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 June 30, 1999
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)
Delaware 84-1500244
(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 July 31, 1999, 5,587,406 shares of common stock were outstanding.
<PAGE>
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION:
Item 1. Condensed Consolidated Financial Statements:
Balance Sheets as of June 30, 1999 (unaudited)
and December 31, 1998......................................... 1
Statements of Income for the three and six months ended
June 30, 1999 and 1998 (unaudited)............................ 2
Statements of Cash Flows for the six months ended
June 30, 1999 and 1998 (unaudited)............................ 3
Notes to Financial Statements (unaudited)..................... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 12
PART II. OTHER INFORMATION:
Item 2. Changes in Securities......................................... 25
Item 4. Submission of Matters to a Vote of Security Holders........... 25
Item 6. Exhibits and Reports on Form 8-K.............................. 25
(i)
<PAGE>
<TABLE>
<CAPTION>
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
June 30, December 31,
1999 1998
---- ----
(unaudited)
ASSETS
<S> <C> <C>
Real estate, net of accumulated depreciation of $5,222 and $3,378 $ 96,818 $ 98,563
Investments in participating mortgages 30,843 27,604
Cash and cash equivalents 2,501 1,426
Investment in Commercial Assets 19,994 20,706
Other assets, net 8,722 9,927
------------ -----------
Total Assets $ 158,878 $ 158,226
============ ===========
LIABILITIES
Secured long-term notes payable $ 48,568 $ 40,506
Secured short-term financing 6,200 10,500
Accounts payable and accrued liabilities 3,107 2,935
------------ -----------
57,875 53,941
------------ -----------
MINORITY INTEREST IN OPERATING PARTNERSHIP 15,529 25,649
STOCKHOLDERS' EQUITY
Preferred stock, par value $.01 per share, 15,000 and 0 shares
authorized, respectively; no shares issued or outstanding -- --
Common stock, par value $.01 per share, 35,000 and 50,000 shares
authorized; 5,586 and 5,016 shares issued; and 5,556 and 5,016
shares outstanding, respectively 56 50
Additional paid-in capital 238,787 229,948
Dividends in excess of accumulated earnings (152,919) (151,362)
Treasury stock, 30 and 0 shares at cost (450) --
------------ -----------
85,474 78,636
------------ -----------
Total Liabilities and Stockholders' Equity $ 158,878 $ 158,226
============ ===========
</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 Six Months
Ended June 30, Ended June 30,
-------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
Rental property operations
<S> <C> <C> <C> <C>
Rental and other property revenues $ 3,695 $ 2,108 $ 7,253 $ 3,852
Interest on participating mortgages 836 764 1,614 1,547
Property operating expenses (1,363) (807) (2,650) (1,600)
--------- --------- --------- ---------
Income from rental property operations
before depreciation 3,168 2,065 6,217 3,799
Depreciation (924) (495) (1,844) (888)
--------- --------- --------- ---------
Income from rental property operations 2,244 1,570 4,373 2,911
--------- --------- --------- ---------
Service operations
Property management income, net 50 33 104 83
Commercial Assets management fees 195 7 284 10
Amortization of management contracts (689) (689) (1,378) (1,516)
--------- --------- --------- ---------
Loss from service operations (444) (649) (990) (1,423)
--------- --------- --------- ---------
Equity in earnings of Commercial Assets 265 266 560 534
General and administrative expenses (371) (336) (709) (658)
Interest and other income 50 219 103 602
Interest expense (957) (268) (1,898) (476)
--------- --------- --------- ---------
Income from operations 787 802 1,439 1,490
Income tax benefit 100 -- 100 --
Loss from early extinguishment of debt (75) -- (75) --
--------- --------- --------- ---------
Income before minority interest in
Operating Partnership 812 802 1,464 1,490
Minority interest in Operating Partnership (125) (175) (235) (318)
--------- --------- --------- ---------
Net income $ 687 $ 627 $ 1,229 $ 1,172
========= ========= ========= =========
Basic and diluted earnings per share $ 0.12 $ 0.12 $ 0.22 $ 0.23
========= ========= ========= =========
Weighted average common shares outstanding 5,567 5,115 5,510 5,112
Weighted average common shares and common
share equivalents outstanding 5,573 5,142 5,514 5,142
Dividends paid per share $ 0.25 $ 0.25 $ 0.50 $ 0.25
========= ========= ========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
- 2 -
<PAGE>
<TABLE>
<CAPTION>
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months
Ended June 30,
--------------
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 1,229 $ 1,172
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation and amortization 3,311 2,404
Minority interest in Operating Partnership 235 318
Equity in earnings of Commercial Assets (456) (534)
Accrued interest on participating mortgages (241) (394)
Increase in other assets (750) (639)
Increase in accounts payable and accrued liabilities 37 47
------- --------
Net cash provided by operating activities 3,365 2,374
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of real estate -- (25,556)
Investments in participating mortgages, net (2,998) (2,012)
Capital replacements (127) (175)
Dividends from Commercial Assets 718 359
--------- --------
Net cash used in investing activities (2,407) (27,384)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of Common Stock dividends (2,786) (1,279)
Payment of distributions to minority interest in Operating Partnership (500) (356)
Proceeds from secured long-term notes payable 10,925 --
Principal paydowns on secured long-term notes payable (2,863) (221)
Proceeds from secured short-term financing -- 7,000
Principal paydowns on secured short-term financing (4,300) --
Payment of loan costs (386) --
Proceeds from the issuance of Common Stock 97 35
Stock issuance costs (70) --
---------- --------
Net cash provided by financing activities 117 5,179
--------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,075 (19,831)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,426 21,802
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,501 $ 1,971
========= ========
</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 Delaware corporation that owns and operates manufactured home
communities and has elected to be taxed as a real estate investment trust
("REIT"). Prior to May 25, 1999, AIC was a Maryland corporation. Effective May
25, 1999, AIC's stockholders approved its reincorporation in Delaware. AIC'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, AIC 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 owns 85% of the Operating Partnership as of June 30, 1999. The
Company also owns 27% of the common stock of Commercial Assets, Inc. ("CAX") and
substantially all of the common stock of both AIC Manufactured Housing Corp.
("AICMHC") and Asset Investors Equity, Inc. ("AIE"). CAX is a publicly-traded
REIT (American Stock Exchange, Inc.: CAX) formed by the Company in August 1993.
AICMHC owns interests in manufactured home community management contracts and
AIE manages 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, under the first step of such plan, 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 22 manufactured home communities and two recreational vehicle parks
with 4,470 developed homesites, 1,070 sites ready for homes, 1,490 sites
available for future development and 180 recreational vehicle sites.
