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, 2000
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 August 4, 2000, 5,679,469 shares of common stock were outstanding.
*The Registrant is changing its corporate name to American Land Lease, Inc.
<PAGE>
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION:
Item 1. Condensed Consolidated Financial Statements:
Balance Sheets as of June 30, 2000 (unaudited)
and December 31, 1999............................................. 1
Statements of Income for the three and six months ended
June 30, 2000 and 1999 (unaudited)................................ 2
Statements of Cash Flows for the six months ended
June 30, 2000 and 1999 (unaudited)................................ 3
Notes to Financial Statements (unaudited)......................... 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk........ 22
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)
June 30, December 31,
2000 1999
---- ----
(unaudited)
ASSETS
<S> <C> <C>
Real estate, net of accumulated depreciation of $9,342 and $7,248 $ 138,655 $ 108,745
Investments in participating mortgages -- 22,475
Cash and cash equivalents 1,198 570
Investment in Commercial Assets 19,053 19,486
Inventory 8,617 --
Other assets, net 6,691 7,817
------------ -----------
Total Assets $ 174,214 $ 159,093
============ ===========
LIABILITIES
Secured long-term notes payable $ 51,997 $ 53,994
Secured short-term financing 15,977 2,610
Accounts payable and accrued liabilities 6,115 3,401
------------ -----------
74,089 60,005
------------ -----------
COMMITMENTS AND CONTINGENCIES -- --
MINORITY INTEREST IN OPERATING PARTNERSHIP 18,077 15,236
STOCKHOLDERS' EQUITY
Preferred stock, par value $.01 per share, 15,000 shares authorized;
no shares issued or outstanding -- --
Common stock, par value $.01 per share, 35,000 shares authorized;
5,679 and 5,633 shares issued; and 5,649 and 5,603 shares
outstanding, respectively 57 56
Additional paid-in capital 239,897 239,381
Notes receivable on common stock purchases (984) (588)
Dividends in excess of accumulated earnings (156,472) (154,547)
Treasury stock, 30 and 30 shares at cost (450) (450)
------------- -----------
82,048 83,852
------------ -----------
Total Liabilities and Stockholders' Equity $ 174,214 $ 159,093
============ ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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<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,
--------------------- -----------------------
2000 1999 2000 1999
-------- -------- --------- ---------
Rental property operations
<S> <C> <C> <C> <C>
Rental and other property revenues $ 4,429 $3,695 $ 8,898 $ 7,253
Income (loss ) on participating mortgages and leases (22) 836 683 1,614
Property operating expenses (1,717) (1,363) (3,426) (2,650)
Depreciation (1,240) (924) (2,329) (1,844)
--------- ------- --------- ---------
Income from rental property operations 1,450 2,244 3,826 4,373
--------- ------- --------- ---------
Sales operations
Home sales revenues 3,083 -- 5,366 --
Cost of home sales (2,704) -- (4,609) --
Selling and marketing expenses (835) -- (1,623) --
Interest expense allocation (106) -- (212) --
Minority interest in sales operations 147 -- 286 --
--------- ------ --------- ---------
Loss from sales operations (415) -- (792) --
---------- ------ ---------- ---------
Service operations
Property management income, net 54 50 112 104
Commercial Assets management fees 145 195 286 284
Amortization of management contracts (516) (689) (1,032) (1,378)
--------- ------- --------- ---------
Loss from service operations (317) (444) (634) (990)
--------- ------- --------- ---------
Equity in earnings of Commercial Assets 286 265 494 560
General and administrative expenses (445) (446) (882) (784)
Interest and other income 466 150 656 203
Interest expense (810) (957) (1,598) (1,898)
--------- ------- --------- ---------
Income before minority interest in Operating Partnership 215 812 1,070 1,464
Minority interest in Operating Partnership (31) (125) (166) (235)
--------- ------- --------- ---------
Net income $ 184 $ 687 $ 904 $ 1,229
========= ======= ========= =========
Basic and diluted earnings per share $ 0.03 $ 0.12 $ 0.16 $ 0.22
========= ======= ====-==== =========
Weighted average common shares outstanding 5,586 5,567 5,579 5,510
Weighted average common shares and common share
equivalents outstanding 5,586 5,573 5,579 5,514
Dividends paid per share $ 0.25 $ 0.25 $ 0.50 $ 0.50
========= ======= ========= =========
</TABLE>
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See Notes to Condensed Consolidated Financial Statements.
