. If we fail to comply with these requirements at the end of any calendar quarter, we must correct such failure within 30 days after the end of the calendar quarter to avoid suffering adverse tax consequences, including potentially losing our REIT status. As a result, we may be required to liquidate otherwise attractive investments, which could materially and adversely affect us. In addition, we may be unable to pursue investments that would be otherwise advantageous to us in order to satisfy the source-of-income, asset-diversification or distribution requirements for qualifying as a REIT. Thus, compliance with the REIT requirements may hinder our ability to make certain attractive investments, which could materially and adversely affect our business, financial condition and results of operations.

 

29
 

  

The ability of our board of directors to revoke our REIT election without stockholder approval may cause adverse consequences to our stockholders.

 

Our charter provides that our board of directors may revoke or otherwise terminate our REIT election, without the approval of our stockholders, if it determines that it is no longer in our best interests to continue to qualify as a REIT. If we cease to qualify as a REIT, we would become subject to federal income tax on our taxable income and would no longer be required to distribute most of our taxable income to our stockholders, which may have adverse consequences on the total return to our stockholders.

 

New legislation, regulation or administrative or judicial action, in each instance potentially with retroactive effect, could make it more difficult or impossible for us to qualify as a REIT.

 

The present U.S. federal income tax treatment of REITs may be modified, possibly with retroactive effect, by legislative, regulatory, administrative or judicial action at any time, which could affect the U.S. federal income tax treatment of an investment in our stock. The U.S. federal income tax rules that affect REITs are under constant review by persons involved in the legislative process, the IRS and the U.S. Treasury Department, which results in statutory changes as well as frequent revisions to regulations and interpretations. Revisions in U.S. federal tax laws and interpretations thereof could cause us to change our investments and commitments, which could also affect the tax considerations of an investment in our stock.

 

Risks Related to the Copper Beech Acquisition

 

If we are unable to successfully integrate the operations of the CB Portfolio, we could be materially and adversely affected.

 

In February 2013, we entered into purchase and sale agreements to acquire interests in a portfolio of 35 student housing properties, one undeveloped land parcel and corporate office building held by the members of Copper Beech Townhome Communities, LLC ("CBTC") and Copper Beech Townhome Communities (PA), LLC ("CBTC PA", together with CBTC, "Copper Beech" or the "Sellers") (the “CB Portfolio”). On January 30, 2015, we completed the acquisition of the Sellers’ remaining interests in 29 of the student housing properties, one undeveloped land parcel, and one other student housing property. The CB Portfolio Acquisition represents the largest acquisition of a property portfolio that we have ever acquired. The transaction involves the integration of a portfolio of properties that has previously operated independently. Successful integration of these operations will depend primarily on our ability to consolidate standards, controls, procedures and policies. This transaction also poses other risks commonly associated with similar transactions, including unanticipated liabilities, unexpected costs and the diversion of management’s attention to the integration of the operations of the CB Portfolio. We may not be able to integrate these operations without encountering difficulties, including, but not limited to, the disruption of our ongoing businesses or possible inconsistencies in standards, controls, procedures and policies. If we have difficulties with any of these integrations, we might not achieve the economic benefits we expect to result from the transaction, and this may hurt our business and financial results. In addition, we may experience greater-than-expected costs or difficulties relating to the integration of the operations of the CB Portfolio. Additional risks include, but are not limited to, the following:

 

·inability to effectively monitor and manage our expanded portfolio of properties, retain key employees or attract highly qualified new employees;

 

·inability to compete in new markets;

 

·increased costs or increases in taxable income due to restructuring or other steps required in connection with the integration of the CB Portfolio as a result of our compliance with the tax requirements applicable to REITs under the Code;

 

·projections of estimated future revenues, cost savings or operating metrics that we developed during the due diligence and integration planning process may not be achieved;

 

·the value of the acquired properties or the market price of our common stock may decline;

 

·adverse impact on the effectiveness of our internal controls and compliance with the regulatory requirements under the Sarbanes-Oxley Act of 2002;

 

·unanticipated issues, expenses and liabilities; diversion of our management’s attention away from other business concerns;

 

·unanticipated expenses and liabilities associated with the tax indemnification agreement which we entered into with the Sellers in connection with the transaction;

 

·exposure to any undisclosed or unknown potential liabilities relating to the CB Portfolio; and

 

·potential underinsured losses on the CB Portfolio.

 

30
 

  

We cannot assure you that we will be able to integrate the CB Portfolio without encountering difficulties or that any such difficulties will not have a material adverse effect on us. Additionally, we cannot assure you that the CB Portfolio Acquisition will be accretive to us in the near term or at all. Failure to realize the intended benefits of the CB Portfolio Acquisition could have a material adverse effect on our results of operations, financial condition, the market price of our common shares and our distributions to our shareholders. Furthermore, if we fail to realize the intended benefits of the CB Portfolio Acquisition, the market price of our common stock could decline to the extent that the market price reflects those benefits.

 

Item 1B. Unresolved Staff Comments.

 

None.

 

Item 2. Properties.

 

As of December 31, 2014, we owned interests in 50 The Grove® and evo® operating properties and 36 Copper Beech branded operating properties. All of The Grove® and evo® operating properties are less than ten years old and more than half are less than four years old. No single property accounted for more than 5% of our total assets or gross revenue as of December 31, 2014 or 2013 or for the years then ended.

 

We focus our investment activities on properties located in medium-sized college and university markets where we believe the overall market dynamics are favorable. Thirty-six of our operating properties are wholly-owned and are operated under the brand The Grove®. Additionally, fourteen of our joint venture operating properties operate under the brands The Grove® and evo®. Our brands provide an identity for our marketing and selling activities, our operations and other on-site activities. The brands figure prominently on our web site, promotional materials and local signage.

 

Amenities at our properties generally include a resort style swimming pool, basketball courts, beach volleyball courts, fire pits, barbeque areas and a large clubhouse featuring a 24-hour fitness center, library and computer center, tavern style game room with billiards and other games, tanning beds, coffee shop and study areas. All of our properties are furnished with upholstered couches, chairs and durable wood case goods.

 

Generally, each student-tenant at our properties executes an individual lease agreement with us that is guaranteed by a parent or guardian. Lease terms are generally 11.5 months, which provides us with approximately two weeks to prepare a unit for a new tenant if the current tenant is vacating upon the expiration of the lease. Rent is payable monthly in 12 equal installments. In addition to unlimited use of all the property amenities listed above, each tenant is entitled to cable, water/sewer and a $25 per month electricity allowance. Student-tenants are prohibited from subletting units without our prior written consent, which is conditioned on, among other things, the payment of a transfer fee. Student-tenants are responsible for the outstanding lease obligations in the event that they are denied admission to, withdraw from or are placed on academic suspension or dismissed by, the college or university that our property services.

 

At December 31, 2014, we owned a 48% effective ownership interest in 36 Copper Beech branded operating properties. The Copper Beech units are townhomes with 3 or 4 beds and may be rented by the unit or by the bed with leases that are generally guaranteed by a parent or guardian. Lease terms are generally 11.5 months, which provides approximately two weeks to prepare a unit for a new tenant if the current tenant is vacating upon the expiration of the lease. Rent is payable monthly in 12 equal installments. Student-tenants are prohibited from subletting units without our prior written consent, which is conditioned on, among other things, the payment of a transfer fee. Student-tenants are responsible for the outstanding lease obligations in the event that they are denied admission to, withdraw from or are placed on academic suspension or dismissed by, the college or university that our property services. Subsequent to December 31, 2014, we completed the acquisition on January 30, 2015, of the remaining interests in 29 of the Copper Beech student housing properties, one undeveloped land parcel, and one other Copper Beech student housing property.

 

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The following table presents certain summary information about our The Grove® and evo® operating properties:

 

                                Average 
                            Occupancy   Monthly 
            Fall 2013   Distance to           as of   Total Revenue 
      Year     Overall   Campus   Number   Number   December 31,   Per 
   Location  Opened  Primary University Served  Enrollment   (miles)   of Units   of Beds   2014 (1)   Occupied Bed (2) 
                                  
1  The Grove at Asheville, NC  2005  UNC - Asheville   3,784    0.1    154    448    98.2%  $484 
2  The Grove at Carrollton, GA  2006  University of West Georgia   11,929    0.1    168    492    94.9%  $463 
3  The Grove at Las Cruces, NM  2006  New Mexico State University   16,765    0.4    168    492    81.2%  $456 
4  The Grove at Milledgeville, GA  2006  Georgia College & State University   6,551    0.1    168    492    98.7%  $599 
5  The Grove at Abilene, TX  2007  Abilene Christian University   4,461    0.5    192    504    92.5%  $477 
6  The Grove at Ellensburg, WA  2007  Central Washington University   11,287    0.5    192    504    97.5%  $531 
7  The Grove at Greeley, CO  2007  University of Northern Colorado   12,710    1.0    192    504    99.1%  $519 
8/9  The Grove at Mobile, AL—Phase I & II (3)  2007/2008  University of South Alabama   15,065    0.0    384    1,008    82.2%  $484 
10  The Grove at Nacogdoches, TX—Phase I & II  2007/2012  Stephen F. Austin State University   12,772    0.4    260    682    89.2%  $573 
11  The Grove at Cheney, WA  2008  Eastern Washington University   12,791    0.5    192    512    93.5%  $472 
12  The Grove at Lubbock, TX  2008  Texas Tech University   33,111    1.2    192    504    92.5%  $497 
13  The Grove at Stephenville, TX  2008  Tarleton State University   13,307    0.8    192    504    89.4%  $565 
14  The Grove at Troy, AL  2008  Troy University   20,573    0.4    192    514    93.7%  $517 
15  The Grove at Waco, TX  2008  Baylor University   15,616    0.8    192    504    89.3%  $564 
16  The Grove at Murfreesboro, TN  2009  Middle Tennessee State University   23,881    0.8    186    504    96.6%  $468 
17  The Grove at San Marcos, TX  2009  Texas State University   35,546    1.7    192    504    97.3%  $565 
18  The Grove at Moscow, ID  2009  University of Idaho   12,024    0.5    192    504    90.6%  $492 
19  The Grove at Huntsville, TX  2010  Sam Houston State University   19,210    0.2    192    504    99.3%  $502 
20  The Grove at Statesboro, GA  2010  Georgia Southern University   20,517    0.7    200    536    78.2%  $454 
21  The Grove at Ames, IA  2011  Iowa State University   32,955    0.3    216    584    99.4%  $534 
22  The Grove at Clarksville, TN  2011  Austin Peay State University   10,399    1.3    208    560    77.1%  $515 
23  The Grove at Columbia, MO  2011  University of Missouri   34,616    0.9    216    632    67.0%  $483 
24  The Grove at Ft. Wayne, IN  2011  Indiana University / Purdue University   13,459    1.1    204    540    84.9%  $432 
25  The Grove at Valdosta, GA  2011  Valdosta State University   11,885    1.9    216    584    87.7%  $490 
32  The Grove at Denton, TX  2011  University of North Texas   38,315    0.6    216    584    100.0%  $584 
26  The Grove at Auburn, AL  2012  Auburn University   24,864    0.0    216    600    99.6%  $604 
27  The Grove at Flagstaff, AZ—Phase I & II  2012/2013  Northern Arizona University   26,594    0.2    270    776    99.7%  $651 
28  The Grove at Orono, ME  2012  University of Maine   11,247    0.5    188    620    93.8%  $556 
29  The Grove at Ft. Collins, CO (3)  2013  Colorado State University   31,186    0.0    218    612    99.7%  $617 
30  The Grove at Muncie, IN  2013  Ball State University   20,503    0.1    216    584    75.6%  $516 
31  The Grove at Pullman, WA  2013  Washington State University   27,642    0.0    216    584    99.9%  $573 
33  The Grove at Gainesville, FL  2014  University of Florida   49,878    0.3    256    682    54.7%  $548 
34  The Grove at Grand Forks, ND  2014  University of North Dakota   15,143    0.1    224    600    99.6%  $549 
35  The Grove at Mt. Pleasant, MI  2014  Central Michigan University   26,841    0.9    224    584    75.8%  $508 
36  The Grove at Slippery Rock, PA  2014  Slippery Rock University   8,347    0.3    201    603    85.3%  $566 
   Subtotal         19,594(4)   0.5(4)   7,305    19,945    89.6%(5)  $526 
                                        
