SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-Q/A
(Amendment No. 1)
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 October 29, 1999, 5,632,569 shares of common stock were outstanding.
<PAGE>
(i)
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION:
Item 1. Condensed Consolidated Financial Statements:
Balance Sheets as of September 30, 1999 (unaudited)
and December 31, 1998......................................... 1
Statements of Income for the three and nine months ended
September 30, 1999 and 1998 (unaudited)....................... 2
Statements of Cash Flows for the nine months ended
September 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 6. Exhibits and Reports on Form 8-K.............................. 26
(i)
<PAGE>
<TABLE>
<CAPTION>
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
September 30, December 31,
1999 1998
---- ----
(unaudited)
ASSETS
<S> <C> <C>
Real estate, net of accumulated depreciation of $6,205 and $3,378 $ 109,543 $ 98,563
Investments in participating mortgages 20,622 27,604
Cash and cash equivalents 1,604 1,426
Investment in Commercial Assets 19,741 20,706
Other assets, net 8,068 9,927
------------ -----------
Total Assets $ 159,578 $ 158,226
============ ===========
LIABILITIES
Secured long-term notes payable $ 54,456 $ 40,506
Secured short-term financing 1,000 10,500
Accounts payable and accrued liabilities 4,060 2,935
------------ -----------
59,516 53,941
------------ -----------
MINORITY INTEREST IN OPERATING PARTNERSHIP 15,386 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; 5,633 and 5,016 shares issued; and 5,572 and 5,016
shares outstanding, respectively 56 50
Additional paid-in capital 239,381 229,948
Notes receivable on common stock purchases (588) --
Dividends in excess of accumulated earnings (153,723) (151,362)
Treasury stock, 30 and 0 shares at cost (450) --
------------ -----------
84,676 78,636
------------ -----------
Total Liabilities and Stockholders' Equity $ 159,578 $ 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 Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
Rental property operations
<S> <C> <C> <C> <C>
Rental and other property revenues $ 3,822 $ 3,280 $ 11,075 $ 7,132
Interest on participating mortgages 688 801 2,302 2,348
Property operating expenses (1,341) (1,212) (3,991) (2,812)
Depreciation (983) (874) (2,827) (1,762)
--------- --------- --------- ---------
Income from rental property operations 2,186 1,995 6,559 4,906
--------- --------- --------- ---------
Service operations
Property management income, net 54 39 158 122
Commercial Assets management fees 134 65 418 75
Amortization of management contracts (689) (689) (2,067) (2,205)
--------- --------- --------- ---------
Loss from service operations (501) (585) (1,491) (2,008)
--------- --------- --------- ---------
Equity in earnings of Commercial Assets 154 154 714 688
General and administrative expenses (389) (373) (1,098) (1,031)
Interest and other income 124 75 227 677
Interest expense (955) (914) (2,853) (1,390)
Cost incurred to acquire management
contract -- (2,092) -- (2,092)
Income tax benefit 150 -- 250 --
Loss from early extinguishment of debt -- -- (75) --
Reincorporation expenses (70) -- (70) --
--------- --------- --------- ---------
Income (loss) before minority interest in
Operating Partnership 699 (1,740) 2,163 (250)
Minority interest in Operating Partnership (106) 372 (341) 54
--------- --------- --------- ---------
Net income (loss) $ 593 $ (1,368) $ 1,822 $ (196)
========= ========= ========= =========
Basic and diluted earnings per share $ 0.11 $ (0.27) $ 0.33 $ (0.04)
========= ========= ========= =========
Weighted average common shares outstanding 5,559 5,123 5,527 5,116
Weighted average common shares and common
share equivalents outstanding 5,563 5,123 5,534 5,116
Dividends paid per share $ 0.25 $ 0.25 $ 0.75 $ 0.50
========= ========= ========= =========
</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)
Nine Months
Ended September 30,
-------------------
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 1,822 $ (196)
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation and amortization 5,021 3,967
Minority interest in Operating Partnership 341 (54)
Equity in earnings of Commercial Assets (561) (659)
Accrued interest on participating mortgages (611) (601)
Cost incurred to acquire management contract -- 2,073
Increase in other assets (1,234) (941)
Increase in accounts payable and accrued liabilities 311 997
------- --------
Net cash provided by operating activities 5,089 4,586
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of real estate (858) (58,058)
Investments in participating mortgages, net (4,215) (3,042)
Capital replacements (198) (207)
Dividends from Commercial Assets 1,077 718
--------- --------
Net cash used in investing activities (4,194) (60,589)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of Common Stock dividends (4,183) (2,562)
Payment of distributions to minority interest in Operating Partnership (750) (713)
Proceeds from secured long-term notes payable 10,925 --
Principal paydowns on secured long-term notes payable (3,175) (335)
Proceeds from secured short-term financing -- 39,770
Principal paydowns on secured short-term financing (3,300) --
Collections of notes receivable 133 --
Payment of loan costs (400) (1,219)
Proceeds from the issuance of Common Stock 103 35
Stock issuance costs (70) --
Repurchase of Common Stock -- (597)
--------- --------
Net cash provided by (used in) financing activities (717) 34,379
--------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 178 (21,624)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,426 21,802
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,604 $ 178
========= ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
- 3 -
<PAGE>
ASSET INVESTORS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A. 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 September 30, 1999. The
Company also owns 27% of the common stock of Commercial Assets, Inc.