Prior to November 1997, the Company and CAX were managed by Financial Asset
Management LLC ("FAM"). An investor group led by Terry Considine, Thomas L.
Rhodes and Bruce D. Benson acquired FAM 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 FAM 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, were 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 expensed
$2,092,000 as additional cost of acquiring the management contract. The issuance
of the remaining 120,000 OP Units was contingent upon the Company having a
90-day average per share price in excess of $20.00 by June 1999. The Company's
average share price did not meet this requirement and the Company's commitment
to issue these additional OP Units has expired.
- 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 June 30, 1999, for the three and six month periods 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 financial 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, 1998.
Certain reclassifications have been made in the 1998 Condensed Consolidated
Financial Statements to conform to the classifications used in the current year.
The effect of such reclassifications on amounts previously reported is
immaterial.
C. Summary of Significant Accounting Policies
Principles of Consolidation
The Condensed Consolidated Financial Statements include the accounts of the
Company, the Operating Partnership and all controlled subsidiaries. The minority
interest in the Operating Partnership represents the OP Units which are
convertible, at the option of the holder. When a holder elects to convert OP
Units, the Company determines whether such OP Units will be converted into 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 at the time of dividend
distributions. As of June 30, 1999, 1,000,000 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 June 30, 1999, 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.
- 5 -
<PAGE>
Revenue Recognition
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 income for services
provided to communities not owned by the Company are also 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 provides reserves as
necessary. As of June 30, 1999, there is a $149,000 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 AIE 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 June 30, 1999, AIC's net operating loss ("NOL") carryover was approximately
$95,000,000 and its capital loss carryover was approximately $20,000,000. 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, and the capital loss carryover is scheduled to expire in 2000 and
2001.
Earnings Per Share
Basic earnings per share for the three and six months ended June 30, 1999 and
1998 are based upon the weighted-average number of shares of Common Stock
outstanding during each such period. Diluted earnings per share reflect the
effect of any dilutive, unexercised stock options in each such period.
- 6 -
<PAGE>
Treasury Stock
The Company owns 27% of CAX's common stock. During 1999, CAX has purchased
114,000 shares of the Company's Common Stock. Consequently, the Company has an
interest in 30,000 shares of its Common Stock and has recorded this as treasury
stock.
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 made
interest payments of $1,749,000 and $417,000 for the six months ended June 30,
1999 and 1998, respectively.
Non-cash operating, investing and financing activities for the six months ended
June 30, 1999 and 1998 were (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
Issuance of OP Units for:
<S> <C> <C>
Real estate acquisitions $ -- $ 2,145
Participating mortgages -- 17
Real estate acquired under earn-out agreements -- 52
Receivables from minority interest in subsidiaries -- 319
Purchase of minority interest in subsidiaries by cancellation of receivables 346 --
Conversion of OP Units into Common Stock 9,536 --
Transfer of stock issue costs to additional paid in capital 868 --
Issuance of Common Stock for services 150 120
Reclassification of investment in Commercial Assets to treasury stock 450 --
</TABLE>
D. Real Estate
Real estate at June 30, 1999 and December 31, 1998, was (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Land $ 11,226 $ 11,226
Land improvements and buildings 90,387 90,268
Furniture and other equipment 427 447
--------- ---------
102,040 101,941
Less accumulated depreciation (5,222) (3,378)
--------- ---------
Real estate, net $ 96,818 $ 98,563
========= =========
</TABLE>
Land improvements and buildings consist primarily of infrastructure, roads,
landscaping, clubhouses, maintenance buildings and common amenities.
- 7 -
<PAGE>
E. Investments in Participating Mortgages
As of June 30, 1999, the Company has an $19,089,000 participating mortgage which
bears 10% interest, matures in 2018 and is secured by a number of manufactured
home communities. In addition, the Company receives additional interest up to
50% of the borrower's profit from such communities.
In addition, the Company has mortgage loans secured by two contiguous
manufactured home communities and one recreational vehicle park in Arizona. The
$5,398,000 first mortgage loan bears 10% interest. The $4,602,000 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. The $882,000 third mortgage loan accrues 15% interest and is payable
from any cash flows in excess of the above amounts. These 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.
As of June 30, 1999, the Company had investments in participating mortgages of
$30,843,000 and income of $836,000 and $1,614,000 from these mortgages for the
three and six months ended June 30, 1999.
F. Investment in Commercial Assets
On June 30, 1999 and December 31, 1998, 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 from August 1998 to June 1999, it has invested approximately
$62,000,000 for interests in 11 communities.
Summarized financial information of CAX as reported by CAX is (in thousands):
<TABLE>
<CAPTION>
Balance Sheets June 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Cash and cash equivalents $ 1,092 $ 3,292
Short-term investments 15,078 45,066
Real estate, net (including joint ventures) 52,627 13,908
Investments in participating mortgages 10,381 9,328
Other assets 9,025 6,640
----------- -----------
Total assets 88,203 78,234
Secured long-term notes payable 9,619 --
Secured short-term financing 214 --
Other liabilities 1,598 980
Minority interest in subsidiaries 615 --
----------- -----------
Stockholders' equity $ 76,157 $ 77,254
=========== ===========
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Statements of Income (unaudited) Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
------------ ------------ ----------- --------
Income from rental property operations before
<S> <C> <C> <C> <C>
depreciation $ 866 $ -- $ 1,453 $ --
Depreciation (232) -- (321) --
--------- --------- -------- --------
Income from rental property operations 634 -- 1,132 --
Interest and other income 564 1,086 1,303 2,179
Interest expense (58) -- (58) --
General and administrative (140) (88) (273) (174)
Management fees (114) (12) (194) (17)
--------- --------- -------- --------
Income from operations 886 986 1,910 1,988
Acquisition fees (152) -- (194) --
--------- --------- -------- --------
Net income $ 734 $ 986 $ 1,716 $ 1,988
========= ========= ======== ========
</TABLE>
G. Secured Long-Term Notes Payable
The following table summarizes the Company's secured long-term notes payable,
all of which are non-recourse to the Company (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
--------------- --------------
<S> <C> <C>
8.25% fixed rate notes maturing in October 2000 $ 2,136 $ 4,519
7.50% fixed rate notes maturing in October 2000 5,636 5,707
7.37% fixed rate note maturing in April 2009 2,541 --
6.50% fixed rate notes maturing in December 2018 30,360 30,280
6.86% fixed rate notes maturing in March 2019 3,195 --
7.04% fixed rate note maturing in June 2019 4,700 --
--------- ---------
$ 48,568 $ 40,506
========= =========
</TABLE>
In 1998, the Company entered into an interest rate lock agreement which was
settled in September 1998. The Company realized a loss on the hedge of $802,000
which was deferred and is being amortized over the terms of the related notes
payable as a charge to interest expense.