   Joint Venture Properties (6)                                    
37  The Grove at Lawrence, KS  2009  Kansas University   26,968    1.6    172    500    79.2%  $444 
38  The Grove at San Angelo, TX  2009  Angelo State University   6,536    0.3    192    504    98.1%  $520 
39  The Grove at Conway, AR  2010  University of Central Arkansas   11,534    0.4    180    504    68.3%  $442 
40  The Grove at Fayetteville, AR  2012  University of Arkansas   25,341    0.5    232    632    59.0%  $489 
41  The Grove at Stillwater, OK  2012  Oklahoma State University   26,073    0.8    206    612    91.7%  $470 
42  The Grove at Laramie, WY  2012  University of Wyoming   12,778    0.3    224    612    84.6%  $488 
43  The Grove at Indiana, PA  2013  Indiana University of Pennsylvania   14,925    0.6    224    600    78.6%  $578 
44  The Grove at State College, PA  2013  Penn State University   46,615    0.8    224    600    80.5%  $642 
45  The Grove at Norman, OK  2013  University of Oklahoma   27,292    0.6    216    584    79.2%  $550 
46  The Grove at Greensboro, NC  2014  University of North Carolina Greensboro   18,074    0.5    216    584    57.2%  $546 
47  The Grove at Louisville, KY  2014  University of Louisville   21,444    0.3    219    660    62.3%  $592 
48  evo at Cira Centre South (3)  2014  University of Pennsylvania   24,630    0.0    344    850    45.3%  $1,310 
         Drexel University   26,132    0.2    N/A    N/A    N/A    N/A 
49/50  evo à Square Victoria and evo à Sherbrooke  2014  McGill University   39,349    0.6    711    1200    13.8%  $828 
         Concordia University   43,752    0.8    N/A    N/A    N/A    N/A 
         L’École de Technologie Supérieure (ÉTS)   6,160    0.3    N/A    N/A    N/A    N/A 
   Subtotal         23,600(4)   0.5(4)   3,360    8,442    64.0%(5)  $608 
                                        
   Total Properties         20,851(4)   0.5(4)   10,665    28,387    82.0%(5)  $548 

 

(1)Represents executed leases in place for the 2014-2015 academic year.
(2)Total revenue (rental and service) for the year ended December 31, 2014 divided by the sum of leased beds at the properties per month.
(3)Properties subject to a ground lease with an unaffiliated third-party.
(4)Represents an average of the properties within the grouping.
(5)Weighted average by number of leased beds as of December 31, 2014.
(6)Joint venture properties include three properties in which we own a 63.9% interest, three properties in which we own a 10% interest, three properties in which we own a 20% interest, three properties in which we own a 30% interest, and two properties in which we own a 47% interest.

32
 

  

The following table presents certain summary information about our Copper Beech branded operating properties:

 

                                Average 
                            Occupancy   Monthly 
            Fall 2013   Distance to           as of   Total Revenue 
      Year     Overall   Campus   Number   Number   December 31,   Per 
   Location  Opened  Primary University Served  Enrollment   (miles)   of Units   of Beds   2014 (1)   Occupied Bed (2) 
1  Copper Beech at State College, PA - CB I  1996  Penn State University  46,615   1.8   59   177   91.5  $ 555 
2  Copper Beech at State College, PA - CB II  1998  Penn State University   46,615    1.7    87    257    93.0%  $568 
3  Copper Beech at State College, PA - Oakwood  2000  Penn State University   46,615    2.3    48    144    77.1%  $557 
4  Copper Beech at State College, PA - Northbrook Greens  2003  Penn State University   46,615    1.9    166    250    100.0%  $787 
5  Copper Beech at State College, PA - Parkway Plaza  1967  Penn State University   46,615    1.1    429    633    88.3%  $718 
6  Copper Beech at Indiana, PA - IUP I  1971  Indiana University of Pennsylvania   14,925    0.6    95    239    100.0%  $474 
7  Copper Beech at Indiana, PA - IUP II  1973  Indiana University of Pennsylvania   14,925    0.6    72    172    100.0%  $494 
8  Copper Beech at Indiana, PA - IUP Buy  1975  Indiana University of Pennsylvania   14,925    0.6    43    74    100.0%  $572 
9  Copper Beech at Radford, VA  2005  Radford University   9,928    0.5    222    500    99.6%  $351 
10  Copper Beech at West Lafayette, IN – Klondike  2003  Purdue University   39,794    2.2    219    486    91.4%  $446 
11  Copper Beech at West Lafayette, IN – Baywater  2004  Purdue University   39,794    0.8    137    488    98.8%  $387 
12  Copper Beech at Bloomington, IN  2005  Indiana University   46,817    2.7    107    297    83.8%  $457 
13  Copper Beech at Mount Pleasant, MI - Phase I  2005  Central Michigan University   26,841    0.7    204    632    100.0%  $460 
14  Copper Beech at Fresno, CA  2006  California State University at Fresno   23,060    2.7    178    506    91.3%  $500 
15  Copper Beech at Bowling Green, OH - Phase I  2005  Bowling Green University   16,958    1.2    128    400    98.8%  $355 
16  Copper Beech at Bowling Green, OH - Phase II  2007  Bowling Green University   16,958    1.2    72    216    99.5%  $367 
17  Copper Beech at Allendale, MI - Phase I  2006  Grand Valley State University   24,477    0.5    206    614    100.0%  $454 
18  Copper Beech at Allendale, MI - Phase II  2007  Grand Valley State University   24,477    0.5    82    290    100.0%  $434 
19  Copper Beech at Columbia, MO  2006  University of Missouri   34,616    1.5    214    654    100.0%  $464 
20  Copper Beech at Bloomington, IN - Colonial Crest  1970  Indiana University   46,817    0.8    206    402    82.3%  $371 
21  Copper Beech at Columbia, SC - Phase I  2007  University of South Carolina   31,964    2.4    278    824    99.4%  $532 
22  Copper Beech at Columbia, SC - Phase II  2008  University of South Carolina   31,964    2.4    72    178    99.4%  $546 
23  Copper Beech at Morgantown, WV  2010  West Virginia University   29,466    1.8    335    920    99.9%  $485 
24  Copper Beech at Harrisonburg, VA  2008  James Madison University   20,181    1.2    414    1,218    99.7%  $492 
25  Copper Beech at Greenville, NC  2008  East Carolina University   26,887    1.9    439    1,232    97.6%  $482 
26  Copper Beech at San Marcos, TX - Phase I  2011  Texas State University   35,546    0.5    273    840    90.1%  $557 
27  Copper Beech at San Marcos, TX - Phase II  2012  Texas State University   35,546    0.6    142    410    92.4%  $563 
28  Copper Beech at Harrisonburg, VA - Grand Duke  2001  James Madison University   20,181    1.2    120    124    97.6%  $529 
29  Copper Beech at Mount Pleasant, MI - Phase II  2013  Central Michigan University   26,841    0.7    119    256    60.2%  $513 
30  Copper Beech at Statesboro, GA - Phase II  2013  Georgia Southern University   20,517    0.3    82    262    66.6%  $464 
31  Copper Beech at State College, PA - Oak Hill  2003  Penn State University   46,615    1.7    106    318    85.0%  $574 
32  Copper Beech at Kalamazoo, MI - Phase I  2007  Western Michigan University   24,294    2.4    256    784    80.7%  $419 
33  Copper Beech at Kalamazoo, MI - Phase II  2008  Western Michigan University   24,294    2.4    115    340    71.0%  $448 
34  Copper Beech at Auburn, AL  2009  Auburn University   24,864    1.8    271    754    84.2%  $453 
35  Copper Beech at Statesboro, GA - Phase I  2007  Georgia Southern University   20,517    0.3    246    754    80.0%  $465 
                                        
   Consolidated Property: 48% Ownership Interest                                    
                                        
36  Copper Beech at Ames, IA  2014  Iowa State University   32,955    0.2    219    636    79.5%  $557 
                                        
   Total Copper Beech Properties         30,028(3)   1.3(3)   6,461    17,281    91.9%(4)  $496 

 

 

(1)Represents executed leases in place for the 2014-2015 academic year.
(2)Total revenue (rental and service) for the year ended December 31, 2014 divided by the sum of leased beds at the properties per month.
(3)Represents an average of the properties within the grouping.
(4)Weighted average by number of leased beds as of December 31, 2014.

 

Item 3. Legal Proceedings.

 

In the normal course of business, we are subject to claims, lawsuits and legal proceedings. In addition to the matters described below, we are involved in various routine legal proceedings arising in the ordinary course of business. Although the outcomes of such routine legal proceedings cannot be predicted with certainty, in the opinion of management, the ultimate resolution of such routine matters will not have a material adverse effect on our financial position or results of operations.

 

On July 3, 2012, we and certain of our subsidiaries were named as defendants in a lawsuit filed in the 250th Judicial District Court in Travis County in Austin, Texas. The case arose from an accident at The Grove at Denton, located in Denton, Texas, in which a balcony of one of the units broke and three people were seriously injured. The claims in the lawsuit against Campus Crest and certain of its subsidiaries by the plaintiffs were settled in their entirety on July 29, 2014 without any admission of liability on the part of Campus Crest or its subsidiaries. The settlement, which is covered by our existing insurance coverage, will not have a material adverse effect on our financial position or results of operations.