<TABLE>
<CAPTION>
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months
Ended June 30,
------------------------------
2000 1999
--------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 904 $ 1,229
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation and amortization 3,504 3,311
Minority interest in Operating Partnership and sales operations (224) 235
Equity in earnings of Commercial Assets (285) (456)
Income from participating mortgages (600) (241)
Gain on sale of real estate (109) --
Increase in inventory (199) --
Increase in other assets (510) (750)
Increase (decrease) in accounts payable and accrued liabilities 151 37
------- --------
Net cash provided by operating activities 2,632 3,365
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of real estate 2,510 --
Purchases of real estate (765) --
Investments in participating mortgages, net -- (2,998)
Capital replacements and improvements (2,863) (127)
Dividends from Commercial Assets 718 718
--------- --------
Net cash used in investing activities (400) (2,407)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of Common Stock dividends (2,829) (2,786)
Payment of distributions to minority interest in Operating Partnership (522) (500)
Proceeds from secured long-term notes payable 103 10,925
Principal paydowns on secured long-term notes payable (6,810) (2,863)
Proceeds from secured short-term financing 6,654 --
Principal paydowns on secured short-term financing -- (4,300)
Contributions for minority interest in subsidiary 1,782
Collections of notes receivable 18 --
Payment of loan costs -- (386)
Proceeds from the issuance of Common Stock, net -- 27
--------- --------
Net cash provided by (used in) financing activities (1,604) 117
---------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 628 1,075
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 570 1,426
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,198 $ 2,501
========= ========
</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 84% of the Operating Partnership as of June 30, 2000. The
Company also owns 27% of the common stock of Commercial Assets, Inc.
("Commercial Assets), a publicly-traded REIT (American Stock Exchange, Inc.:
CAX) formed by the Company in August 1993.
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, 2000, 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, 1999.
Certain reclassifications have been made in the 1999 Condensed Consolidated
Financial Statements to conform to the classifications used in the current year.
Such reclassifications have no material effect on amounts previously reported.
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, 2000, 1,045,000 OP Units were outstanding. All
significant intercompany balances and transactions have been eliminated in
consolidation. The Company's investment in Commercial Assets is recorded under
the equity method.
- 4-
<PAGE>
Rental Properties and Depreciation
Rental properties are recorded at cost less accumulated depreciation, unless
considered impaired. If events or circumstances indicate that the carrying
amount of a property may be impaired, the Company will make an assessment of its
recoverability by estimating the future undiscounted cash flows, excluding
interest charges, of the property. If the carrying amount exceeds the aggregate
future cash flows, the Company would recognize an impairment loss to the extent
the carrying amount exceeds the fair value of the property. As of June 30, 2000,
management believes that no impairments exist based on periodic reviews. No
impairment losses were recognized for the three and six months ended June 30,
2000 and 1999.
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.
Investments in Participating Mortgages
The Company has loans secured by real estate which provide for an interest rate
return plus up to 50% of net profits, cash flows and sales proceeds from the
secured real estate. The Company accounts for these investments as loans when
(a) the Company does not have an interest in the borrower and either (b) the
borrower has a substantial equity investment in the real estate collateral or
(c) the Company has recourse to other substantial tangible assets of the
borrower. As such, the Company records interest income based on the rate
provided for in the loan and records its share of any net profits or gains from
the sale of the underlying real estate when realized. If the above requirements
are not met, then the loan is accounted for as an equity investment in real
estate under the equity method of accounting.
Inventory
Inventories are recorded at the lesser of cost or market. At June 30, 2000,
there was no reserve for inventory.
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
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.
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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 consolidated subsidiaries that (a) own interests in
property management contracts, (b) manage Commercial Assets and (c) sell homes
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, 2000, 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 months ended June 30, 2000 and 1999 are
based upon the weighted-average number of shares of Common Stock outstanding
during each such period. Diluted earnings per share for the three and six months
ended June 30, 1999 reflect the effect of dilutive, unexercised stock options of
6,000 and 4,000, respectively. There were no dilutive, unexercised stock options
for the three and six months ended June 30, 2000.
Capitalized Interest
Interest is capitalized on development projects during periods of construction
or development. Capitalized interest was $482,000 and $18,000 for the three
months ended June 30, 2000 and 1999, respectively, and $901,000 and $35,000 for
the six months ended June 30, 2000 and 1999, respectively.
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<PAGE>
Treasury Stock
The Company owns 27% of Commercial Assets' common stock. During 1999, Commercial
Assets 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 $2,412,000 and $1,749,000 for the six months ended June 30,
2000 and 1999, respectively.
Non-cash operating, investing and financing activities for the six months ended
June 30, 2000 and 1999 were (in thousands):
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Conversion of OP Units into Common Stock $ -- $ 8,668
Real estate acquired:
By cancellation of participating mortgages 22,591 --
By assumption of notes payable 4,711 --
By assumption of accounts payable and accrued liabilities, net of other
assets received 1,848 --
For issuance of note payable 1,740 --
For issuance of OP Units 496 --
Inventory acquired:
By assumption of secured short-term financing 4,594 --
By cancellation of participating mortgages and notes receivable 1,805 --
By assumption of accounts payable and accrued liabilities, net of other
assets received 649 --
By minority interest in subsidiary 1,404 --
Receivables from minority interest in subsidiaries 4 346
Purchase of property management contracts for note payable 380 --
Other assets, net of assumed liabilities, for minority interest in subsidiary 97 --
Issuance of Common Stock:
For services 77 150
For notes receivable 440 --
Cancellation of notes receivable for services 52 --
Reclassification of investment in Commercial Assets to treasury stock -- 450
</TABLE>
D. Proposed Merger with Commercial Assets
The Company and Commercial Assets have agreed to merge, subject to the approval
by both (a) a majority of the Company's outstanding shares and (b) two-thirds of
Commercial Assets' outstanding shares. The Company owns approximately 27% of the
Commercial Assets' outstanding shares and has agreed to vote these shares in
favor of the merger. The Company will issue 0.4075 shares of its common stock
for each outstanding share of the Commercial Assets common stock. Alternatively,
Commercial Assets' stockholders may elect to receive $5.75 per share in cash for
up to 3,549,868 shares of Commercial Assets common stock with any remaining
shares receiving 0.4075 shares of the Company's Common Stock. The officers and
directors of the Company and of Commercial Assets have agreed to elect to
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<PAGE>
receive shares of the Company's Common Stock for all shares of Commercial Assets
common stock that they own. In August 2000, stockholders approved the merger.
