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 HAVE 1934
For the quarterly period ended September 30, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-9360
AMERICAN LAND LEASE, INC.
(Exact name of registrant as specified in its charter)
Delaware 84-1500244
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification No.)
2637 McCormick Drive 33759
Clearwater, Florida (Zip Code)
(Address of Principal Executive Offices)
(727) 726-8868
(Registrant's telephone number, including area code)
Asset Investors Corporation
3410 South Galena Street, Suite 210
Denver, CO 80231
(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 November 13, 2000, 7,229,755 shares of common stock were outstanding.
<PAGE>
AMERICAN LAND LEASE, INC. (f/k/a Asset Investors Corporation) AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION:
Item 1. Condensed Consolidated Financial Statements:
Balance Sheets as of September 30, 2000 (unaudited)
and December 31, 1999............................................. 1
Statements of Income for the three and nine months ended
September 30, 2000 and 1999 (unaudited)........................... 2
Statements of Cash Flows for the nine months ended
September 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.........................................15
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......26
PART II. OTHER INFORMATION:
Item 2. Changes in Securities and Use of Proceeds.........................27
Item 4. Submission of Matters to a Vote of Security Holders...............27
Item 6. Exhibits and Reports on Form 8-K..................................27
(i)
<PAGE>
<TABLE>
<CAPTION>
AMERICAN LAND LEASE, INC.
(formerly Asset Investors Corporation) AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
September 30, December 31,
2000 1999
---- ----
(unaudited)
ASSETS
<S> <C> <C>
Real estate, net of accumulated depreciation of $10,872 and $7,248 $ 198,414 $ 108,745
Investments in participating mortgages -- 22,475
Cash and cash equivalents 2,406 570
Investment in Commercial Assets -- 19,486
Inventory 8,027 --
Other assets, net 11,116 7,817
------------ -----------
Total Assets $ 219,963 $ 159,093
============ ===========
LIABILITIES
Secured long-term notes payable $ 91,306 $ 53,994
Secured short-term financing 7,057 2,610
Accounts payable and accrued liabilities 6,856 3,401
------------ -----------
Total liabilities 105,219 60,005
------------ -----------
COMMITMENTS AND CONTINGENCIES -- --
MINORITY INTEREST IN OPERATING PARTNERSHIP 15,033 15,197
MINORITY INTEREST IN OTHER ENTITIES 596 39
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;
8,295 and 5,633 shares issued; and 7,170 and 5,603 shares
outstanding, respectively 85 56
Additional paid-in capital 277,400 239,381
Notes receivable on common stock purchases (982) (588)
Dividends in excess of accumulated earnings (158,063) (154,547)
Treasury stock, 1,125 and 30 shares, at cost (19,325) (450)
------------- -----------
99,115 83,852
------------ -----------
Total Liabilities and Stockholders' Equity $ 219,963 $ 159,093
============ ===========
</TABLE>
- 1 -
<PAGE>
See Notes to Condensed Consolidated Financial Statements.
<TABLE>
<CAPTION>
AMERICAN LAND LEASE, INC.