 

On January 21, 2015, we and certain of our subsidiaries were named as defendants in a lawsuit filed in the 7th Division of the Jefferson Circuit Court in Jefferson County in Louisville, Kentucky. The case arose from an individual who fell to his death at a construction site located at 2501 South 4th Street, Louisville, Jefferson County, Kentucky. Also named as co-defendants in the case are three other companies associated with the construction and/or employment of the deceased individual. The plaintiffs allege, among other things, we were negligent and/or allowed a dangerous or hazardous condition to exist on the premises. The plaintiffs’ initial complaint did not specify the amount of damages sought. We are presently reviewing the complaint, reviewing applicable law and venue, and preparing our responsive pleadings. Based upon the totality of the circumstances, including the existence of insurance coverage and anticipated indemnity from third-parties, we do not believe that the lawsuit, if adversely determined, would have a material adverse effect on our financial position or results of operation.

 

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Item 4.   Mine Safety Disclosures.

 

Not applicable.

 

PART II.

 

Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

Information about our Amended and Restated Equity Incentive Compensation Plan is incorporated by reference to our definitive Proxy Statement for our 2014 annual meeting of stockholders (the "Proxy Statement").

 

Market Information

 

Our common stock has been listed and is traded on the NYSE under the symbol "CCG." The following table sets forth, for the quarterly periods indicated, the high and low sale prices per share reported on the NYSE and declared dividends per share for our common stock:

 

           Common   Preferred 
   Stock Price   Stock   Series A 
Period  High   Low   Dividends   Dividends 
                 
2013:                    
First Quarter  $14.11   $11.81   $0.165   $0.50 
Second Quarter   14.36    10.73    0.165    0.50 
Third Quarter   12.43    10.10    0.165    0.50 
Fourth Quarter   10.82    8.90    0.165(1)   0.50(2)
2014:                    
First Quarter  $9.54   $8.14   $0.165   $0.50 
Second Quarter   9.00    8.50    0.165    0.50 
Third Quarter   9.19    6.13    0.165    0.50 
Fourth Quarter   7.86    6.00    0.090(3)   0.50(4)

 

 

(1)Paid January 8, 2014, to stockholders of record on December 23, 2013.
(2)Paid January 15, 2014, to stockholders of record on December 23, 2013.
(3)Paid January 29, 2015, to stockholders of record on December 31, 2014.
(4)Paid January 15, 2015, to stockholders of record on December 31, 2014.

 

On December 19, 2014, our Board of Directors declared a fourth quarter 2014 dividend of $0.09 per common share and OP Unit that was paid in cash on January 29, 2015, to stockholders of record on December 31, 2014. The common stock dividends of $0.585 per share are classified for income tax purposes as 100% return of capital.

 

On December 19, 2014, our Board of Directors also declared a cash dividend of $0.50 per share of Series A Preferred Stock for the fourth quarter of 2014 that was paid in cash on January 15, 2015, to stockholders of record on December 31, 2014. The Preferred Series A stock dividends of $2.00 per share are classified for income tax purposes as 100% return of capital.

 

Performance Graph

 

The following graph provides a comparison of the cumulative total return on our common stock from October 19, 2010 (first day of trading for our common stock) to the NYSE closing price per share on December 31, 2014 with the cumulative total return on the Standard & Poor’s 500 Composite Stock Price Index, or the S&P 500 Index, and the FTSE EPRA/NAREIT United States Index, or the FTSE EPRA/NAREIT US Index. Total return values were calculated assuming a $100 investment on October 19, 2010 with the reinvestment of all dividends in (i) our common stock, (ii) the S&P 500 Index and (iii) the FTSE EPRA/NAREIT US Index.

 

34
 

 

  

The actual returns on the graph above are as follows:

 

   Initial Investment at   Value of Initial Investment as of December 31, 
Name  October 19, 2010   2010   2011   2012   2013   2014 
Campus Crest Communities, Inc.  $100.00   $112.96   $85.76   $110.54   $90.13   $75.36 
S&P 500   100.00    108.33    110.62    128.32    169.88    193.14 
FTSE EPRA/NAREIT US Index   100.00    103.06    111.05    131.01    134.24    175.09 

 

Holders

 

As of December 31, 2014, there were approximately 41 holders of record of our common stock and 64,742,713 shares of common stock outstanding.

 

Distributions

 

We intend to continue to declare quarterly distributions on our common stock. The actual amount, timing and form of payment of distributions, however, will be at the discretion of our Board of Directors and will depend upon our financial condition in addition to the requirements of the Internal Revenue Code, and no assurance can be given as to the amounts, timing or form of payment of future distributions. The payment of distributions is subject to restrictions under our corporate-level debt described in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 under "Liquidity and Capital Resources."

 

Item 6.   Selected Financial Data.

 

The following selected financial and operating data should be read in conjunction with the Notes to Consolidated Financial Statements in Item 15 and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Item 7.

 

35
 

 

Statements of Operations Information:

 

   The Company   Predecessor 
                   October 19,   January 1, 
                   2010   2010 
                   Through   Through 
   Year Ended December 31,   December 31,   October 18 
(in thousands, except share data)  2014   2013   2012   2011   2010   2010 
Revenues:                              
Student housing rental  $101,724   $87,635   $71,211   $49,048   $8,784   $32,609 
Student housing services   3,768    3,615    2,880    2,062    254    1,254 
Development, construction and management services   1,249    820    559    199    -    - 
Total revenues   106,741    92,070    74,650    51,309    9,038    33,863 
Operating expenses:                              
Student housing operations   47,154    40,726    33,013    23,696    4,658    17,921 
General and administrative   14,303    10,658    8,821    6,749    1,157    5,515 
Severance   6,159    -    -    -    -    - 
Impairment of land & pre-development costs   31,927    -    -    -    -    - 
Write-off of corporate other assets   15,110    -    -    -    -    - 
Transaction costs   3,046    1,121    -    -    -    - 
Ground leases   477    249    217    209    42    214 
Depreciation and amortization   29,426    23,700    20,693    16,524    3,052    11,311 
                               
Total operating expenses   147,602    76,454    62,744    47,178    8,909    34,961 
Equity in earnings (loss) of unconsolidated entities   (5,510)   (3,727)   361    (1,164)   (163)   (259)
Impairment of unconsolidated entities   (57,789)   (312)   -    -    -    - 
Effect of not exercising Copper Beech purchase option   (33,375)   -    -    -    -    - 
                               
Operating income (loss)   (137,535)   11,577    12,267    2,967    (34)   (1,357)
                               
Nonoperating income (expense):                              
Interest expense   (16,156)   (12,969)   (11,545)   (6,888)   (2,149)   (19,379)
Other income (expense)   42    1,414    (410)   720    190    914 
Gain on purchase of previously unconsolidated entities   -    -    6,554    3,159    577    - 
                               
Total nonoperating expenses, net   (16,114)   (11,555)   (5,401)   (3,009)   (1,382)   (18,465)
                               
Income (loss) before income taxes   (153,649)   22    6,866    (42)   (1,416)   (19,822)
Income tax benefit (expense)   (731)   727    (356)   (464)   -    - 
                               
Income (loss) from continuing operations   (154,380)   749    6,510    (506)   (1,416)   (19,822)
Income (loss) from discontinued operations   (9,576)   489    3,908    3,907    (569)   (830)
Net income (loss)   (163,956)   1,238    10,418    3,401    (1,985)   (20,652)
Net income (loss) attributable to noncontrolling interests   (1,233)   (34)   46    51    (14)   (7,479)
Dividends on preferred stock   12,200    6,183    4,114    -    -    - 
                               
Net income (loss) attributable to                              
Campus Crest Communities, Inc and Predecessor  $(174,923)  $(4,911)  $6,258   $3,350   $(1,971)  $(13,173)
Net income (loss) per share attributable to common stockholders - basic and diluted:                              
Basic and diluted  $(2.69)  $(0.08)  $0.18   $0.11   $(0.07)     
Weighted-average common shares and OP Units outstanding:                              
Basic   65,102    59,984    34,781    30,717    29,877      
Diluted   65,102    60,418    35,217    31,153    29,877      
Distributions per common share  $0.59   $0.66   $0.64   $0.64   $0.13      

 

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Balance Sheet Information:

 

   The Company 
   December 31, 
(in thousands)  2014   2013   2012   2011   2010 
Assets                         
Investment in real estate, net:                         
Student housing properties  $935,962   $716,285   $669,387   $512,227   $372,746 
Accumulated depreciation   (128,121)   (102,356)   (97,820)   (76,164)   (57,463)
Development in process   -    91,184    50,781    45,278    24,232 
Land held for sale   38,105    -    -    -    - 
Land held for investment   7,413    -    -    -    - 
                          
Investment in real estate, net   853,359    705,113    622,348    481,341    339,515 
Investment in unconsolidated entities   259,740    324,838    22,555    21,052    13,751 
Other assets, net   63,712    152,728    51,417    37,864    17,991 
                          
Total assets  $1,176,811   $1,182,679   $696,320   $540,257   $371,257 
                          
Liabilities and equity                         
Liabilities:                         
Mortgage and construction loans  $300,673   $205,531   $218,337   $186,914   $60,840 
Line of credit and other debt   317,746    207,952    75,375    82,052    42,500 
Other liabilities   76,389    76,115    57,706    40,156    21,127 
                          
Total liabilities   694,808    489,598    351,418    309,122    124,467 
                          
Equity:                         
Stockholders’ and owner’s equity   473,212    688,427    340,461    227,109    243,159 
Cumulative redeemable preferred stock   61    61    23    -    - 
Noncontrolling interests   8,730    4,593    4,418    4,026    3,631 
                          
Total equity   482,003    693,081    344,902    231,135    246,790 
                          
Total liabilities and equity  $1,176,811   $1,182,679   $696,320   $540,257   $371,257 

 

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Other Data:

 

   The Company   Predecessor 
                   October 19,   January 1, 
                   2010   2010 
   Year Ended   Year Ended   Year Ended   Year Ended   Through   Through 
   December 31,   December 31,   December 31,   December 31,   December 31,   October 18 
(unaudited and in thousands)  2014   2013   2012   2011   2010   2010 
Funds from operations (“FFO”)(1)                              
Net income (loss) attributable to common stockholders  $(174,923)  $(4,911)  $6,258   $3,350   $(1,971)  $(13,173)
Net income (loss) attributable to noncontrolling interests   (1,233)   (34)   46    51    (14)   (7,479)
Gain on purchase of joint venture properties(2)   -    -    (6,554)   (3,159)   (577)   - 
Real estate related depreciation and amortization   27,858    25,503    23,521    19,832    3,911    14,660 
Real estate related depreciation and amortization unconsolidated entities   25,034    23,271    1,731    2,434    454    245 
FFO (3)  $(123,263)  $43,829   $25,002   $22,508   $1,803   $(5,747)
                               