In June 1999, the Company repaid a $2,230,000 note payable and paid a prepayment
penalty of $75,000. The penalty is recorded as a loss from early extinguishment
of debt in the condensed consolidated statements of income.
Real estate assets which secure the long-term notes payable had a net book value
of $83,988,000 at June 30, 1999. The Company has $150,000 in escrow for real
estate taxes on the secured long-term notes payable at June 30, 1999.
H. Secured Short-Term Financing
In September 1998, the Company executed a revolving line of credit with a bank
that bears interest at the London Interbank Offered Rate ("LIBOR") plus 1.75%
per annum (6.99% at June 30, 1999). The line of credit is secured by 1,015,674
shares of the common stock of CAX held by the Company and matures in September
2000. The line of credit is limited to the lesser of (1) $5,000,000, (2) 65% of
the product of the trading price of Commercial Assets common stock times
1,015,674 or (3) 65% of the purchase price of certain unpledged real estate. As
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<PAGE>
of June 30, 1999, the limit was $3,840,000 and $0 was outstanding on this line
of credit.
In December 1998, the Company borrowed $8,500,000 in short-term financing from a
bank. The loan is secured by the Company's $10,000,000 of participating
mortgages involving two communities and one recreational vehicle park in
Arizona. The loan bears interest at LIBOR plus 2.5% (7.68% at June 30, 1999) and
matured in June 1999. The Company repaid $2,300,000 in March 1999 with proceeds
from secured long-term notes payable and extended the maturity date on the
remaining $6,200,000 balance to April 2001.
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 six
months ended June 30, 1999 and 1998, the Company advanced cash and OP Units as
follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash advances $ 99 $ 17 $ 182 $ 17
OP Unit advances -- -- -- 17
--------- --------- -------- --------
Total $ 99 $ 17 $ 182 $ 34
========= ========= ======== ========
</TABLE>
In connection with the acquisition of the assets and operations of its former
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. Under the terms of the agreement, the Company would have been required
to issue an additional 120,000 OP Units if the Company's average stock price
exceeded $20.00 per share for any 90-day period prior to June 17, 1999. Such
average stock price was not achieved and the Company's commitment to issue the
additional OP Units expired.
At June 30, 1999, there were 1,070 sites ready for homes and 1,490 sites
available for future development in properties in which the Company has an
interest. In connection with efforts to lease such sites, a sales corporation
markets an inventory of homes located in the various properties to potential
tenants. The Company's President owns 50% of the sales corporation. A portion of
the cost of this home inventory was financed by the sales corporation with a
line of credit guaranteed by the Company. As of June 30, 1999, $5,097,000 was
outstanding under the line of credit. The terms of the line of credit require
monthly payments of interest and payment of principal upon sale of the
inventory. If the inventory is not sold within one year, monthly payments of
principal are also required.
J. Operating Segments
Investments in adult communities constitute substantially all of the Company's
portfolio of manufactured home communities, and as such, management of the
Company assesses the performance of the Company as one operating segment.
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<PAGE>
K. Common Stock and Dividends
During the three and six months ended June 30, 1999, the Company paid $0.25 and
$0.50 per share dividends on Common Stock and OP Units totaling $1,646,000 and
$3,286,000, respectively. Dividends and distributions paid during the same
periods in 1998 were $0.25 and $0.25 per share on Common Stock and OP Units
totaling $1,635,000 and $1,635,000, respectively.
L. Income Tax Benefit
In connection with the Company's restructuring of its former bond portfolio in
1997, a consolidated subsidiary incurred income taxes from such restructuring.
These taxes were netted against the gain from the restructuring in 1997. The
subsidiary recorded a loss for tax purposes during the three months ended June
30, 1999 and can carryback such tax loss for a refund of taxes incurred in 1997.
Accordingly, the Company has recorded a $100,000 income tax benefit during the
second quarter of 1999.
M. Other Matters
Prior to November 1997, FAM (the former manager) 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 $2,073,000 and
expensed in August 1998.
The CAX Management Agreement has been extended through December 31, 1999. The
Company earned management fees under the CAX Management Agreement (net of
elimination for the Company's 27% ownership of CAX) as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Management fees $ 195,000 $ 7,000 $ 284,000 $ 10,000
</TABLE>
As of June 30, 1999, the net book value of the CAX Management Agreement was
$2,753,000 and is included in other assets.
- 11 -
<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, our Quarterly Report to Stockholders and our filings
with the Securities and Exchange Commission 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, constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements may include
projections of our 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 our actual results, performance
or achievements 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 our
investment criteria; our ability to reduce expense levels, implement rent
increases, use leverage and other risks set forth in our SEC filings.
In this report, the words "the Company," "we," "our" and "us" refer to Asset
Investors Corporation, a Delaware corporation, our predecessor, Asset Investors
Corporation, a Maryland corporation and, where appropriate, our subsidiaries.
Business
Company Background
We have been a Delaware corporation since May 25, 1999. Prior to this, we were a
Maryland corporation that was formed in 1986. We have elected to be treated for
United States federal income tax purposes as a real estate investment trust or
"REIT." We are a self-administered and self-managed company in the business of
owning, acquiring, developing and managing manufactured home communities. As of
June 30, 1999, we held interests as owner, ground lessee or mortgage lender
(including participating mortgages) in 22 manufactured home communities and two
recreational vehicle parks with a total of 4,470 developed homesites (sites with
homes in place), 1,070 sites ready for homes, 1,490 sites available for future
development and 180 recreational vehicle sites. In addition, we managed 15
communities for affiliates and third-party owners. Our shares of common stock
are listed on the New York Stock Exchange under the symbol "AIC."
We primarily conduct our business through our subsidiary Asset Investors
Operating Partnership and where appropriate, its other subsidiary companies
(which we collectively refer to as the Operating Partnership). As of June 30,
1999, we owned 85% of the Operating Partnership. The Operating Partnership also
owns 27% of the common stock of Commercial Assets, Inc., a publicly-traded REIT
that is listed on the American Stock Exchange under the symbol "CAX." Commercial
Assets is also engaged in the ownership, acquisition and development of
manufactured home communities. In addition to acquiring and managing
manufactured home communities for our own account, we also perform these
services for Commercial Assets, for which Commercial Assets pays us a management
fee.
