SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-9360
ASSET INVESTORS CORPORATION
(Exact name of registrant as specified in its charter)
Maryland 84-1038736
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3410 South Galena Street, Suite 210 80231
Denver, Colorado (Zip Code)
(Address of Principal Executive Offices)
(303) 614-9400
(Registrant's telephone number, including area code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __.
As of October 30, 1998, 5,015,594 shares of Asset Investors Corporation Common
Stock were outstanding.
<PAGE>
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION:
Item 1. Condensed Consolidated Financial Statements:
Balance Sheets as of September 30, 1998 (unaudited)
and December 31, 1997.............................................. 1
Statements of Income for the three and nine months ended
September 30, 1998 and 1997 (unaudited)............................ 2
Statements of Cash Flows for the nine months ended
September 30, 1998 and 1997 (unaudited)............................ 3
Notes to Financial Statements (unaudited).......................... 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 13
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K................................ 23
(i)
<PAGE>
<TABLE>
<CAPTION>
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands except per share data)
September 30, December 31,
1998 1997
---- ----
(unaudited)
ASSETS
<S> <C> <C>
Real estate, net of accumulated depreciation of $2,455 and $693 $ 99,387 $ 40,726
Investments in participating mortgages 29,071 25,415
Cash and cash equivalents 178 21,802
Investment in CAX 20,808 20,866
Other assets, net 10,995 10,352
---------- ----------
Total Assets $ 160,439 $ 119,161
========== ==========
LIABILITIES
Secured long-term notes payable $ 10,342 $ 10,677
Secured short-term financing 39,770 --
Accounts payable and accrued liabilities 3,831 2,607
---------- ----------
53,943 13,284
---------- ----------
MINORITY INTEREST IN OPERATING PARTNERSHIP 25,903 22,362
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share, 50,000 shares authorized 5,097
and 5,108 shares issued and outstanding, respectively 51 51
Additional paid-in capital 231,057 231,221
Dividends in excess of accumulated earnings (150,515) (147,757)
-------- --------
80,593 83,515
---------- ----------
Total Liabilities and Stockholders' Equity $ 160,439 $ 119,161
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
- 1 -
<PAGE>
<TABLE>
<CAPTION>
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
RENTAL PROPERTY OPERATIONS
<S> <C> <C> <C> <C>
Rental and other property revenues $ 3,280 $1,084 $ 7,132 $ 1,652
Interest on participating mortgages 801 -- 2,348 --
Equity in earnings of rental property joint ventures -- 142 -- 145
Property operating expenses (1,212) (493) (2,812) (736)
-------- -------- -------- --------
Income from property operations before depreciation 2,869 733 6,668 1,061
Depreciation (874) (244) (1,762) (375)
-------- -------- -------- --------
Income from rental property operations 1,995 489 4,906 686
-------- -------- -------- --------
SERVICE OPERATIONS
Property management fees and other income, net 39 42 122 50
CAX management fees 65 -- 75 --
Amortization of management contracts (689) (35) (2,205) (53)
-------- -------- -------- --------
Income (loss) from service operations (585) 7 (2,008) (3)
-------- -------- -------- --------
OTHER ACTIVITIES
Non-agency MBS bonds revenues -- 276 50 2,726
Equity in earnings of CAX 154 664 688 1,612
Management fees to former manager -- (111) -- (485)
-------- -------- -------- --------
Income from other activities 154 829 738 3,853
-------- -------- -------- --------
General and administrative expenses (373) (191) (1,031) (614)
Interest and other income 75 632 627 1,476
Interest expense (914) (101) (1,390) (182)
Cost incurred to acquire management contract (2,092) -- (2,092) --
-------- -------- -------- --------
INCOME (LOSS) BEFORE GAIN ON RESTRUCTURING OF BONDS
AND MINORITY INTEREST
(1,740) 1,665 (250) 5,216
Gain on restructuring of bonds -- -- -- 5,287
-------- -------- -------- --------
INCOME (LOSS) BEFORE MINORITY INTEREST (1,740) 1,665 (250) 10,503
Minority interest in Operating Partnership 372 -- 54 --
-------- -------- -------- --------
NET INCOME (LOSS) $ (1,368) $ 1,665 $ (196) $ 10,503
======== ======== ======== ========
BASIC EARNINGS PER SHARE $ (0.27) $ 0.33 $ (0.04) $ 2.08
======== ======== ======== ========
DILUTED EARNINGS PER SHARE $ (0.27) $ 0.33 $ (0.04) $ 2.06
======== ======== ======== ========
DIVIDENDS DECLARED PER SHARE $ 0.250 $ 0.325 $ 0.500 $ 1.100
======== ======== ======== ========
Weighted-Average Common Shares Outstanding 5,123 5,048 5,116 5,057
Weighted-Average Common Shares and Common Share
Equivalents Outstanding 5,123 5,093 5,116 5,092
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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<PAGE>
<TABLE>
<CAPTION>
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
-------------
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss) $ (196) $ 10,503
Adjustments to reconcile net income to net cash flows from operating
activities:
Depreciation and amortization 3,967 428
Minority interest in Operating Partnership (54) --
Equity in earnings of CAX (659) (1,612)
Accrued interest on participating mortgages (601) --
Equity in earnings of rental property joint ventures -- (145)
Amortization of non-agency MBS bonds -- 469
Increase in other assets (941) (573)
Increase in accounts payable and accrued liabilities 997 151
Costs incurred to acquire management contract 2,073 --
Gain on restructuring of assets -- (7,359)
------- -------
Net cash provided by operating activities 4,586 1,862
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of real estate (58,058) (22,616)
Investments in participating mortgages, net (3,042) --
Investment in rental property joint ventures -- (13,922)
Capital replacements (207) (44)
Dividends from CAX 718 1,408
Distributions from rental property joint ventures -- 166
Principal collections and indemnifications on non-agency MBS bonds -- 547
Proceeds from the restructuring of assets -- 69,743
--------- ---------
Net cash provided by (used in) investing activities (60,589) 35,282
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds (paydowns) from secured short-term financing 39,770 (3,000)
Principal paydown on secured long-term notes payable (335) (88)
Payment of loan costs, including costs from interest rate hedges (1,219) --
Repurchase of Common Stock (597) --
Proceeds from the issuance of Common Stock 35 11
Payment of Common Stock dividends (2,562) (5,515)
Payment of distributions to minority interest in Operating Partnership (713) (12)
---------- ----------
Net cash provided by (used in) financing activities 34,379 (8,604)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(21,624) 28,540
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 21,802 417
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 178 $ 28,957
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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<PAGE>
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A. The Company
Asset Investors Corporation ("AIC" and, together with its subsidiaries, the
"Company") is a Maryland corporation that owns and operates manufactured home
communities and has elected to be taxed as a real estate investment trust
("REIT"). The Company's common stock, par value $.01 per share ("Common Stock"),
is listed on the New York Stock Exchange under the symbol "AIC." In May 1997,
the Company contributed its net assets to Asset Investors Operating Partnership,
L.P. (the "Operating Partnership") in exchange for the sole general partner
interest in the Operating Partnership and substantially all of the Operating
Partnership's initial capital. AIC held a 77% interest in the Operating
Partnership as of September 30, 1998. The Company also owns 27% of the voting
common stock of Commercial Assets, Inc. ("CAX") and all of the non-voting common
stock of both AIC Manufactured Housing Corp. ("AICMHC") and AIC Management Corp.
("Management Corp."). CAX is a publicly-traded REIT (American Stock Exchange,
Inc.: CAX) formed by the Company in August 1993. In the third quarter of 1998,
CAX announced that it intended to acquire manufactured home communities
identified for it by the Company. AICMHC owns interests in manufactured home
community management contracts and Management Corp. owns the management
agreement to manage CAX.