FFO  $(123,263)  $43,829   $25,002   $22,508   $1,803   $(5,747)
Elimination of change in fair value of interest rate derivatives(4)   -    -    -    (337)   (139)   (5,002)
Elimination of Copper Beech dividend equivalency(5)   1,200    -    -    -    -    - 
Elimination of write-off of unamortized deferred financing fees   -    236    966    -    -    - 
Elimination of transaction costs(6)   4,801    2,027    -    -    -    - 
Elimination of fair value debt and purchase accounting adjustments at our investment in Copper Beech(7)   (6,491)   (3,576)   -    -    -    - 
Elimination of write off of land, pre-development costs and asset held for sale(8)   31,927    175    -    -    -    537 
Elimination of impairment of disposed assets(9)   -    4,729    -    -    -    - 
Elimination of impairment of unconsolidated entities(10)   57,789    -    -    -    -    - 
Elimination of effect of not exercising Copper Beach purchase option(11)   33,375    -    -    -    -    - 
Elimination of write-off of corporate other assets(12)   15,110    -    -    -    -    - 
Elimination of severance(13)   6,159    -    -    -    -    - 
Elimination of discontinued operations(14)   9,576    (489)   (3,908)   (3,907)   569    830 
Elimination of change in valuation allowance for deferred tax asset   731    -    -    -    -    - 
                               
Funds from operations adjusted (“FFOA”)(15)  $30,914   $46,931   $22,060   $18,264   $2,233   $(9,382)

 

(1)FFO is used by industry analysts and investors as a supplemental operating performance measure for REITs. We calculate FFO in accordance with the definition that was adopted by the Board of Governors of the National Association of Real Estate Investment Trusts, or NAREIT. FFO, as defined by NAREIT, represents net income (loss) determined in accordance with GAAP, excluding extraordinary items as defined under GAAP and gains or losses from sales of previously depreciated operating real estate assets, plus specified non-cash items, such as real estate asset depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. In addition, in October 2011, NAREIT communicated to its members that the exclusion of impairment write-downs of depreciable real estate is consistent with the definition of FFO. We use FFO as a supplemental performance measure because, in excluding real estate-related depreciation and amortization and gains and losses from property dispositions, it provides a performance measure that, when compared year over year, captures trends in occupancy rates, rental rates and operating expenses. We also believe that, as a widely recognized measure of the performance of equity REITs, FFO will be used by investors as a basis to compare our operating performance with that of other REITs. However, because FFO excludes depreciation and amortization and captures neither the changes in the value of our properties that result from use or market conditions nor the level of capital expenditures necessary to maintain the operating performance of our properties, all of which have real economic effects and could materially and adversely impact our results from operations, the utility of FFO as a measure of our performance is limited. While FFO is a relevant and widely used measure of operating performance of equity REITs, other equity REITs may use different methodologies for calculating FFO and, accordingly, FFO as disclosed by such other REITs may not be comparable to FFO published herein. Therefore, we believe that in order to facilitate a clear understanding of our historical operating results, FFO should be examined in conjunction with net income (loss) as presented in the consolidated and combined financial statements and the other financial statements accompanying this report. FFO should not be considered as an alternative to net income (loss) (computed in accordance with GAAP) as an indicator of the properties’ financial performance or to cash flow from operating activities (computed in accordance with GAAP) as an indicator of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends or make distributions.
(2)For 2010, gain was from the purchase of our joint venture partner’s interest in The Grove at San Marcos, Texas; for 2011, gain was from the purchase of our joint venture partner’s interests in The Grove at Huntsville, Texas, and The Grove at Statesboro, Georgia; for 2012, gain was from the purchase of our joint venture partner's interests in The Grove at Moscow, Idaho, and The Grove at Valdosta, Georgia.
(3)The fair value debt and purchase accounting adjustments included in equity in earnings related to Copper Beech were approximately $6.5 million and $3.6 million for the years ended December 31, 2014 and 2013, respectively. In addition, the immaterial correction described in Note 2 to the consolidated financial statements was not material to FFO.
(4)Includes only the non-cash portion of the change in unhedged derivatives.
(5)Amount represents a one-time cash dividend equivalency payment made during the year ended December 31, 2014 to the CB Investors, per the CB Investors’ interpretation of the second amendment to the purchase and sale agreement of Copper Beech.
(6)Includes costs incurred in connection with Copper Beech and CSH Montreal for the years presented, including our proportional share of costs incurred within the ventures.
(7)Includes our proportionate share of non-cash fair value debt and other purchase accounting adjustments in our investment in Copper Beech.
(8)  During the year ended December 31, 2014, we recorded impairment for land and pre-development costs of $31.9 million in the consolidated statement of operations and comprehensive income (loss), based on our estimated fair values. The fair values were obtained from third-party appraisals based on comparable properties (market approach; which involved Level 3 inputs in the fair value hierarchy).
(9)  In 2013, we sold four unencumbered, wholly-owned properties: The Grove at Jacksonville, Alabama, The Grove at Jonesboro, Arkansas, The Grove at Wichita, Kansas, and The Grove at Wichita Falls, Texas, for a combined sales price of $51.0 million resulting in net proceeds of approximately $48.6 million. In connection with the disposition of these properties, we recorded an impairment of $4.7 million.
(10)  During the year ended December 31, 2014, we recorded an impairment of $57.8 million in the consolidated statement of operations and comprehensive income (loss) for certain unconsolidated entities, including $31.3 million related to HSRE I, HSRE V, HSRE VI and HSRE X (the “HSRE Investments”) and $26.5 million related to the investment in CSH Montreal.
(11)  During the year ended December 31, 2014, we recorded expense of $33.4 million due to the effect of not exercising the Copper Beech purchase option during August of 2014. See Note 6 in the accompanying consolidated financial statements for the year ended December 31, 2014.

 

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(12)  In 2014, we recorded $15.1 million of impairments of other assets related to corporate infrastructure changes, as a result of the strategic repositioning. Assets impaired included the corporate aircraft and Enterprise Resource Planning system.
(13)  We recognized severance expense of $9.1 million during the year ended December 31, 2014, of which $2.9 million is included in loss from discontinued operations and $6.2 million is included in operating expenses (see Note 4 of the accompanying consolidated financial statements).
(14)  In connection with the strategic repositioning initiatives announced in Form 10-Q for the quarterly period ended September 30, 2014, we discontinued all construction and development operations, which resulted in the income (loss) from discontinued operations of $(9.6) million in 2014, $3.5 million in 2013, $3.2 million in 2012, $3.8 million in 2011, and $1.8 million for the full year ended December 31, 2010. Additionally, in December 2013, we sold four unencumbered, wholly-owned properties: The Grove at Jacksonville, Alabama, The Grove at Jonesboro, Arkansas, The Grove at Wichita, Kansas, and The Grove at Wichita Falls, Texas, for a combined sales price of $51.0 million, resulting in net proceeds of approximately $48.6 million. In connection with the disposition of these properties, an impairment of $4.7 million was recorded which is presented in discontinued operations in the accompanying consolidated statements of operations and comprehensive income (loss) for the year ended December 31, 2013. This resulted in income (loss) from discontinued operations of $(3.0) million in 2013, $0.7 million in 2012, $0.1 million in 2011, and $(3.2) million in 2010. An additional impairment of $1.4 million was recorded at December 31, 2014 related to settlement costs for these properties.
(15)  When considering our FFO, we believe it is also a meaningful measure of our performance to adjust FFO to exclude the change in fair value of unhedged interest rate derivatives, Copper Beech dividend equivalency, write-off of unamortized deferred financing fees, transaction costs (including those within equity in earnings), fair value of debt adjustments within our investment in Copper Beech, the write-off of land and pre-development costs, impairment of disposed assets, impairment of unconsolidated entities, effect of not exercising Copper Beech purchase option, write-off of corporate other assets, severance, discontinued operations, and change in valuation for deferred tax asset. Excluding these items adjusts FFO to be more reflective of operating results prior to capital replacement or expansion, debt amortization of principal or other commitments and contingencies. This measure is referred to herein as FFOA. The immaterial correction described in Note 2 to the consolidated financial statements was not material to FFOA.

 

The following table represents our operating costs related to our leased aircrafts and our owned aircraft for the years ended December 31, 2014, 2013 and 2012 (in thousands):

 

   Year ended December 31, 
   2014   2013   2012 
Leased   2,502    4,658    3,855 
Owned   2,184    1,377    - 
    4,686    6,035    3,855 

 

       The Company 
   The Company   and Predecessor 
                   Year Ended 
   Year Ended December 31,   December 31, 
(in thousands)  2014   2013   2012   2011   2010 
Net cash flow information:                         
Net cash provided by (used in) operating activities  $66,322   $14,388   $29,470   $22,770   $(6,923)
Net cash used in investing activities   (213,300)   (489,673)   (133,053)   (126,916)   (59,931)
Net cash provided by financing activities   130,164    501,369    98,818    112,554    66,279 

 

Selected Property Information:

 

       The Company 
   The Company   and Predecessor 
                   Year Ended 
   Year Ended December 31,   December 31, 
   2014 (1)   2013 (1)   2012   2011   2010 
                     
Operating Properties   86    69    39    33    27 
Units   17,651    13,198    7,670    6,324    5,048 
Beds   46,689    35,480    20,884    17,064    13,580 
Occupancy   84.9%   92.3%   90.4%   89.0%   89.0%

 

(1)Includes The Grove®, evo®, and Copper Beech properties for the years ended December 31, 2014 and December 31, 2013.

 

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Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

As used herein, references to “we,” “us,” “our,” the “Company” and “Campus Crest” refer to Campus Crest Communities, Inc. and our consolidated subsidiaries, including Campus Crest Communities Operating Partnership, LP (the “Operating Partnership”), except where the context otherwise requires.

 

Overview

 

Our Company

 

We are a self-managed and self-administered REIT focused on owning and managing a high-quality student housing portfolio located close to college campuses in targeted markets. We operate our business through the Operating Partnership and our subsidiaries. We derive substantially all of our revenue from student housing rental, student housing services and management services. As of December 31, 2014, we owned (i) the sole general partnership interest, (ii) 99.3% of the outstanding common units of limited partnership interest in the Operating Partnership, or OP Units, and (iii) 100% of the outstanding preferred units of limited partnership interest in the Operating Partnership.

 

We believe that we are one of the largest owners and managers of high-quality student housing properties in the United States, based on beds owned and under management. As of December 31, 2014, we owned interests in 47 operating student housing The Grove® properties containing approximately 9,700 apartment units and 26,300 beds. Thirty-six of our operating The Grove® properties are wholly-owned and eleven of our The Grove® properties are owned through joint ventures with HSRE. As of December 31, 2014, we also owned interests in 36 operating student housing Copper Beech branded properties containing approximately 6,500 apartment units and 17,300 beds. Our Copper Beech branded properties are owned by us and the CB Investors (see "CB Portfolio" below). On November 3, 2014, we entered into an agreement that will result in a restructuring of our ownership in Copper Beech branded properties. See "CB Portfolio" below. As of December 31, 2014, we also owned interests in three operating student housing evo® properties containing approximately 1,500 units and 3,000 beds and owned one wholly-owned redevelopment property containing approximately 170 units and 340 beds. As of December 31, 2014, our operating portfolio consisted of the following:

  

   Properties in       Number   Number 
   Operation   Ownership   of Units   of Beds 
Wholly-owned Grove properties(1)   36    100.0%   7,305    19,945 
Joint venture Grove properties:                    
HSRE I   3    63.9%(2)   544    1,508 
HSRE V   3    10.0%   662    1,856 
HSRE VI   3    20.0%   664    1,784 
HSRE X   2    30.0%   468    1,240 
Total Grove properties   47         9,643    26,333 
                     
Joint venture evo properties:                    
CSH Montreal   2    47.0%   1,203    2,223 
HSRE IX   1    30.0%   344    850 
Total evo properties   3         1,547    3,073 
                     
CB Portfolio   36    48.0%(3)   6,461    17,283 
                     
Total Portfolio(4)   86         17,651    46,689 

 

(1)In January 2014, we acquired the remaining outstanding interests in The Grove at Denton, Texas.
(2)In January 2014, we amended and restated our operating agreement with HSRE resulting in our previously held preferred interest in The Grove at San Angelo, Texas, and The Grove at Conway, Arkansas, being converted to additional membership units of HSRE-Campus Crest I, LLC.
(3)As of September 30, 2014, we held an effective interest in the CB Portfolio of 48.0%, with 35 unconsolidated properties and one consolidated property (Copper Beech at Ames). See Note 6 to the consolidated financial statements.
(4)Our 100% owned property in Toledo, Ohio, which was acquired in March 2013, is excluded as it is in re-development.

