Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Our Company and Our Business
Overview
We are one of the largest owners, managers, and developers of high quality student housing properties in the United States. We are a fully integrated, self-managed, and self-administered equity REIT with expertise in the acquisition, design, financing, development, construction management, leasing, and management of student housing properties. Refer to Item 1 contained herein for additional information regarding our business objectives, investment strategies, and operating segments.
We believe that the ownership and operation of student housing communities in close proximity to selected colleges and universities presents an attractive long-term investment opportunity for our investors. We intend to continue to execute our strategy of identifying existing differentiated, typically highly amenitized, student housing communities or development opportunities in close proximity to university campuses with high barriers to entry which are projected to experience substantial increases in enrollment and/or are under-serviced in terms of existing on and/or off-campus student housing.
Property Portfolio
Below is a summary of our property portfolio as of December 31, 2021:
Property portfolio
Properties
Beds
Owned operating properties
Off-campus properties
On-campus ACE ® (1) (2) (3)
Subtotal – operating properties
Owned properties under development
On-campus ACE ® (2) (4)
Subtotal – properties under development
Total owned properties
On-campus participating properties
Total owned property portfolio
Managed properties
Total property portfolio
(1) Includes two properties at Prairie View A&M University that we ultimately expect to be refinanced under the existing on-campus participating structure.
(2) Includes 33 properties operated under ground/facility leases with 16 university systems and one property operated under a ground/facility lease with Walt Disney World ® Resort which consists of ten phases, six of which were delivered as of December 31, 2021, with the remainder anticipated to be delivered in 2022 and 2023.
(3) Includes 739 beds for which construction was substantially complete as of December 31, 2021 but were not open for occupancy until January 2022.
(4) The Walt Disney World ® Resort project consists of one property with multiple phases delivered through 2023; as such, only the beds for remaining phases to be completed are included in the beds for owned properties under development. Beds for any completed phases of this project are included in owned operating properties beds.
Leasing Results
Our financial results for the year ended December 31, 2021 are impacted by the results of our annual leasing process for the 2020/2021 and 2021/2022 academic years. As of September 30, 2020, the beginning of the 2020/2021 academic year, occupancy at our 2021 same store properties was 90.3% with a rental rate increase of 1.1% compared to the prior academic year, and occupancy at our total owned property portfolio (including two development properties completed in Fall 2020) was 89.9%. Our leasing results for the 2020/2021 academic year were negatively impacted by general uncertainty associated with COVID-19, with university policies affecting students’ housing decisions and preferences. However, leasing results for the 2021/2022 academic year for both our Company and the broader student housing sector improved significantly due to many universities reinstating on-campus housing policies and resuming in-person campus activities. As of September 30, 2021, the beginning of the 2021/2022 academic year, occupancy at our 2022 same store properties was 95.8% with a rental rate increase of 3.8% compared to the prior academic year.
Owned Development
The Company is in the process of constructing a ten-phase housing project under our ACE ® structure with scheduled phase deliveries from 2020 to 2023 for Walt Disney World ® Resort that will serve student interns participating in the highly competitive Disney College Program (“Disney College Program” or “DCP”). As of December 31, 2021, the Company has completed construction on six phases of the project within the targeted delivery timeline, and the remaining phases are anticipated to be delivered in 2022 and 2023. In May 2021, Walt Disney World ® Resort announced that it was recommencing the DCP in the summer of 2021 after temporarily suspending the program in 2020 due to the COVID-19 pandemic. As of December 31, 2021, occupancy at the completed phases of the project was approximately 83.4%.
Owned Development Projects Recently Completed
During the year ended December 31, 2021, the final stages of construction were completed for the following phases of the Disney College Program project as summarized in the table below:
University / Market Served
Project
Location
Beds
Total Project Cost
Construction Completed
Walt Disney World ® Resort
Disney College Program Phase III
Orlando, FL
January 2021
Disney College Program Phases IV
Orlando, FL
May 2021
Disney College Program Phases V (1)
Orlando, FL
July 2021
Disney College Program Phases VI (1) (2)
Orlando, FL
December 2021
(1) Beds and total project costs per phase amounts may vary from those previously disclosed due to early deliveries of beds at certain phases.
(2) Initial occupancy occurred in January 2022.
Owned Development Project Under Construction
At December 31, 2021, we were in process of constructing the remaining phases of the Disney College Program project as summarized in the table below:
University / Market Served
Project
Location
Beds
Estimated Project Cost
Total Costs Incurred
Scheduled Completion
Walt Disney World ® Resort
Disney College Program Phases VII-VIII
Orlando, FL
May & Aug 2022
Disney College Program Phases IX-X
Orlando, FL
Jan & May 2023
Third-Party Development and Management Services
Through ACC’s TRS entities, we provide development and construction management services for student housing properties owned by colleges and universities, charitable foundations, and others. During the year ended December 31, 2021, the final stages of construction were completed on the property summarized in the following table:
University / Market Served
Project
Location
Beds
Total Fees
Construction Completed
University of California, Riverside
North District Phase I
Riverside, CA
August 2021
As of December 31, 2021, we were under contract on five third-party development projects that are currently under construction and whose fees total $17.9 million. As of December 31, 2021, fees of approximately $9.1 million remained to be earned by the Company with respect to these projects, which have scheduled completion dates in 2022 and 2023.
As of December 31, 2021, we also provided third-party management and leasing services for 37 properties that represented approximately 29,000 beds.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions in certain circumstances that affect amounts reported in our 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 consolidated financial statements, giving due consideration to materiality. It is possible that the ultimate outcome anticipated by management in formulating its estimates may not be 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 could 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.