(formerly Asset Investors Corporation) AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2000 1999 2000 1999
---- ---- ---- ----
Rental property operations
<S> <C> <C> <C> <C>
Rental and other property revenues $ 5,591 $ 3,822 $ 14,489 $ 11,075
Income (loss) on participating mortgages and leases (73) 688 610 2,302
Property operating expenses (2,269) (1,341) (5,695) (3,991)
Depreciation (1,507) (983) (3,836) (2,827)
---------- ------- ---------- ---------
Income from rental property operations 1,742 2,186 5,568 6,559
--------- ------- --------- ---------
Sales operations
Home sales revenues 2,723 -- 8,089 --
Cost of home sales (1,820) -- (6,429) --
Selling and marketing expenses (789) -- (2,412) --
Interest expense allocation (39) -- (251) --
Minority interest in sales operations (14) -- 272 --
---------- ------ --------- ---------
Income (loss) from sales operations 61 -- (731) --
--------- ------ ---------- ---------
Service operations
Property management income, net 29 54 141 158
Commercial Assets management fees 49 134 335 418
Amortization of management contracts (834) (689) (1,866) (2,067)
---------- ------- ---------- ---------
Loss from service operations (756) (501) (1,390) (1,491)
---------- ------- ---------- ---------
Equity in earnings of Commercial Assets 192 154 686 714
General and administrative expenses (538) (459) (1,420) (1,168)
Interest and other income 235 274 891 477
Interest expense (1,178) (955) (2,776) (2,928)
---------- ------- ---------- ---------
Income (loss) before minority interest in Operating
Partnership (242) 699 828 2,163
Minority interest in Operating Partnership 42 (106) (124) (341)
--------- ------- ---------- ---------
Net income (loss) $ (200) $ 593 $ 704 $ 1,822
========== ======= ========= =========
Basic and diluted earnings (loss) per share $ (0.03) $ 0.11 $ 0.12 $ 0.33
========= ======= ========= =========
Weighted average common shares outstanding 6,637 5,559 5,934 5,527
========= ======= ========= =========
Weighted average common shares and common share
equivalents outstanding 6,637 5,563 5,935 5,534
========= ======= ========= =========
Dividends paid per share $ 0.25 $ 0.25 $ 0.75 $ 0.75
========= ======= ========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
- 2 -
<PAGE>
<TABLE>
<CAPTION>
AMERICAN LAND LEASE, INC.
(formerly Asset Investors Corporation) AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months
Ended September 30,
-------------------
2000 1999
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 704 $ 1,822
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation and amortization 5,952 5,021
Amortization of discount on secured long-term notes payable 44 --
Minority interest in Operating Partnership and sales operations (246) 341
Equity in earnings of Commercial Assets (465) (561)
Equity in earnings of real estate joint ventures (10) --
Income from participating mortgages (600) (611)
Gain on sale of real estate (109) --
Increase in inventory (688) --
Increase in operating assets and liabilities (54) (923)
------------ --------------
Net cash provided by operating activities 4,528 5,089
------------ --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of real estate 3,443 --
Purchases of real estate (765) (858)
Investments in participating mortgages, net -- (4,215)
Proceed from sale of short-term investments 10,618 --
Capital replacements and improvements (4,358) (198)
Dividends from Commercial Assets 1,077 1,077
Dividends from real estate joint ventures 26 --
Purchase of Commercial Assets common stock (20,418) --
Cash received in connection with acquisitions 11,860 --
Cash paid for merger related costs (3,706) --
------------ --------------
Net cash used in investing activities (2,223) (4,194)
------------ --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of Common Stock dividends (4,248) (4,183)
Payment of distributions to minority interest in Operating Partnership (783) (750)
Proceeds from secured long-term notes payable 20,050 10,925
Principal paydowns on secured long-term notes payable (14,641) (3,175)
Principal paydowns on secured short-term financing (2,267) (3,300)
Contributions for minority interest in subsidiary 1,782 --
Collections of notes receivable 21 133
Payment of loan costs (383) (400)
Proceeds from the issuance of Common Stock, net -- 33
------------ --------------
Net cash used in financing activities (469) (717)
------------ --------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,836 178
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 570 1,426
------------ --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,406 $ 1,604
============ ==============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
- 3 -
<PAGE>
AMERICAN LAND LEASE, INC.
(formerly Asset Investors Corporation) AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A. The Company
American Land Lease, Inc. ("ANL" 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 August 11, 2000, ANL was known as Asset Investors
Corporation. ANL's common stock, par value $.01 per share ("Common Stock"), is
listed on the New York Stock Exchange under the symbol "ANL." Prior to its name
change in August 2000, its shares were listed on the New York Stock Exchange
under the symbol "AIC". In May 1997, ANL 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. ANL owns 87%
of the Operating Partnership as of September 30, 2000. Prior to August 2000, the
Company also owned approximately 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. Effective August 1, 2000,
Commercial Assets was merged into the Company. See Note D.
B. Presentation of Financial Statements
The Condensed Consolidated Financial Statements of the Company presented herein
have been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. These financial
statements reflect all adjustments, consisting of only normal recurring
accruals, which, in the opinion of management, are necessary to present fairly
the financial position, results of operations and cash flows of the Company as
of September 30, 2000, 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. Operating results for the three
and nine month periods ended September 30, 2000 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2000.
The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
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.