Prior to 1997, the Company owned debt interests in residential mortgage loan
securitizations collateralized by pools of non-conforming (non-agency
guaranteed) single-family mortgage loans ("non-agency MBS bonds"). In February
1997, the Company decided to restructure the Company's asset base and redeploy
its assets in an attempt to both reduce risks associated with the Company's
non-agency MBS bonds and maximize long-term, risk-adjusted returns to
stockholders. In March 1997, the Company contributed its portfolio of non-agency
MBS bonds into an owner trust in a structured transaction in which the Company
received $67,671,000 cash proceeds and retained a small equity interest.
Subsequently, the Company has acquired interests in 23 manufactured home
communities and two recreational vehicle parks with approximately 4,610
developed homesites, 380 recreational vehicle sites, 790 sites ready for homes
and 1,960 sites available for future development.
Prior to November 1997, the Company and CAX were managed by Financial Asset
Management LLC ("FAM" or the "Manager"). An investor group led by Terry
Considine, Thomas L. Rhodes and Bruce D. Benson acquired the Manager in
September 1996. Mr. Considine is the Chairman and Chief Executive Officer of
both the Company and CAX. Mr. Rhodes is Vice Chairman and Mr. Benson is a
director of both the Company and CAX. In November 1997, the Company's
stockholders approved the acquisition of the assets and operations of the
Manager in order to become a self-managed and self-administered REIT. The
$11,692,000 purchase price was paid by issuing 676,700 limited partnership units
of the Operating Partnership ("OP Units") plus up to 240,000 additional OP Units
if certain performance goals, including investment and share price targets, are
achieved by the Company within a specified time period. During the third quarter
of 1998, the Company achieved the first set of performance goals by realizing
annualized returns before depreciation in excess of 9% on its real estate
investments for a period of six months. As a result of achieving these goals,
the Company issued 120,000 OP Units and recorded an additional cost of acquiring
the management contract of $2,092,000. The issuance of the remaining 120,000 OP
Units is contingent upon the Company having a 90-day average per share price in
excess of $20.00 by June 1999.
- 4 -
<PAGE>
B. Presentation of Financial Statements
The Condensed Consolidated Financial Statements of the Company presented herein
have been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. These financial
statements reflect all adjustments, consisting of only normal recurring
accruals, which, in the opinion of management, are necessary to present fairly
the financial position, results of operations and cash flows of the Company as
of September 30, 1998, and for the three and nine months then ended and for all
prior periods presented. These statements are condensed and do not include all
the information required by generally accepted accounting principles ("GAAP") in
a full set of financial statements. These statements should be read in
conjunction with the Company's Consolidated Financial Statements and notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
Certain reclassifications have been made in the Condensed Consolidated Financial
Statements to conform to the classifications currently used. The effect of such
reclassifications on amounts previously reported is immaterial.
C. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, the
Operating Partnership and all majority-owned subsidiaries. The minority interest
in the Operating Partnership represents the OP Units which are redeemable at the
option of the holder. When a holder elects to redeem OP Units, the Company
determines whether such OP Units will be redeemed for cash or shares of Common
Stock. The holders of OP Units receive the same amount per OP Unit in
distributions as the holders of Common Stock receive in dividends. As of
September 30, 1998, 1,545,000 OP Units were outstanding. All significant
intercompany balances and transactions have been eliminated in consolidation.
The Company's investment in CAX is recorded under the equity method.
Rental Properties and Depreciation
Rental properties are recorded at cost less accumulated depreciation.
Depreciation is computed using the straight line method over an estimated useful
life of 25 years for land improvements and buildings and five years for
furniture and other equipment. Significant renovations and improvements, which
improve or extend the useful life of the asset, are capitalized and depreciated
over the remaining estimated life. In addition, the Company capitalizes direct
and indirect costs (including interest, taxes and other costs) in connection
with the development of additional homesites within its manufactured home
communities. Maintenance, repairs and minor improvements are expensed as
incurred.
When conditions exist which indicate that the carrying amount of a property may
be impaired, the Company will evaluate the recoverability of its net investment
in the property by assessing current and future levels of income and cash flows.
As of September 30, 1998, there has been no impairment of the Company's
investment in rental properties.
Amortization
Included in other assets is the cost related to the acquisition of management
contracts, which is being amortized over a period of three years. Revenue
Recognition
- 5 -
<PAGE>
The Company derives its income from the rental of homesites. The leases entered
into by residents for the rental of the site are generally for terms not longer
than one year and the rental revenues associated with the leases are recognized
when earned and due from residents. Property management revenues for services
provided to communities not owned by the Company are recognized when earned.
Interest on participating mortgages is recorded based upon outstanding balances
and interest rates per the terms of the mortgages. In addition, the Company
evaluates the collectibility of any unpaid interest and reserves for as
necessary. As of September 30, 1998, there is no reserve for uncollected
interest on the participating mortgages.
Deferred Financing Costs
Fees and costs incurred in obtaining financing are capitalized. Such costs are
amortized over the terms of the related loan agreements and are charged to
interest expense.
Interest Rate Lock Agreements
Interest rate lock agreements related to planned refinancings of identified
variable rate indebtedness are accounted for as anticipatory hedges. Upon the
refinancing of such indebtedness, any gain or loss associated with the
termination of the interest rate lock agreement is deferred and recognized over
the life of the refinanced indebtedness.
Income Taxes
AIC has elected to be taxed as a REIT as defined under the Internal Revenue Code
of 1986, as amended (the "Code"). In order for AIC to qualify as a REIT, at
least 95% of its gross income in any year must be derived from qualifying
sources. The activities of AICMHC and Management Corp. are not qualifying
sources.
As a REIT, AIC generally will not be subject to federal income taxes at the
corporate level if it distributes at least 95% of its REIT taxable income to its
stockholders. REITs are also subject to a number of other organizational and
operational requirements. If AIC fails to qualify as a REIT in any taxable year,
its taxable income will be subject to federal income tax at regular corporate
rates (including any applicable alternative minimum tax). Even if AIC qualifies
as a REIT, it may be subject to certain state and local income taxes and to
federal income and excise taxes on its undistributed income.
At September 30, 1998, AIC's net operating loss ("NOL") carryover was
approximately $95,000,000 and its capital loss carryover was approximately
$34,000,000. The NOL carryover may be used to offset all or a portion of AIC's
REIT income, and as a result, to reduce the amount that AIC must distribute to
stockholders to maintain its status as a REIT. The NOL carryover is scheduled to
expire between 2007 and 2009. Approximately $10,000,000 of the capital loss
carryover is scheduled to expire in 1998 with the balance scheduled to expire in
2000-2001.
Earnings Per Share
Basic earnings per share for the three and nine months ended September 30, 1998
and 1997 are based upon the weighted-average number of shares of Common Stock
- 6 -
<PAGE>
outstanding during each such period. Diluted earnings per share reflect the
effect of any dilutive, unexercised stock options in each such period. In
November 1997, stockholders approved a one-for-five reverse split of the Common
Stock. Accordingly, all historical weighted-average share and per share amounts
have been restated to reflect the reverse stock split.
Statements of Cash Flows
For purposes of reporting cash flows, cash maintained in bank accounts, money
market funds and highly-liquid investments with an initial maturity of three
months or less are considered to be cash and cash equivalents. The Company paid
$1,262,000 and $164,000 in interest during the nine months ended September 30,
1998 and 1997, respectively.