Capital Expenditures
We capitalize costs during the development of owned assets. Capitalization begins when we determine that development of a future asset is probable and continues until the asset, or a portion of the asset, is delivered and is ready for its intended use. As such, our judgment of the date the project is substantially complete has a direct impact on our operating expenses for the period. We also capitalize pre-development costs incurred in pursuit of development of a property. These costs include legal fees, design fees, regulatory fees, and other related costs. Future development of these pursuits is dependent upon various factors, including zoning and regulatory approval, rental market conditions, construction costs, and availability of capital. Pre-development costs incurred for pursuits for which future development is not yet considered probable are expensed as incurred. The determination of whether a project is probable requires judgment. If we determine that a project is probable, operating expenses could be materially different than if we determine the project is not probable. We also capitalize other costs that are directly identifiable with a specific development property, such as payroll costs associated with corporate staff who oversee such development activities. We also capitalize non-recurring expenditures for additions and betterments to buildings and land improvements. In addition, we generally capitalize expenditures for exterior painting, roofing, and other major maintenance projects that substantially extend the useful life of the existing assets. The cost of ordinary repairs and maintenance that do not the value of an asset or extend its useful life are charged to expense when incurred.
For all owned predevelopment and development projects, as well as additions and betterments, the Company uses its professional judgment in determining whether such costs meet the criteria for capitalization or must be expensed as incurred. There may be a change in our operating expenses in the event that there are changes to the level of our owned development activities. For instance, if we reduce our owned development activities, there may be an increase in our operating expenses. The costs capitalized related to projects in the predevelopment phase for which construction has not yet commenced, are included in other assets on the consolidated balance sheets. Owned predevelopment project costs capitalized during the years ended December 31, 2021, 2020, and 2019 were $8.1 million, $6.8 million, and $2.9 million, respectively. The costs capitalized related to owned development projects under construction, as well as additions and betterments, are reported on the consolidated balance sheets as investments in real estate, net of accumulated depreciation. Owned development project costs capitalized during the years ended December 31, 2021, 2020, and 2019 were $210.0 million, $357.7 million, and $487.8 million, respectively.
Impairment of Long-Lived Assets
Management assesses on a property-by-property basis whether there are any indicators that the value of our real estate assets held for use may be impaired. This analysis is performed at least annually or whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. The judgments regarding the existence of impairment indicators are based on factors such as operational performance, market conditions, legal, regulatory and environmental concerns, the Company’s intent and ability to hold the related asset, as well as any significant cost overruns on development properties. A property’s value is considered impaired if management’s estimate of the aggregate future undiscounted cash flows to be generated by the property is less than the carrying value of the property. The estimation of expected future net cash flows uses estimates, including capitalization rates and growth rates, which are inherently uncertain and rely on assumptions regarding current and future economics and market conditions. To the extent an impairment has occurred, the loss will be measured as the excess of the carrying amount of the property over the fair value of the property, thereby reducing our net income. Management also performs a periodic assessment to determine which of our properties are likely to be sold prior to the end of their estimated useful lives. The criteria for determining when a property is held for sale requires judgment and has potential financial statement impact as depreciation would and an could occur upon determination of held
for sale status. For those probable sales, an impairment charge is recorded for any excess of the carrying amount of the property over the estimated fair value less estimated selling costs, thereby reducing our net income.
Results of Operations
Comparison of the Years Ended December 31, 2021 and 2020
The following table presents our results of operations for the years ended December 31, 2021 and 2020, including the amount and percentage change in these results between the two periods.
Year Ended December 31,
Change ($)
Change (%)
Revenues
Owned properties
On-campus participating properties
Third-party development services
Third-party management services
Total revenues
Operating expenses (income)
Owned properties
On-campus participating properties
Third-party development and management services
General and administrative
Depreciation and amortization
Ground/facility leases
Gain from disposition of real estate
Other operating expenses
Total operating expenses
Operating income
Nonoperating income (expenses)
Interest income
Interest expense
Amortization of deferred financing costs
Loss from extinguishment of debt
Other nonoperating income
Total nonoperating expenses
Income before income taxes
Income tax provision
Net income
Net loss attributable to noncontrolling interests
Net income attributable to ACC, Inc. and
Subsidiaries common stockholders
Same Store and New Property Operations
We define our same store property portfolio as owned properties that were owned and operating for both of the full years ended December 31, 2021 and December 31, 2020, which are not conducting or planning to conduct substantial development, redevelopment, or repositioning activities, and are not classified as held for sale as of December 31, 2021. It also includes the full operating results of properties owned through joint ventures in which the Company has a controlling financial interest and which are consolidated for financial reporting purposes.
Same store revenues are defined as revenues generated from our same store portfolio and consist of rental revenue earned from student leases as well as other income items such as utility income, damages, parking income, summer conference rent, application and administration fees, income from retail tenants, the provision for uncollectible accounts, and income earned by our taxable REIT subsidiaries (“TRS”) from ancillary activities such as the provision of food services.
Same store operating expenses are defined as operating expenses generated from our same store portfolio and include usual and customary expenses incurred to operate a property such as payroll, maintenance, utilities, marketing, general and administrative costs, insurance, and property taxes. Same store operating expenses also include an allocation of payroll and other administrative costs related to corporate management and oversight.
A reconciliation of our same store, new property, and sold/other property operations to our consolidated statements of comprehensive income is set forth below:
Same Store Properties
New Properties (1)
Sold/Other
Properties (2)
Total - All Properties
Year Ended
December 31,
Year Ended
December 31,
Year Ended
December 31,
Year Ended
December 31,
Number of properties (3)
Number of beds (3)
Revenues
Operating expenses
(1) Property count does not include the Walt Disney World ® Resort project which is counted as one property under development and consists of ten phases, five of which were available for occupancy as of December 31, 2021, with the remaining phases anticipated to be available for occupancy in 2022 and 2023. Bed count includes the beds for the five phases of this project that were available for occupancy as of December 31, 2021.