- 4 -
<PAGE>
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 majority-owned subsidiaries. The
minority interest in the Operating Partnership represents the OP Units which are
exchangeable, at the option of the holder. When a holder elects to exchange OP
Units, the Company determines whether such OP Units will be exchanged for cash
or shares of Common Stock. The holders of OP Units receive the same amount per
OP Unit in distributions as the holders of Common Stock at the time of dividend
distributions. As of September 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 was recorded under
the equity method until the effective date of the merger with the Company.
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,
2000, management believes that no impairments exist based on periodic reviews.
No impairment losses were recognized for the three and nine months ended
September 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 September 30, 2000,
there was no reserve for inventory.
- 5 -
<PAGE>
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 collectability of any unpaid interest and provides reserves as
necessary.
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.
Income Taxes
ANL has elected to be taxed as a REIT as defined under the Internal Revenue Code
of 1986, as amended (the "Code"). In order for ANL to qualify as a REIT, among
other requirements, specified percentages of its income and assets must consist
of certain qualifying categories. The activities of consolidated subsidiaries
that (a) owned interests in property management contracts, (b) managed
Commercial Assets and (c) sell homes might not qualify if conducted by ANL,
although ANL's share of dividend income received from these entities generally
would qualify for these purposes.
As a REIT, ANL 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 (or 90% beginning in 2001). REITs are also subject to a number of
other organizational and operational requirements. If ANL 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 ANL 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, 2000, ANL'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 ANL's
REIT income, and as a result, to reduce the amount that ANL 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.
- 6 -
<PAGE>
Earnings Per Share
Basic earnings per share for the three and nine months ended September 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 nine months ended September 30, 1999 reflect the effect of dilutive,
unexercised stock options of 4,000 and 7,000, respectively. There were no
material dilutive, unexercised stock options for the nine months ended September
30, 2000. In periods when there is a net loss, the effect of any unexercised
stock options is not included in the computation of diluted earnings per share
as they would be antidilutive.
Capitalized Interest
Interest is capitalized on development projects during periods of construction
or development. Capitalized interest was $593,000 and $39,000 for the three
months ended September 30, 2000 and 1999, respectively, and $ 1,494,000 and
$74,000 for the nine months ended September 30, 2000 and 1999, respectively.
Treasury Stock
Prior to August 2000, the Company owned approximately 27% of Commercial Assets'
common stock. In connection with the August 2000 merger of the Company and
Commercial Assets, these shares of Commercial Assets were converted into
1,125,000 shares of the Company's Common Stock and have been recorded as
treasury stock for accounting purposes. During 1999, Commercial Assets purchased
114,000 shares of the Company's Common Stock. Consequently, the Company had an
interest in 30,000 shares of its Common Stock and had recorded this as treasury
stock. These 114,000 shares of the Company's Common Stock were cancelled in
August 2000 as a result of the Company's merger with Commercial Assets.
Statements of 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 $3,904,000
and $2,696,000 for the nine months ended September 30, 2000 and 1999,
respectively.
Non-cash operating, investing and financing activities for the nine months ended
September 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 and other assets acquired in merger with Commercial Assets:
By assumption of notes payable 29,412 --
By assumption of accounts payable and accrued liabilities 2,662 --
By assumption of minority interest 554 --
By issuance of common stock, net of treasury stock 20,067 --
Reclassification of investment in Commercial Assets to treasury stock 18,875 450
Real estate acquired:
By cancellation of participating mortgages 23,333 --
- 7 -
<PAGE>
2000 1999
-------- --------
By assumption of notes payable 4,711 --
By assumption of accounts payable and accrued liabilities, net of other
assets received 2,186 --
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 1,063 12,780
By assumption of accounts payable and accrued liabilities, net of other
assets received 311 --
By minority interest in subsidiary 1,404 --
Receivables from minority interest in subsidiaries 4 346
Purchase of property management contracts for note payable 380 --
Cancellation of intercompany balances as a result of the merger 4,426 --
Other assets, net of assumed liabilities, for minority interest in subsidiary 97 --
Issuance of Common Stock:
For services 77 150
For notes receivable 440 588
Cancellation of notes receivable for services 52 --
Short-term financing extended to long-term debt -- 6,200
Investment in participating mortgages for other assets -- 165
</TABLE>
D. Merger with Commercial Assets
Effective August 1, 2000, the Company and Commercial Assets merged. Prior to the
merger, the Company owned 2,761,000 shares of Commercial Assets. Pursuant to the
amended merger agreement as referenced in Note K, Commercial Assets
shareholders, with the exception of the Company and its officers and directors
and the officers and directors of Commercial Assets, were provided an election
to receive either (1) $5.75 in cash per share of Commercial Assets common stock
or (2) 0.4075 shares of ANL common stock per share of Commercial Assets common
stock.