("Commercial Assets") and substantially all of the common stock of both AIC
Manufactured Housing Corp. ("AICMHC") and Asset Investors Equity, Inc. ("AIE").
Commercial Assets 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 Commercial Assets.
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 resecuritize 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 1997, the Company received $67,671,000 cash proceeds from the
sale of the non-agency MBS bonds and has invested these proceeds in manufactured
home communities.
Prior to November 1997, the Company and Commercial Assets 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 Commercial Assets. Mr. Rhodes is Vice Chairman and Mr. Benson is a director
of both the Company and Commercial Assets. 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. Merger with Commercial Assets
The Company and Commercial Assets have agreed to merge, subject to approval by a
majority of the outstanding shares of both companies. The Company will issue
0.4075 shares of its Common Stock for each outstanding share of Commercial
Assets' common stock.
C. Presentation of Financial Statements
The Condensed Consolidated Financial Statements of the Company presented herein
have been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. These financial
statements reflect all adjustments, consisting of only normal recurring
accruals, which, in the opinion of management, are necessary to present fairly
the financial position, results of operations and cash flows of the Company as
of September 30, 1999, for the three and nine 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/A (Amendment No. 1) 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.
D. 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 September 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 Commercial Assets is recorded under
the equity method.
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 September 30,
1999, management believes that no impairments exist based on periodic reviews.
No impairment losses were recognized for the three and nine months ended
September 30, 1999 and 1998.
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
- 5 -
<PAGE>
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.
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. As of September 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.
- 6 -
<PAGE>
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 September 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 nine months ended September 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 dilutive, unexercised stock options of 4,000 and 7,000 shares for the
three and nine months ended September 30, 1999, respectively. There were no
dilutive, unexercised stock options for the three and nine months ended
September 30, 1998.
Capitalized Interest
Interest is capitalized on development projects during periods of construction
or development.
Treasury Stock
The Company owns 27% of Commercial Assets' common stock. During 1999, Commercial
Assets 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 $2,696,000 and $1,262,000 for the nine months ended
September 30, 1999 and 1998, respectively.
- 7 -
<PAGE>
Non-cash operating, investing and financing activities for the nine months ended
September 30, 1999 and 1998 were (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- ------
Issuance of Common Stock for:
<S> <C> <C>
Conversion of OP Units $ 9,536 $ --
Services 150 120
Notes receivable 588 278
Investments in participating mortgages:
For other assets 165 --
By issuance of OP Units -- 17
Real estate acquired:
By cancellation of participating mortgages 12,780 --
From earn-out agreements -- 52
For issuance of OP Units -- 2,145
Receivables from minority interest in subsidiaries -- 319
Purchase of minority interest in subsidiaries by cancellation of receivables 346 --
Transfer of stock issue costs to additional paid in capital 868 --
Reclassification of investment in Commercial Assets to treasury stock 450 --
Short-term financing extended to long-term debt 6,200 --
</TABLE>
E. Real Estate
Real estate at September 30, 1999 and December 31, 1998, was (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Land $ 13,260 $ 11,226
Land improvements and buildings 102,056 90,268
Furniture and other equipment 432 447
---------- ---------
115,748 101,941
Less accumulated depreciation (6,205) (3,378)
---------- ---------
Real estate, net $ 109,543 $ 98,563
========== =========
</TABLE>
Land improvements and buildings consist primarily of infrastructure, roads,
landscaping, clubhouses, maintenance buildings and common amenities.