(2) Does not include the allocation of payroll and other administrative costs related to corporate management and oversight. Includes professional fees related to the operation of consolidated joint ventures that are included in owned properties operating expenses in the accompanying consolidated statements of comprehensive income.
(3) Does not include properties under construction or undergoing redevelopment.
Same Store Properties: The increase in revenues from our same store properties was primarily due to a decrease in COVID-19 related concessions provided during the year ended December 31, 2021 as compared to December 31, 2020, including rent forgiven as a part of our Resident Hardship Program, rent refunds provided to tenants at our on-campus ACE ® properties and certain off-campus residence halls, and waived fees. The increase in revenues was also driven by an increase in rental rates and fee income, offset by a slight decrease in weighted average occupancy from 89.3% for the year ended December 31, 2020 to 89.2% for the year ended December 31, 2021. Future revenues will be dependent on our ability to maintain our current leases in effect for the 2021/2022 academic year and our ability to obtain appropriate rental rates and desired occupancy for the 2022/2023 academic year at our properties.
The increase in operating expenses for our same store properties was primarily due to the normalization of the Company’s operations in 2021, as compared to the prior year which was significantly impacted by COVID-19. We anticipate that operating expenses for our same store property portfolio for 2022 will increase as compared to 2021 due to increases in property tax and insurance expenses, payroll costs, and general inflationary factors.
New Property Operations: Our new properties for the year ended December 31, 2021 include development properties that opened for occupancy in 2020 and 2021. These properties are summarized in the table below:
Property
Location
University / Market Served
Beds
Opening Date / Construction Completed
Disney College Program Phase I (ACE)
Orlando, FL
Walt Disney World ® Resort
May 2020
Currie Hall Phase II (ACE)
Los Angeles, CA
University of Southern California
July 2020
Disney College Program Phase II (ACE)
Orlando, FL
Walt Disney World ® Resort
August 2020
Manzanita Square (ACE)
San Francisco, CA
San Francisco State University
August 2020
Disney College Program Phase III (ACE)
Orlando, FL
Walt Disney World ® Resort
January 2021
Disney College Program Phase IV (ACE)
Orlando, FL
Walt Disney World ® Resort
May 2021
Disney College Program Phase V (ACE)
Orlando, FL
Walt Disney World ® Resort
July 2021
Total - New Properties
On-Campus Participating Properties (“OCPP”) Operations
As of December 31, 2021, we had six on-campus participating properties containing 5,230 beds. Revenues from these properties increased by $1.3 million, from $29.9 million for the year ended December 31, 2020, to $31.2 million for the year ended December 31, 2021. The increase is primarily due to COVID-19 related concessions provided in 2020 as well as increases in rental rates, fee income, and summer camp and conference revenue. These increases were offset by a slight decrease in average occupancy from 67.8% for the year ended December 31, 2020, to 66.8% for the year ended December 31, 2021. Future revenues will be dependent on our ability to maintain our current leases in effect for the 2021/2022 academic year and our ability to obtain appropriate rental rates and desired occupancy for the 2022/2023 academic year at our OCPPs.
Operating expenses at these properties increased by $0.8 million, from $13.5 million for the year ended December 31, 2020, to $14.3 million for the year ended December 31, 2021. This increase was primarily due to increases in maintenance and utilities expenses as a result of the normalization of operations during 2021. We anticipate that operating expenses for our OCPPs for 2022 will increase as compared to 2021 due to the continued normalization of operations as discussed above.
Third-Party Development Services Revenue
Third-party development services revenue increased by approximately $2.7 million, from $7.5 million during the year ended December 31, 2020, to $10.2 million for the year ended December 31, 2021. The increase was primarily due to the commencement of construction of a second phase project at Concordia University, the Lake Campus Housing project at Princeton University, the Kelly Hall Renovation project at Drexel University and the closing of bond financing and commencement of construction of a fifth phase at University of California, Irvine during the current year, which contributed $6.5 million of revenue during the year ended December 31, 2021, as compared to the commencement of construction at the Capitol Campus Housing project at Georgetown University during the prior year which contributed approximately $1.8 million in revenue during the year ended December 31, 2020. This increase was partially offset by a $1.2 million decrease in incentive fees earned during the comparable periods related to cost savings from completed development projects and a $0.8 million decrease related to continued development services revenues for projects that commenced construction in 2018, 2019, and 2020.
Development services revenues are dependent on our ability to successfully be awarded such projects, the amount of the contractual fee related to the project, and the timing and completion of the development and construction of the project. In addition, to the extent projects are completed under budget, we may be entitled to a portion of such savings, which are recognized as revenue when performance has been agreed upon by all parties, or when performance has been verified by an independent third-party. It is possible that projects for which we have deferred pre-development costs will not close and that we will not be reimbursed for such costs. The pre-development costs associated therewith will ordinarily be charged against income for the then-current period. We anticipate that third-party development services revenue will increase in 2022 as compared to 2021 due to a large number of projects in our development pipeline that are anticipated to close and commence construction in 2022, including both newly awarded projects and/or projects previously delayed as a result of COVID-19.
Third-Party Development and Management Services Expenses
Third-party development and management services expenses decreased by approximately $1.1 million, from $21.7 million during the year ended December 31, 2020, to $20.6 million for the year ended December 31, 2021. The decrease was primarily due to a decrease in payroll and security costs related to a decrease in the number of properties managed near Walt Disney World ® Resort that are no longer managed, as well as a decrease in the provision for uncollectible accounts related to accounts receivable from third-party development and management projects. We anticipate third-party development and management services expenses will decrease in 2022 as compared to 2021 due to the decrease in the number of managed properties located near Walt Disney World ® Resort, as Disney College Program participants transition to the Company's Flamingo Crossings owned development project.