Non-cash investing and financing activities for the nine months ended September
30, 1998 and 1997 were (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Unrealized holding gains and losses on debt securities $ -- $3,758
Real estate acquired under earn-out agreements 52 --
Issuance of Common Stock for services 120 101
Issuance of Common Stock for notes receivable 278 --
Consideration for acquisition of real estate:
Issuance of Common Stock -- 1,250
Assumption of secured notes payable -- 4,962
Issuance of OP Units 2,145 406
Issuance of OP Units for Participating Mortgages 17 --
Receivables from minority interest in subsidiaries 319 --
</TABLE>
D. Real Estate
Real estate at September 30, 1998 and December 31, 1997, was (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---- ----
(unaudited)
<S> <C> <C>
Land $ 11,226 $ 5,286
Land improvements and buildings 90,170 35,689
Furniture and other equipment 446 444
--------- ---------
101,842 41,419
Less accumulated depreciation (2,455) (693)
--------- ---------
Investment in real estate, net $ 99,387 $ 40,726
========= =========
</TABLE>
Land improvements and buildings consist primarily of infrastructure, roads,
landscaping, clubhouses, maintenance buildings and common amenities.
E. Investments in Participating Mortgages
As of December 31, 1997, the Company had notes receivable of $15,872,000 from
joint ventures in which the Company owned a 50% joint venture interest.
Effective January 1, 1998, the Company sold its interest in the various joint
ventures and consolidated the various notes into a single note secured by a
number of manufactured home communities. The note bears 10% interest, matures in
20 years and provides for additional advances up to a maximum of $20,000,000. In
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<PAGE>
addition, the Company receives additional interest up to 50% of the borrower's
profit from such communities.
In addition, the Company has first and second mortgage loans secured by three
contiguous manufactured home communities in Arizona. The first mortgage loan
bears 10% interest. The second mortgage loan accrues 15% interest and paid 9%
interest through July 1998, with the pay rate increasing 1% annually for three
years to a maximum of 12% per annum. Both loans mature in April 2001. The
Company receives additional interest of 3% of gross revenues, increasing to 11%
of gross revenues in the event of a refinancing of the debt on the communities,
and 50% of net proceeds from a sale or refinancing of the communities. In 1997,
the mortgage loans were accounted for as an equity investment in real estate.
Effective January 1, 1998, the Company reclassified the investment to
participating mortgages.
As of September 30, 1998, the Company had investments in participating mortgages
of $29,071,000. During the three and nine months ended September 30, 1998, the
Company had earnings of $801,000 and $2,348,000, respectively, from these
mortgages.
F. Investment in Commercial Assets
On September 30, 1998 and December 31, 1997, the Company owned 2,761,126 shares
(approximately 27%) of the common stock of CAX. In November 1997, CAX sold or
resecuritized its entire portfolio of commercial mortgage loan securitizations
of multi-family real estate ("CMBS bonds") and temporarily invested the proceeds
until it determined which type of real estate assets to invest in. During the
third quarter of 1998, CAX announced that it plans to acquire manufactured home
communities and during the three months ended September 30, 1998, had invested
$9,400,000 in participating mortgages and leases on four communities. Summarized
financial information of CAX as reported by CAX is (in thousands):
<TABLE>
<CAPTION>
Balance Sheets September 30, December 31,
1998 1997
---- ----
(unaudited)
<S> <C> <C>
Cash and cash equivalents $ 2,641 $ 74,153
Short-term investments 59,564 --
Investment in participating mortgages and leases 9,514 --
Other assets 6,533 3,995
----------- -----------
Total assets 78,252 78,148
Total liabilities 618 443
----------- -----------
Stockholders' equity $ 77,634 $ 77,705
=========== ===========
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Statements of Income (unaudited) Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income from property operations $ 131 $ -- $ 131 $ --
Interest and other income 1,012 51 3,107 211
CMBS bonds revenue 40 3,423 124 7,660
General and administrative expenses (129) (104) (303) (348)
Management fees (7) (886) (24) (1,494)
-------- --------- -------- --------
OPERATING INCOME 1,047 2,484 3,035 6,029
Acquisition fees (61) -- (61) --
Reserve for costs related to potential marina
investments (500) -- (500) --
-------- --------- -------- --------
NET INCOME 486 2,484 2,474 6,029
Unrealized holding gains on CMBS bonds -- 6,431 -- 8,389
-------- --------- -------- --------
COMPREHENSIVE INCOME $ 486 $ 8,915 $ 2,474 $ 14,418
======== ========= ======== ========
</TABLE>
G. Secured Notes Payable
The following table summarizes the Company's long-term secured notes payable,
all of which are non-recourse to the Company (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---- ----
(unaudited)
<S> <C> <C>
8.25% fixed rate notes maturing in October 2000 $ 4,592 $ 4,805
7.5% fixed rate notes maturing in October 2000 5,750 5,872
--------- ---------
$ 10,342 $ 10,677
========= =========
</TABLE>
Real estate assets which secure the secured notes payable had a net book value
of $22,992,000 at September 30, 1998. The Company had paid $309,000 in escrow
for real estate taxes on the secured notes payable at September 30, 1998.
Scheduled principal payments after September 30, 1998 for the secured notes
payable are (in thousands):
1998 $ 102
1999 487
2000 9,753
---------
$ 10,342
H. Secured Short-Term Financing
In September 1998, the Company executed a $5,000,000 revolving credit agreement
with a bank that bears interest at the London Interbank Offered Rate ("LIBOR")
plus 1.75% per annum (7.4% at September 30, 1998). The agreement is secured by
- 9 -
<PAGE>
1,016,000 shares of the common stock of CAX held by the Company and matures in
August 2000. At September 30, 1998, $770,000 was outstanding.
In July 1998, the Company borrowed $39,000,000 of non-recourse, secured
short-term financing, which bears interest at LIBOR plus 1% per annum (6.6% at
September 30, 1998) In connection with the financing, the Company paid a loan
fee equal to 0.25% of the amount borrowed and incurred $120,000 in other costs.
The fee and other costs are being expensed over the life of the loan. The
proceeds from this financing were used to acquire three manufactured home
communities and to repay $7,000,000 of secured short-term financing that the
Company borrowed in June 1998 in connection with the acquisition of a
manufactured home community. Six manufactured home communities, with a carrying
value at September 30, 1998 of $58,229,000, and $10,000,000 of participating
mortgages secure the loan. The Company expects to repay the loan with proceeds
from future long-term secured notes payable on its various properties. The
Company expects to extend the maturity of such loan until the refinancing is
finalized.
In 1996, the Company had a $10,000,000 secured revolving credit and term loan
agreement with a bank. Borrowings of $3,000,000 under this credit facility were
repaid and the agreement was canceled during the first quarter of 1997.
I. Commitments and Contingencies
In connection with a participating mortgage on a manufactured home community,
the Company entered into an earn-out agreement with respect to unoccupied
homesites. The Company advances an additional $17,000 pursuant to the
participating mortgage for each newly occupied homesite either in the form of
cash or 946 OP Units, as determined by the borrower. During the three and nine
months ended September 30, 1998, the Company advanced $17,000 in cash and
$50,000 ($17,000 in OP Units and $33,000 in cash), respectively, for newly
occupied homesites.
In connection with the acquisition of the assets and operations of the Manager
in November 1997, the Company entered in an agreement to issue additional OP
Units upon the achievement of certain performance goals by the Company. Per the
terms of the agreement, the Company will be required to issue an additional
120,000 OP Units if the Company's average stock price exceeds $20.00 per share
for any 90-day period from September 30, 1998 to June 17, 1999.
J. Common Stock and Dividends
During the third quarter of 1998, the Board of Directors authorized the Company
to repurchase up to 800,000 shares of its Common Stock in the open market and
through privately negotiated transactions. The shares may be purchased from time
to time as market conditions warrant. Through September 30, 1998, 39,900 shares
were repurchased at a cost of $597,000 ($14.98 per share).