F. Investments in Participating Mortgages
The Company had non-recourse mortgage loans totaling $11,326,000 secured by two
contiguous 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
cancellation of the three loans plus the payment of $858,000.
- 8 -
<PAGE>
The Company also has a non-recourse 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 profits and net sales proceeds from such communities.
As of September 30, 1999, the Company had investments in participating mortgages
of $20,622,000 and income of $688,000 and $2,302,000 from these participating
mortgages for the three and nine months ended September 30, 1999.
G. Investment in Commercial Assets
On September 30, 1999 and December 31, 1998, the Company owned 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
announced that it plans to acquire manufactured home communities, and from
August 1998 to September 1999, it has invested approximately $65,000,000 for
interests in 11 communities.
Summarized financial information of Commercial Assets as reported by Commercial
Assets is (in thousands):
<TABLE>
<CAPTION>
Balance Sheets September 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Cash and cash equivalents $ 5,076 $ 3,292
Short-term investments 13,334 45,066
Real estate, net (including joint ventures) 64,557 13,908
Investments in participating mortgages 1,951 9,328
Other assets 11,035 6,640
----------- -----------
Total assets 95,953 78,234
Secured long-term notes payable 18,128 --
Secured short-term financing 212 --
Other liabilities 1,966 980
Minority interest in subsidiaries 615 --
----------- -----------
Stockholders' equity $ 75,032 $ 77,254
=========== ===========
</TABLE>
- 9 -
<PAGE>
<TABLE>
<CAPTION>
Statements of Income (unaudited) Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- -----------------------------
1999 1998 1999 1998
------------ ------------ ----------- ---------
<S> <C> <C> <C> <C>
Rental and other property revenues $ 945 $ -- $ 1,382 $ --
Income from participating mortgages and leases 455 151 1,645 151
Property operating expenses (428) -- (602) --
Depreciation (465) (4) (786) (4)
--------- --------- -------- --------
Income from rental property operations 507 147 1,639 147
Interest and other income 397 1,052 1,700 3,231
Interest expense (61) -- (119) --
General and administrative (131) (129) (404) (303)
Management fees (181) (23) (375) (40)
Acquisition fees (3) (61) (197) (61)
Nonrecurring expenses (120) (500) (120) (500)
--------- --------- -------- --------
Net income $ 408 $ 486 $ 2,124 $ 2,474
========= ========= ======== ========
</TABLE>
H. Secured Short-Term Financing
The Company has a revolving line of credit with a bank that bears interest at
the 30-day London Interbank Offered Rate ("LIBOR") plus 1.75% per annum (7.15%
at September 30, 1999). The line of credit is secured by 1,015,674 shares of the
common stock of Commercial Assets 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
of September 30, 1999, the limit was $3,425,000 and $1,000,000 was outstanding
on this line of credit.
I. Secured Long-Term Notes Payable
The following table summarizes the Company's secured long-term notes payable (in
thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
--------------- -----------------
Fixed rate, ranging from 6.50% to 7.04%, fully amortizing, non-recourse notes
<S> <C> <C>
maturing at various dates from December 2018 through June 2019 $ 38,023 $ 30,280
Fixed rate, ranging from 7.37% to 8.25%, non-amortizing notes maturing at
various dates from October 2000 through April 2009 10,233 10,226
Floating rate equal to LIBOR plus 2.5% (7.88% at September 30, 1999),
non-amortizing, recourse note maturing in April 2001 6,200 --
--------- ---------
$ 54,456 $ 40,506
========= =========
</TABLE>
In 1998, the Company entered into an interest rate lock agreement in connection
with expected debt financing. The agreement had an aggregate notional value of
$32,200,000, fixed the interest rate on the expected debt at 6.8% and 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.
- 10 -
<PAGE>
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.
Real estate assets which secure the long-term notes payable had a net book value
of $96,844,000 at September 30, 1999. The Company has $226,000 in escrow for
real estate taxes on secured long-term notes payable at September 30, 1999.