E. Real Estate
Real estate at June 30, 2000 and December 31, 1999, was (in thousands):
June 30, December 31,
2000 1999
---- ----
Land $ 25,771 $ 13,260
Land improvements and buildings 122,226 102,733
---------- -------
147,997 115,993
Less accumulated depreciation (9,342) (7,248)
---------- ---------
Real estate, net $ 138,655 $ 108,745
========== =========
In January 2000, the Company purchased four manufactured home communities,
undeveloped homesites at three additional manufactured home communities,
inventory and other assets for $36,816,000. The purchase price was allocated as
follows (in thousands):
Real estate $ 29,618
Cash and cash equivalents 205
Other assets 6,993
----------
$ 36,816
Land improvements and buildings consist primarily of infrastructure, roads,
landscaping, clubhouses, maintenance buildings and common amenities.
F. Investments in Participating Mortgages
During 1999, the Company had non-recourse mortgage loans secured by two
manufactured home communities and one recreational vehicle park in Arizona. The
loans had interest rates ranging from 10% to 15% and were scheduled to mature in
April 2001. The Company received 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 August 1999, the Company purchased the two manufactured home
communities and the recreational vehicle park in exchange for the payment of
$858,000, the cancellation of the three loans with a carrying amount of
$11,973,000 and $761,000 of assumed liabilities and other costs. during 1999,
the Company had a non-recourse participating mortgage that bears 10% interest
and matures in 2018. The Company receives additional interest up to 50% of the
borrower's profit and net cash flows from the properties securing the
participating mortgage. In January 2000, the Company purchased for $36,816,000
the four manufactured home communities and the undeveloped homesites at three
additional manufactured home communities which secured the Company's
participating mortgage. The purchase price was paid as follows:
(in thousands)
Cancellation of participating mortgages and loans $ 24,851
Assumption of debt 10,704
Issuance of 44,572 OP Units 496
Cash 765
---------
$ 36,816
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G. Investment in Commercial Assets
The Company owns 2,761,126 shares (approximately 27%) of the common stock of
Commercial Assets. In November 1997, Commercial Assets 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, Commercial Assets began acquiring manufactured home
communities, and from August 1998 to June 2000, it has invested approximately
$70 million for interests in 12 communities.
Summarized financial information of Commercial Assets as reported by Commercial
Assets is (in thousands):
<TABLE>
<CAPTION>
Balance Sheets June 30, December 31,
2000 1999
---- ----
<S> <C> <C>
Cash and short-term investments $ 20,353 $ 17,166
Real estate, net (including participating mortgages and joint ventures) 70,840 68,353
Other assets 13,600 11,564
----------- -----------
Total assets $ 104,793 $ 97,083
=========== ===========
Secured long-term notes payable $ 29,436 $ 20,442
Other liabilities 2,128 1,945
Minority interest in subsidiaries 615 615
Stockholders' equity 72,614 74,081
----------- -----------
Total liabilities and stockholders' equity $ 104,793 $ 97,083
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
Statements of Income Three Months Six Months
Ended June 30, Ended June 30,
------------- ---------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Rental and other property revenues $ 1,748 $ 437 $ 3,531 $437
Income (loss) from participating mortgages and leases (2) 603 75 1,190
Property operating expenses (764) (174) (1,425) (174)
Depreciation (488) (232) (981) (321)
--------- --------- --------- --------
Income from rental property operations 494 634 1,200 1,132
--------- --------- --------- --------
Interest and other income 1,119 564 1,627 1,303
Interest expense (333) (58) (697) (58)
Equity in loss from home sales operations (198) -- (389) --
General and administrative expenses (143) (140) (264) (273)
Related-party management fees (198) (114) (391) (194)
Related-party acquisition fees -- (152) -- (194)
--------- ---------- --------- --------
Net income $ 741 $ 734 $ 1,086 $ 1,716
========= ========= ========= ========
</TABLE>
H. Investment in Home Sales Company
Effective January 1, 2000, a consolidated subsidiary ("Sales Corp.") of the
Company acquired all of the manufactured home inventory located at communities
owned by the Company or Commercial Assets for $8,452,000. The Company owns 65%
of the nonvoting common stock of Sales Corp., Commercial Assets owns the
remaining 35% of the nonvoting common stock and certain of the Company's
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officers own all of Sales Corp.'s voting common stock. The nonvoting common
stock represents 99% of all outstanding shares of Sales Corp.'s capital stock.