In February 1998, the Company announced that it was changing the date on which
its quarterly dividends are declared from the last month of the quarter to the
first month of the subsequent quarter. This change was made to allow the
dividend to be based on actual results instead of estimated results.
Accordingly, no dividend was declared during the first quarter of 1998. In
April, July and October 1998, the Company declared a $0.25 per share dividend on
the Common Stock for the first, second and third quarters of 1998. Concurrently,
the Operating Partnership declared a $0.25 per OP Unit distribution for the
first, second and third quarters of 1998. During the three and nine months ended
September 30, 1997, the Company declared $0.325 and $1.10, respectively, per
share dividends on the Common Stock, and the Operating Partnership declared a
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<PAGE>
$0.325 and $0.625 per OP Unit distribution, respectively. The Operating
Partnership did not exist during the first quarter of 1997.
K. Non-agency MBS Bonds
In March 1997, the Company resecuritized its portfolio of non-agency MBS bonds
by contributing them to a trust in which it retained the equity interest and
having the trust sell nonrecourse debt securities representing senior interests
in the trust's assets. The Company realized net proceeds of $67,671,000 and
recorded a net gain of $5,287,000 from the sale. The Company's retained equity
interest in the trust represents the first-loss class of the portfolio and,
accordingly, no carrying value was assigned to it. During the three and nine
months ended September 30 1997, the Company recognized $276,000 and $2,726,000,
respectively, of interest income from the non-agency MBS bonds of which $276,000
and $726,000, respectively, was from the retained equity interest. The Company
recorded revenues of $0 and $50,000, respectively, from the retained equity
interest during the three and nine months ended September 30, 1998.
L. Other Matters
From January to November 1997, FAM provided all personnel and related overhead
necessary to conduct the Company's activities in exchange for various fees
provided for in a management agreement (the "AIC Management Agreement"). In
November 1997, the Company's stockholders approved the purchase of FAM's assets
and operations for $11,692,000 in connection with the Company becoming a
self-managed and self-administered REIT. The initial purchase price and related
costs were allocated $6,553,000 to the AIC Management Agreement and $5,936,000
to a management agreement pursuant to which the Company manages CAX (the "CAX
Management Agreement"). The Company expensed the amount allocated to the AIC
Management Agreement in 1997 and is amortizing the cost of the CAX Management
Agreement over three years. In addition to the initial purchase price, FAM
received 120,000 additional OP Units in August 1998 because the Company had
annualized returns before depreciation in excess of 9% on certain of its real
estate investments. These OP Units were valued at $2,092,000 and are expensed in
results of operations for the three and nine months ended September 30, 1998.
The CAX Management Agreement has been extended through December 31, 1998. During
the three and nine months ended September 30, 1998, the Company earned
management fees of $65,000 and $75,000, respectively, under the CAX Management
Agreement (net of elimination for the Company's 27% ownership of CAX). As of
September 30, 1998 and December 31, 1997, the net book value of the CAX
Management Agreement was $4,238,000 and $5,722,000, respectively, and is
included in other assets.
Through March 31, 1997, the Manager received a "Base Fee," an "Incentive Fee"
and an "Administrative Fee." The Base Fee was an annual fee equal to 3/8 of 1%
of the "average invested assets" of the Company for such year. The Incentive Fee
was equal to 20% of the amount of the Company's net income which was in excess
of the return on the Company's "average net worth" equal to the "Ten-Year U.S.
Treasury rate" plus 1%. The Manager received an Administrative Fee of up to
$3,500 per annum per non-agency MBS bond for certain bond administration and
other related services. In connection with the change in the Company's assets,
the AIC Management Agreement was amended April 1, 1997, to: (i) increase the
Base Fee to 1% per annum of "average invested assets;" (ii) provide for an
acquisition fee (the "Acquisition Fee") equal to 0.5% of the cost of real estate
investments acquired; and (iii) change the Incentive Fee to be calculated from
Adjusted Funds From Operations ("AFFO") rather than net income. AFFO is
generally equal to the Company's net income plus (a) depreciation of rental
properties, (b) amortization of management contracts and (c) minority interest
- 11 -
<PAGE>
in the Operating Partnership; less capital replacement reserves. The
Administrative Fee was effectively eliminated as a result of the
resecuritization of the Company's non-agency MBS bonds.
During the three and nine months ended September 30, 1997, the Company incurred
the following fees under the AIC Management Agreement (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1997 September 30, 1997
------------------ ------------------
<S> <C> <C>
Base Fees $ 83 $ 180
Incentive Fees 6 59
Administrative Fees 22 246
Acquisition Fees 67 219
------- -------
Total $ 178 $ 704
======= =======
</TABLE>
The Company incurred $1,472,000 of additional Incentive Fees during the nine
months ended September 30, 1997 from its gain on the restructuring of its bonds
plus an additional fee of $600,000 in exchange for the Manager agreeing to
continue as a loss mitigation advisor on the non-agency MBS bonds. Such fees
were charged against the Company's gain from such restructuring.
- 12 -
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Introduction
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements in certain circumstances. Certain information
included in this Report, the Company's Annual Report to Stockholders and other
Company filings (collectively "SEC Filings") under the Securities Act of 1933,
as amended, and the Securities Exchange Act of 1934, as amended (as well as
information communicated orally or in writing between the dates of such SEC
Filings) contains or may contain information that is forward looking, including,
without limitation, statements regarding projections of the Company's future
financial performance, cash flow, dividends and anticipated returns on real
estate investments. Such forward-looking statements involve known and unknown
risks, uncertainties and other factors that may cause the actual results,
performance or achievements of the Company to be materially different from any
future results, performance or achievements expressed or implied by the
forward-looking statements. Such factors include: general economic and business
conditions; interest rate changes; financing and refinancing risks; risks
inherent in owning real estate or debt secured by real estate; future
development rate of homesites; competition; the availability of real estate
assets at prices which meet the Company's investment criteria; the Company's
ability to reduce expense levels, implement rent increases and use leverage; and
other risks set forth in the Company's Securities and Exchange Commission
filings. Readers should carefully review the Company's financial statements and
the notes thereto, as well as the risk factors described in the SEC Filings.
Business
Asset Investors Corporation, a Maryland corporation formed in 1986, ("AIC" and
together with its consolidated subsidiaries the "Company") is a
self-administered and self-managed real estate investment trust ("REIT") engaged
in the ownership, acquisition, development and management of manufactured home
communities. AIC's shares of common stock ("Common Stock") are listed on the New
York Stock Exchange ("NYSE") under the symbol "AIC." In May 1997, AIC
contributed all of its net assets to Asset Investors Operating Partnership, L.P.
(the "Operating Partnership") in exchange for the sole general partner interest
in the Operating Partnership and substantially all of the Operating
Partnership's initial capital. As of September 30, 1998, AIC owned 77% of the
Operating Partnership. The Company also manages and owns approximately 27% of
the common stock of Commercial Assets, Inc. ("CAX"). CAX is a publicly-traded
REIT (American Stock Exchange, Inc.: CAX) that is also involved in the
ownership, acquisition, development and management of manufactured home
communities.
A manufactured home community is a residential subdivision designed and improved
with sites for the placement of manufactured homes and related improvements and
amenities. Manufactured homes are detached, single-family homes which are
produced off-site by manufacturers and installed on sites within the community.
Manufactured homes are available in a variety of designs and floor plans,
offering many amenities and custom options.