J. Commitments and Contingencies
In connection with a participating mortgage on a manufactured home community,
the Company entered into an earn-out agreement with respect to unoccupied
homesites. The Company advances an additional $17,000 pursuant to the
participating mortgage for each newly occupied homesite either in the form of
cash or 946 OP Units, as determined by the borrower. During the three and nine
months ended September 30, 1999 and 1998, the Company advanced cash and OP Units
as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- -----------------------
1999 1998 1999 1998
------------ ------------ ----------- -------
<S> <C> <C> <C> <C>
Cash advances $ 50 $ 17 $ 232 $ 33
OP Unit advances -- -- -- 17
--------- --------- -------- --------
Total $ 50 $ 17 $ 232 $ 50
========= ========= ======== ========
</TABLE>
At September 30, 1999, there were 2,540 undeveloped homesites 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
September 30, 1999, $5,132,000 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.
K. 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.
L. Common Stock and Dividends
During the three and nine months ended September 30, 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. The notes accrue interest at 7.5% and mature in 2009. At September 30,
1999, $403,000 of the notes were nonrecourse and $185,000 were recourse to the
respective directors or executive officers.
During the three and nine months ended September 30, 1999, the Company paid
$0.25 and $0.75 per share dividends on Common Stock and OP Units totaling
$1,647,000 and $4,933,000, respectively. Dividends and distributions paid during
- 11 -
<PAGE>
the same periods in 1998 were $0.25 and $0.50 per share on Common Stock and OP
Units totaling $1,640,000 and $3,276,000, respectively.
M. 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 and nine months
ended September 30, 1999 and can carryback $250,000 of such tax loss for a
refund of taxes incurred in 1997. Accordingly, the Company has recorded an
income tax benefit of $250,000.
N. Other Matters
Prior to November 1997, a 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 the manager'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 Commercial
Assets (the "Commercial Assets Management Agreement"). The Company expensed the
amount allocated to the AIC Management Agreement in 1997 and is amortizing the
cost of the Commercial Assets 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 Commercial Assets Management Agreement has been extended through December
31, 1999. 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 Ended Nine Months Ended
September 30, September 30,
------------------------------- -----------------------------
1999 1998 1999 1998
----------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
Management fees $ 134,000 $ 65,000 $ 418,000 $ 75,000
</TABLE>
As of September 30, 1999, the net book value of the Commercial Assets Management
Agreement was $2,259,000 and is included in other assets.
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
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<PAGE>
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 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
September 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:
o 4,490 developed homesites (sites with homes in place);
o 2,540 undeveloped homesites; and
o 180 recreational vehicle sites.
In addition, we manage 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 September 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.
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.
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<PAGE>
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 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;
o costs we incurred in order to become self-managed;
o amortization of management contracts; and
o nonrecurring income, net.
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<PAGE>
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 unusual and nonrecurring expenses as well as 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;
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 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 72%
of our properties are in Florida and 16% are in Arizona; and
- 15 -
<PAGE>
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
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:
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
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.
- 16 -
<PAGE>
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 make a
determination with respect to each acquisition on a case-by-case basis. As of
September 30, 1999, Commercial Assets had invested approximately $65 million in
communities. Accordingly, we now coordinate our acquisitions with Commercial
Assets on a case-by-case basis.
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:
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 September 30, 1999, Commercial Assets had
acquired interests in 11 communities at a cost of approximately $65 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 Nine Months Ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
------------ ------------ ----------- ----------
<S> <C> <C> <C> <C>
Base Fees $ 181,000 $ 23,000 $ 375,000 $ 40,000
Acquisition Fees 3,000 61,000 197,000 61,000
Incentive Fees -- -- -- --
----------- --------- ----------- ---------
$ 184,000 $ 84,000 $ 572,000 $ 101,000
=========== ========= =========== =========
</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 September 30, 1999, we held interests in
24 communities with 2,540 undeveloped homesites.
