5. Investment in Unconsolidated Entities

We have investments in real estate ventures with HSRE, Copper Beech, and Beaumont that we do not consolidate. These joint ventures are engaged primarily in developing, constructing, owning and managing student housing properties. Both we and our joint venture partners hold joint approval rights for major decisions, including those regarding property acquisition and disposition as well as property operation. As such, we hold noncontrolling interests in these joint ventures and account for them under the equity method of accounting.

We act as the operating member and day-to-day manager for these joint ventures and as such are entitled to receive fees for providing development and construction services (as applicable) and management services.

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 is currently building two new student housing properties with completion targeted for the 2014-2015 academic year. The properties, located in Louisville, Kentucky and Greensboro, North Carolina are expected to have approximately 1,200 beds and have an estimated cost of $65.6 million. We own a 30% interest in this venture and affiliates of HSRE own the balance.

We are the guarantor of the construction and mortgage debt of our joint ventures with HSRE. Details of our unconsolidated investments at September 30, 2013 are presented in the following table (dollars in thousands):

										Debt
											Weighted
					Number of Properties						Average
	Our			Year	In	Under		Our Total		Amount	Interest
Unconsolidated Entities	Ownership			Founded	Operations	Development		Investment		Outstanding	Rate			Maturity Date / Range
HSRE-Campus Crest I, LLC	49.9	%		2009	3	-	$	10,751	$	32,980	2.68	%	⁽¹⁾	11/09/2013 – 1/09/2014
HSRE-Campus Crest IV, LLC	20.0	%		2011	1	-		2,271		16,893	5.75	%	⁽²⁾	12/1/2013
HSRE-Campus Crest V, LLC	10.0	%		2011	3	-		3,297		45,670	2.90	%	⁽¹⁾	12/20/2014 – 01/05/2015
HSRE-Campus Crest VI, LLC	20.0	%		2012	3	-		7,226		32,994	2.55	%	⁽¹⁾	5/08/2015 – 12/19/2015
HSRE-Campus Crest IX, LLC	30.0	%		2013	-	1		12,427		-	n/a			n/a
HSRE-Campus Crest X, LLC	30.0	%		2013	-	2		7,420		-	n/a			n/a
CB Portfolio	47.2	%	⁽³⁾	2013	35	1		241,821		478,474	5.57	%	⁽⁴⁾	10/01/2013 – 10/01/2020
DCV Holdings, LP	20.0	%		2013	-	1		38,055		-	n/a			n/a
Total Unconsolidated Entities					45	5	$	323,268	$	607,011	5.05	%

⁽¹⁾ Variable interest rates.

⁽²⁾ Comprised of one fixed rate loan.

⁽³⁾ At September 30, 2013, our effective interest in the CB Portfolio was 47.2%. As of October 1, 2013, our interest in the Copper Beech portfolio was amended as noted below in the Amendment to Copper Beech Purchase Agreement.

⁽⁴⁾ Comprised of fixed rate debt with the exception of the construction loan borrowings related to the 2013 phase II deliveries

The following is a summary of the combined financial position of our unconsolidated entities with HSRE and DCV Holdings in their entirety, not only our interest in the entities, including provisional fair value balances that are subject to our allocation analyses and appraisals, for the periods presented (amounts in thousands):

	September 30,		December 31,
	2013		2012
Assets
Student housing properties, net	$	326,956	$	143,108
Other assets		17,883		40,154
Total assets	$	344,839	$	183,262

Liabilities and Equity
Mortgage and construction loans	$	128,537	$	92,456
Other liabilities		42,337		30,402
Owners' equity		173,965		60,404
Total liabilities and owners' equity	$	344,839	$	183,262

Company's share of historical owners' equity	$	33,163	$	14,078
Preferred investment⁽¹⁾		49,521		11,828
Net difference in carrying value of investment versus net book value of underlying net assets⁽²⁾		(1,237)		(3,351)
Carrying value of investment in unconsolidated entities	$	81,447	$	22,555

⁽¹⁾ As of September 30, 2013, we held aggregate Class B interests in The Grove at Greensboro, The Grove at Louisville, Kentucky, The Grove at San Angelo, Texas, The Grove at Indiana, Pennsylvania, and The Grove at Conway, Arkansas of approximately $16.5 million, entitling us to a 9.0% return on our investment, as well as a Class A interest in DCV Holdings of $33.0 million, entitling us to a 5.22% return on our investment. As of December 31, 2012, we held aggregate Class B interests in The Grove at San Angelo, Texas, The Grove at Indiana, Pennsylvania, and The Grove at Conway, Arkansas of approximately $11.8 million. These preferred interests entitle us to a return on our investment but otherwise do not change our effective ownership interest in these properties.