Modern manufactured home communities are similar to typical residential
subdivisions containing centralized entrances, paved streets, curbs and gutters
and parkways. The communities frequently provide a clubhouse for social and
recreation activities and other amenities, which may include golf courses,
swimming pools, shuffleboard courts and laundry facilities. Utilities are
provided or arranged for by the owner of the community. Community lifestyles,
primarily promoted by resident managers, include a wide array of social
activities that serve to promote a sense of neighborhood. The communities
- 13 -
<PAGE>
provide an attractive and affordable housing alternative for retirees, empty
nesters and start-up or single-parent families.
The owner of each home in the Company's communities leases the site on which the
home is located. The typical lease entered into between the tenant and one of
the Company's manufactured home communities for the rental of a site is
month-to-month or year-to-year, renewable upon the consent of both parties or,
in some instances, as provided by statute. In some circumstances, the Company
also offers a 99-year lease to a tenant in order to enable the tenant to have
some benefits of an owner of real property (e.g. the Homestead exemption). These
leases are cancelable, depending on state law, for non-payment of rent,
violation of community rules and regulations or other specified defaults.
Generally, market rate adjustments are made on an annual basis. The Company owns
the underlying land, utility connections, streets, lighting, driveways, common
area amenities and other capital improvements and is responsible for enforcement
of community guidelines and maintenance. Each homeowner within the manufactured
home community is responsible for the maintenance of his home and leased site
including lawn care in some communities.
The Company believes that manufactured home communities, once fully occupied,
tend to achieve a stable rate of occupancy. The cost and effort involved in
relocating a home to another community generally encourages the owner of the
home to resell it within the community.
Recent Developments
Manufactured Home Community Acquisitions
During 1998, AIC acquired interests in seven manufactured home communities, for
total consideration of $60.2 million consisting of $58 million cash and units of
limited partnership interests in the Operating Partnership ("OP Units") with a
total recorded value of $2.2 million. As of September 30, 1998, the Company has
interests in 23 manufactured home communities and two recreational vehicle
parks. The communities consist of 4,610 developed homesites, 790 sites ready for
homes, 1,960 sites available for future development and 380 recreational vehicle
sites. Of such properties, 18 communities are located in Florida, three are in
Arizona and one each is in Pennsylvania and New Jersey. The recreational vehicle
parks are in California and Arizona.
Stock Repurchases
In the third quarter of 1998, the Company announced that it will repurchase up
to 800,000 shares of its common stock in the open market and privately
negotiated transactions. As of October 30, 1998, 121,250 shares have been
repurchased at an average price of $14.09 per share.
Growth and Operating Strategies
The Company measures its economic profitability based on Funds From Operations
("FFO"). The Company's management believes that FFO provides investors with an
understanding of the Company's ability to incur and service debt and make
capital expenditures. The Board of Governors of the National Association of Real
Estate Investment Trusts ("NAREIT") defines FFO as net income (loss), computed
in accordance with generally accepted accounting principles ("GAAP"), excluding
gains and losses from debt restructuring and sales of property, plus real estate
related depreciation and amortization (excluding amortization of financing
costs), and after adjustments for unconsolidated partnerships and joint
ventures. The Company calculates FFO in a manner consistent with the NAREIT
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<PAGE>
definition, which includes adjustments for minority interest in the Operating
Partnership and amortization of goodwill related to controlled management
contracts, including the management agreement between the Company and CAX and
the Company's acquisition of the agreement to manage itself. FFO should not be
considered an alternative to net income or net cash flows from operating
activities, as calculated in accordance with GAAP, as an indication of the
Company's performance or as a measure of liquidity. FFO is not necessarily
indicative of cash available to fund future cash needs.
The Company's primary objective is to maximize stockholder value by increasing
the amount and predictability of FFO on a per share basis. The Company seeks to
achieve this objective primarily by improving net operating income from its
existing portfolio of manufactured home communities and by acquiring additional
communities at values that are accretive on a per share basis. The Company
intends to follow operating and financial strategies, including: (i) obtaining a
geographically diverse portfolio of communities; (ii) providing a minimum $50
per homesite per year for capital replacements to maintain its communities;
(iii) utilizing long-term, fixed-rate, fully-amortizing debt; and (iv)
maintaining a ratio of (a) Adjusted Funds From Operations ("AFFO") plus interest
expense to (b) interest expense of at least 2 to 1. AFFO is equal to FFO less an
estimated annual reserve for capital replacements of $50 per homesite. In
addition, the Company seeks to: (i) selectively acquire manufactured home
communities that have potential long-term appreciation of value through, among
other things, rent increases, expense efficiencies and in-park homesite
absorption and development; (ii) improve the profitability of its communities
through aggressive management of occupancy, community development and
maintenance and expense control; (iii) develop and maintain resident
satisfaction and a reputation for quality communities through maintenance of the
physical condition of the communities and providing activities that improve the
community lifestyle; and (iv) recruit and retain quality community management
personnel.
Future Acquisitions
From time to time, the Company evaluates acquisition opportunities in the
manufactured home community industry and expects to acquire additional
properties as opportunities can be identified on terms considered beneficial by
management. The acquisition of interests in additional communities could also
result in the Company becoming increasingly leveraged as it incurs debt in
connection with these transactions.
When evaluating potential acquisitions, the Company considers such factors as:
(i) the geographic area and type of property; (ii) the location, construction
quality, condition and design of the property; (iii) the current and projected
cash flow of the property and the ability to increase cash flow; (iv) the
potential for capital appreciation of the property; (v) the terms of tenant
leases, including the potential for rent increases; (vi) the potential for
economic growth and the tax and regulatory environment of the community in which
the property is located; (vii) the potential for expansion of the physical
layout of the property and/or the number of sites; (viii) the occupancy and
demand by residents for properties of a similar type in the vicinity and the
residents' profile; (ix) the prospects for liquidity through sale, financing or
refinancing of the property; (x) competition from existing manufactured home
communities and the potential for the construction of new communities in the
area; and (xi) the replacement cost of the property.
Expansion of Existing Communities
The Company also seeks to increase the number of homesites and earnings
generated from its existing portfolio of manufactured home communities and from
future acquisitions by expanding the number of sites available to be leased to
residents if justified by local market conditions and permitted by zoning and
other applicable laws. As of September 30, 1998, the Company has an interest in
11 communities with 792 sites ready for homes and 1,960 sites available for
future development.
- 15 -
<PAGE>
Properties
The manufactured home communities in which the Company has interests are
primarily located in Florida and Arizona. The following table sets forth certain
information as of September 30, 1998, with respect to the Company's communities
and principal markets:
<TABLE>
<CAPTION>
Average
Monthly
Developed Rent RV Sites Ready Sites Available
Community Location Homesites Occupancy (1) per Site Sites for Homes for Development
- ----------------------------------------------------------------------------------------------------------------------------------
Owned and Participating Mortgage Communities
Florida:
<S> <C> <C> <C> <C> <C> <C>
Cardinal Court Largo, FL 138 99% $254 -- -- --
Caribbean Cove Orlando, FL 255 100 265 -- 31 --
Casa del Mar Punta Gorda, FL (2) 108 100 221 -- 135 212
Forest View Homosassa, FL 186 99 218 -- 125 (2) --
Gulfstream Harbor Orlando, FL 379 99 301 -- 3 171
Gulfstream Harbor II Orlando, FL 286 99 297 -- 22 --
Park Royale Pinellas Park, FL 260 94 314 -- 49 (2) --
Pinewood St. Petersburg, FL 220 98 273 -- -- --
Pleasant Living Riverview, FL 244 100 263 -- -- --
Royal Palm Haines City, FL (2) 219 99 204 -- 67 175
Brentwood Hudson, FL (2) 71 89 188 -- 75 74
Savanna Club Port St. Lucie, FL (2) 5 100 171 -- -- 1,328
Serendipity Ft. Myers, FL 338 99 265 -- -- --
Stonebrook Homosassa, FL 120 99 239 -- 98 (2) --
Sun Lake Grand Island, FL (2) 217 100 238 -- 187 --
Sun Valley Tarpon Springs, FL 261 100 330 -- -- --
Westwind I Dunedin, FL 195 99 316 -- -- --
Westwind II Dunedin, FL 189 99 332 -- -- --
Arizona:
Blue Star Apache Junction, AZ (2) 28 100 200 125 -- --
Brentwood West Mesa, AZ 350 100 274 -- -- --
Lost Dutchman Apache Junction, AZ (2)(3) 153 100 229 194 -- --
Sun Valley Apache Junction, AZ (2) 268 100 227 -- -- --
Other:
Marina Dunes Marina, CA -- -- -- 65 -- --
Mullica Woods Egg Harbor City, NJ 90 100 428 -- -- --
Salem Farm Bensalem, PA 28 100 399 -- -- --
===============================================================================
4,608 99% $265 384 792 1,960
===============================================================================
<FN>
(1) Excludes recreational vehicle sites, which are leased on a seasonal basis.