- 17 -
<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 September 30, 1999 are located:
<TABLE>
<CAPTION>
Number of Sites
--------------------------------------------------------------
Number of Recreational
Communities Developed Undeveloped Vehicles
----------------- ----------------- ----------------- ----------------
<S> <C> <C> <C>
Florida 17 3,579 2,428 --
Arizona 4 794 108 122
New Jersey 1 90 -- --
Pennsylvania 1 28 -- --
California 1 -- -- 65
--- ------ ------- ----
Total 24 4,491 2,536 187
=== ====== ======= ====
</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 Undeveloped
Community Location Homesites Occupancy (1) Rent RV Sites Sites
- -----------------------------------------------------------------------------------------------------------------
Owned Communities
<S> <C> <C> <C> <C> <C> <C>
Blue Star Apache Junction, AZ 29 100% $227 122 --
Brentwood West Mesa, AZ 350 100 306 -- --
Cardinal Court Largo, FL 138 96 268 -- --
Caribbean Cove Orlando, FL 255 99 280 -- 31
Forest View Homosassa, FL 191 100 235 -- 120 (3)
Gulfstream Harbor Orlando, FL 381 99 323 -- 172
Gulfstream Harbor II Orlando, FL 287 100 310 -- 21
Lost Dutchman Apache Junction, AZ 151 100 246 -- 108
Marina Dunes Marina, CA -- -- -- 65 --
Mullica Woods Egg Harbor City, NJ 90 100 459 -- --
Park Royale Pinellas Park, FL 258 95 351 -- 51 (3)
Pinewood St. Petersburg, FL 220 96 289 -- --
Pleasant Living Riverview, FL 245 100 278 -- --
Salem Farm Bensalem, PA 28 100 412 -- --
Serendipity Ft. Myers, FL 338 99 277 -- --
Stonebrook Homosassa, FL 123 99 249 -- 95 (3)
Sun Valley Apache Junction, AZ 264 100 247 -- --
Sun Valley Tarpon Springs, FL 261 100 340 -- --
Westwind I(2) Dunedin, FL 195 98 336 -- --
Westwind II (2) Dunedin, FL 189 100 346 -- --
---------------------------------------------------------------
Subtotal 3,993 99 301 187 598
---------------------------------------------------------------
Participating Mortgage Communities (3)
Blue Heron Pines Punta Gorda, FL 129 98 249 -- 315
Brentwood Hudson, FL 75 89 202 -- 148
Savanna Club Port St. Lucie, FL 49 100 158 -- 1,297
Sun Lake Grand Island, FL 245 94 257 -- 178
---------------------------------------------------------------
Subtotal 498 98 237 -- 1,938
---------------------------------------------------------------
Total Communities 4,491 98% $294 187 2,536
===============================================================
<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>
- 18 -
<PAGE>
<TABLE>
<CAPTION>
Average
Developed Monthly Undeveloped
Community Location Homesites Occupancy (1) Rent RV Sites Sites
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Cannery Village Newport Beach, CA -- --% $ -- -- 30
Casa Encanta Mesa, AZ 106 96 345 -- --
Cypress Greens Lakeland, FL 86 100 190 -- 21
Desert Harbor Apache Junction, AZ 103 100 202 -- 104
Fiesta Village Mesa, AZ 170 95 272 -- 206
La Casa Blanca Apache Junction, AZ 198 100 151 -- --
Lakeshore Villas Tampa, FL 290 96 323 -- --
Rancho Mirage Apache Junction, AZ 312 100 175 -- --
Riverside Ruskin, FL 221 99 403 -- 769
Royal Palm Haines City, FL 233 98 216 -- 217
Savanna Club Port St. Lucie, FL 12 100 163 -- 25
Southern Palms Mesa, AZ 36 97 208 26 --
Sun Lake Grand Island, FL -- -- -- -- 5
--------------------------------------------------------------
Subtotal 1,755 98 252 26 1,377
--------------------------------------------------------------
Communities Managed for Others 588 99 223 -- 83
--------------------------------------------------------------
Total Managed Communities 2,355 98% $245 26 1,460
==============================================================
</TABLE>
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 NINE MONTHS ENDED SEPTEMBER 30, 1999
Comparison of Nine Months Ended September 30, 1999 to Nine Months Ended
September 30, 1998
Rental Property Operations
Income from rental property operations totaled $6,559,000 and $4,906,000 for the
nine months ended September 30, 1999 and 1998, respectively, an increase of
33.7%. The increase is primarily due to our acquisition of communities in 1998,
increases in rents at our communities and additional investments in
participating mortgages.