The inventory purchase price was paid as follows:
<TABLE>
<CAPTION>
<S> <C>
Assumption of secured short-term financing $ 4,594
Cancellation of participating mortgages and notes receivable 1,805
Assumption of notes payable 403
Assumption of accounts payable and accrued liabilities, net
of other assets received 649
Contribution by Commercial Assets 1,001
--------
$ 8,452
</TABLE>
I. Secured Short-Term Financing
In April 2000, the Company entered into a $15,000,000 revolving line of credit
with a bank. The line of credit bears interest at the bank's prime rate (9.75%
at June 30, 2000) and matures in May 2001. The line of credit is secured by
three manufactured home communities and one recreational vehicle park which have
a combined net book value of $26,016,000 at June 30, 2000. The line of credit
replaced the Company's two prior lines of credit and a $5,993,000 recourse note
payable due in April 2001.
The Company previously had a revolving line of credit with a bank that bore
interest at the 30-day London Interbank Offered Rate ("LIBOR") plus 1.75% per
annum. The line of credit was secured by 1,015,674 shares of the common stock of
Commercial Assets held by the Company and matures in September 2000. This line
of credit was cancelled and replaced in April 2000 by the Company's $15,000,000
line of credit.
In connection with the Company's January 2000 purchase of manufactured home
communities, undeveloped homesites, inventory and other assets, the Company
assumed a line of credit secured by the inventory. In April 2000, this line of
credit was cancelled and replaced by the $15,000,000 line of credit.
As of June 30, 2000, the Company had a $2,120,000 promissory note payable to
Community Management Investors Corporation ("CMIC") that matures in January 2001
and bears interest at 8.5%. The Company purchased CMIC's 50% interest in two
property management companies as of January 1, 2000 in exchange for the note
payable. This resulted in the Company owning 100% of the property management
companies. The Company's President and Chief Operating Officer owns 35% of CMIC,
and the Company's Vice President of Development owns 20% of CMIC.
J. Commitments and Contingencies
In connection with the purchase of a manufactured home community, the Company
has an earn-out agreement with respect to unoccupied homesites. The Company pays
$17,000 for each newly occupied homesite either in the form of cash or 946 OP
Units, as determined by the former owner. During the three months ended June 30,
2000 and 1999, the Company paid $33,000 and $99,000 in cash, respectively. The
Company paid $116,000 and $182,000 in cash during the six months ended June 30,
2000 and 1999, respectively. At June 30, 2000, there were 106 unoccupied
homesites subject to the earnout.
In September 1999, four Commercial Assets stockholders, individually and as
purported representatives of all Commercial Assets stockholders, except the
Company and its affiliates, filed three purported class action lawsuits in
Delaware against Commercial Assets, the members of the board of directors and
certain officers of the Company and Commercial Assets. These lawsuits alleged
that the defendants breached their fiduciary duties to the Commercial Assets
stockholders in connection with the proposed merger of the Company and
Commercial Assets and Commercial Assets' recent reincorporation in Delaware. In
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<PAGE>
November 1999, these lawsuits were consolidated into a single lawsuit. In March
2000, the parties entered into a settlement agreement, subject to the court's
approval, which amended the merger agreement as follows:
o Commercial Assets stockholders, other than the Company and the officers and
directors of the Company and Commercial Assets, may elect to receive $5.75
per share in cash for up to 3,549,868 shares of Commercial Assets common
stock with any remaining shares receiving 0.4075 shares of the Company's
Common Stock; and
o the percentage of votes of Commercial Assets common stock needed to approve
the merger was increased from a simple majority to two-thirds.
In August 2000, the court approved the settlement agreement.
K. Operating Segments
Investments in manufactured home communities constitute substantially all of the
Company's portfolio of real estate, and as such, management of the Company
assesses the performance of the Company as one operating segment.
L. Common Stock and Dividends
During 1999, certain directors and executive officers (or entities affiliated
with them) exercised options to purchase 46,000 shares of Common Stock by
issuing notes receivable totaling $588,000. In April 2000, the Company's Vice
President of Development exercised options to purchase 40,000 shares of Common
Stock by issuing a $440,000 note receivable, of which 75% was nonrecourse. The
notes accrue interest at 7.5% and mature at various times in 2009 and 2010. At
June 30, 2000, $733,000 of the notes were nonrecourse and $251,000 were recourse
to the respective directors or executive officers.
During each of the three month periods ended June 30, 2000 and 1999, the Company
paid quarterly dividends of $0.25 per share on Common Stock and OP Units. During
each of the six month periods ended June 30, 2000 and 1999, the Company paid
dividends of $0.50 per share on Common Stock and OP Units.
M. Other Matters
The Commercial Assets Management Agreement has been extended through December
31, 2000; however, the agreement will terminate upon the merger of the Company
and Commercial Assets. The Company earned management fees under the Commercial
Assets Management Agreement (net of elimination for the Company's 27% ownership
of Commercial Assets) as follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
------------------------------ -----------------------
2000 1999 2000 1999
------------ ------------ ------------ --------
<S> <C> <C> <C> <C>
Management fees $145,000 $195,000 $ 286,000 $ 284,000
</TABLE>
As of June 30, 2000, the net book value of the Commercial Assets Management
Agreement was $775,000 and is included in other assets. In connection with the
Company's merger with Commercial Assets in August 2000, the Company will expense
the net book value of the Commercial Assets Management Agreement.