General and Administrative
General and administrative expenses increased by approximately $9.7 million, from $35.8 million during the year ended December 31, 2020, to $45.5 million for the year ended December 31, 2021. The increase was primarily due to the following items incurred during the year ended December 31, 2021: (i) $2.6 million in accelerated amortization of unvested restricted stock awards due to the retirement of the Company’s President in August 2021; (ii) a $1.3 million increase in consulting, legal, and other related costs incurred in relation to stockholder activism activities over the comparative periods; (iii) a $0.6 million increase in compensation expense related to the appointment of three new Board of Directors members in January 2021; (iv) increases in insurance expense; (v) increases in incentive payroll expenses driven by improved operational performance in 2021; (vi) increases in expenses incurred in connection with enhancements to our operating systems platform; and (vii) other general inflationary factors. We anticipate general and administrative expenses will decrease in 2022 as compared to 2021 due to $4.2 million in expenses incurred in 2021 that were not in the ordinary course of business. This includes $2.6 million in accelerated amortization of unvested restricted stock awards due to the retirement of the Company's President in August 2021 and $1.6 million in consulting, legal, and other related costs incurred in relation to stockholder activism activities in preparation for the Company's annual stockholders' meetings. Excluding any such items incurred in 2022 that are not in the ordinary course of business, the increase in general and administrative expenses in 2022 is anticipated to be inflationary.
Depreciation and Amortization
Depreciation and amortization increased by approximately $7.9 million, from $267.7 million during the year ended December 31, 2020, to $275.6 million for the year ended December 31, 2021. This increase was primarily due to an increase of $10.7 million related to the completion of construction and opening of owned development properties in 2020 and 2021. This increase was offset by a $2.0 million decrease in depreciation and amortization expense at our same store properties due to assets that became fully amortized or depreciated during the year ended December 31, 2021 and a $0.6 million decrease in depreciation of corporate assets. We anticipate depreciation and amortization expense will decrease in 2022 as compared to 2021 as certain assets at our same store properties will become fully amortized during the year.
Ground/Facility Leases
Ground/facility leases expense increased by approximately $4.2 million from $13.5 million during the year ended December 31, 2020, to $17.7 million for the year ended December 31, 2021. The increase was primarily due to the additional expense incurred at our Disney College Program Project as a result of the reinstatement of the Disney College Program in May 2021 and ACE ® development projects that completed construction in 2020. We anticipate ground/facilities leases expense will increase in 2022 as compared to 2021 for the reasons discussed above.
Gain from Disposition of Real Estate
During the year ended December 31, 2020, we sold one owned property containing 901 beds, resulting in a gain from disposition of real estate of approximately $48.5 million. Refer to Note 6 in the accompanying Notes to Consolidated Financial Statements contained in Item 8 for additional details.
Other Operating Expenses
Other operating expenses for the year ended December 31, 2021, include a $2.5 million charitable donation to Arizona State University in December 2021 in connection with the joint venture transaction described in Note 6 of the accompanying Notes to Consolidated Financial Statements contained in Item 8 herein and a $2.0 million litigation settlement described in Note 15 of the accompanying Notes to Consolidated Financial Statements contained in Item 8 herein. Other operating expenses for the year ended December 31, 2020, include a $1.1 million litigation settlement. We do not anticipate similar expenses in 2022 as those incurred in 2021 were not in the ordinary course of business.
Interest Income
Interest income decreased by approximately $1.5 million, from $2.9 million during the year ended December 31, 2020, to $1.4 million for the year ended December 31, 2021. The decrease was primarily due to the early repayment of a note receivable in October 2020. Refer to Note 2 in the accompanying Notes to the Consolidated Financial Statements contained in Item 8 for additional details regarding the early repayment of the note receivable. We anticipate interest income will remain constant in 2022 as compared to 2021.
Interest Expense
Interest expense increased by approximately $5.3 million, from $112.5 million during the year ended December 31, 2020, to $117.8 million for the year ended December 31, 2021. The increase was primarily due to $9.0 million of additional interest incurred related to our offerings of unsecured notes in January 2020, June 2020, and October 2021, which is net of a reduction in interest expense related to the early repayment of unsecured notes in January 2020 that were originally scheduled to mature in October 2020, as well as a $3.5 million decrease in capitalized interest, which is based on the timing of completion of our owned development pipeline. These items were offset by: (i) a $3.6 million decrease due to the pay-off of mortgage debt; (ii) a $2.8 million decrease in interest expense on our revolving credit facility due to a decrease in LIBOR rates and a decrease in the spread, which changed from 1.0% to 0.85% as a part of the renewal of the facility in May 2021; and (iii) a $0.6 million decrease related to our OCPPs driven by the refinance of the mortgage loan on one OCPP property that was swapped to a fixed rate as well as scheduled principal payments on OCPP debt. We anticipate interest expense will increase in 2022 as compared to 2021 due to a full year of interest expense related to the unsecured notes issued in October 2021 and a decrease in capitalized interest related to the delivery of additional phases of our owned development project located at Walt Disney World ® Resort.
Amortization of Deferred Financing Costs
Amortization of deferred financing costs increased by approximately $0.5 million, from $5.3 million during the year ended December 31, 2020, to $5.8 million for the year ended December 31, 2021. This increase was primarily due to an $0.8 million increase associated with the renewal of our revolving credit facility in May 2021, the issuance of unsecured notes in June 2020 and October 2021, and the refinance of a mortgage loan at one of our OCPPs in January 2021. We anticipate amortization of deferred financing costs will increase in 2022 as compared to 2021 due to the reason discussed above.
Loss from Extinguishment of Debt
During the year ended December 31, 2020, we recognized a $4.8 million loss on the extinguishment of debt related to the early redemption of our $400 million 3.35% Senior Notes due October 2020. The redemption was funded using net proceeds from the Operating Partnership’s closing of a $400 million offering of senior unsecured notes under its existing shelf registration in January 2020. Refer to Note 8 in the accompanying Notes to the Consolidated Financial Statements contained in Item 8 for additional details regarding the Company's debt.