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<PAGE>
Service Operations
During the nine months ended September 30, 1999 and 1998, we earned $158,000 and
$122,000, 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 $418,000 and $75,000 for the
nine months ended September 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 $2,205,000 for the first
nine months of 1998 to $2,067,000 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 nine months ended
September 30, 1999 and 1998 was $714,000 and $688,000, respectively. Commercial
Assets reported to us that its income decreased by $350,000 primarily due to
$782,000 increase in depreciation on acquired manufactured home communities and
$335,000 increase in management fees paid to us partially offset by $380,000 in
lower nonrecurring expenses. Due to our 27% interest in Commercial Assets,
however, during the nine months ended September 30, 1999 and 1998, $153,000 and
$28,000, respectively, 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 $1,098,000 and $1,031,000 for the
nine months ended September 30, 1999 and 1998, respectively, primarily due to
increases in the number of personnel.
Interest and Other Income
During the nine months ended September 30, 1999 and 1998, interest and other
income was $227,000 and $677,000, respectively. The decrease occurred because
prior to September 30, 1998, we had invested substantially all of our cash
resources in manufactured home communities.
Interest Expense
During the nine months ended September 30, 1999 and 1998, interest expense was
$2,853,000 and $1,390,000, 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 nine months ended
September 30, 1999. As a result, it can carry back such tax loss for a $250,000
refund of income taxes incurred by the subsidiary during 1997.
- 20 -
<PAGE>
Loss from Early Extinguishment of Debt
During the nine months ended September 30, 1999, we prepaid a $2.2 million note
payable and paid a $75,000 prepayment penalty.
Reincorporation Expenses
During the nine months ended September 30, 1999, we incurred $70,000 of
nonrecurring expenses related to our reincorporation to Delaware.
Comparison of Three Months Ended September 30, 1999 to Three Months Ended
September 30, 1998
Rental Property Operations
Income from rental property operations totaled $2,186,000 and $1,995,000 for the
three months ended September 30, 1999 and 1998, respectively, an increase of
9.6%. The increase is primarily due to increases in rents at our communities and
additional investments in participating mortgages.
Service Operations
During the three months ended September 30, 1999 and 1998, we earned $54,000 and
$39,000, 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 $134,000 and $65,000 for the
three months ended September 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 September 30, 1999 and 1998.
Equity in Earnings of Commercial Assets
Income from our 27% interest in Commercial Assets was $154,000 for each of the
three months ended September 30, 1999 and 1998. Commercial Assets reported to us
that its income decreased by $78,000 primarily due to $461,000 increase in
depreciation on acquired manufactured home communities and $158,000 increase in
management fees paid to us partially offset by $500,000 in lower nonrecurring
expenses. However, due to our 27% interest in Commercial Assets, for the three
months ended September 30, 1999 and 1998, $49,000 and $24,000, respectively, 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 $389,000 and $373,000 for the three
months ended September 30, 1999 and 1998, respectively. The increase is
primarily due to increases in the number of personnel.
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<PAGE>
Interest and Other Income
During the three months ended September 30, 1999 and 1998, interest and other
income was $124,000 and $75,000, respectively. The increase occurred primarily
because of income from non-agency MBS bonds during the 1999 period.
Interest Expense
During the three months ended September 30, 1999 and 1998, interest expense was
$955,000 and $914,000, respectively, primarily due to borrowings used to make
additional investments in participating mortgages after September 1998.
Income Tax Benefit
A subsidiary recorded a loss for tax purposes during the three months ended
September 30, 1999. As a result, it can carry back such tax loss for a $150,000
refund of income taxes incurred by the subsidiary during 1997.
Reincorporation Expenses
During the three months ended September 30, 1999, we incurred $70,000 of
nonrecurring expenses related to our reincorporation in Delaware.
NOL and Capital Loss Carryovers
At September 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 nine months ended September 30, 1999, we distributed
$1,647,000 or $0.25 per share, and $4,933,000 or $0.75 per share, to holders of
common stock and OP Units. During the same periods in 1998, $1,640,000 or $0.25
per share, and $3,276,000 or $0.50 per share, was distributed as we made no
distributions during the first quarter of 1998.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, we had cash and cash equivalents of $1.6 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.
Our net cash provided by operating activities was $5.1 million during the nine
months ended September 30, 1999 compared to $4.6 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,
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<PAGE>
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 nine months ended September 30, 1999, the net cash used in investing
activities was $4.2 million compared with $60.6 million for the same period in
1998. The decrease is primarily due to our investment of $58.1 million to
acquire manufactured home communities during the 1998 period.
During the nine months ended September 30, 1999, net cash used in financing
activities was $0.7 million compared with $34.4 million provided by financing
activities 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 London Interbank
Offered Rate plus 1.75% per annum (7.15% at September 30, 1999). The line of
credit is 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.