- 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 and our other 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 these SEC filings, constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Forward-looking statements may include projections of our cash flow,
dividends and anticipated returns on real estate investments. 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. These 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, sell homes 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, 2000, we held interests as owner or ground lessee in 21 manufactured
home communities and two recreational vehicle parks with a total of:
o 4,410 developed homesites (sites with homes in place);
o 2,490 undeveloped homesites; and
o 180 recreational vehicle sites.
In addition, we manage 14 communities for affiliates. 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,
2000, we owned 84% of the Operating Partnership. Prior to our merger in August
2000 with Commercial Assets, Inc., a publicly-traded REIT, the Operating
Partnership also owned 27% of Commercial Assets common stock. Commercial Assets
was also engaged in the ownership, acquisition and development of manufactured
- 12-
<PAGE>
home communities. In addition to acquiring and managing manufactured home
communities for our own account, we also performed these services for Commercial
Assets, for which Commercial Assets paid us a management fee.
Proposed Merger with Commercial Assets
In August 1999, we agreed to merge with Commercial Assets. We agreed to issue
0.4075 shares of our common stock for each share of Commercial Assets common
stock. Alternatively, Commercial Assets stockholders may elect to receive $5.75
per share in cash for up to 3,549,868 shares of Commercial Assets common stock
with any remaining shares of Commercial Assets common stock receiving 0.4075
shares of our common stock. The merger requires the approval by a majority of
our outstanding shares of common stock and two-thirds of the outstanding shares
of Commercial Assets common stock. We owned 27% of the outstanding shares of
Commercial Assets common stock and agreed to vote these shares in favor of the
merger. Commercial Assets' officers and directors and our officers and directors
agreed to elect to receive Asset Investors common stock for all shares of
Commercial Assets common stock that they own. In August 2000, the merger was
approved.
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.
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<PAGE>
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 or "FFO",
less an annual capital replacement reserve of at least $50 per developed
homesite. This reserve is management's estimate based on its experience in
owning, operating and managing manufactured home communities. We believe that
the presentation of FFO, when considered with the financial data determined in
accordance with generally accepted accounting principles, provides a useful
measure of our performance. However, FFO does not represent cash flow and is not
necessarily indicative of cash flow or liquidity available to us, nor should it
be considered as an alternative to net income as an indicator of operating
performance. The Board of Governors of the National Association of Real Estate
Investment Trusts, also known as NAREIT, defines FFO as net income or 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 beginning with the NAREIT definition and include adjustments
for:
o the minority interest in the Operating Partnership owned by persons other
than us; and
o amortization of property and investment management contracts.
We believe that the presentation of FFO provides investors with measurements
which help facilitate an understanding of our ability to make required dividend
payments, capital expenditures and principal payments on our debt. Since FFO
excludes depreciation and other real estate related expenses, FFO may be
materially different from net income. Therefore, FFO should not be considered as
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 operating performance or liquidity.
FFO is not necessarily indicative of cash available to fund our cash needs,
including our ability to make distributions. We use FFO in measuring our
operating performance because we believe that the items that result in a
difference between FFO and net income do not impact the ongoing operating
performance of a real estate company. Also, we believe that other real estate
companies, analysts and investors utilize FFO in analyzing the results of real
estate companies. Our basis of computing FFO is not necessarily comparable with
that of other REITs.
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; and
o acquiring additional communities at values that are accretive on a per
share basis.
- 14-
<PAGE>
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 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 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;
o improving the profitability of our communities through aggressive
management of occupancy, community development and maintenance and expense
controls;
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 ensuring the continued maintenance of our communities by providing a
minimum $50 per homesite per year for capital replacements;
o seeking to reduce our exposure to downturns in regional real estate markets
by diversifying our portfolio of communities since currently 70% of our
properties are in Florida and 17% are in Arizona; and
o recruiting and retaining capable community management personnel.
Future Acquisitions
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:
o the increasing acceptability of and demand for manufactured homes, as shown
by the growth in the number of individuals living in manufactured homes;
and
o the continued constraints on development of new manufactured home
communities.
We are actively seeking to acquire additional communities on our own behalf 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.
- 15-
<PAGE>
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.
Fees and Earnings from Commercial Assets
Prior to our August 2000 merger with Commercial Assets, we managed Commercial
Assets and owned 27% of Commercial Assets common stock. Under the terms of our
management agreement with Commercial Assets, we received the following fees:
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, 2000, Commercial Assets had
acquired interests in 12 communities at a cost of approximately $70 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 Six Months
Ended June 30, Ended June 30,
------------------------------- ------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ----------
<S> <C> <C> <C> <C>
Base Fees $ 198,000 $ 119,000 $ 391,000 $ 194,000
Acquisition Fees -- 152,000 -- 194,000
Incentive Fees -- (5,000) -- --
------------ ------------ ------------ ----------
$ 198,000 $ 266,000 $ 391,000 $ 388,000
============ ============ ============ ==========
</TABLE>
As a result of the merger, the management agreement terminated in August, 2000.
- 16-
<PAGE>
Expansion of Existing Communities
We 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 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.