 

As of December 31, 2014, the average occupancy for our 47 operating The Grove® properties was approximately 87.2% and the average monthly total revenue per occupied bed was approximately $527. Our operating The Grove® properties are located in 23 states, contain modern apartment units with many resort-style amenities, and have an average age of approximately 4.0 years as of December 31, 2014. Our properties are primarily located in medium-sized college and university markets, which we define as markets located outside of major U.S. cities that have nearby schools generally with overall enrollment of approximately 5,000 to 20,000 students. We believe such markets are underserved and are generally experiencing enrollment growth.

 

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We have developed, built and managed substantially all of our wholly-owned properties and several of our unconsolidated, joint venture properties, which are based upon a common prototypical residential building design. We believe that our use of this prototypical building design, which we have built more than 700 times (approximately 15 of such residential buildings make up one student housing property), allows us to efficiently deliver a uniform and proven student housing product in multiple markets. All of our operating properties (other than those in the CB Portfolio as defined below, evo® and Toledo) operate under The Grove® brand, and we believe that our brand and the associated lifestyle are effective differentiators that create higher visibility and appeal for our properties within their markets both with the student as well as the universities we serve.

 

In connection with our strategic repositioning initiatives, we discontinued all construction and development operations during the year ended December 31, 2014. As a result, we recorded impairment for land and pre-development costs of $31.9 million in the consolidated statement of operations and comprehensive income (loss), based on their estimated fair values. The fair values were obtained from third-party appraisals based on comparable properties (market approach; which involved Level 3 inputs in the fair value hierarchy). As of December 31, 2014, we had no properties under development.

 

Additionally, we recorded $15.1 million of impairments of other assets related to corporate infrastructure changes, as a result of the strategic repositioning. Assets impaired included the corporate aircraft and Enterprise Resource Planning system.

 

We eliminated positions via termination of the employment of certain employees and acceptance of the resignation of certain employees as part of the strategic repositioning. In connection with these terminations and resignations, the Company recognized severance expense of $9.1 million during the year ended December 31, 2014, of which $2.9 million is included in loss from discontinued operations and $6.2 million is included in operating expenses in the consolidated statements of operations and comprehensive income (loss). Severance expense included $2.7 million for the acceleration of the vesting conditions of restricted shares. As of December 31, 2014, there was $5.7 million included in accounts payable and accrued expenses in the consolidated balance sheet of which $4.3 million and $1.4 million is expected to be paid in 2015 and 2016, respectively.

 

CB Portfolio Acquisition

 

In February 2013, we entered into purchase and sale agreements to acquire an approximate 48.0% interest in a portfolio of 35 student housing properties, one undeveloped land parcel and a corporate office building held by the members of Copper Beech Townhome Communities, LLC ("CBTC") and Copper Beech Townhome Communities (PA), LLC ("CBTC PA," together with CBTC, "Copper Beech" or the "Sellers") (the “CB Portfolio”), and a fully integrated platform and brand with management, development and construction teams, for an initial purchase price of approximately $230.2 million, including the repayment of $106.7 million of debt. The remaining interests in the CB Portfolio are held by certain of the former members of CBTC and CBTC PA, (the “CB Investors”). Pursuant to our 48.0% interest in the CB Portfolio, we entered into a purchase and sale agreement (the “Purchase Agreement”), and related transactions, with the members of CBTC and CBTC PA, to acquire in steps a 36.3% interest in the CB Portfolio. We also entered into a purchase and sale agreement with certain investors in the CB Portfolio who are not members of Copper Beech (the “Non-Member Investors”) to acquire the interests in the CB Portfolio held by such Non-Member Investors (the “Non-Member Purchase Agreement”). Pursuant to the Non-Member Purchase Agreement, we acquired approximately an 11.7% interest in the CB Portfolio from the Non-Member Investors. We refer to this transaction as the “CB Portfolio Acquisition.”

 

Our $230.2 million investment in the CB Portfolio entitled us to a preferred payment of $13.0 million for the first year of our investment and 48.0% of remaining operating cash flows. In connection with the CB Portfolio Acquisition we loaned approximately $31.7 million to the CB Investors. The loan had an interest rate of 8.5% per annum and a term of three years, and was secured by the CB Investors’ interests in six unencumbered properties in the CB Portfolio. This amount was repaid by year ended December 31, 2013. See below for further discussion.

 

We recognized approximately $1.6 million and $3.8 million in equity in losses of Copper Beech as well as no interest income and approximately $1.4 million interest income from the loan to the CB Investors for the years ended December 31, 2014 and December 31, 2013, respectively. Additionally, we recognized approximately $3.0 million and $1.1 million of transaction expenses related to the CB Portfolio Acquisition and incurred $4.0 million and $16.9 million of costs which were included in our investment basis in Copper Beech for the years ended December 31, 2014 and December 31, 2013, respectively.

 

On January 30, 2015, we and certain of our affiliates completed the acquisition (the “Initial Closing”) of (i) the Sellers’ remaining interests in the CB Portfolio and (ii) the Sellers’ remaining interests in Copper Beech at Ames, Iowa, pursuant to that certain Amendment (the “Second Amendment”) to the Purchase Agreement with the Sellers.

 

Pursuant to the terms of the Second Amendment, we agreed to acquire the Sellers’ remaining interests in each of the properties comprising the CB Portfolio other than Copper Beech Kalamazoo Phase 1, Copper Beech Kalamazoo Phase 2, Copper Beech Morgantown, Copper Beech Harrisonburg, Copper Beech Greenville and Copper Beech Parkway Plaza. Following the consummation of the Initial Closing, we hold a 100% interest in 27 of the properties in the CB Portfolio including one land parcel and a corporate office, an 85% interest in one property in the CB Portfolio, an 86% interest in one property in the CB Portfolio and a 48% interest in 4 of the properties in the CB Portfolio and have no ownership interests in 2 of the properties in the CB Portfolio and have a 100% interest in Copper Beech at Ames, Iowa. We expect to complete the acquisition of the Sellers’ interests in the remaining 2 properties in the CB Portfolio – Copper Beech San Marcos Phase 1 and Copper Beech IUP Buy – at such time as we obtain the requisite lender consents. We currently expect to obtain all such consents and to complete the acquisition of Copper Beech San Marcos Phase 1 and Copper Beech IUP Buy on or before the end of the first quarter of 2015 (the date of completion of such acquisition is referred to herein as the “Second Closing Date”).

 

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As consideration for the additional interests acquired in the Initial Closing, we paid to the Sellers aggregate cash consideration of approximately $58.9 million and the Operating Partnership issued to the Sellers an aggregate of approximately 10.4 million limited partnership units of the Operating Partnership (“OP units”). The remaining consideration pursuant to the Second Amendment, consisting of approximately $1.4 million in cash and approximately 2.0 million in OP units, will be payable to the Sellers on the Second Closing Date.

 

The following table presents certain summary information about the properties in the CB Portfolio:

 

Copper Beech Properties  Primary University  Units   Beds 
Copper Beech I—State College  Penn State University   59    177 
Copper Beech II—State College  Penn State University   87    257 
Oakwood—State College  Penn State University   48    144 
Northbrook Greens—State College  Penn State University   166    250 
Parkway Plaza—State College  Penn State University   429    633 
IUP Phase I—Indiana  Indiana University of Pennsylvania   95    239 
IUP Phase II—Indiana  Indiana University of Pennsylvania   72    172 
IUP Buy—Indiana  Indiana University of Pennsylvania   43    76 
Radford, VA  Radford University   222    500 
Klondike—Purdue  Purdue University   219    486 
Baywater—Purdue  Purdue University   137    488 
Bloomington, IN  Indiana University   107    297 
CMU Phase I—Mount Pleasant, MI  Central Michigan University   204    632 
Fresno, CA  California State University at Fresno   178    506 
Bowling Green Phase I  Bowling Green University   128    400 
Bowling Green Phase II  Bowling Green University   72    216 
Allendale Phase I  Grand Valley State University   206    614 
Allendale Phase II  Grand Valley State University   82    290 
Columbia, MO  University  of Missouri   214    654 
Colonial Crest—Bloomington, IN  Indiana University   206    402 
Columbia, SC Phase I  University of South Carolina   278    824 
Columbia, SC Phase II  University of South Carolina   72    178 
Morgantown, WV  West Virginia University   335    920 
Harrisonburg, VA  James Madison University   414    1,218 
Grand Duke  James Madison University   120    124 
Greenville, NC  East Carolina University   439    1,232 
San Marcos, TX Phase I  Texas State University   273    840 
San Marcos, TX Phase II  Texas State University   142    410 
Oak Hill—State College  Penn State University   106    318 
CMU Phase II—Mount Pleasant, MI  Central Michigan University   119    256 
Statesboro, GA Phase I  Georgia Southern University   246    754 
Statesboro, GA Phase II  Georgia Southern University   82    262 
Kalamazoo Phase I  Western Michigan University   256    784 
Kalamazoo Phase II  Western Michigan University   115    340 
Auburn, AL  Auburn University   271    754 
              
Total - Copper Beech Properties      6,242    16,647 

 

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Our Relationship with HSRE

 

We are a party to active joint venture arrangements with HSRE, a real estate private equity firm founded in 2005 that has significant real estate asset holdings, including student housing properties, senior housing/assisted living units, self-storage units, boat storage facilities and medical office space. As of December 31, 2014, we held 12 operating joint venture properties with HSRE, including one joint venture property where we are partners with both HSRE and Brandywine.