As of September 30, 1999, the borrowing limit was $3,425,000 and $1,000,000 was
outstanding on this line of credit.
At September 30, 1998, the weighted-average interest rate on our secured,
long-term notes payable was 6.9% with a weighted-average maturity of 10 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 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,
o costs we incurred in order to become self-managed,
o amortization of management contracts, and
o nonrecurring income, net.
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<PAGE>
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 unusual and nonrecurring expenses as well as 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.
For the three and nine months ended September 30, 1999 and 1998, our FFO was (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- -----------------------------
1999 1998 1999 1998
------------ ------------ ----------- ---------
Income (loss) before minority interest in
<S> <C> <C> <C> <C>
Operating Partnership $ 699 $ (1,740) $ 2,163 $ (250)
Real estate depreciation 983 874 2,827 1,762
Amortization of management contracts 689 689 2,067 2,205
Nonrecurring income, net (8) -- (33) --
Equity in Commercial Assets' adjustments for FFO 124 169 209 136
Cost incurred to acquire management contract -- 2,092 -- 2,092
--------- --------- -------- --------
Funds From Operations (FFO) $ 2,487 $ 2,084 $ 7,233 $ 5,945
========= ========= ======== ========
Weighted average common shares and OP Units
outstanding 6,559 6,587 6,563 6,528
========= ========= ======== ========
</TABLE>
For the nine months ended September 30, 1999 and 1998, net cash flows were as
follows (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------
1999 1998
--------- -----------
<S> <C> <C>
Cash provided by operating activities $ 5,089 $ 4,586
Cash used in investing activities (4,194) (60,589)
Cash (used in) provided by financing activities (717) 34,379
</TABLE>
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
- 24 -
<PAGE>
fail or create erroneous results. The following disclosure provides information
regarding the current status of our Year 2000 compliance program.
Our 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
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 have received oral representations
from our third party vendors indicating that they are substantially Year 2000
compliant.
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.
Our worst case scenario would be in the event that the U.S. Social Security
Administration were unable to process their payments to our tenants, in which
case large numbers of our tenants may be unable to pay their rent when due. If
this were to occur, we may be unable to continue to service our debt as it
becomes due and foreclosure proceedings on our affected properties could be
commenced by our lenders. We have no contingency plan with respect to potential
Year 2000 related problems. We note, however, that on December 28, 1998,
President Clinton publicly announced that the U.S. Social Security
Administration would be fully Year 2000 compliant before the end of 1999.
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 $38.0 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,
- 25 -
<PAGE>
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 long-term financing that bears
interest at the London Interbank Offered Rate or "LIBOR" plus 2.5% and matures
in April 2001. If LIBOR increased immediately by 1%, our annual net income would
decrease by $62,000 due to an increase in interest expense on this $6.2 million
note payable. We expect to refinance this debt with non-recourse, secured, fixed
rate, long-term debt during 2000. 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 September 30, 1999, the outstanding balance was
$1,000,000. Changes in LIBOR would affect the cost of funds borrowed in the
future. If LIBOR increased immediately by 1% then our annual net income would
decrease by $10,000 due to an increase in interest expense on this line of
credit, based on the outstanding balance at September 30, 1999.
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).
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
(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 August 31, 1999 reporting the
proposed merger between the Company and Commercial Assets, Inc.
- 26 -
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ASSET INVESTORS CORPORATION
(Registrant)
Date: March 8, 2000 By /s/David M. Becker
----------------------------
David M. Becker
Chief Financial Officer
- 27 -
<TABLE> <S> <C>
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<CIK> 0000804138
<NAME> ASSET INVESTORS COMPANY
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,604
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,234
<PP&E> 115,748
<DEPRECIATION> (6,205)
<TOTAL-ASSETS> 159,578
<CURRENT-LIABILITIES> 4,060
<BONDS> 55,456
0
0
<COMMON> 56
<OTHER-SE> 84,620
<TOTAL-LIABILITY-AND-EQUITY> 159,578
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<TOTAL-REVENUES> 13,953
<CGS> 0
<TOTAL-COSTS> 8,885
<OTHER-EXPENSES> 393
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,853
<INCOME-PRETAX> 1,822
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,822
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,822
<EPS-BASIC> 0.33
<EPS-DILUTED> 0.33
</TABLE>