(2) The Company holds notes receivable secured by the communities. The notes
earn interest and participate in profits from the communities.
(3) The Apache Acres manufactured home community has been merged into the Lost
Dutchman community.
</FN>
</TABLE>
- 16 -
<PAGE>
<TABLE>
<CAPTION>
Number of Sites
---------------------------------------------------------------
Available for
Number of Ready for Future Recreational
Communities Developed Homes Development Vehicles
----------- --------- ----- ----------- --------
<S> <C> <C> <C> <C>
Florida 18 3,691 792 1,960 --
Arizona 4 799 -- -- 319
New Jersey 1 90 -- -- --
Pennsylvania 1 28 -- -- --
California 1 -- -- -- 65
--- ------ ---- ------ ----
Total 25 4,608 792 1,960 384
=== ===== ==== ====== ====
</TABLE>
Taxation of the Company
AIC has elected to be taxed as a REIT under the Internal Revenue Code of 1986,
as amended (the "Code"), and intends to operate in such a manner. AIC's current
qualification as a REIT depends on its ability to meet the various requirements
imposed by the Code, through actual operating results, distribution levels and
diversity of stock ownership.
If AIC qualifies for taxation as a REIT, it will generally not be subject to
federal corporate income tax on its net income that is currently distributed to
stockholders. This treatment substantially eliminates the "double taxation" (at
the corporate and stockholder levels) that generally results from investment in
a corporation. If AIC fails to qualify as a REIT in any taxable year, its
taxable income will be subject to federal income tax at regular corporate rates
(including any applicable alternative minimum tax). AIC has a NOL carryover of
approximately $95 million that could be used in the event that it fails to
qualify as a REIT. Even if AIC qualifies as a REIT, it may be subject to certain
state and local income and other taxes and to federal income and excise taxes on
its undistributed income.
If in any taxable year AIC fails to qualify as a REIT and incurs a tax
liability, AIC might need to borrow funds or liquidate certain investments in
order to pay the applicable tax and AIC would not be compelled under the Code to
make distributions. Unless entitled to relief under certain statutory
provisions, AIC would also be disqualified from treatment as a REIT for the four
taxable years following the year during which qualification is lost. Although
AIC currently intends to operate in a manner designed to qualify as a REIT, it
is possible that future economic, market, legal, tax or other considerations may
cause AIC to fail to qualify as a REIT or may cause the Board of Directors to
revoke the REIT election.
The Company and its stockholders may be subject to state or local taxation in
various jurisdictions, including those in which it or they transact business or
reside. The state and local tax treatment of the Company and its stockholders
may not conform to the federal income tax treatment.
NOL and Capital Loss Carryovers
At September 30, 1998, the AIC's NOL carryover was approximately $95 million and
its capital loss carryover was approximately $34 million. The NOL carryover may
be used to offset all or a portion of AIC's REIT income, and as a result, to
reduce the amount of income that AIC must distribute to stockholders to maintain
its status as a REIT. The NOL carryover is scheduled to expire between 2007 and
2009. Approximately $10 million of the capital loss carryover is scheduled to
expire in 1998 with the balance scheduled to expire in 2000-2001.
- 17 -
<PAGE>
Dividend Distributions
In February 1998, AIC announced that it was changing the date on which its
quarterly dividends are declared from the last month of the quarter to the first
month of the subsequent quarter. This change was made to allow the dividend to
be based on actual results instead of estimated results. Accordingly, no
dividend was declared during the first quarter of 1998. In April and July 1998,
AIC declared $0.25 per share dividends on its Common Stock for the first and
second quarters of 1998 totaling $1,279,000, which was paid in May 1998 and
$1,283,000 which was paid in August 1998. Similarly, the Operating Partnership
declared and paid a $0.25 per OP Unit distribution to holders of OP Units. In
October 1998, AIC and the Operating Partnership each declared a $0.25 per share
dividend and per OP Unit distribution, as applicable, for the third quarter
payable in November 1998. During the three and nine months ended September 30,
1997, AIC declared and paid $0.325 and $1.10, respectively, per share dividends
on its Common Stock, totaling $1,641,000 and $5,515,000, respectively. During
the three months and nine months ended September 30, 1997, the Operating
Partnership declared a $0.325 and $0.625, respectively, per OP Unit distribution
as the Operating Partnership did not exist during the first quarter of 1997.
Acquisition of Manager
Prior to November 1997, the Company's daily activities were performed by
Financial Asset Management LLC (the "Manager" or "FAM") pursuant to a management
agreement (the "AIC Management Agreement"). The Manager provided all personnel
and related overhead necessary to conduct the Company's activities in exchange
for various fees provided for in the AIC Management Agreement. In addition, the
Manager provided similar services to CAX pursuant to a separate agreement (the
"CAX Management Agreement") (collectively, the "Management Agreements"). In
November 1997, stockholders approved the acquisition of the Manager's assets and
operations for a purchase price of $11,692,000, which was paid by issuing
676,696 OP Units plus the right to receive an additional 240,000 OP Units if the
Company achieved certain performance goals involving investment and share price
targets. As a result of the acquisition, the AIC Management Agreement was
cancelled, the fees formerly payable by the Company to the Manager ceased, and
the Company manages CAX pursuant to the CAX Management Agreement. FAM is owned
by an investor group involving Terry Considine, Thomas L. Rhodes and Bruce D.
Benson. Mr. Considine is Chairman of the Board of Directors and Chief Executive
Officer of both the Company and CAX. Mr. Rhodes is Vice Chairman and Mr. Benson
is a director of both companies. In the third quarter of 1998, the Company
issued 120,000 OP Units to FAM due to the Company achieving the investment
performance goal by realizing annualized returns before depreciation in excess
of 9% on certain of its real estate investments for a period of six months. FAM
will be entitled to the remaining 120,000 OP Units if the Company achieves an
average stock price greater than $20.00 per share for a 90-day period by June
1999.
The CAX Management Agreement has been extended through December 31, 1998 and
provides that the Company manages CAX's activities in exchange for the following
fees: (i) Acquisition Fees equal to 0.5% of the cost of each asset acquired by
CAX; (ii) Base Fees equal to 1% per annum of CAX's average invested real estate
assets, and (iii) Incentive Fees equal to 20% of the amount by which CAX's REIT
income exceeds the amount calculated by multiplying CAX's "average net worth" by
the "Ten Year United States Treasury rate" plus 1%. During the third quarter of
1998, CAX announced that it plans to acquire investments in manufactured home
communities and that it had invested $9.4 million in participating mortgages and
leases involving four communities. As a result of these acquisitions, the
Company earned management fees of $65,000 (net of elimination for the Company's
27% ownership of CAX) during the third quarter of 1998. Although there can be no
- 18 -
<PAGE>
assurance of when CAX will make additional investments or the amount thereof,
the Company believes that CAX will continue to invest in manufactured home
communities and fees earned under the CAX Management Agreement will increase.