Taxation of the Company
We have elected to be taxed as a REIT under the Internal Revenue Code of 1986,
and we intend to operate in a manner which will allow us to avail ourselves of
the beneficial tax provisions applicable to REITs. Our qualification as a REIT
depends on our ability to meet the various requirements imposed by the Internal
Revenue 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"
which would otherwise occur 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 or "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.
RESULTS OF OPERATIONS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2000
Comparison of Three Months Ended June 30, 2000 to Three Months Ended June 30,
1999
Rental Property Operations
Rental and other property revenues from our owned properties totaled $4,429,000
for the three months ended June 30, 2000 compared to $3,695,000 for the three
months ended June 30, 1999, an increase of $734,000 or 20%. The increase was
primarily a result of rent increases at our communities and our purchase of
communities in January 2000.
Property operating expenses from our owned properties totaled $1,717,000 for the
three months ended June 30, 2000 compared to $1,363,000 for the same period in
1999, an increase of $354,000 or 26%. The increase was primarily due to higher
expenses at our communities and our purchase of communities in January 2000.
Loss on participating mortgages and leases was $22,000 for the three months
ended June 30, 2000 compared to income of $836,000 for the three months ended
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<PAGE>
June 30, 1999. We ceased to have participating mortgages in the first quarter of
2000. Income from participating mortgages and leases is expected to be
significantly less than prior years as we no longer hold any investments in
participating mortgages.
Depreciation expense was $1,240,000 during the three months ended June 30, 2000
compared to $924,000 during the same period in 1999. The increase was due to
acquisitions of manufactured home communities during 1999 and 2000.
Sales Operations
Beginning in January 2000, we commenced home sales activities to sell
manufactured homes to be placed on our undeveloped homesites. The homeowner will
then pay rent to us for locating his or her home on our land. During the three
months ended June 30, 2000, we had a loss of $415,000 from sales operations,
after Commercial Assets minority interest in the loss.
Service Operations
Property management income was comparable for the three months ended June 30,
2000 and 1999.
Fee revenue from managing Commercial Assets was $145,000 and $195,000 for the
three months ended June 30, 2000 and 1999, respectively. The decrease is because
Commercial Assets acquired no communities during the 2000 period but acquired
$30 million of communities during the 1999 period for which we received
acquisition fees from Commercial Assets.
Amortization of management contracts was $516,000 and $689,000 for the three
months ended June 30, 2000 and 1999, respectively. The decrease is due to
property management contracts becoming fully amortized during 1999.
Equity in Earnings of Commercial Assets
Income from our 27% interest in Commercial Assets was comparable for the three
months ended June 30, 2000 and 1999, respectively.
General and Administrative Expenses
Our general and administrative expenses were comparable for the three months
ended June 30, 2000 and 1999, respectively.
Interest and Other Income
During the three months ended June 30, 2000 and 1999, interest and other income
was $466,000 and $150,000, respectively. The increase occurred because of
nonrecurring income during the 2000 period comprised primarily of $265,000 of
income due to a change in estimate of accrued liabilities and $50,000 of income
resulting from a forfeited deposit by a potential purchaser of one of our
communities.
Interest Expense
During the three months ended June 30, 2000, interest expense was $916,000, of
which $106,000 is allocated to the sales operations. Interest expense for the
three months ended June 30, 1999 was $957,000. The decrease was primarily due to
- 18-
<PAGE>
capitalized interest on our undeveloped homesites during the 2000 period;
partially offset by the increased interest expense related to the sales
operations.
Comparison of Six Months Ended June 30, 2000 to Six Months Ended June 30, 1999
Rental Property Operations
Rental and other property revenues from our owned properties totaled $8,898,000
for the six months ended June 30, 2000 compared to $7,253,000 for the six months
ended June 30, 1999, an increase of $1,645,000 or 23%. The increase was
primarily a result of rent increases at our communities and our purchase of
communities in January 2000.
Property operating expenses from our owned properties totaled $3,426,000 for the
six months ended June 30, 2000 compared to $2,650,000 for the same period in
1999, an increase of $776,000 or 29%. The increase was primarily due to higher
expenses at our communities and our purchase of communities in January 2000.
Income on participating mortgages and leases was $683,000 for the six months
ended June 30, 2000 compared to income of $1,614,000 for the six months ended
June 30, 1999. We ceased to have participating mortgages in the first quarter of
2000. Income from participating mortgages and leases is expected to be
significantly less than prior years as we no longer hold any investments in
participating mortgages.
Depreciation expense was $2,329,000 during the six months ended June 30, 2000
compared to $1,844,000 during the same period in 1999. The increase was due to
acquisitions of manufactured home communities during 1999 and 2000.
Sales Operations
Beginning in January 2000, we commenced home sales activities to sell
manufactured homes to be placed on our undeveloped homesites. The homeowner will
then pay rent to us for locating his or her home on our land. During the six
months ended June 30, 2000, we had a loss of $792,000 from sales operations,
after Commercial Assets minority interest in the loss.
Service Operations
Property management income was comparable for the six months ended June 30, 2000
and 1999.
Fee revenue from managing Commercial Assets was comparable for the six months
ended June 30, 2000 and 1999.