- 12 -
<PAGE>
Industry Background
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
activities and recreation and other amenities, which may include golf courses,
swimming pools, shuffleboard courts and laundry facilities. Utilities are
provided by or arranged for by the owner of the community. Community lifestyles,
primarily promoted by resident managers, include a wide variety of social
activities that promote a sense of neighborhood. The communities provide an
attractive and affordable housing alternative for retirees, empty nesters and
start-up or single-parent families. Manufactured home communities are primarily
characterized as "all age" communities and "adult" communities. Adult
communities typically require that at least 80% of the tenants be at least 55
years old, and in all age communities there is no age restriction on tenants.
The owner of a home in our communities leases from us the site on which the home
is located. Typically, the leases are on a month-to-month or year-to-year basis,
renewable upon the consent of both parties or, in some instances, as provided by
statute. In some circumstances, we offer a 99-year lease to tenants in order to
enable the tenant to have some benefits of an owner of real property, including
creditor protection laws in some states. These leases can be cancelled,
depending on state law, for non-payment of rent, violation of community rules
and regulations or other specified defaults. Generally, rental rate increases
are made on an annual basis. The size of these rental rate increases depends
upon the policies that are in place at each community. Rental increases may be
based on fixed dollar amounts, percentage amounts, inflation indexes, or they
may depend entirely on local market conditions. We own interests in the
underlying land, utility connections, streets, lighting, driveways, common area
amenities and other capital improvements and are responsible for enforcement of
community guidelines and maintenance. Each homeowner within the manufactured
home communities is responsible for the maintenance of his or her home and
leased site, including lawn care in some communities.
The ownership of manufactured home communities, once fully occupied, tends to be
a stable, predictable asset class. The cost and effort involved in relocating a
home to another manufactured home community generally encourages the owner of
the home to resell it within the community.
Growth and Operating Strategies
We measure our economic profitability based on Funds From Operations ("FFO"),
less an annual capital replacement reserve of at least $50 per developed
homesite. We believe that FFO, less a capital replacement reserve, provides
investors with an understanding of our ability to incur and service debt and to
make capital expenditures. The Board of Governors of the National Association of
Real Estate Investment Trusts (also known as NAREIT) defines FFO as net income
(loss), computed in accordance with generally accepted accounting principles,
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. We calculate FFO in a manner consistent with NAREIT's
definition. In our calculation we include adjustments for:
- 13 -
<PAGE>
o the minority interest in the Operating Partnership owned by persons other
than us;
o costs we incurred in order to become self-managed;
o amortization of management contracts; and
o income tax benefits related to transactions in prior years that were also
excluded from FFO.
FFO should not be considered an alternative to net income or net cash flows from
operating activities, as calculated in accordance with generally accepted
accounting principles, as an indication of our performance or as a measure of
liquidity. FFO is not necessarily indicative of cash available to fund future
cash needs.
Our primary objective is to maximize stockholder value by increasing the amount
and predictability of FFO on a per share basis, less a reserve for capital
replacements. We seek to achieve this objective primarily by:
o improving net operating income from our existing portfolio of manufactured
home communities;
o acquiring additional communities at values that are accretive on a per share
basis;
o earning increased management fees as Commercial Assets invests in more
manufactured home communities; and
o as Commercial Assets' FFO increases, our share of their FFO similarly
increases.
Company Policies
Management has adopted specific policies to accomplish our objective of
increasing the amount and predictability of our FFO on a per share basis, less a
reserve for capital replacements. These policies include:
o seeking to reduce our exposure to downturns in regional real estate markets
by obtaining a geographically diverse portfolio of communities;
o ensuring the continued maintenance of our communities by providing a minimum
$50 per homesite per year for capital replacements;
o using debt leverage to increase our financial returns;
o reducing our exposure to interest rate fluctuations by utilizing long-term,
fixed-rate, fully-amortizing debt to pay off higher cost, short term debt;
o selectively acquiring manufactured home communities that have potential
long-term appreciation of value through, among other things, rent increases,
expense efficiencies and in-park homesite development;
o improving the profitability of our communities through aggressive management
of occupancy, community development and maintenance and expense controls;
o developing and maintaining resident satisfaction and a reputation for
quality communities through maintenance of the physical condition of our
communities and providing activities that improve the community lifestyle;
and
o recruiting and retaining capable community management personnel.
Future Acquisitions
In 1997, when we decided to enter the manufactured home community business, we
began to implement a business plan which called for the investment of our
capital in the acquisition of manufactured home communities. Since the second
- 14 -
<PAGE>
half of 1997, we have focused on identifying acquisition opportunities that we
believe provide returns that are accretive to our stockholders.
Our acquisition of interests in manufactured home communities takes many forms.
In many cases we acquire fee title to the community. When a community has a
significant number of unleased homesites, we seek a stable return from the
community during the development and lease-up phase while also seeking to
participate in future increased earnings after development is completed and the
sites are leased. We seek to accomplish this goal by making loans to development
companies in return for participating mortgages that are non-recourse to the
borrowers and secured by the property. In general, our participating mortgages
earn interest at fixed rates and, in addition, participate in the profits or
revenues from the community. This profit participation right generally entitles
us to 50% of the net income and cash flow generated by the community.
We believe that acquisition opportunities for manufactured home communities are
attractive at this time because of the increasing acceptability of and demand
for manufactured homes and the continued constraints on development of new
manufactured home communities. We are actively seeking to acquire additional
communities on our own behalf and on behalf of Commercial Assets, and we are
currently engaged in various stages of negotiations relating to the possible
acquisition of a number of communities. The acquisition of interests in
additional communities could also result in our becoming increasingly leveraged
as we incur debt in connection with these transactions.
When evaluating potential acquisitions, we consider such factors as:
o the location and type of property;
o the value of the homes located on the leased land;
o the improvements, such as golf courses and swimming pools, at the property;
o the current and projected cash flow of the property and our ability to
increase cash flow;
o the potential for capital appreciation of the property;
o the terms of tenant leases, including the potential for rent increases;
o the tax and regulatory environment of the community in which the property is
located;
o the potential for expansion of the physical layout of the property and the
number of sites;
o the occupancy and demand by residents for properties of a similar type in
the vicinity;
o the credit of the residents in a community;
o the prospects for liquidity through sale, financing or refinancing of the
property;
o the competition from existing manufactured home communities;
o the potential for the construction of new communities in the area; and
o the replacement cost of the property.