RESULTS OF OPERATIONS FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998
Comparison of three and nine months ended September 30, 1998 to three and nine
months ended September 30, 1997
Rental Property
Income from rental properties totaled $1,995,000 and $4,906,000, respectively,
during the three and nine months ended September 30, 1998, and $489,000 and
$686,000, respectively, during the same periods in 1997. The increase between
years was due to acquisitions of communities during 1997 and 1998. The Company's
first acquisition of interests in manufactured home communities was in May 1997,
and as of September 30, 1997, the Company had invested $43.2 million in 13
communities. As of September 30, 1998, the Company had invested $130.0 million
in 25 communities.
Service Operations
During the three and nine months ended September 30, 1998, the Company earned
$39,000 and $122,000, respectively, of property management fees and other income
versus $35,000 and $53,000, respectively, during the same periods in 1997.
Property management fees and other income increased during the first nine months
of 1998 as compared to 1997 because the property management contracts were not
acquired until May 1997.
Amortization of management contracts increased from $53,000 to $2,205,000 for
the first nine months of 1997 and 1998, respectively, due to the Company's
acquisition of property management contracts in May 1997 and the CAX Management
Agreement in November 1997. Similarly, fee revenue from the CAX management
agreement did not occur until 1998.
Equity in CAX Earnings
Income from the Company's 27% interest in CAX for the three and nine months
ended September 30, 1998 was $154,000 and $688,000, respectively, compared to
$664,000 and $1,612,000, respectively, for the same periods of 1997. CAX
received income from a portfolio of CMBS bonds prior to November 1997 when it
restructured its portfolio, and the proceeds from the restructuring were
invested in short-term investments while CAX investigated alternative
investments. In the third quarter of 1998, CAX announced that it intends to
invest in manufactured home communities, and that it has invested $9.4 million
in such communities. CAX reported to the Company that the decrease in income
during the three and nine months ended September 30, 1998 as compared to the
same periods in 1997 was due to: (i) lower yields during 1998 on short-term
investments and interests in manufactured housing communities than during 1997
on CMBS bonds, and (ii) a non-recurring $500,000 expense in 1998 from the cost
of investigating marina investments.
- 19 -
<PAGE>
Non-agency MBS Bonds
In March 1997, the Company sold its portfolio of unrated credit support debt
interests in non-conforming residential mortgage loan securitizations known as
"non-agency MBS bonds" in order to reduce risk associated with this type of
investment and to maximize long-term, risk-adjusted returns to stockholders.
Income from non-agency MBS bonds decreased to $50,000 during the first nine
months of 1998 compared with $2,726,000 for the same period in 1997 due to the
transaction in March 1997. Revenues from non-agency MBS bonds subsequent to
March 1997 represent income from a small equity interest retained from the sale.
No income has been recognized from the retained equity interest after the first
quarter of 1998, and the Company anticipates receiving minimal, if any,
additional income in the future from such retained interest.
Management Fees
The Company incurred $111,000 and $485,000 of management fees to the Manager
during the three and nine months ended September 30, 1997, respectively. There
were no management fees in 1998 due to the Company's acquisition of its
management agreement in November 1997.
General and Administrative Expenses
General and administrative expenses were $373,000 and $1,031,000 for the three
and nine months ended September 30, 1998, respectively, compared to $191,000 and
$614,000, respectively for the same periods in 1997. Expenses increased in 1998
over 1997 primarily due to personnel and related expenses incurred by the
Company during 1998 as a result of it becoming self-administered and self
managed in November 1997. In addition, the Company incurred costs during 1998
for the evaluation of potential acquisitions which were not completed. The
increase in general and administrative expenses are partially offset by the
elimination of management fees noted above.
Interest and Other Income
Interest and other income for the three and nine months ended September 30, 1998
was $75,000 and $627,000, respectively, compared to $632,000 and $1,476,000,
respectively, for the same periods in 1997. The decreases in 1998 as compared to
1997 are due to interest earned on the cash proceeds from the restructuring of
the non-agency MBS bonds. The proceeds from the restructuring were temporarily
invested until used to acquire manufactured home communities. In June 1998, the
Company had used substantially all of the proceeds from the restructuring to
acquire communities. Therefore, the Company does not expect significant interest
income in the future. The average interest rate on the Company's temporary
investments during the nine months ended September 30, 1998 was 5.3% compared to
5.5% for the same period in 1997.
Interest Expense
Interest expense increased in 1998 over 1997 due to increases in both long-term
and short-term borrowings in 1998. During the first nine months of 1998, the
Company incurred interest expense on approximately $10 million of secured
long-term debt assumed with the acquisition of four manufactured housing
communities. During the same period in 1997, the Company incurred interest
expense on approximately $5 million of secured long-term debt which was assumed
when the two related communities were acquired in May 1997. Interest on secured
short-term borrowings during 1998 was $641,000, primarily from $39 million
borrowed in July 1998 in connection with the acquisition of communities compared
to $26,000 in 1997 on $3 million of borrowings outstanding during a portion of
- 20 -
<PAGE>
the first quarter of 1997. In addition, the three and nine months ended
September 30, 1998, include $130,000 of amortized loan costs related to the
secured short-term borrowings.
Cost Incurred to Acquire Management Contract
During the third quarter of 1998, the Company achieved annualized returns before
depreciation on certain of its real estate investments in excess of 9% for a
period of six months. Pursuant to the November 1997 acquisition of its
management contract, the Company issued 120,000 OP Units to the former manager
as a result of such returns and recognized a $2,092,000 expense for additional
consideration paid to the former manager.
Gain on Restructuring of Bonds
In connection with the resecuritization of the non-agency MBS bonds, the Company
realized net proceeds of $69,743,000 before related management fees. A gain of
$7,359,000 was recognized during the first quarter of 1997, reduced by both
$1,472,000 of Incentive Fees related to the gain and an additional fee of
$600,000 incurred in exchange for the Manager agreeing to continue as a loss
mitigation advisor on the non-agency MBS bonds.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, the Company had cash and cash equivalents of $178,000.
The Company's principal demands for liquidity include normal operating
activities, payments of principal and interest on outstanding debt, acquisitions
of or additional investments in properties, dividends paid to stockholders and
distributions made to limited partners in the Operating Partnership. The Company
considers its cash provided by operating activities to be adequate to meet
short-term liquidity demands other than non-recourse, short-term borrowings
which the Company anticipates replacing with long-term secured notes payable.
Net cash provided by operating activities was $4.6 million during the nine
months ended September 30, 1998, compared to $1.9 million during the same period
in 1997. The increase was primarily a result of $4.1 million of increased cash
flow from the ownership and management of manufactured home communities due to
acquisitions in 1997 and 1998 offset by decreased cash flow from the non-agency
MBS bonds and short-term investments held by the Company in 1997.
Net cash used in investing activities was $60.6 million during the first nine
months of 1998 primarily related to the acquisition of manufactured home
communities. During the first nine months of 1997, net cash provided by
investing activities of $35.3 million included $69.7 million from the
restructuring of the Company's bond portfolio offset by $36.5 million used to
acquire interests in communities.