⁽²⁾ This amount represents the aggregate difference between our historical cost basis and the basis reflected at the entity level, which is typically amortized over the life of the related asset. The basis differential occurs primarily due to the difference between the allocated value to acquired entity interests and the venture’s basis in those interests, the capitalization of additional investment in the unconsolidated entity and the elimination of service related revenue to the extent of our percentage ownership.

ASC 323 Investments – Equity Method and Joint Ventures and Article 4.08(g) of Regulation S-X requires summarized financial information of material investments accounted for under the equity method be provided of the investee’s financial position and results of operations including assets, liabilities and results of operations under the investee’s historical cost basis of accounting. Notwithstanding the extensive efforts of the Company and Copper Beech to compile the necessary financial information, we have determined that the information needed for the preparation of historical financial statements of the CB Portfolio to satisfy these requirements is not available or otherwise sufficiently reliable. As a result, we have elected to present financial information on our investment in Copper Beech on the Company’s cost basis for our investment as of September 30, 2013 as we believe this information is reliable and relevant to the users of our financial statements. Further, although we acknowledge that the information provided does not comply with all of the provisions of ASC 323 or Article 4.08(g) of Regulation S-X, we do not believe that the lack of the omitted disclosures, or the information of the financial position reflecting the cost basis of our investment provided results in a material omission or misstatement of the Company’s condensed consolidated financial statements taken as a whole.

The following is a summary of the financial position reflecting the cost basis, including provisional fair value balances that are subject to our allocation analyses and appraisals, of our investment in Copper Beech in its entirety for the 35 properties in the CB Portfolio as of September 30, 2013 (in thousands):

	September 30,
	2013
Assets
Student housing properties, net	$	953,835
Intangible assets		7,230
Other assets		9,557
Total assets	$	970,622

Liabilities and Equity
Mortgage and construction loans	$	515,859
Other liabilities		20,073
Owners' equity		434,690
Total liabilities and owners' equity	$	970,622

Company's share of historical owners' equity	$	225,181
Net difference in carrying value of investment versus net book value of underlying net assets⁽¹⁾		16,640
Carrying value of investment in Copper Beech	$	241,821

⁽¹⁾

This amount represents the aggregate difference between our historical cost basis and the basis reflected at the entity level, which is typically amortized over the life of the related asset. The basis differential occurs primarily due to the capitalization of additional investment in the unconsolidated entity.

The following is a summary of the combined operating results for our unconsolidated entities with HSRE and DCV Holdings in their entirety, not only our interest in the entities, including results based on the provisional fair value adjustments that are subject to our allocation analyses and appraisals, for the periods presented (in thousands):

	Three months ended				Nine months ended
	September 30, 2013		September 30, 2012		September 30, 2013		September 30, 2012
Revenues	$	6,341	$	4,162	$	15,922	$	13,337
Expenses:
Operating expenses		3,070		2,159		8,327		7,242
Interest expense		1,260		1,091		3,553		3,790
Depreciation and amortization		1,592		1,134		4,298		3,555
Other expenses		4,571		-		4,588		-
Total expenses		10,493		4,384		20,766		14,587
Net loss	$	(4,152)	$	(222)	$	(4,844)	$	(1,250)

Company’s share of net income (loss)⁽¹⁾	$	(650)	$	(20)	$	(658)	$	(135)
Income on preferred investments		479		106		684		418
Equity in earnings of unconsolidated entities	$	(171)	$	86	$	26	$	283

⁽¹⁾ Amount differs from net loss multiplied by our ownership percentage due to the amortization of the aggregate difference between our historical cost basis and our basis reflected at the entity level and elimination of management fees.