In order to allocate investments between us and Commercial Assets, the companies
have agreed that Commercial Assets will invest at least $50 million of its cash
resources in the acquisition of communities before we invest any further cash in
the acquisition of communities. Thereafter, the companies will coordinate their
investments. As of June 30, 1999, Commercial Assets had invested $62 million in
communities. Accordingly, we now coordinate our acquisitions with Commercial
Assets.
Fees and Earnings from Commercial Assets
We manage Commercial Assets and own 27% of Commercial Assets' common stock.
Under the terms of our management agreement with Commercial Assets, we receive
the following fees:
- 15 -
<PAGE>
o Acquisition Fees equal to 0.5% of the cost of each real estate-related asset
acquired by Commercial Assets;
o Base Fees equal to 1% per year of the net book value of Commercial Assets'
real estate-related assets;
o Incentive Fees equal to 20% of the amount by which Commercial Assets' FFO,
less an annual capital replacement reserve of at least $50 per developed
homesite, exceeds (a) its average net worth, multiplied by (b) 1% over the
ten year United States Treasury rate.
In the third quarter of 1998, Commercial Assets entered the manufactured home
community business and began acquiring interests in manufactured home
communities identified by us. As of June 30, 1999, Commercial Assets had
acquired interests in 11 communities at a cost of $62 million. Commercial Assets
paid us Base Fees, Acquisition Fees and Incentive Fees primarily due to
Commercial Assets' investment in communities as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Base Fees $ 119,000 $ 12,000 $ 194,000 $ 17,000
Acquisition Fees 152,000 -- 194,000 --
Incentive Fees (5,000) -- -- --
----------- --------- ----------- --------
$ 266,000 $ 12,000 $ 388,000 $ 17,000
=========== ========= =========== ========
</TABLE>
The management agreement expires December 31, 1999 and is subject to annual
renewal. During 1998, Incentive Fees were based upon Commercial Assets' REIT
income instead of its FFO, less an annual capital replacement reserve. It was
changed for 1999 in order to cause our Incentive Fees to be tied more closely to
Commercial Assets' measure of economic profitability of its manufactured home
community business.
Although there can be no assurance of such, we expect Commercial Assets to
continue to acquire interests in communities during 1999.
Expansion of Existing Communities
We will seek to increase the number of homesites and the amount of earnings
generated from our existing portfolio of manufactured home communities through
marketing campaigns aimed at increasing occupancy. We will also seek expansion
through future acquisitions and expansion of 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 June 30, 1999, we held interests in 11
communities with 1,070 sites ready for homes and 1,490 sites available for
future development.
- 16 -
<PAGE>
Properties
The manufactured home communities in which we have interests are primarily
located in Florida and Arizona and are concentrated in or around four
metropolitan areas. We hold interests in these communities as owner, ground
lessee or mortgage lender (including participating mortgages). The following
table sets forth the states in which the communities in which we held an
interest on June 30, 1999 are located:
<TABLE>
<CAPTION>
Number of Sites
--------------------------------------------------------------------------
Available for
Number of Ready for Future Recreational
Communities Developed Homes Development Vehicles
---------------- --------------- ------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Florida 17 3,554 960 1,493 --
Arizona 4 798 109 -- 120
New Jersey 1 90 -- -- --
Pennsylvania 1 28 -- -- --
California 1 -- -- -- 65
--- ------ ------ ------ ----
Total 24 4,470 1,069 1,493 185
=== ====== ====== ====== ====
</TABLE>
The following table sets forth information regarding each manufactured home
community in which we held an interest and those manufactured home communities
which we manage for others:
<TABLE>
<CAPTION>
Average
Developed Monthly Sites Ready Sites Available
Community Location Homesites Occupancy(1) Rent RV Sites for Homes for Development
- -------------------------------------------------------------------------------------------------------------------
Owned Communities
<S> <C> <C> <C> <C> <C> <C> <C>
Brentwood West Mesa, AZ 350 99% $308 -- -- --
Cardinal Court Largo, FL 138 96 268 -- -- --
Caribbean Cove Orlando, FL 255 99 277 -- 31 --
Forest View Homosassa, FL 189 100 235 -- 122 (3) --
Gulfstream Harbor Orlando, FL 381 99 319 -- 1 171
Gulfstream Harbor II Orlando, FL 286 100 304 -- 22 --
Marina Dunes Marina, CA -- -- -- 65 -- --
Mullica Woods Egg Harbor City, NJ 90 100 449 -- -- --
Park Royale Pinellas Park, FL 258 95 351 -- 51 (3) --
Pinewood St. Petersburg, FL 220 97 289 -- -- --
Pleasant Living Riverview, FL 245 100 266 -- -- --
Salem Farm Bensalem, PA 28 100 408 -- -- --
Serendipity Ft. Myers, FL 338 99 277 -- -- --
Stonebrook Homosassa, FL 123 99 240 -- 95 (3) --
Sun Valley Tarpon Springs, FL 261 100 339 -- -- --
Westwind I (2) Dunedin, FL 195 99 336 -- -- --
Westwind II (2) Dunedin, FL 189 100 346 -- -- --
----------------------------------------------------------------------------
Subtotal 3,546 99 305 65 322 171
----------------------------------------------------------------------------
Participating Mortgage Communities (3)
Blue Heron Pines Punta Gorda, FL 128 98 248 -- 119 197
Blue Star Apache Junction, AZ 30 100 216 120 -- --
Brentwood Hudson, FL 73 89 202 -- 70 80
Lost Dutchman Apache Junction, AZ 150 100 237 -- 109 --
Savanna Club Port St. Lucie, FL 31 100 165 -- 270 1,045
Sun Lake Grand Island, FL 244 94 253 -- 179 --
Sun Valley Apache Junction, AZ 268 100 237 -- -- --
----------------------------------------------------------------------------
Subtotal 924 97 237 120 747 1,322
----------------------------------------------------------------------------
Total Communities 4,470 99% $291 185 1,069 1,493
============================================================================
- 17 -
<PAGE>
Average
Developed Monthly Sites Ready Sites Available
Community Location Homesites Occupancy(1) Rent RV Sites for Homes for Development
- -------------------------------------------------------------------------------------------------------------------
Communities Managed for Commercial Assets
Cannery Village Newport Beach, CA -- --% $ -- -- -- 30
Casa Encanta Mesa, AZ 111 87 350 -- -- --
Cypress Greens Lakeland, FL 85 100 190 -- 22 --
Fiesta Village Mesa, AZ 175 98 273 -- -- 206
La Casa Blanca Apache Junction, AZ 198 100 150 -- -- --
La Casa Blanca East Apache Junction, AZ 106 100 200 -- 101 --
Lakeshore Villas Tampa, FL 290 96 323 -- -- --
Rancho Mirage Apache Junction, AZ 312 100 175 -- -- --
Riverside Ruskin, FL 221 99 401 -- 23 837
Royal Palm Haines City, FL 231 98 216 -- 55 164
Savanna Club Port St. Lucie, FL 7 100 165 -- 19 --
Southern Palms Mesa, AZ 51 100 203 -- -- --
Sun Lake Grand Island, FL -- -- -- -- 4 --
----------------------------------------------------------------------------
Subtotal 1,787 98 252 -- 224 1,237
----------------------------------------------------------------------------
Communities Managed for Others 586 99 223 -- 85 --
----------------------------------------------------------------------------
Total Managed Communities 2,373 98% $ 244 -- 309 1,237
============================================================================
<FN>
(1) Excludes recreational vehicle sites, which are leased on a seasonal basis.