Net cash provided by financing activities of $34.4 million during the first nine
months of 1998 was comprised of (i) $39.8 million from secured short-term
borrowings used to acquire properties, (ii) payment of $3.3 million used for
common stock dividends and OP Unit distributions, (iii) repurchases of Common
Stock for $0.6 million, (iv) principal repayments on secured long-term notes
payable of $0.3 million, and (iv) payment of $1.2 million of deferred loan
costs. During the nine months ended September 30, 1997, the Company used $8.6
million of cash to repay short-term borrowings and to pay Common Stock
dividends.
- 21 -
<PAGE>
The Company has a line of credit with a bank through August 31, 2000. Advances
under this line bear interest at LIBOR + 1.75% (7.4% at September 30, 1998). The
line of credit is secured by 1,016,000 shares of the common stock of CAX held by
the Company. The maximum amount available under the line of credit is limited to
the lesser of (i) $5,000,000, (ii) 65% of the purchase price of certain
unpledged real estate, and (iii) 65% of the product of trading prices of the CAX
common stock and the 1,016,000 shares of CAX pledged to the bank. At September
30, 1998, the maximum amount of the line of credit was $3,672,000 and $770,000
of advances were outstanding.
As of September 30, 1998, 50% of the Company's real estate and 31% of its total
assets were encumbered by debt, and the Company had total outstanding
indebtedness of $50.1 million, all of which was secured by various manufactured
home communities and other assets. The Company's indebtedness is comprised of
$10.3 million of non-recourse secured, long-term financing and $39.0 million of
non-recourse secured short-term financing and $0.8 million of secured short-term
financing. The Company expects to extend the maturity of the $39.0 million loan
until it is refinanced with non-recourse secured, long-term financing. This is
expected to occur in the fourth quarter of 1998. As of September 30, 1998, none
of the long-term and all of the short-term financing bears interest at variable
rates. The weighted average interest rate on the secured long-term notes payable
was 7.8% with a weighted-average maturity of 2 years. The weighted average
interest rate on the Company's short term financing was 6.6%.
The Company expects to meet its long-term liquidity requirements through
long-term borrowings secured by its properties, the issuance of OP Units and
equity securities, cash generated by operations and dividends received from CAX.
FUNDS FROM OPERATIONS
The Company measures its economic profitability based on Funds From Operations
("FFO"). The Company's management believes that FFO provides investors with an
understanding of the Company's ability to incur and service debt and make
capital expenditures. The Board of Governors of the National Association of Real
Estate Investment Trusts ("NAREIT") defines FFO as net income (loss), computed
in accordance with generally accepted accounting principles ("GAAP"), excluding
gains and losses from debt restructuring and sales of property, plus real estate
related depreciation and amortization (excluding amortization of financing
costs), and after adjustments for unconsolidated partnerships and joint
ventures. The Company calculates FFO in a manner consistent with the NAREIT
definition, which includes adjustments for minority interest in the Operating
Partnership and amortization of goodwill related to controlled management
contracts, including the management agreement between the Company and CAX and
the Company's acquisition of the agreement to manage itself. FFO should not be
considered an alternative to net income or net cash flows from operating
activities, as calculated in accordance with GAAP, as an indication of the
Company's performance or as a measure of liquidity. FFO is not necessarily
indicative of cash available to fund future cash needs.
- 22 -
<PAGE>
For the three and nine months ended September 30, 1998 and 1997, the Company's
FFO was as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ------------------------
1998 1997 1998 1997
--------- ---------- --------- ----------
Operating Activities:
Income (loss) before minority interest in Operating
<S> <C> <C> <C> <C>
Partnership $ (1,740) $ 1,665 $ (250) $ 5,216
Real estate depreciation 874 252 1,762 387
Amortization of management contracts 689 35 2,205 54
Amortization of non-agency MBS bonds -- -- -- 1,016
Equity in CAX adjustments for FFO 185 -- 185 --
Costs incurred to acquire management contract 2,092 -- 2,092 --
-------- -------- --------- --------
Funds From Operations $ 2,100 $ 1,952 $ 5,994 $ 6,673
======== ======== ========= ========
Weighted average common shares and Operating
Partnership units outstanding 6,587 5,067 6,528 5,097
======== ======== ========= ========
</TABLE>
YEAR 2000 COMPLIANCE
The Company's hardware and software systems that are critical to its business
operations are currently Year 2000 compliant. Upon failure of any system, any
data included in critical software (such as rent-rolls and certain
record-keeping systems) could be transferred to alternative commercially
available software at a reasonable cost to the Company and within a reasonable
time period to enable the Company to continue its business operations without
any material interruption or material effect on its business, results of
operations or financial condition. In addition, management anticipates that any
hardware or software that the Company acquires (including in order to upgrade
existing systems) between now and December 31, 1999 will be Year 2000 compliant.
Management believes that the cost of modification or replacement of its
accounting and reporting software and hardware that is not compliant with Year
2000 requirements will not be material to the Company's financial position or
results of operations.
- 23 -
<PAGE>
PART II
OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit No. Description
3.1 Certificate of Incorporation of Asset Investors Corporation (the
"Registrant"), as amended (incorporated herein by reference to
Exhibit 3.1(b) to the Quarterly Report on Form 10-Q of the
Registrant for the quarter ended June 30, 1989, Commission File
No. 1-9360, filed on August 14, 1989).
3.2 By-laws of the Registrant, as amended and restated (incorporated
herein by reference to Exhibit 3.3 to the Annual Report on Form
10-K of the Registrant for the fiscal year ended December 31,
1993, Commission File No. 1-9360 filed March 31, 1994).
3.2(a) June 21, 1994 Amendment to the By-laws of the Registrant
(incorporated herein by reference to Exhibit 3.3(b) to the
Annual Report on Form 10-K of the Registrant for the fiscal year
ended December 31, 1994, Commission File No. 1-9360 filed March
30, 1995).
3.2(b) March 15, 1995 Amendment to the By-laws of the Registrant
(incorporated herein by reference to Exhibit 3.3(c) to the
Annual Report on Form 10-K of the Registrant for the fiscal year
ended December 31, 1994, Commission File No. 1-9360 filed March
30, 1995).
3.2(c) January 14, 1997, Amendment to the By-laws of the Registrant
(incorporated herein by reference to Exhibit 3.2(c) to the
Annual Report on Form 10-K of the Registrant for the fiscal year
ended December 31, 1996, Commission File No. 1-9360, filed on
March 24, 1997).
27 Financial Data Schedule
(b) Reports on Form 8-K:
The following Current Reports on Form 8-K were filed by the
Registrant during the period covered by this Quarterly Report
on Form 10-Q:
Form 8-K dated July 16, 1998, reporting the acquisition of
manufactured housing community assets and related Amendment
No. 1 to Form 8-K dated July 16, 1998, reporting the
acquisition of manufactured home community assets which
included the Statement of Excess of Revenues Over Specific
Operating Expenses of the Gulfstream Harbor Communities for
the year ended December 31, 1997 (audited) and the period from
January 1, 1998 to March 31, 1998 (unaudited).
- 24 -
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ASSET INVESTORS CORPORATION
(Registrant)
Date: November 16, 1998 By /s/David M. Becker
------------------
David M. Becker
Chief Financial Officer
- 25 -
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 178
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2664
<PP&E> 101842
<DEPRECIATION> (2455)
<TOTAL-ASSETS> 160439
<CURRENT-LIABILITIES> 3831
<BONDS> 50112
0
0
<COMMON> 51
<OTHER-SE> 80542
<TOTAL-LIABILITY-AND-EQUITY> 160439
<SALES> 0
<TOTAL-REVENUES> 9677
<CGS> 0
<TOTAL-COSTS> 6779
<OTHER-EXPENSES> 1704
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1390
<INCOME-PRETAX> (196)
<INCOME-TAX> 0
<INCOME-CONTINUING> (196)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (196)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