 

HSRE I. Our first joint venture with HSRE, HSRE-Campus Crest I, LLC ("HSRE I"), indirectly owned 100% of the interests in the following three properties at December 31, 2014: The Grove at Conway, Arkansas, The Grove at Lawrence, Kansas, and The Grove at San Angelo, Texas. On July 5, 2012, we completed the purchase of HSRE's 50.1% interest in The Grove at Moscow, Idaho, which was included in HSRE I prior to that date. On December 29, 2011, we completed the purchase of HSRE's 50.1% interests in The Grove at Huntsville, Texas and The Grove at Statesboro, Georgia, which were included in HSRE I prior to that date. At December 31, 2014, we owned a 63.9% interest in HSRE I and HSRE owned the remaining 36.1%. At December 31, 2014, we are entitled to 50% of the net proceeds from a sale of a property owned by HSRE I. During the year ended December 31, 2014, we recorded an other than temporary impairment on our investment in HSRE I. See Note 4 to the consolidated financial statements regarding our write-down of the carrying value of our investment to fair value.

 

In general, we are responsible for the day-to-day management of HSRE I’s business and affairs, provided that major decisions must be approved by us and HSRE. In addition to distributions to which we are entitled as an investor in HSRE I, we receive or have in the past received fees for providing services to the properties held by HSRE I pursuant to development and construction agreements and property management agreements. We granted to an entity related to HSRE I a right of first opportunity with respect to certain development or acquisition opportunities identified by us. This right of first opportunity was to terminate at such time as HSRE had provided at least $40 million of equity funding to HSRE I and/or certain related ventures. This right of first opportunity was amended in conjunction with the formation of HSRE IV as discussed below. HSRE I will dissolve upon the disposition of substantially all of its assets or the occurrence of certain events specified in the agreement between us and HSRE.

 

HSRE IV. In January 2011, we entered into a joint venture with HSRE, HSRE-Campus Crest IV, LLC ("HSRE IV") to develop and operate additional purpose-built student housing properties. HSRE IV completed two new student housing properties in August 2011 for the 2011-2012 academic year. The properties, located in Denton, Texas, and Valdosta, Georgia, contain an aggregate of approximately 1,168 beds and cost approximately $45.7 million. We owned a 20.0% interest in this venture and affiliates of HSRE own the balance. On July 5, 2012, we completed the purchase of HSRE's 80% interest in The Grove at Valdosta, which was included in HSRE IV prior to that date. In January 2014, we completed the purchase of HSRE’s 80% interest in The Grove at Denton, Texas, which was included in HSRE IV prior to that date. Following the sale of The Grove at Denton, HSRE IV was dissolved.

 

HSRE V. In October 2011, we entered into a joint venture with HSRE, HSRE-Campus Crest V, LLC ("HSRE V"), to develop and operate additional purpose-built student housing properties. HSRE V completed three new student housing properties in August 2012 for the 2012-2013 academic year. The properties, located in Fayetteville, Arkansas, Laramie, Wyoming, and Stillwater, Oklahoma, contain an aggregate of approximately 1,856 beds and cost approximately $72.1 million. We own a 10% interest in this venture and affiliates of HSRE own the balance. During the year ended December 31, 2014, we recorded an other than temporary impairment on our investment in HSRE V. See Note 4 to the consolidated financial statements regarding our write-down of the carrying value of our investment to fair value.

 

HSRE VI. In March 2012, we entered into a joint venture with HSRE, HSRE-Campus Crest VI, LLC ("HSRE VI"), to develop and operate additional purpose-built student housing properties. HSRE VI completed three new student housing properties in August 2013 for the 2013-2014 academic year. The properties, located in Norman, Oklahoma, State College, Pennsylvania and Indiana, Pennsylvania, contain an aggregate of approximately 1,784 beds and cost approximately $83.3 million. We own a 20.0% interest in this venture and affiliates of HSRE own the balance. During the year ended December 31, 2014, we recorded an other than temporary impairment on our investment in HSRE VI. See Note 4 to the consolidated financial statements regarding our write-down of the carrying value of our investment to fair value.

 

HSRE IX. In January 2013, we entered into a joint venture with HSRE and Brandywine, HSRE-Campus Crest IX, LLC ("HSRE IX"), to develop and operate additional purpose-built student housing properties. HSRE IX has completed one new student housing property, evo® at Cira Centre South. The property, located in the University City submarket of Philadelphia, Pennsylvania, contains approximately 850 beds and cost approximately $158.5 million. We own a 30.0% interest in this venture, Brandywine owns 30.0% and affiliates of HSRE own the balance.

 

In general, we, along with Brandywine, are responsible for the day-to-day management of HSRE IX’s business and affairs, provided that major decisions (including deciding to pursue a particular development opportunity) must be approved by us, HSRE, and Brandywine. In addition to distributions to which we are entitled as an investor in HSRE IX, we, along with Brandywine, will receive fees for providing services to HSRE IX pursuant the property management agreement. In general, we, along with Brandywine, will earn management fees equal to approximately 3.0% of the gross revenues and 3.0% of the net operating income of operating properties held by HSRE IX.

 

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HSRE X. In March 2013, we entered into a joint venture agreement with HSRE, HSRE-Campus Crest X, LLC ("HSRE X"), to develop and operate additional purpose-built student housing properties. HSRE X has completed two new student housing properties, The Grove at Louisville, Kentucky and The Grove at Greensboro, North Carolina. The properties, located in Louisville, Kentucky and Greensboro, North Carolina contain an aggregate of approximately 1,240 beds and cost approximately $69.1 million. We own a 30.0% interest in this joint venture and affiliates of HSRE own the balance. During the year ended December 31, 2014, we recorded an other than temporary impairment on our investment in HSRE X. See Note 4 to the consolidated financial statements regarding our write-down of the carrying value of our investment to fair value.

 

In general, we are responsible for the day-to-day management of HSRE I’s, HSRE V’s, HSRE VI's, and HSRE X’s business and affairs, provided that major decisions (including deciding to pursue a particular development opportunity) must be approved by us and HSRE. In addition to distributions to which we are entitled as an investor in HSRE I, HSRE V, HSRE VI and HSRE X, we will receive fees for providing services to HSRE I, HSRE V, HSRE VI and HSRE X, pursuant to property management agreements. In general, we will earn management fees equal to approximately 3.0% of the gross revenues and 3.0% of the net operating income of operating properties held by HSRE I, HSRE V, HSRE VI, and HSRE X.

 

We amended HSRE’s right of first opportunity, originally granted with respect to HSRE I, to develop all future student housing development opportunities identified by us that are funded in part with equity investments by parties unaffiliated with us, until such time as affiliates of HSRE have invested an aggregate $50 million in HSRE IV, HSRE V, HSRE VI, HSRE IX, and HSRE X or caused HSRE IV, HSRE V, HSRE VI, HSRE IX, and HSRE X to decline three development opportunities in any calendar year. As of December 31, 2014, HSRE had funded approximately all of the $50 million right of first opportunity. The terms of this joint venture do not prohibit us from developing a wholly-owned student housing property for our own account.

 

Our Relationship with Beaumont

 

In July 2013, we entered into a joint venture, DCV Holdings, LP (“DCV Holdings”) with Beaumont Partners SA (“Beaumont”) to acquire a 711 room, 33-story hotel in downtown Montreal, Quebec, Canada, for approximately CAD 51.0 million ($44.9 million). During 2014, the joint venture converted the property into an upscale student housing tower featuring a mix of single and double units serving McGill University, Concordia University and L’Ecole de Technologie for the 2014-2015 academic year.

 

In December 2013, the joint venture partnership formed a holding company, CSH Montreal LP (“CSH Montreal”). With regard to CSH Montreal, we are a limited partner with no general partner representation and limited control rights. DCV Holdings was subsequently contributed to CSH Montreal, such that CSH Montreal became the sole limited partner in DCV Holdings. In addition, following the insertion of CSH Montreal as the holding company in the joint venture arrangement, CSH Montreal acquired ownership of HIM Holdings LP (“HIM Holdings”), an entity formed to facilitate the acquisition of another property in Canada.

 

On January 15, 2014, through the newly formed HIM Holdings, the joint venture partnership acquired the 488-room, 22-story Holiday Inn Midtown in Montréal, Québec for approximately CAD 65 million ($56.1 million). During 2014, the joint venture converted the property into an upscale evo® student housing tower near McGill University. In connection with the acquisition of the Holiday Inn property, we increased our ownership interest from 20.0% to 47.0% in CSH Montreal, the joint venture that holds the newest evo® and the previously announced evo® à Square Victoria. In connection with our investment in CSH Montreal, we guarantee up to 50% of the outstanding balance of the acquisition and development credit facility (“CSH Montreal Debt”) of CAD 112.0 million ($96.8 million) at December 31, 2014 exchange rate. As of December 31, 2014, the outstanding balance of the CSH Montreal Debt was CAD 101.8 million ($88.0 million) at December 31, 2014 exchange rate, of which we guaranteed CAD 50.9 ($44.0 million) at December 31, 2014 exchange rate. The term of the guarantee follows the term of the underlying debt, which matures on January 13, 2016, unless the twelve month extension, which is subject to lender approval, is exercised. The CSH Montreal debt is secured by, among other things, a first mortgage position on the real estate and improvements owned by CSH Montreal.

 

In January 2014, with the acquisition of the Holiday Inn Midtown property, we provided CAD 16.0 million ($13.8 million) of preferred bridge equity financing to CSH Montreal to be repaid to us on or before September 2, 2014. As of September 2, 2014, our preferred equity had not been repaid in full and, as a result, we are now entitled to 60.54% of all cash distributions from CSH Montreal with Beaumont and its partners being entitled to the remaining 39.46%. We currently retain an ownership interest of 47.0% in CSH Montreal and, as such, are responsible for funding only 47.0% of operating losses.

 

The occupancy levels and rental rates for the CSH Montreal properties for the year ended December 31, 2014, were significantly below our expectations when we entered into this joint venture and acquired the joint venture properties. We have determined that the initial performance results indicate that there has been a permanent impairment to our investment in this joint venture. As a result, during the year ended December 31, 2014, we recorded an other than temporary impairment on our investment in CSH Montreal. See Note 4 to the consolidated financial statements.

 

Critical Accounting Policies

 

Set forth below is a summary of the accounting policies that management believes are critical to the preparation of the consolidated financial statements. Certain of these accounting policies are particularly important for an understanding of the financial position and results of operations presented in the consolidated financial statements set forth elsewhere in this report. These policies require the application of judgment and assumptions by management and, as a result, are subject to a degree of uncertainty. Actual results could differ as a result of such judgment and assumptions.

 

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Our consolidated financial statements include the accounts of all investments, which include joint ventures in which we have a controlling interest and our consolidated subsidiaries. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in our historical consolidated financial statements and related notes. In preparing these financial statements, management has utilized all available information, including its past history, industry standards and the current economic environment, among other factors, in forming its estimates and judgments of certain amounts included in the historical consolidated financial statements, giving due consideration to materiality. Our estimates may not be ultimately realized. Application of the critical accounting policies below involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results may differ from these estimates. In addition, other companies in similar businesses may utilize different estimation policies and methodologies, which may impact the comparability of our results of operations and financial condition to those companies.