Other Nonoperating Income
Other nonoperating income decreased by approximately $3.2 million, from $3.5 million during the year ended December 31, 2020, to $0.3 million for the year ended December 31, 2021. This decrease was primarily due to a $2.1 million gain associated with the write-off of the unamortized discount due to the early repayment of a note receivable in October 2020 and a $1.1 million gain related to the settlement of a litigation matter recognized during the year ended December 31, 2020.
Net Loss Attributable to Noncontrolling Interests
Net loss attributable to noncontrolling interests represents consolidated joint venture partners’ share of net loss, as well as net loss allocable to OP unitholders. Net loss attributable to noncontrolling interests decreased by $0.8 million, from $3.0 million for the year ended December 31, 2020, to $2.2 million for the year ended December 31, 2021. The decrease in the net loss is due to improved operational performance at the properties in the joint ventures during the year ended December 31, 2021 compared to the year ended December 31, 2020 which was impacted by COVID-19. Refer to Note 10 in the accompanying Notes to Consolidated Financial Statements contained in Item 8 for additional details. In 2022, we anticipate net income attributable to noncontrolling interests as compared to a net loss attributable to noncontrolling interests in 2021 primarily due to the closing of an additional joint venture transaction on December 31, 2021, as described in Note 6 in the accompanying Notes to Consolidated Financial Statements contained in Item 8, as well as improved operating performance at the properties in previously existing joint ventures.
Comparison of the Years Ended December 31, 2020 and 2019
Management’s Discussion and Analysis of Financial Condition and Results of Operations on pages 32 through 36 of the Form 10-K for the fiscal year ended December 31, 2020 is incorporated herein by reference.
Liquidity and Capital Resources
Cash Balances and Cash Flows
As of December 31, 2021, we had $134.7 million in cash, cash equivalents, and restricted cash as compared to $74.0 million in cash, cash equivalents, and restricted cash as of December 31, 2020. Restricted cash primarily consists of escrow accounts held by lenders and resident security deposits, as required by law in certain states, and funds held in escrow in connection with potential acquisition and development opportunities. The following discussion relates to changes in cash due to operating, investing and financing activities, which are presented in our accompanying consolidated statements of cash flows included in Item 8 herein.
Operating Activities: For the year ended December 31, 2021, net cash provided by operating activities was approximately $334.8 million, as compared to approximately $351.1 million for the year ended December 31, 2020, a decrease of approximately $16.3 million. This decrease was due to the timing of the collection of receivables related to properties with master lease agreements and increases in receivables due to increased activity related to our third-party development projects. This decrease was partially offset by improved operating results at our properties during the year ended December 31, 2021, due to the normalization of operations at our owned properties, a decrease in COVID-19 related concessions, increases in occupancy and rental rates for the 2021/2022 academic year, and the recommencement of the Disney College Program in 2021.
Investing Activities: Investing activities utilized approximately $239.4 million and $207.4 million for the years ended December 31, 2021 and 2020, respectively. The $32.0 million increase in cash utilized in investing activities was a result of the following: (i) $146.1 million in proceeds from the disposition of one property during the year ended December 31, 2020, as compared to no dispositions of properties during the year ended December 31, 2021; (ii) $45.4 million in cash proceeds from the early repayment of a note receivable in October 2020, as compared to no such repayments during the year ended December 31, 2021; and (iii) a $12.9 million increase in cash used for capital expenditures at our owned and on-campus participating properties. These increases in cash utilized were partially offset by a $156.4 million decrease in cash used to fund the construction of our owned development properties and an $8.8 million decrease in cash paid to acquire land parcels.
Financing Activities: For the year ended December 31, 2021, net cash utilized by financing activities totaled approximately $34.7 million, as compared to net cash utilized by financing activities of $151.1 million for the year ended December 31, 2020. The $116.4 million decrease in cash utilized by financing activities was primarily due to the following: (i) a $268.2 million increase in contributions from noncontrolling partners primarily due to $273.6 million in proceeds related to the ACC / HS Joint Venture Transaction during the year ended December 31, 2021, as compared to $5.4 million in proceeds from the Nashville Joint Venture transaction during the year ended December 31, 2020; (ii) a $77.2 million decrease in cash paid to purchase the remaining ownership interest in two properties held in a joint venture during the year ended December 31, 2020, as compared to no such purchase during the year ended December 31, 2021; (iii) $58.9 million in net proceeds from the sale of common stock during the year ended December 31, 2021; and (iv) a $24.7 million decrease in net pay-offs of mortgage debt. These decreases in cash utilized by financing activities were primarily offset by the following: (i) a $311.2 million decrease in
net borrowings of unsecured debt and (ii) $1.4 million of transaction costs associated with the closing of the ACC / HS Joint Venture Transaction.
Liquidity Needs, Sources, and Uses of Capital
In May 2021, the Company renewed its $1.0 billion revolving credit facility ("Credit Facility"). The Credit Facility now matures in May 2025 and demonstrates the Company’s commitment to Environmental, Social, and Governance (“ESG”) practices with sustainability-linked pricing, whereby the borrowing rate improves if the Company meets certain ESG performance targets. The Credit Facility also includes two 6-month extension options and an accordion feature that allows the Company to expand the Credit Facility by up to an additional $500 million, subject to the satisfaction of certain conditions. Borrowing rates float at a margin over LIBOR plus an annual facility fee with spreads reflecting current market terms. Both the margin and the facility fee are priced on a grid that is tied to the Company’s credit rating. Based on the Company’s current Baa2/BBB rating, the annual facility fee is 20 basis points and the LIBOR margin is 85 basis points, a reduction of 15 basis points from previous pricing levels. Refer to Note 8 in the accompanying Notes to the Consolidated Financial Statements contained in Item 8 for additional information.