As a result of the merger, the Company acquired the remaining shares of
Commercial Assets by paying $20,418,000 in cash for 3,551,000 Commercial Assets
shares and issuing 1,664,000 shares of ANL Common Stock valued at $20,067,000
for 4,085,000 Commercial Assets shares. The merger with Commercial Assets was
recorded using the purchase method of accounting. The purchase price of
$63,352,000 (including the Company's previous investment in Commercial Assets of
$18,875,000 and transaction costs of $3,992,000) was recorded as follows (in
thousands):
Real Estate $ 60,477
Investment in real estate joint venture 1,764
Cash and cash equivalents 11,860
Short term investments 10,618
Investment in home sales. 2,717
Other assets 8,544
Secured long-term notes payable (29,412)
Accounts payable and accrued liabilities (2,662)
Minority interest (554)
- 8 -
<PAGE>
The allocation of the purchase price of Commercial Assets is based upon
preliminary estimates and is subject to final determination based upon estimates
and other evaluations of fair value. Therefore, the allocations reflected above
may differ from the amounts ultimately determined.
The unaudited pro forma condensed consolidated statements of operations for nine
months ended September 30, 2000 and 1999 have been prepared as if the merger had
occurred on January 1, 1999. The pro forma information is not necessarily
indicative of what the Company's results of operations would have been assuming
the completion of the described transactions at the beginning of the periods
indicated, nor does it purport to project the Company's results of operations
for any future period.
Pro Forma Condensed Consolidated Statement of Operations:
(In thousands except per share data) (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
2000 1999
---- ----
<S> <C> <C>
Income from property operations $ 6,845 $ 6,527
Net income before minority interest in operating partnership 3,257 2,007
Net income 2,842 1,745
Basic and diluted earnings per share $0.40 $0.24
Weighted average common shares and common share equivalents outstanding
7,165 7,187
</TABLE>
E. Real Estate
Real estate at September 30, 2000 and December 31, 1999, was (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---- ----
<S> <C> <C>
Land $ 37,647 $ 13,260
Land improvements and buildings 171,639 102,733
----------------- -----------------
209,286 115,993
Less accumulated depreciation (10,872) (7,248)
------------------ -----------------
Real estate, net $ 198,414 $ 108,745
================= =================
</TABLE>
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. See Note F. The purchase price was
allocated as follows (in thousands):
Real estate $ 30,360
Cash and cash equivalents 205
Other assets 5,913
-----------------
$ 36,478
=================
- 9 -
<PAGE>
In August 2000, the Company acquired Commercial Assets. See Note D.
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 assumed liabilities and other costs of $761,000. During 1999,
the Company had a non-recourse participating mortgage bearing 10% interest and
maturing in 2018. The Company was entitled to receive 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. See Note D. The amounts and components of the purchase
price were as follows:
(in thousands)
Cancellation of participating mortgages and loans $ 24,851
Assumption of debt 10,366
Issuance of 44,572 OP Units 496
Cash 765
------------
$ 36,478
============
G. Investment in Commercial Assets
Prior to August 2000, the Company owned 2,761,000 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 the type of real estate assets in
which to invest. During the third quarter of 1998, Commercial Assets began
acquiring manufactured home communities, and from August 1998 to July 2000, it
had invested approximately $70 million for interests in 12 communities.
Effective August 1, 2000, the Company acquired the remaining outstanding shares
of Commercial Assets. See Note D.