 

Valuation of Investment in Real Estate

 

Investment in real estate is recorded at historical cost. Pre-development expenditures include items such as entitlement costs, architectural fees and deposits associated with the pursuit of partially-owned and wholly-owned development projects. These costs are capitalized until such time that management believes it is no longer probable that a contract will be executed and/or construction will commence. Management evaluates the status of projects where we have not yet acquired the target property or where we have not yet commenced construction on a periodic basis and writes off any pre-development costs related to projects whose current status indicates the commencement of construction is not probable. Such write-offs are included within discontinued operations for 2013 and 2012, and in a separate line for 2014 in the accompanying consolidated statements of operations.

 

Management assesses whether there has been impairment in the value of our investment in real estate whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of investment in real estate is assessed by a comparison of the carrying amount of a student housing property to the estimated future undiscounted cash flows expected to be generated by the property. Impairment is recognized when estimated future undiscounted cash flows are less than the carrying value of the property. The estimation of expected future undiscounted cash flows is inherently uncertain and relies on assumptions regarding current and future economics and market conditions. If such conditions change, then an adjustment reducing the carrying value of our long-lived assets could occur in the future period in which conditions change. To the extent that a property is impaired, the excess of the carrying amount of the property over its estimated fair value is charged to operating earnings. Fair value is determined based upon the discounted cash flows of the property, quoted market prices or independent appraisals, as considered necessary.

 

Investment in Unconsolidated Entities

 

Under the equity method, investments in unconsolidated entities are initially recognized in the balance sheet at cost and are subsequently adjusted to reflect our proportionate share of net earnings or losses of the entity, distributions received, contributions and certain other adjustments, as appropriate. Any difference between the carrying amount of these investments on our balance sheet and the underlying equity in net assets is amortized as an adjustment to equity in earnings (loss) of unconsolidated entities. When circumstances indicate there may have been a loss in value of an equity method investment, and we determine the loss in value is other than temporary, we recognize an impairment charge to reflect the investment at fair value.

 

During the year ended December 31, 2014, we recorded an other than temporary impairment of $57.8 million in the consolidated statement of operations and comprehensive income (loss) for certain unconsolidated entities, including $31.3 million related to HSRE I, HSRE V, HSRE VI and HSRE X (the “HSRE Investments”) and $26.5 million related to the investment in CSH Montreal. Factors giving rise to the strategic repositioning including results below expectations in original underwriting transactions as well as communication from the venture partner about their desire to dispose of certain properties in the HSRE Investments in the near term, resulted in our determination that an other than temporary impairment existed during the year ended December 31, 2014. After the impairments were recorded, the carrying values of our HSRE investments and investment in CSH Montreal were $15.1 million and $6.9, respectively. We engaged third-party specialists to assist us with our valuation of certain of the underlying properties in the HSRE Investments. An income approach was used to determine the fair value of our HSRE Investments. Inputs and assumptions included in the determination of fair value included our expectation of projected net operating income to be earned and capital expenditures to be incurred at the underlying properties and capitalization rates ranging between 5.9% and 8.5%. The capitalization rates were determined based on the marketability of each of the properties and the extent to which the operations of the property has stabilized.

 

For our investment in CSH Montreal, we used a discounted cash flow valuation technique to estimate the fair value of the Company’s investment. The discounted cash flows take into consideration current occupancy levels with revenue per available bed increasing in conjunction with occupancies growing up to 92% over a four year period, an expected exit value based on a 7.25% capitalization rate, and a 9.25% discount rate. The discount rate includes the Company’s belief that the properties have not stabilized yet, given the occupancy levels of the properties owned by CSH Montreal during its first year of operations. These valuation techniques involve Level 3 inputs in the fair value hierarchy, and the Company believes that the highest and best use of these properties continues to be for student housing.

 

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The information above is provided to allow transparency into the assumptions used to calculate our impairment of unconsolidated entities. There is a significant level of subjectivity and judgment necessary to account for highly uncertain matters and there is susceptibility of such assumptions not being realized. The impact of these estimates and assumptions not being met would result in a material impact to our consolidated results of operations. In connection with the HSRE investments, for every one percent change in net operating income and for every 10 basis point change in the capitalization rate, the impairment would change by $1.0 million and $1.1 million, respectively, should the result of certain key assumptions be different than those used in the impairment calculations. In connection with our investment in CSH Montreal, for every one percent change in net operating income, the impairment would change by an immaterial amount. For every 10 basis point change in the capitalization rate, the impairment would change by $2.1 million.

 

Discontinued Development and Construction Services

 

During the year ended December 31, 2014, we discontinued all construction and development activities. Development and construction service revenue is recognized using the percentage of completion method, as determined by construction costs incurred relative to total estimated construction costs. Any changes in significant judgments and/or estimates used in determining construction and development revenue could significantly change the timing or amount of construction and development revenue recognized.

 

Development and construction service revenues are recognized for contracts with entities we do not consolidate. For projects where revenue is based on a fixed price, any cost overruns incurred during construction, as compared to the original budget, will reduce the net profit ultimately recognized on those projects. Profit derived from these projects is eliminated to the extent of our interest in the unconsolidated entity. Any incentive fees, net of the impact of our ownership interest, are recognized when the project is complete and performance has been agreed upon by all parties, or when performance has been verified by an independent third party. When total development or construction costs at completion exceed the fixed price set forth within the related contract, such cost overruns are recorded as additional investment in the unconsolidated entity to the extent these amounts are determined to be realizable. Entitlement fees, where applicable, are recognized when earned based on the terms of the related contract.

 

Property Management Services

 

In addition to our wholly-owned properties, all but one of which are managed by us, we also provide management services to unconsolidated joint ventures in which we have an ownership interest. We recognize management fees from these entities as earned in accordance with the property management agreement with these entities, as adjusted to eliminate our proportionate ownership of each entity.

 

We have set forth a discussion comparing our consolidated results for the year ended December 31, 2014 to the consolidated results of our operations for the year ended December 31, 2013. Additionally, we have set forth a discussion comparing our consolidated results for year ended December 31, 2013 to the consolidated results for the year ended December 31, 2012. The historical results of operations presented below should be reviewed in conjunction with the notes to the consolidated financial statements accompanying this report.

 

Allowance for Doubtful Accounts

 

Allowances for student receivables are established when management determines that collections of such receivables are doubtful. Balances are considered past due when payment is not received on the contractual due date. When management has determined receivables are uncollectible, they are written off against the allowance for doubtful accounts.

 

Fair Value of Financial Instruments

 

The carrying value of cash, cash equivalents, restricted cash, student receivables and accounts payable are representative of their respective fair values due to the short-term nature of these instruments. The estimated fair value of our revolving line of credit approximates the outstanding balance due to the frequent market based re-pricing of the underlying variable rate index. The estimated fair values of mortgages and construction loans are determined by comparing current borrowing rates and risk spreads offered in the market to the stated interest rates and spreads on our current mortgages, construction loans, and Exchangeable Senior Notes.

 

Fair value guidance for financial assets and liabilities that are recognized and disclosed in the consolidated financial statements on a recurring basis and nonfinancial assets on a nonrecurring basis establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:

 

 Level 1 - Observable inputs, such as quoted prices in active markets at the measurement date for identical, unrestricted assets or liabilities.

 

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Level 2 - Other inputs that are observable directly or indirectly, such as quoted prices in markets that are not active or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability.

 

Level 3 - Unobservable inputs for which there is little or no market data and which we make our own assumptions about how market participants would price the asset or liability.

 

Fair value is defined as the price that would be received when selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). In instances where inputs used to measure fair value fall into different levels of the fair value hierarchy, the level in the fair value hierarchy within which the fair value measurement in its entirety has been determined is based on the lowest level input significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

 

Income Taxes

 

We have made an election to qualify, and believe we are operating so as to qualify, as a REIT under Sections 856 through 859 of the Internal Revenue Code. Our qualification as a REIT depends upon our ability to meet on a continuing basis, through actual investment and operating results, various complex requirements under the Internal Revenue Code relating to, among other things, the sources of our gross income, the composition and values of our assets, our distribution levels and the diversity of ownership of our stock. We believe that we are organized in conformity with the requirements for qualification and taxation as a REIT under the Internal Revenue Code and that our intended manner of operation will enable us to meet the requirements for qualification and taxation as a REIT.

 

As a REIT, we generally will not be subject to U.S. federal and state income tax on taxable income that we distribute currently to our stockholders. If we fail to qualify as a REIT in any taxable year and do not qualify for certain statutory relief provisions, we will be subject to U.S. federal income tax at regular corporate rates and generally will be precluded from qualifying as a REIT for the subsequent four taxable years following the year during which we lost our REIT qualification. Accordingly, our failure to qualify as a REIT could materially and adversely affect us, including our ability to make distributions to our stockholders in the future.

 

We have made the election to treat TRS Holdings, our wholly-owned subsidiary as a TRS. TRS Holdings holds our management companies that provide services to entities in which we do not own 100% of the equity interests. As a TRS, the operations of TRS Holdings and its subsidiaries are generally subject to federal, state and local income and franchise taxes. Our TRS accounts for its income taxes in accordance with U.S. GAAP, which includes an estimate of the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in our financial statements or tax returns. Deferred tax assets and liabilities of the TRS entities are recognized based on the difference between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates in effect in the years in which those temporary differences are expected to reverse.

 

We follow a two-step approach for evaluating uncertain tax positions. Recognition (step one) occurs when we conclude that a tax position, based solely on its technical merits, is more-likely-than-not (a likelihood of more than 50 percent) to be sustained upon examination. Measurement (step two) determines the amount of benefit that more-likely-than-not will be realized upon settlement. Derecognition of a tax position that was previously recognized would occur when we subsequently determined that a tax position no longer met the more-likely-than-not threshold of being sustained. The use of a valuation allowance as a substitute for derecognition of tax positions is prohibited.

 

Property Acquisitions

 

We allocate the purchase price of acquired properties to net tangible and identified intangible assets based on relative fair values. Fair value estimates are based on information obtained from independent appraisals, other market data, information obtained during due diligence and information related to the marketing and leasing at the specific property. The value of in-place leases is based on the difference between (i) the property valued with existing in-place leases adjusted to market rental rates and (ii) the property valued "as-if" vacant. As lease terms are typically one year or less, rates on in-place leases generally approximate market rental rates. Factors considered in the valuation of in-place leases include an estimate of the carrying costs during the expected lease-up period considering current market conditions, nature of the tenancy and costs to execute similar leases. Carrying costs include estimates of lost rentals at market rates during the expected lease-up period, net of variable operating expenses. The value of in-place leases is amortized over the remaining initial term of the respective leases, generally less than one year. The purchase price of property acquisitions is not expected to be allocated to tenant relationships, considering the terms of the leases and the expected levels of renewals. Acquisition-related costs such as due diligence, legal and accounting fees are expensed as incurred and not applied in determining the fair value of an acquired property.

 

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Changes in Financial Condition

 

In January 2013, we entered into the second amended and restated credit agreement (the "Second Amended and Restated Credit Agreement"), which provides for a $250 million senior unsecured revolving credit facility (the "Revolving Credit Facility"), a $50 million term loan (the “Term Loan”, together with the “Revolving Credit Facility”, the “Amended Credit Facility”), and an accordion feature that allows us, under certain circumstances, to request an increase in the total commitments by an additional $300.0 million, increasing total commitments to $600.0 million. The Second Amended and Restated Credit Facility will mature in January 2017 and contains a one-year extension option, subject to certain terms and conditions. For additional information regarding the Amended Credit Facility, please refer to "Liquidity and Capital Resources—Principal Capital Resources" below.