(2) We are the ground lessee of these communities.
(3) We hold notes receivable secured by mortgages on these sites. The notes
earn interest and participate in profits or revenues from the sites.
</FN>
</TABLE>
Taxation of the Company
We have elected to be taxed as a REIT under the Internal Revenue Code of 1986,
as amended (the "Code"), and we intend to operate in a manner which will allow
us to avail ourselves of the beneficial tax provisions applicable to REIT's. Our
qualification as a REIT depends on our ability to meet the various requirements
imposed by the Code, such as specifications relating to actual operating
results, distribution levels and diversity of stock ownership. In addition, our
ability to qualify as a REIT depends in part upon the actions of third parties
over which we have no control, or only limited influence. For instance, our
qualification depends upon the conduct of certain entities with which we have a
direct or indirect relationship, in our capacity as a lender, lessor, or holder
of non-controlling equity interests. Our qualification also depends upon
Commercial Assets' continued qualification as a REIT.
If we qualify for taxation as a REIT, we will generally not be subject to
Federal corporate income tax on our 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 we fail to qualify as a REIT in any taxable year, we will be
subject to Federal income tax at regular corporate rates on our taxable income
(including any applicable alternative minimum tax). We have a net operating loss
("NOL") carryover of approximately $95 million which may, subject to some
restrictions and limitations, be used to offset taxable income in the event that
we fail to qualify as a REIT. Additionally, even if we qualify as a REIT, we may
be subject to certain state and local income and other taxes and to Federal
income and excise taxes on our undistributed income.
- 18 -
<PAGE>
RESULTS OF OPERATIONS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 1999
Comparison of Six Months Ended June 30, 1999 to Six Months Ended June 30, 1998
Rental Property Operations
Income from rental property operations totaled $4,373,000 and $2,911,000 for the
six months ended June 30, 1999 and 1998, respectively, an increase of 50%. The
increase is primarily due to our acquisition of communities in 1998, increases
in rents at our communities and additional investments in participating
mortgages.
Service Operations
During the six months ended June 30, 1999 and 1998, we earned $104,000 and
$83,000, respectively, in property management income. The increase is primarily
due to an increase in the number of properties that we manage for Commercial
Assets.
Fee revenue from managing Commercial Assets was $284,000 and $10,000 for the six
months ended June 30, 1999 and 1998, respectively. The increase is due to
Commercial Assets' investments in communities beginning in August 1998. We do
not earn fees on cash and short-term investments held by Commercial Assets which
is what Commercial Assets primarily held in the 1998 period.
Amortization of management contracts decreased from $1,516,000 for the first six
months of 1998 to $1,378,000 for the same period in 1999 due to our acquisition
in February 1998 of two communities which we previously managed.
Equity in Earnings of Commercial Assets
Income from our 27% interest in Commercial Assets for the six months ended June
30, 1999 and 1998 was $560,000 and $534,000, respectively. Commercial Assets
reported to us that its income decreased primarily due to management fees paid
to us. Due to our 27% interest in Commercial Assets, however, $104,000 of these
management fees have been reported as equity in earnings of Commercial Assets in
accordance with generally accepted accounting principles.
General and Administrative Expenses
Our general and administrative expenses were $709,000 and $658,000 for the six
months ended June 30, 1999 and 1998, respectively, primarily due to increases in
the number of personnel.
Interest and Other Income
During the six months ended June 30, 1999 and 1998, interest and other income
was $103,000 and $602,000, respectively. The decrease occurred because prior to
June 30, 1998, we had invested substantially all of our cash resources in
manufactured home communities.
- 19 -
<PAGE>
Interest Expense
During the six months ended June 30, 1999 and 1998, interest expense was
$1,898,000 and $476,000, respectively. The increase was primarily due to
borrowings used to acquire manufactured home communities after June 1998.
Income Tax Benefit
A subsidiary recorded a loss for tax purposes during the six months ended June
30, 1999. As a result, it can carry back such tax loss for a $100,000 refund of
income taxes incurred by the subsidiary during 1997.
Loss from Early Extinguishment of Debt
During the six months ended June 30, 1999, we prepaid a $2.2 million note
payable and paid a $75,000 prepayment penalty.
Comparison of Three Months Ended June 30, 1999 to Three Months Ended June 30,
1998
Rental Property Operations
Income from rental property operations totaled $2,244,000 and $1,570,000 for the
three months ended June 30, 1999 and 1998, respectively, an increase of 43%. The
increase is due to our acquisition of communities in 1998, increases in rents at
our communities and additional investments in participating mortgages.
Service Operations
During the three months ended June 30, 1999 and 1998, we earned $50,000 and
$33,000, respectively, in property management income. The increase is primarily
due to an increase in the number of properties that we manage for Commercial
Assets.
Fee revenue from managing Commercial Assets was $195,000 and $7,000 for the
three months ended June 30, 1999 and 1998, respectively, due to Commercial
Assets' investments in communities beginning in August 1998.
Amortization of management contracts was $689,000 for each of the three months
ended June 30, 1999 and 1998.
Equity in Earnings of Commercial Assets
Income from our 27% interest in Commercial Assets for the three months ended
June 30, 1999 and 1998 was $265,000 and $266,000, respectively. Commercial
Assets reported to us that its income decreased primarily due to management fees
paid to us. However, due to our 27% interest in Commercial Assets, $71,000 of
these management fees have been reported as equity in earnings of Commercial
Assets in accordance with generally accepted accounting principles.
