Stripnomics

ACC filed their 10K yesterday. They usually file a bit later but I guess management wanted to hurry up and let that lockup period end so they can sell, sell, sell. Watch closely. You will see the insider sales start soon.

I have reviewed the 10k for any amendments to their credit agreements. I have found none and conclude that a dividend cut is INEVITABLE. The cut will occur next quarter. The math says so.

ACC has certain debt covenants which they must comply with. The dividend cut is inevitable because of these debt covenants. I make two assumptions in my analysis:

(i) Q1 FFO will be stable (not higher than Q4)

(ii) ACC will be unable to amend its debt covenants

I think my assumptions are fair. First, Q1 FFO should not be significantly higher than Q4 since dormitory business is based on the university calendar. Since students enroll in August and September, I would expect that dorm revenues will not increase significantly in January. If anything, I would expect that they would actually fall since some students will dropout. In any case, I will just assume that FFO will remain stable. Second, I think its fair to assume that the debt covenants will not be modified since it’s in the bank’s best interest NOT to allow higher dividends. The bank will want to ACC to retain capital to allow for repayment.

You will recall that I previously posted the debt covenants which read as follows:

By deleting subsection (i) of Section 5.02(g) of the Loan Agreement in its entirety and inserting in lieu thereof the following: “(i) no Default or Event of Default shall have occurred and be continuing at the time of declaration or payment thereof and the aggregate amount of such Cash dividends or distributions, together with the aggregate amount of Cash dividends or distributions made during the applicable period pursuant to the immediately following clause (ii), (A) do not exceed 115% of Funds From Operations for the current four fiscal quarter periods of Parent Guarantor ending September 30, 2008 and December 31, 2008, (B) do not exceed 110% of Funds From Operations for the current four fiscal quarter period of Parent Guarantor ending March 31, 2009, (C) do not exceed 100% of Funds from Operations during any other four consecutive fiscal quarters of the Parent Guarantor thereafter, and (D) do not exceed 100% of Funds From Operations during any one fiscal quarter for the fiscal quarters of the Parent Guarantor ending on December 31, 2008 and March 31, 2009,”

Hence, the dividend for Q1 must be less than or equal to 110% of the four quarter period ending Q1. The rule, as applied to the four quarters ending March 31 (Q4 2009) can be expressed as:

D1 + D2 + D3 + D4 ≤ 1.10 (F1 + F2 + F3 + F4)

Or, using distributive property, as:

D1 + D2 + D3 + D4 ≤ 1.10F1 + 1.10F2 + 1.10F3 + 1.10F4

Most of these variables are now known constants. The only remaining variable is D4 (next quarter’s dividend). We can solve for D4 by rearranging the equation and plugging in our constants.

Variable	Quarterly Dividend	Aggregate Dividend
D4 =	2009 Q2	????
D3 =	2009 Q1	$14,276,250
D2 =	2008 Q4	$14,403,000
D1 =	2008 Q3	$12,517,000
Variable	Quarterly FFO		Aggregate FFO
F4 =	2009 Q1		$15,232,000*
F3 =	2008 Q4		$15,232,000
F2 =	2008 Q3		$6,372,000
F1 =	2008 Q2		$10,589,000

* 2009 Q1 FFO assuming stable FFO from 2008 Q4

Since we know (or can reasonable assume) all variables other than D4, we can solve for D4 by plugging in our constants such that:

$12,517,000 + $14,403,000 + $14,276,250 + D4 ≤ 1.10 ($10,589,000) + 1.10 ($6,372,000) - 1.10($15,232,000) + 1.10 ($15,232,000) or restated:

$41,196,250 + D4 ≤ $52,167,500 or restated:

D4 ≤ $10,971,250

Since there are 42,355,283 shares outstanding as of February 25, 2009, the dividend will have to be cut to:

$10,971,250 ÷ 42,355,283 = 25.9¢ per share

I want to emphasize that although this is the highest dividend allowed per the debt covenants, I know that this amount is way too high given the state of ACC’s business. ACC is a LOSER. It LOSES money. It has NEGATIVE EPS! I believe that it is an UNREASONABLE BREACH OF PRUDENT BUSINESS PRACTICES to pay any more than the minimum amount necessary to retain REIT status. This can be proven mathematically. Someday, it will be proven against many of the REITs in court. You are on notice.

Then again, we know that GCT got themselves into this kind of trouble before (Click HERE for the link to GCT’s settlement).

ACC will wait to the last minute to announce the cut. To do otherwise would be inconsistent with the Churn & Burn philosophy.

Churn & Burn! Pump & Dump!

This entry was posted on Tuesday, March 3rd, 2009 at 3:05 pm and is filed under Accounting, American Campus Communities (ACC), Law, Real Estate. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.