 

In March 2013, we completed an underwritten public offering of approximately 25.5 million shares of common stock, including approximately 3.3 million shares issued and sold pursuant to the full exercise of the underwriters’ option to purchase additional shares, resulting in net proceeds of approximately $299.7 million. The net proceeds were used: (1) to fund our investment in the CB Portfolio and related transactional costs, including investment banking advisory fees (see Note 6 to the accompanying consolidated financial statements); and (2) for general corporate purposes, including the repayment of debt.

 

In June 2013, we implemented an At-The-Market offering program under which we may sell at market price up to $100.0 million in shares of our common stock over the term of the program. As of December 31, 2014, we had not issued and sold any shares under this program.

 

In October 2013, we reopened our Series A Preferred Stock in an underwritten public offering of 3,800,000 shares, including 400,000 shares issued and sold pursuant to the partial exercise of the underwriters’ option to purchase additional shares of the Series A Preferred Stock. The shares of Series A Preferred Stock were issued at a public offering price of $25.0611 per share, for net proceeds of approximately $91.3 million, after deducting the underwriting discount and other estimated offering expenses of approximately $4.0 million. We used the net proceeds, as well as the net proceeds from our issuance of Exchangeable Senior Notes (defined below), to repay approximately $46.8 million of indebtedness outstanding under three construction loans, to repay amounts owed under the Amended Credit Facility and for general corporate purposes.

 

In October 2013, the Operating Partnership completed a private offering of $100.0 million of unsecured 4.75% exchangeable senior notes (the "Exchangeable Senior Notes") due October 15, 2018. Interest on the Exchangeable Senior Notes is payable semi-annually on April 15 and October 15, beginning April 15, 2014. Upon exchange of the notes, the Operating Partnership will deliver cash, shares of Campus Crest common stock, or a combination of both at an initial exchange rate of 79.6020 shares per $1,000 principal amount of Exchangeable Senior Notes (equivalent to an initial exchange price of approximately $12.56 per share of our common stock). The Exchangeable Senior Notes may not be redeemed prior to the maturity date. At any time prior to July 15, 2018, the Operating Partnership may irrevocably elect, in its sole discretion without the consent of the holders of the notes, to settle all of its future exchange obligation entirely in shares of our common stock. The Exchangeable Senior Notes rank equally in right of payment to all other unsecured debt and are subordinated in right of payment to all secured debt, liabilities, and preferred equity of our subsidiaries.

 

We used the net proceeds from the reopening of the Series A Preferred Stock and the Exchangeable Senior Notes offerings for the repayment of debt, development funding and working capital purposes.

 

REIT Qualification Requirements

 

We have elected to be treated as a REIT under Sections 856 through 859 of the Internal Revenue Code. Our continued qualification as a REIT depends upon our ability to meet on a continuing basis, through actual investment and operating results, various complex requirements under the Internal Revenue Code relating to, among other things, the sources of our gross income, the composition and values of our assets, our distribution levels and the diversity of ownership of our stock. We believe that our intended manner of operation will enable us to meet the requirements for qualification and taxation as a REIT. As a REIT, we generally will not be subject to U.S. federal income tax on taxable income that we distribute currently to our stockholders.

 

Factors Expected to Affect Our Operating Results

 

Unique Leasing Characteristics

 

Student housing properties are typically leased by the bed on an individual lease liability basis, unlike multi-family housing where leasing is by the unit. Individual lease liability limits each student-tenant’s liability to his or her own rent without liability for a roommate’s rent. A parent or guardian is required to execute each lease as a guarantor unless the student-tenant provides adequate proof of income. The number of lease contracts that we administer is therefore equivalent to the number of beds occupied rather than the number of units.

 

Due to our predominantly private bedroom accommodations, the high level of student-oriented amenities offered at our properties and the individual lease liability for our student-tenants and their parents, we believe that we typically command higher per-unit and per-square foot rental rates than many multi-family properties located in the markets in which we operate. We are also typically able to charge higher rental rates than on-campus student housing, which generally offers fewer amenities.

 

Unlike traditional multi-family housing, most of our leases commence on the same date. In the case of our typical 11.5-month leases (which provide for 12 equal monthly payments), this date coincides with the commencement of the fall academic term and typically terminates at the completion of the last summer school session. As such, we must re-lease each property in its entirety each year, resulting in significant turnover in our tenant population from year to year. As a result, we are highly dependent upon the effectiveness of our marketing and leasing efforts during the annual leasing season, which typically begins each October and ends in September of the following year. As of the start of the fall term for the 2014-2015 and 2013-2014 academic years, we had approximately 37.6% and 41.7%, respectively; of our current tenants renew their lease for the upcoming academic year.

 

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Results of Operations

 

Our Business Segments

 

We define business segments by their distinct customer base and services provided. We have identified two reportable business segments: (i) student housing operations and (ii) property management services. All construction and development activities are reported in discontinued operations at December 31, 2014. Management evaluates each segment’s performance by reference to net operating income (“NOI”), which we define as operating income before depreciation and amortization. The accounting policies of our reportable business segments are described in more detail in the summary of significant accounting policies footnote (Note 2) to our consolidated financial statements. Intercompany fees are reflected at the contractually stipulated amounts, as adjusted to reflect our proportionate ownership of unconsolidated entities.

 

Student Housing Operations

 

Our student housing operations are comprised of rental and other service revenues, such as application fees, pet fees and late payment fees. In 2014, we opened four wholly-owned properties and an additional six properties that are owned in a real estate ventures in which we have a noncontrolling interest.

 

Due to the continuous opening of new properties in consecutive years and annual lease terms that do not coincide with our reported fiscal (calendar) years, the comparison of our consolidated financial results from period to period may not provide a meaningful measure of our operating performance. For this reason, we divide the results of operations in our student housing operations segment between new property operations and "same-store" operations, which we believe provides a more meaningful indicator of comparative historical performance.

 

"Same store" properties are our wholly-owned operating properties acquired or placed in-service prior to the beginning of the earliest period presented and owned by us and remaining in service through the end of the latest period presented or period being analyzed. "New properties" are our wholly-owned operating properties that we acquired or placed in service after the beginning of the earliest period presented or period being analyzed.

 

We monitor NOI of our student housing properties, which is a non-GAAP financial measure. In general terms, we define NOI as student housing rental revenue less student housing operating expenses including real estate taxes related to our properties. We believe this measure provides an operating perspective not immediately apparent from GAAP operating income (loss) or net income (loss). We use NOI to evaluate performance on a community-by-community basis because it allows management to evaluate the impact that factors such as lease structure, lease rates and tenant base, which vary by locality, have on our financial performance.

 

We specifically calculate NOI by adding back to (or subtracting from) net income (loss) attributable to common stockholders the following expenses or charges: income tax expense, other expense, interest expense, equity in loss of unconsolidated entities, depreciation and amortization, ground lease expense, general and administrative expense, property management services expenses and other non-recurring costs or expenses. The following income or gains are then deducted from net income (loss) attributable to common stockholders, adjusted for add backs of expenses or charges: other income, property management services revenues and non-recurring income or gains.

 

NOI excludes multiple components of net income (loss) attributable to common stockholders (computed in accordance with GAAP) and captures neither the changes in the value of our properties that result from use or market conditions nor the level of capital expenditures necessary to maintain the operating performance of our properties, all of which have real economic effects and could materially and adversely impact our results of operations. Therefore, the utility of NOI as a measure of our performance is limited. Additionally, other companies, including other equity REITs, may use different methodologies for calculating NOI and, accordingly, NOI as disclosed by such other companies may not be comparable to NOI published herein. We believe that in order to facilitate a clear understanding of our historical operating results, NOI should be examined in conjunction with net income (loss) as presented in the consolidated financial statements accompanying this report. NOI should not be considered as an alternative to net income (loss) attributable to common stockholders as an indicator of our properties’ financial performance or to cash flow from operating activities (computed in accordance with GAAP) as an indicator of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends or make distribution.

 

Management Services

 

In addition to our wholly-owned properties, all but one of which are managed by us, we also provide management services to unconsolidated joint ventures in which we have an ownership interest. We recognize management fees from these entities as earned in accordance with the property management agreement with these entities, as adjusted to eliminate our proportionate ownership of each entity.

 

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We have set forth a discussion comparing our consolidated results for the year ended December 31, 2014 to the consolidated results of our operations for the year ended December 31, 2013. Additionally, we have set forth a discussion comparing our consolidated results for year ended December 31, 2013 to the consolidated results for the year ended December 31, 2012. The historical results of operations presented below should be reviewed in conjunction with the notes to the consolidated financial statements accompanying this report.

 

Comparison of Years Ended December 31, 2014 and December 31, 2013

 

As of December 31, 2014, our property portfolio consisted of 37 consolidated operating properties, containing approximately 7,520 apartment units and 20,580 beds, and 49 operating properties held in seven unconsolidated joint ventures, containing approximately 10,130 apartment units and 26,110 beds. Four consolidated operating properties have been presented in discontinued operations.

 

As of December 31, 2013, our property portfolio consisted of 31 consolidated operating properties, containing approximately 6,065 apartment units and 16,570 beds, and 38 operating properties held in five unconsolidated joint ventures, containing approximately 7,135 apartment units and 18,910 beds. Four consolidated operating properties have been presented in discontinued operations.

 

The following table presents our results of operations for the periods presented, including the amount and percentage change in these results between the periods (in thousands):

 

   Year Ended December 31,         
   2014   2013   Change ($)   Change (%) 
Revenues:                    
Student housing rental  $101,724   $87,635    14,089    16.1%
Student housing services   3,768    3,615    153    4.2%
Property management services   1,249    820    429    52.3%
                     
Total revenues   106,741    92,070    14,671    15.9%
Operating expenses:                    
Student housing operations   47,154    40,726    6,428    15.8%
General and administrative   14,303    10,658    3,645    34.2%
Severance   6,159    -    6,159    N/A 
Impairment of land and pre-development costs   31,927    -    31,927    N/A 
Write-off of corporate other assets   15,110    -    15,110    N/A 
Transaction costs   3,046    1,121    1,925    171.7%
Ground leases   477    249    228    91.6%
Depreciation and amortization   29,426    23,700    5,726    24.2%
                     
Total operating expenses   147,602    76,454    71,148    93.1%
Equity in losses of unconsolidated entities   (5,510)   (3,727)   (1,783)   47.8%
Impairment of unconsolidated entities   (57,789)   (312)   (57,477)   18422.1%
Effect of not exercising Copper Beech purchase option   (33,375)   -    (33,375)   N/A 
                     
Operating income (loss)   (137,535)   11,577    (149,112)   -1288.0%
                     
Nonoperating income (expense):                    
Interest expense   (16,156)   (12,969)   (3,187)   24.6%