- 20 -
<PAGE>
General and Administrative Expenses
Our general and administrative expenses were $371,000 and $336,000 for the three
months ended June 30, 1999 and 1998, respectively. The increase is primarily due
to increases in the number of personnel.
Interest and Other Income
During the three months ended June 30, 1999 and 1998, interest and other income
was $50,000 and $219,000, respectively. The decrease occurred because prior to
June 30, 1998, we had invested substantially all of our cash resources in
manufactured home communities.
Interest Expense
During the three months ended June 30, 1999 and 1998, interest expense was
$957,000 and $268,000, respectively, primarily due to borrowings used to acquire
manufactured home communities after June 1998.
Income Tax Benefit
A subsidiary recorded a loss for tax purposes during the three months ended June
30, 1999. As a result, it can carry back such tax loss for a $100,000 refund of
income taxes incurred by the subsidiary during 1997.
Loss from Early Extinguishment of Debt
During the three months ended June 30, 1999, we prepaid a $2.2 million note
payable and we paid a $75,000 prepayment penalty.
NOL and Capital Loss Carryovers
At June 30, 1999, our NOL carryover was approximately $95,000,000 and our
capital loss carryover was approximately $20,000,000. Subject to some
limitations, the NOL carryover may be used to offset all or a portion of our
REIT income, and as a result, to reduce the amount of income that we must
distribute to stockholders to maintain our status as a REIT. The NOL carryover
is scheduled to expire between 2007 and 2009 and the capital loss carryover is
scheduled to expire in 2000 and 2001.
Dividend Distributions
During the three and six months ended June 30, 1999, we distributed $1,646,000
($0.25 per share) and $3,286,000 ($0.50 per share), respectively, to holders of
common stock and OP Units. During the same periods in 1998, $1,635,000 ($0.25
per share) and $1,635,000 ($0.25 per share), respectively, was distributed as we
made no distributions during the first quarter of 1998.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999, we had cash and cash equivalents of $2.5 million. Our
principal activities that demand liquidity include our normal operating
activities, payments of principal and interest on outstanding debt, acquisitions
of or additional investments in properties, payments of dividends to
stockholders and distributions made to limited partners in the Operating
Partnership.
- 21 -
<PAGE>
Our net cash provided by operating activities was $3.4 million during the six
months ended June 30, 1999 compared to $2.4 million during the same period in
1998. The increase was primarily a result of:
o increased earnings before depreciation from manufactured home communities
acquired in 1998,
o increases in net operating income from communities acquired in 1997, and
o increased management fees from Commercial Assets due to its investments in
manufactured home communities since August 1998.
During the six months ended June 30, 1999, the net cash used by investing
activities was $2.4 million compared with $27.4 million for the same period in
1998. The decrease is primarily due to our investment of $25.6 million to
acquire manufactured home communities during the 1998 period.
During the six months ended June 30, 1999, net cash provided by financing
activities was $0.1 million compared with $5.2 million for the same period in
1998. The decrease is primarily due to borrowings incurred during the 1998
period to fund acquisitions of manufactured home communities while borrowings
during the 1999 period in excess of the repayment of short-term financing was
offset by increased dividends and distributions to stockholders and OP Unit
holders in the Operating Partnership.
We have a line of credit with a bank which matures in September 2000. The line
of credit is secured by 1,015,674 shares of our Commercial Assets common stock.
Advances under this line of credit bear interest at the 30-day LIBOR rate plus
1.75%. The line of credit is limited to the lesser of (1) $5,000,000, (2) 65% of
the product of the trading price of Commercial Assets common stock times
1,015,674 or (3) 65% of the purchase price of certain unpledged real estate. As
of June 30, 1999, the borrowing limit was $3,840,000, all of which was
available.
At June 30, 1998, the weighted-average interest rate on our secured, long-term
notes payable was 6.8% with a weighted-average maturity of 11 years.
We expect to meet our long-term liquidity requirements through long-term,
secured borrowings, the issuance of OP Units and other equity securities and
cash generated by operations.
FUNDS FROM OPERATIONS
We measure our economic profitability based on FFO, less an annual capital
replacement reserve of at least $50 per developed homesite. We believe that FFO,
less a capital replacement reserve, provides investors with an understanding of
our ability to incur and service debt and to make capital expenditures. The
Board of Governors of NAREIT defines FFO as net income (loss), computed in
accordance with generally accepted accounting principles, 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. We
calculate FFO in a manner consistent with NAREIT's definition. In our
calculation we include adjustments for:
o the minority interest in the Operating Partnership owned by persons other
than us,
o costs we incurred in order to become self-managed,
o amortization of management contracts, and
o income tax benefits related to transactions in prior years that were also
excluded from FFO.
- 22 -
<PAGE>
FFO should not be considered an alternative to net income or net cash flows from
operating activities, as calculated in accordance with generally accepted
accounting principles, as an indication of our performance or as a measure of
liquidity. FFO is not necessarily indicative of cash available to fund future
cash needs.
For the three and six months ended June 30, 1999 and 1998, our FFO was (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
Income before minority interest in Operating
<S> <C> <C> <C> <C>
Partnership $ 812 $ 802 $ 1,464 $ 1,490
Real estate depreciation 924 495 1,844 888
Amortization of management contracts 689 689 1,378 1,516
Income tax benefit (100) -- (100) --
Loss from early extinguishment of debt 75 -- 75 --
Equity in Commercial Assets' adjustments for FFO 66 -- 106 --
--------- --------- -------- --------
Funds From Operations (FFO) $ 2,466 $ 1,986 $ 4,767 $ 3,894
========= ========= ======== ========
Weighted average common shares and OP Units
outstanding 6,567 6,540 6,565 6,498
========= ========= ======== ========
</TABLE>
For the six months ended June 30, 1999 and 1998, net cash flows were as follows
(in thousands):
Six Months Ended
June 30,
--------
1999 1998
---- ----
Cash provided by operating activities $ 3,365 $ 2,374
Cash used in investing activities (2,407) (27,384)
Cash provided by financing activities 117 5,179
YEAR 2000 COMPLIANCE
Year 2000 issues have arisen because many existing computer programs and
chip-based embedded technology systems use only the last two digits to refer to
a year, and therefore do not properly recognize a year that begins with "20"
instead of the familiar "19". If not corrected, many computer applications could
fail or create erroneous results. The following disclosure provides information
regarding the current status of our Year 2000 compliance program.
Our critical hardware and software systems are currently Year 2000 compliant.