During the year ended December 31, 2021, the Company sold 1,216,600 shares of common stock under the ATM program at a weighted average price of $49.05 per share, for net proceeds of approximately $58.9 million. The proceeds were primarily used to repay borrowings on the Company’s Credit Facility. As of December 31, 2021, total gross proceeds of $59.7 million have been raised under the Company’s current ATM program, leaving approximately $440.3 million of capacity. Refer to Note 9 in the accompanying Notes to the Consolidated Financial Statements contained in Item 8 for additional information.
In October 2021, the Operating Partnership closed a $400 million offering of senior unsecured notes under its existing shelf registration. These seven-year notes were issued at 99.928% of par value with a coupon of 2.250% and are fully and unconditionally guaranteed by the Company. Interest on the notes is payable semi-annually on January 15 and July 15, with the first payment due and payable on January 15, 2022. The notes will mature on January 15, 2029. Net proceeds from the sale of the senior unsecured notes totaled approximately $394.4 million. The Company used the proceeds to repay borrowings under its Credit Facility.
As of December 31, 2021, our short-term and long-term liquidity needs included, but were not limited to, the following:
(i) scheduled interest payments on outstanding debt due in 2022 of approximately $119.8 million and approximately $505.2 million due beyond the next twelve months, assuming no modifications of the debt outstanding as of December 31, 2021;
(ii) estimated development costs of approximately $28.6 million in 2022 and approximately $4.1 million in 2023 related to the completion of construction of the Disney College Program development project;
(iii) debt maturities and scheduled principal payments as described in the debt maturities table in Note 8 of the accompanying Notes to the Consolidated Financial Statements contained in Item 8, assuming no modifications of the debt outstanding as of December 31, 2021;
(iv) the future minimum lease payments described in Note 14 of the accompanying Notes to the Consolidated Financial Statements contained in Item 8;
(v) interest on our Credit Facility, which varies based on the timing of draws and paydowns as well as fluctuations in LIBOR, and had no balance at December 31, 2021;
(vi) funds for other owned development projects that could potentially commence construction;
(vii) potential future property or land acquisitions as well as potential joint venture transactions; and
(viii) recurring capital expenditures.
We expect to meet our short-term and long-term liquidity requirements by:
(i) utilizing current cash on hand and net cash provided by operations;
(ii) borrowing under our Credit Facility, which had availability of $1.0 billion as of December 31, 2021;
(iii) accessing the unsecured bond market;
(iv) exercising debt extension options to the extent they are available;
(v) refinance, renew, or modifying existing debt to more favorable terms;
(vi) issuing securities, including common stock, under our ATM Equity Program discussed more fully in Note 9 in the accompanying Notes to Consolidated Financial Statements contained in Item 8, or otherwise; and
(vii) potentially disposing of properties and/or selling ownership interests in existing properties through joint venture arrangements, depending on market conditions.
Our ability to obtain additional financing will depend on a variety of factors such as market conditions, the general availability of credit, the overall availability of credit to the real estate industry, our credit ratings, our credit capacity, and the perception of lenders regarding our long or short-term financial prospects.
We may seek additional funds to undertake initiatives not contemplated by our business plan or to obtain additional cushion against possible shortfalls. We also may pursue additional financing as opportunities arise. Future financings may include a range of different sizes or types of financing, including the incurrence of additional secured debt and the sale of additional debt or equity securities. These funds may not be available on favorable terms or at all. Our ability to obtain additional financing depends on several factors, including future market conditions, our future creditworthiness, and restrictions contained in agreements with our investors or lenders, including the restrictions contained in the agreements governing our unsecured credit facility and unsecured notes. These financings could increase our level of indebtedness or result in dilution to our equity holders.
Distributions
We are required to distribute 90% of our REIT taxable income (excluding capital gains) on an annual basis in order to qualify as a REIT for federal income tax purposes. Distributions to common stockholders are at the discretion of the Board of Directors. We may use borrowings under our unsecured revolving credit facility to fund distributions. The Board of Directors considers a number of factors when determining distribution levels, including market factors and our Company’s performance in addition to REIT requirements.
On January 24, 2022, our Board of Directors declared a distribution of $0.47 per share, which was paid on February 25, 2022, to all common stockholders of record as of February 4, 2022. Assuming similar dividend distributions for the remainder of 2022, our annualized dividend rate would be $1.88 per share.
Indebtedness
A summary of our consolidated indebtedness as of December 31, 2021 is as follows. Refer to Note 8 in the accompanying Notes to Consolidated Financial Statements contained in Item 8 for a detailed discussion of our indebtedness.
Amount
% of Total
Weighted
Average
Rates (1)
Weighted Average Maturities
Secured
6.6 Years
Unsecured
5.2 Years
Total consolidated debt
5.4 Years
Fixed rate debt
Secured
Project-based taxable bonds
3.1 Years
Mortgage
6.6 years
Unsecured
April 2013 Notes
1.3 Years
June 2014 Notes
2.5 Years
October 2017 Notes
5.9 Years
June 2019 Notes
4.5 Years
January 2020 Notes
8.1 Years
June 2020 Notes
9.1 Years
October 2021 Notes
7.1 Years
Term loans
.5 Years
Total - fixed rate debt
5.4 Years
Variable rate debt
Secured mortgage
23.6 years
Unsecured revolving credit facility (2)
3.4 Years
Total - variable rate debt
23.6 Years
Total consolidated debt
5.4 Years
(1) Represents stated interest rate and does not include the effect of the amortization of deferred financing costs, debt premiums and discounts, OIDs, and interest rate swap terminations.
(2) The Company's Credit Facility is excluded from the table above as the principal balance was zero as of December 31, 2021. Refer to Note 8 in the accompanying Notes to Consolidated Financial Statements contained in Item 8 for further discussion.