Amortization of management contracts was $1,032,000 and $1,378,000 for the six
months ended June 30, 2000 and 1999, respectively. The decrease is due to
property management contracts becoming fully amortized during 1999.
- 19-
<PAGE>
Equity in Earnings of Commercial Assets
Income from our 27% interest in Commercial Assets was $494,000 for the six
months ended June 30, 2000 compared to $560,000 for the same period in 1999.
Commercial Assets reported to us that its income decreased by $630,000 primarily
due to:
o a $660,000 increase in depreciation on acquired manufactured home
communities,
o a $389,000 loss from home sales operations,
o a $308,000 decrease in interest and other income, and
o a $639,000 increase in interest expense; partially off set by
o $620,000 of nonrecurring income from its commercial mortgage backed
securities bonds, and
o a $700,000 increase in income from rental property operations before
depreciation.
General and Administrative Expenses
Our general and administrative expenses were $882,000 for the six months ended
June 30, 2000 compared to $784,000 for the same period in 1999. The increase is
primarily due to increases in the number of personnel and related expenses.
Interest and Other Income
During the six months ended June 30, 2000 and 1999, interest and other income
was $656,000 and $203,000, respectively. The increase occurred because of
nonrecurring income during the 2000 period comprised primarily of:
o $265,000 of income due to a change in estimate of accrued liabilities,
o $50,000 of income resulting from a forfeited deposit by a potential
purchaser of one of our communities, and
o a $109,000 gain on the sale of real estate.
Interest Expense
During the six months ended June 30, 2000, interest expense was $1,810,000, of
which $212,000 is allocated to the sales operations. Interest expense for the
six months ended June 30, 1999 was $1,898,000. The decrease was primarily due to
capitalized interest on our undeveloped homesites during the 2000 period;
partially offset by the increased interest expense related to the sales
operations.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000, we had cash and cash equivalents of $1,198,000. 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.
Our net cash provided by operating activities was $2.6 million during the six
months ended June 30, 2000, compared to $3.4 million during the same period in
1999. The decrease was primarily a result of a $0.8 million loss from home sales
operations.
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<PAGE>
During the six months ended June 30, 2000, the net cash used in investing
activities was $0.4 million compared with a net use of $2.4 million for the same
period in 1999. The decrease in net cash used is primarily due to proceeds from
the sale of real estate in the 2000 period.
During the six months ended June 30, 2000, net cash used in financing activities
was $1.6 million compared with net cash provided of $0.1 million for the same
period in 1999. The decrease is primarily because of proceeds received by the
Company from secured long-term notes payable in the 1999 period.
We had a line of credit with a bank that was secured by 1,015,674 shares of our
Commercial Assets common stock. Advances under this line of credit bear interest
at the 30-day London Interbank Offered Rate plus 1.75% per annum . The line of
credit was limited to the lesser of:
o $5,000,000;
o 65% of the product of the trading price of Commercial Assets common stock
times 1,015,674; or
o 65% of the purchase price of certain unpledged real estate.
In April 2000, this line of credit was replaced by a $15,000,000 line of credit
with a bank due in May 2001. This new line of credit bears interest at the
bank's prime rate (9.75% at June 30, 2000) and is secured by three manufactured
home communities and one recreational vehicle park. In addition to replacing the
prior bank line of credit, the new line of credit also replaced (a) a $3.4
million line of credit assumed by us when we purchased inventory in January 2000
and (b) a $6.0 million recourse note payable due in April 2001.
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 the
presentation of FFO when considered with the financial data determined in
accordance with generally accepted accounting principles, provides a useful
measure of our performance. However, FFO does not represent cash flow and is not
necessarily indicative of cash flow or liquidity available to us, nor should it
be considered as an alternative to net income as an indicator of operating
performance. The Board of Governors of NAREIT defines FFO as net income or 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 beginning with the NAREIT definition and include adjustments
for:
o the minority interest in the Operating Partnership owned by persons other
than us, and
o amortization of property and investment management contracts.
We believe that the presentation of FFO provides investors with measurements
which help facilitate an understanding of our ability to make required dividend
payments, capital expenditures and principal payments on our debt. Since FFO
excludes depreciation and other real estate related expenses, FFO may be
materially different from net income. Therefore, FFO should not be considered as
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 operating performance or liquidity.
- 21-
<PAGE>
FFO is not necessarily indicative of cash available to fund our cash needs,
including our ability to make distributions. We use FFO in measuring our
operating performance because we believe that the items that result in a
difference between FFO and net income do not impact the ongoing operating
performance of a real estate company, Also, we believe that other real estate
companies, analysts and investors utilize FFO in analyzing the results of real
estate companies. Our basis of computing FFO is not necessarily comparable with
that of other REITs.