Upon failure of any system, 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 and within a
reasonable time period. Consequently, we would be able to continue our business
operations without any material interruption or material effect on our business,
results of operations or financial condition. In addition, we anticipate that
any hardware or software that we acquire (including upgrades to existing
systems) between now and December 31, 1999 will be Year 2000 compliant.
Disruptions in the economy generally resulting from Year 2000 issues could also
materially adversely affect us. Moreover, because a large number of our tenants
may be dependent on social security payments to pay their rents, a failure of
- 23 -
<PAGE>
the Social Security Administration to cause their systems to be Year 2000
compliant may result in a material adverse effect on our operations. The Social
Security Administration has announced that they will have their systems Year
2000 compliant before January 1, 2000.
We believe that the cost of modification or replacement of our less essential
accounting and reporting software and hardware that is not currently compliant
with Year 2000 requirements, if any, will not be material to our financial
position or results of operations.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our principal exposure to market risk is through our various debt instruments
and borrowings. The following is a list of these debt instruments and borrowing
arrangements.
We have $38.3 million of fixed rate, non-recourse, secured long-term notes
payable that mature in 2018 and 2019. The rates on these notes range from 6.5%
to 7.04%. We do not have significant exposure to changing interest rates on
these notes as the rates are fixed and the notes are fully amortizing.
We have a $2.5 million, 7.37%, non-recourse, partially amortizing, secured
long-term note payable that matures in 2009. We do not have significant exposure
to changing interest rates on this note as the rate is fixed and the balance due
at maturity is only $2 million.
We have $7.8 million of non-recourse, secured long-term notes payable that
mature in October 2000 with a principal payment at maturity of $7.3 million. The
rates on these notes range from 7.5% to 8.25% and are fixed. We intend to
refinance these notes during 1999 or 2000 with long-term, fully amortizing,
fixed rate debt. While changes in interest rates would affect the cost of funds
borrowed in the future to refinance the existing debt, we believe that the
effect, if any, of near-term changes in interest rates on our financial
position, results of operations or cash flows would not be material as the
existing debt is fixed rate until October 2000.
We have $6.2 million of recourse, secured short-term financing that bears
interest at the London Interbank Offered Rate ("LIBOR") plus 2.5% and matures in
April 2001. We expect to refinance this debt with non-recourse, secured, fixed
rate, long-term debt during 1999 or 2000. We have loan commitments from a lender
for amounts in excess of the existing loan amount for 20 year, fully amortized
debt with a fixed rate of interest. If such refinancing occurs, we would not
have significant exposure to changing interest rates. If the loan is not
refinanced with fixed rate, fully amortized debt, then changes in LIBOR would
affect the cost of funds borrowed in the future.
We have a $5.0 million recourse, secured line of credit that bears interest at
LIBOR plus 1.75%. As of June 30, 1999, the outstanding balance was zero. Changes
in LIBOR would affect the cost of funds borrowed in the future; however, its
affect would not be material to our financial position, results of operations or
cash flows.
- 24 -
<PAGE>
PART II
OTHER INFORMATION
Item 2. CHANGES IN SECURITIES.
In connection with our reincorporation from Maryland to Delaware on May 25,
1999, we are authorized to issue up to 50 million shares of capital stock: 35
million shares designated as common stock and 15 million shares designated as
preferred stock. The terms of the preferred stock may be determined by our Board
of Directors. Currently, no shares of preferred stock have been issued. Prior to
our reincorporation in Delaware, we were authorized to issue up to 50 million
shares of its capital stock in designations of any quantity of common or
preferred shares as determined by our Board of Directors.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Our 1999 Annual Meeting of Stockholders was held on May 24, 1999. At the
meeting, Messrs. Richard L. Robinson, Tim Schultz and William J. White were
elected as Class I Directors to terms expiring in 2002. There were 5,123,195,
5,127,893 and 5,127,414 votes cast "for" the election of Messrs. Robinson,
Schultz and White, respectively, and 102,847, 98,149 and 98,628 votes were
withheld, respectively. In addition, the stockholders approved our
reincorporation from Maryland to Delaware. Of the votes cast, 3,488,646 were
cast "for" approval of the reincorporation and 84,680 were cast "against"
approval of the reincorporation with 32,273 abstentions. In addition, 1,620,443
shares were not voted in connection with the reincorporation. Under Maryland
law, all votes cast as abstentions and all unvoted shares constituted votes
"against" approval of the reincorporation.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit No. Description
2.1 Agreement and Plan of Merger, dated as of March 15, 1999,
between Asset Investors Corporation, a Maryland corporation and
Asset Investors Corporation, a Delaware corporation
(incorporated herein by reference to Exhibit 2.1 to the
Registrant's Current Report on Form 8-K, dated May 26, 1999,
Commission File No. 1-9360, filed on May 26, 1999).
3.1 Amended and Restated Certificate of Incorporation of Asset
Investors Corporation (incorporated herein by reference to
Exhibit 3.1 to the Registrant's Current Report on Form 8-K,
dated May 26, 1999, Commission File No. 1-9360, filed on May 26,
1999).
3.2 Amended and Restated By-laws of Asset Investors Corporation
(incorporated herein by reference to Exhibit 3.2 to the
Registrant's Current Report on Form 8-K, dated May 26, 1999,
Commission File No.
1-9360, filed on May 26, 1999).
27 Financial Data Schedule
- 25 -
<PAGE>
(b) Reports on Form 8-K:
The following Current Report on Form 8-K was filed by the
Registrant during the period covered by this Quarterly Report on
Form 10-Q:
Current Report on Form 8-K, dated May 26, 1999 reporting our
reincorporation in Delaware.
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: August 3, 1999 By /s/David M. Becker
------------------------
David M. Becker
Chief Financial Officer
- 26 -
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 2501
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3844
<PP&E> 102040
<DEPRECIATION> (5222)
<TOTAL-ASSETS> 158878
<CURRENT-LIABILITIES> 3107
<BONDS> 54768
0
0
<COMMON> 56
<OTHER-SE> 85474
<TOTAL-LIABILITY-AND-EQUITY> 158878
<SALES> 0
<TOTAL-REVENUES> 9255
<CGS> 0
<TOTAL-COSTS> 5872
<OTHER-EXPENSES> 256
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1898
<INCOME-PRETAX> 1229
<INCOME-TAX> 0
<INCOME-CONTINUING> 1229
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1229
<EPS-BASIC> 0.22
<EPS-DILUTED> 0.22
</TABLE>