Supplemental Guarantor Information
Effective January 4, 2021, the Securities and Exchange Commission (SEC) adopted amendments to the financial disclosure requirements applicable to registered debt offerings that include certain credit enhancements. The Company adopted the new rules on January 4, 2021 which permit subsidiary issuers of obligations guaranteed by the parent to omit separate financial statements if the consolidated financial statements of the parent company have been filed, the subsidiary obligor is a consolidated subsidiary of the parent company, the guaranteed security is debt or debt-like, and the security is guaranteed fully and unconditionally by the parent. Accordingly, separate consolidated financial statements of the Operating Partnership have not been presented. Furthermore, as permitted under Rule 13-01(a)(4)(vi), the Company has excluded the summarized financial information for the Operating Partnership as the assets, liabilities, and results of operations of the Company and the Operating Partnership are not materially different than the corresponding amounts presented in the consolidated financial statements of the Company, and management believes such summarized financial information would be repetitive and not provide incremental value to investors.
American Campus Communities Operating Partnership, LP (the “Subsidiary Issuer") has issued the unsecured notes described in the Unsecured Notes section of Note 8 in the accompanying Notes to Consolidated Financial Statements contained in Item 8. The Unsecured Notes are fully and unconditionally guaranteed by the Company, and the Subsidiary Issuer is 99.6% owned, directly or indirectly, by the Company. The guarantees are direct senior unsecured obligations of the Company and rank equally in right of payment with all other senior unsecured indebtedness of the Company from time to time outstanding. Furthermore, the Company’s guarantees will be effectively subordinated in right of payment to all liabilities, whether secured or
unsecured, and any preferred equity of its subsidiaries (including the Operating Partnership and any entity the Company accounts for under the equity method of accounting). In addition, under the federal bankruptcy law and comparable provisions of state fraudulent transfer laws, a guarantee, such as the guarantee provided by the Company, could be voided, and payment thereon could be required to be returned to the guarantor or to a fund for the benefit of the creditors of the guarantor, under certain circumstances.
The terms of the unsecured notes include certain financial covenants that require the Operating Partnership to limit the amount of total debt and secured debt as a percentage of total asset value, as defined. In addition, the Operating Partnership must maintain a minimum ratio of unencumbered asset value to unsecured debt, as well as a minimum interest coverage level. As of December 31, 2021, the Operating Partnership was in compliance with all such covenants.
Capital Expenditures
We distinguish between the following five categories of capital expenditures:
Non-recurring and other capital expenditures represent the addition of features or amenities that did not exist at the property but were deemed necessary to remain competitive within a specific market. This category also includes items considered infrequent or extraordinary in nature.
Recurring capital expenditures represent additions that are recurring in nature to maintain a property’s income, value, and competitive position within the market. Recurring capital expenditures typically include, but are not limited to, appliances, furnishings, carpeting, and flooring, HVAC equipment, and kitchen/bath cabinets. Maintenance and repair costs incurred throughout the year, including those incurred during our annual turn process due to normal wear and tear by residents, are expensed as incurred.
Renovations and strategic repositioning capital expenditures are incurred to enhance the economic value and return of the property and undergo an investment return underwrite prior to being incurred.
Acquisition-related capital expenditures represent additions identified upon acquiring a property and are considered part of the initial investment. These expenditures are intended to position the property to be consistent with our physical standards and are usually incurred within the first two and occasionally the third year after acquisition.
Disposition-related capital expenditures represent capital improvements at properties disposed of during all years presented.
Additionally, we are required by certain of our lenders to contribute amounts to reserves for capital repairs and improvements at our mortgaged properties, which may exceed the amount of capital expenditures actually incurred by us during those periods.
Capital expenditures at our owned properties are set forth below:
As of and for the Year Ended December 31,
Non-recurring and other
Recurring
Renovations and strategic repositioning
Acquisition-related
Disposition-related (1)
Total
Average beds (2)
Average recurring capital expenditures per bed
(1) Includes properties sold during 2020 and 2019. Also includes one property that was in receivership until July 2019 when it was transferred to the lender in settlement of the property’s mortgage loan that matured in August 2017. Historical capital expenditures for these properties have been reclassified for all periods presented.
(2) Does not include beds related to the disposed properties discussed above.
Funds From Operations (“FFO”)
The National Association of Real Estate Investment Trusts (“NAREIT”) currently defines FFO as net income or loss attributable to common shares computed in accordance with generally accepted accounting principles (“GAAP”), excluding gains or losses from depreciable operating property sales, impairment charges and real estate depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. We present FFO because we consider it an important supplemental measure of our operating performance and believe it is frequently used by securities analysts, investors, and other interested parties in the evaluation of REITs, many of which present FFO when reporting their results. FFO excludes GAAP historical cost depreciation and amortization of real estate and related assets, which assumes that the value of real estate diminishes ratably over time. Historically, however, real estate values have risen or fallen with market conditions. We therefore believe that FFO provides a performance measure that, when compared year over year, reflects the impact to operations from trends in occupancy rates, rental rates, operating costs, and interest costs, among other items, providing perspective not immediately apparent from net income. We compute FFO in accordance with standards established by the Board of Governors of NAREIT in its December 2018 White Paper, which may differ from the methodology for calculating FFO utilized by other equity REITs and, accordingly, may not be comparable to such other REITs.