For the three and six months ended June 30, 2000 and 1999, our FFO was (in
thousands):
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30 Ended June 30
------------------------- ------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Income before minority interest in Operating Partnership $ 215 $ 812 $ 1,070 $ 1,464
Real estate depreciation 1,240 924 2,329 1,844
Amortization of management contracts 516 689 1,032 1,378
Gain on sale of real estate -- -- (109) --
Equity in Commercial Assets' adjustments for FFO 130 66 261 106
--------- --------- --------- --------
Funds From Operations (FFO) $ 2,101 $ 2,491 $ 4,583 $ 4,792
========= ========= ========= ========
Weighted average common shares and OP Units outstanding 6,631 6,567 6,624 6,565
========= ========= ========= ========
</TABLE>
For the six months ended June 30, 2000 and 1999, net cash flows were as follows
(in thousands):
<TABLE>
<CAPTION>
Six Months
Ended June 30,
----------------------
2000 1999
---- ----
<S> <C> <C>
Cash provided by operating activities $ 2,632 $ 3,365
Cash used in investing activities (400) (2,407)
Cash provided by (used in) financing activities (1,604) 117
</TABLE>
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 a $15.0 million recourse, secured line of credit that bears interest at
the bank's prime rate. If the prime rate increased immediately by 1% then our
annual net income and cash flows would decrease by $150,000 due to an increase
in interest expense on this line of credit, based on the maximum balance of the
line of credit.
We have $42.1 million of fixed rate, fully amortizing, non-recourse, secured
long-term notes payable. 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 $7.4 million of fixed rate, non-recourse, secured long-term notes
payable that mature in October 2000. The rates on these notes range from 7.5% to
8.25% with a weighted average rate of 7.7%. We intend to refinance the notes
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<PAGE>
during 2000 with long-term, partially amortizing, variable rate debt. Therefore,
changes in interest rates would affect the cost of funds borrowed in the future
to refinance the existing debt. If the interest rate on the refinanced debt was
1.0% greater than the weighted average rate on the existing debt, our annual net
income and cash flows would decrease by $74,000 due to an increase in interest
expense on these notes, based on the outstanding balances at June 30, 2000.
We have a $2.5 million fixed rate, partially amortizing, non-recourse, secured
long-term note payable that matures in April 2009. We do not have significant
exposure to changes in interest rates since the interest rate is fixed and the
balance due at maturity is $2 million.
PART II
OTHER INFORMATION
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).
2.2 Second Amended and Restated Agreement and Plan of Merger dated
as of June 2, 2000 by and between Asset Investors Corporation
and Commercial Assets, Inc. (incorporated by reference to Annex
A to the Registrant's Joint Proxy Statement/Prospectus dated
June 13, 2000, Commission File No. 1-9360, filed on June 13,
2000).
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).
10.13 Revolving Promissory Note dated April 7, 2000, between Asset
Investors Operating Partnership, L.P., Community Savanna Club
Joint Venture, AIOP Lost Dutchman Notes, LLC and U. S. Bank
National Association (incorporated herein by reference to
Exhibit 10.13 to the Registrant's Quarterly Report on Form 10-Q,
dated March 31, 2000, Commission File No. 1-9360, filed on May
12, 2000).
10.13(a) Line of Credit Agreement dated April 7, 2000, between Asset
Investors Operating Partnership, L.P., AIOP Florida Properties
I, L.L.C., AIOP Florida Properties II, L.L.C., Community Savanna
Club Joint Venture, AIOP Lost Dutchman Notes, LLC and U. S. Bank
National Association (incorporated herein by reference to
Exhibit 10.13(a) to the Registrant's Quarterly Report on Form
10-Q, dated March 31, 2000, Commission File No. 1-9360, filed on
May 12, 2000).
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<PAGE>
10.13(b) Deed of Trust, Security Agreement, Financing Statement and
Assignment of Rents and Revenues dated April 7, 2000, between
AIOP Lost Dutchman Notes, LLC and U. S. Bank National
Association (incorporated herein by reference to Exhibit
10.13(b) to the Registrant's Quarterly Report on Form 10-Q,
dated March 31, 2000, Commission File No. 1-9360, filed on May
12, 2000).
10.13(c) Mortgage, Security Agreement, Financing Statement and Absolute
Assignment of Rents and Revenues dated April 7, 2000, between
Community Savanna Club Joint Venture and U. S. Bank National
Association (incorporated herein by reference to Exhibit
10.13(c) to the Registrant's Quarterly Report on Form 10-Q,
dated March 31, 2000, Commission File No. 1-9360, filed on May
12, 2000).
10.13(d) Security Agreement dated April 7, 2000, between Asset Investors
Operating Partnership, L.P., AIOP Lost Dutchman Notes, LLC and
U. S. Bank National Association (incorporated herein by
reference to Exhibit 10.13(d) to the Registrant's Quarterly
Report on Form 10-Q, dated March 31, 2000, Commission File No.
1-9360, filed on May 12, 2000).
10.13(e) Security Agreement dated April 7, 2000, between Asset Investors
Operating Partnership, L.P., Community Savanna Club Joint
Venture and U. S. Bank national Association (incorporated herein
by reference to Exhibit 10.13(e) to the Registrant's Quarterly
Report on Form 10-Q, dated March 31, 2000, Commission File No.
1-9360, filed on May 12, 2000).
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:
No Current Reports on Form 8-K were filed by the Registrant
during the period covered by this Quarterly Report on Form
10-Q.
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 14, 2000 By /s/David M. Becker
--------------------------
David M. Becker
Chief Financial Officer
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