The following is a summary of the combined operating results for our unconsolidated entity, Copper Beech, in its entirety, not only our interest in the entity. This summary includes the results of the 37 properties from March 18, 2013 through September 30, 2013 and reflects the impact of the Company’s cost basis of our investment, which include provisional adjustments subject to our allocation analyses and appraisals, related to purchase accounting(in thousands):

	Three months ended		Nine months ended
	September 30, 2013		September 30, 2013

Revenues	$	22,899	$	49,400
Direct operating expenses		10,526		20,963
Revenues less direct operating expenses		12,373		28,437
Interest expense		4,008		9,072
Depreciation and amortization		9,304		22,363
Net loss based on the Company's purchase price	$	(939)	$	(2,998)

Company’s share of net income (loss)⁽¹⁾	$	1,473	$	3,582

⁽¹⁾	Amount differs from net loss multiplied by our ownership percentage due to the amortization of the aggregate difference between our historical cost basis and our basis reflected at the entity level and our preferred payment.

During the period from March 18, 2013 to September 30, 2013, the CB Portfolio had net cash provided by operating activities of approximately $11.2 million, net cash used in investing activities of approximately $17.7 million and net cash provided by financing activities of approximately $7.3 million.

The following table is the calculation of the Company’s equity in earnings for the CB Portfolio for the period from March 18, 2013 to September 30, 2013. As there are several components of the calculation, set forth below are notes corresponding to the notes included in the Company’s calculation below to further explain these components.

Net loss incurred by the CB Portfolio based on the Company’s purchase price⁽¹⁾	$	(2,998)
Campus Crest’s share of net loss		(972)
Campus Crest percentage of preferred payment⁽²⁾		4,590
Campus Crest income from Copper Beech		3,618
Amortization of basis difference⁽³⁾		(87)
Total equity in earnings in CB Portfolio	$	3,531

(1)

The basis of the financial statements of the CB Portfolio used in the calculation of the Company’s equity in earnings for the period from March 18, 2013 to September 30, 2013 was computed using the Company’s cost basis for its investment in the CB Portfolio’s underlying assets and liabilities, including the effects of provisional purchase price adjustments, for its properties at the dates the Company acquired its interests in the CB Portfolio. For the period from March 18, 2013 to September 30, 2013 this included 35 properties.

We consummated the acquisition of a 48.0% interest in 35 properties of the CB Portfolio. As a result of lender consents that were required to be obtained from various lenders to the CB Portfolio prior to our ownership, we completed our acquisition of the 48.0% interest in stages, which resulted in a variation in our ownership percentage from 25.3% to 48.0% in all 35 of the CB Portfolio properties from March 18, 2013 to September 30, 2013. Accordingly, the Company recognized its proportionate share of earnings of the CB Portfolio for the specific percentage of ownership interest we held during the applicable period.

(2)

As part of the purchase and sale agreement, the Company was entitled to receive a $13.0 million preferred payment over a one year period beginning March 18, 2013 and ending on March 17, 2014. As such, for the period from March 18, 2013 to September 30, 2013 the Company recorded in income its proportionate share of this payment, which corresponds to the portion of the CB Portfolio held by the other owners of Copper Beech.

(3)

Included in the calculation of equity in earnings in the CB Portfolio is the amortization of the net difference in the Company’s carrying value of investment as compared to the underlying equity in net assets of the investee.

We are entitled to a preferred payment of $13.0 million for the first year of our investment and 48.0% of the remaining operating cash flows in the CB Portfolio. During the period from March 18, 2013 to September 30, 2013, we were entitled to approximately $7.6 million of cash distributions of which we had received $4.9 million, approximately $4.3 million of preferred payment and approximately $0.6 million in other distributions, as of September 30, 2013. During the period from March 18, 2013 to September 30, 2013, the CB Portfolio had net cash provided by operating activities of approximately $11.2 million, net cash used in investing activities of approximately $17.7 millionand net cash provided by financing activities of approximately $7.3 million.