We also believe it is meaningful to present a measure we refer to as FFO-Modified ("FFOM"), which reflects certain adjustments related to the economic performance of our on-campus participating properties, and other items, as we determine in good faith that do not reflect our core operations on a comparative basis. Under our participating ground leases, we and the participating university systems each receive 50% of the properties’ net cash available for distribution after payment of operating expenses, debt service (which includes significant amounts towards repayment of principal), and capital expenditures. A substantial portion of our revenues attributable to these properties is reflective of cash that is required to be used for capital expenditures and for the amortization of applicable property indebtedness. These amounts do not increase our economic interest in these properties or otherwise benefit us since our interest in the properties terminates upon the repayment of the applicable property indebtedness. Therefore, unlike the ownership of our owned properties, the unique features of our ownership interest in our on-campus participating properties cause the value of these properties to diminish over time. For example, since the ground/facility leases under which we operate the participating properties require the reinvestment from operations of specified amounts for capital expenditures and for the repayment of debt while our interest in these properties upon the repayment of the debt, such capital expenditures do not increase the value of the property to us and mortgage debt amortization only increases the equity of the ground lessor. Accordingly, we believe it is meaningful to modify FFO to exclude the operations of our on-campus participating properties and to consider their impact on our performance by including only that portion of our revenues from those properties that are reflective of our share of net cash flow and the management fees that we receive, both of which increase and decrease with the operating performance of the properties. This narrower measure of performance measures our for these properties in a manner that is similar to the measure of our from our third-party services business where we similarly incur no initial or ongoing capital investment in a property and derive only consequential benefits from capital expenditures and debt amortization. We believe, however, that this narrower measure of performance is in traditional real estate ownership structures where debt amortization and capital expenditures the property owner’s long-term from its investment.
Our FFOM may have limitations as an analytical tool because it reflects the contractual calculation of net cash flow from our on-campus participating properties, which is unique to us and is different from that of our owned off-campus properties. Companies that are considered to be in our industry may not have similar ownership structures; and therefore, those companies may not calculate FFOM in the same manner that we do, or at all, limiting its usefulness as a comparative measure. We compensate for these limitations by relying primarily on our GAAP and FFO results and using FFOM only supplementally. Further, FFO and FFOM do not represent amounts available for management’s discretionary use because of needed capital replacement or expansion, debt service obligations or other commitments and uncertainties. FFO and FFOM should not be considered as alternatives to net income or loss computed in accordance with GAAP as an indicator of our financial performance, or to cash flow from operating activities computed in accordance with GAAP as an indicator of our liquidity, nor are these measures indicative of funds available to fund our cash needs, including our ability to pay dividends or make distributions.
The following table presents a reconciliation of our net income attributable to common shareholders to FFO and FFOM:
Year Ended December 31,
Net income attributable to ACC, Inc. and Subsidiaries common stockholders
Noncontrolling interests' share of net (loss) income
Joint Venture ("JV") partners' share of FFO
JV partners' share of net loss (income)
JV partners' share of depreciation and amortization
(Gain) loss from disposition of real estate, net
Elimination of provision for real estate impairment
Total depreciation and amortization
Corporate depreciation (1)
FFO attributable to common stockholders and OP unitholders
Elimination of operations of OCPPs
Net income from OCPPs
Amortization of investment in OCPPs
Modifications to reflect operational performance of OCPPs
Our share of net cash flow (2)
Management fees and other
Contribution from OCPPs
Transaction costs (3)
Elimination of provision for impairment of intangible asset (4)
Elimination of FFO from property in receivership (5)
Elimination of loss (gain) from extinguishment of debt, net (6)
Elimination of gain from early repayment of loan receivable
Executive retirement charges (7)
Elimination of charitable donation (8)
Elimination of litigation settlements (9)
Stockholder engagement and other proxy advisory costs (10)
FFOM attributable to common stockholders and OP unitholders
FFO per share – diluted
FFOM per share – diluted
Weighted-average common shares outstanding - diluted
(1) Represents depreciation on corporate assets not added back for purposes of calculating FFO.
(2) 50% of the properties’ net cash available for distribution after payment of operating expenses, debt service (including repayment of principal), and capital expenditures which is included in ground/facility leases expense in the accompanying consolidated statements of comprehensive income. During the year ended December 31, 2020, the Company waived its right to one property's 50% share of the net cash flow for the 2019/2020 academic year, which resulted in a $0.6 million reversal of contribution from OCPPs.
(3) Represents transaction costs incurred in connection with the closing of presale development transactions.
(4) Represents a non-cash impairment charge for an intangible asset related to a property tax incentive arrangement at one owned property.
(5) Represents FFO for an owned property that was transferred to the lender in July 2019 in settlement of the property's mortgage loan.
(6) The year ended December 31, 2020 amount represents the loss associated with the January 2020 redemption of the Company's $400 million 3.35% Senior Notes originally scheduled to mature in October 2020. The year ended December 31, 2019 amount represents the gain on the extinguishment of debt associated with a property that was transferred to the lender in settlement of the property's mortgage loan in July 2019.
(7) Represents accelerated amortization of unvested restricted stock awards due to the retirement of the Company's President in August 2021, which is included in general and administrative expenses in the accompanying consolidated statements of comprehensive income.
(8) Represents a charitable donation to Arizona State University (ASU) in connection with the closing of a joint venture transaction in December 2021, which is included in other operating expenses in the accompanying consolidated statements of comprehensive income. Refer to Note 6 in the accompanying Notes to the Consolidated Financial Statements contained in Item 8 for additional information.
(9) Represents expenses or gains associated with the settlement of litigation matters, which are included in other operating expenses and other nonoperating income, respectively, in the accompanying consolidated statements of comprehensive income.
(10) Represents consulting, legal, and other related costs incurred in relation to stockholder activism activities in preparation for the Company’s 2021 and 2022 annual stockholders' meetings, which are included in general and administrative expenses in the accompanying consolidated statements of comprehensive income.
Inflation
Our student leases do not typically provide for rent escalations. However, they typically do not have terms that extend beyond 12 months. Accordingly, although on a short term basis we would be required to bear the impact of rising costs resulting from inflation, we have the opportunity to raise rental rates at least annually to offset such rising costs. However, a weak economic environment or declining student enrollment at our principal universities may limit our ability to raise rental rates.