- 10 -
<PAGE>
Summarized financial information of Commercial Assets through the date of its
acquisition by the Company as reported by Commercial Assets is as follows (in
thousands):
Statement of Income
<TABLE>
<CAPTION>
Seven Months Nine Months
Ended July 31, 2000 Ended September 30, 1999
--------------------- ------------------------
<S> <C> <C>
Rental and other property revenues $ 3,891 $ 1,382
Income from participating mortgages and leases 164 1,645
Property operating expenses (1,661) (602)
Depreciation (1,188) (786)
------------------------- --------------------------
Income from rental property operations 1,206 1,639
Interest and other income 1,072 1,700
Interest expense (739) (119)
Equity in loss from home sales operations (370) --
Equity in earnings of Asset Investors 17 --
CMBS bonds revenue 1,264 --
General and administrative expenses (229) (524)
Related-party management fees (457) (375)
Related-party acquisition fees -- (197)
------------------------ ---------------------------
Net income $ 1,764 $ 2,124
======================== =========================
</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 $7,372,000. From January through
July 2000, the Company owned 65% of the nonvoting common stock of Sales Corp.,
Commercial Assets owned the remaining 35% of the nonvoting common stock and
certain of the Company's officers owned all of Sales Corp.'s voting common
stock. The nonvoting common stock represents 99% of all outstanding shares of
Sales Corp.'s capital stock. As a result of the Company's acquisition of
Commercial Assets on August 1, 2000, the Company owns all of the nonvoting
common stock of Sales Corp. The amounts and components of the purchase price
were as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Assumption of secured short-term financing $ 4,594
Cancellation of participating mortgages and notes receivable 1,063
Assumption of notes payable 403
Assumption of accounts payable and accrued liabilities, net of other assets received 311
Contribution by Commercial Assets 1,001
--------
$ 7,372
========
</TABLE>
- 11 -
<PAGE>
I. Secured Long-Term Notes Payable
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
(in thousands)
Fixed rate, ranging from 6.5% to 8.8%, fully amortizing,
non-recourse notes maturing at various dates from 2018
<S> <C> <C>
through 2020 $68,031 $37,790
Fixed rate, ranging from 7.5% to 8.3%, partially amortizing,
non-recourse notes maturing at October 2000
-- 7,605
Fixed rate, ranging from 7.7% to 8.1%, partially amortizing,
non-recourse notes maturing at various dates from 2007
through 2009 5,432 2,528
Recourse fully-amortizing note discounted at 7.0% maturing in
2002 3,863 --
Floating rate equal to LIBOR plus 2.5%, partially amortizing,
recourse note maturing at April 2001 -- 6,071
8.57% fixed rate, partially amortizing, recourse term loan
maturing in August 2002 13,980 --
------- -------
$91,306 $53,994
======= =======
</TABLE>
In connection with the merger with Commercial Assets, the Company assumed
secured long-term notes payable totaling $29,412,000, which is included in the
above table.
In August 2000, the Company entered into a $14,300,000 term loan that bears
interest at a fixed rate of 8.57% and matures in August 2002. The term loan is
secured by three manufactured home communities, which have a combined net book
value of $16,400,000 at September 30, 2000. Proceeds from the term loan were
used to extinguish existing first mortgage debt of approximately $10 million and
provide additional working capital.
J. 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 (9.5% at
September 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 $17,070,000 at September 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. At September 30, 2000, unused
commitment under the revolving line of credit was $7,943,000.
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 matured 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.
- 12 -
<PAGE>
During 2000, the Company had a $2,120,000 promissory note payable to Community
Management Investors Corporation ("CMIC") that was scheduled to mature 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, Chief Operating Officer and Chief
Financial Officer own 35% of CMIC, and the Company's Vice President of
Development owns 20% of CMIC. In August 2000, the Company repaid the note
payable.
K. Commitments and Contingencies
In connection with the purchase of a manufactured home community, the Company
has an earnout 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
September 30, 2000 and 1999, the Company paid $-0- and $50,000 in cash,
respectively. The Company paid $116,000 and $232,000 in cash during the nine
months ended September 30, 2000 and 1999, respectively. At September 30, 2000,
there were 106 unoccupied homesites subject to the earnout.
In connection with the Company's August 2000 acquisition of Commercial Assets,
the Company assumed the following commitments and contingencies formerly the
responsibility of Commercial Assets:
o The Company will pay an earnout to the former owner of a manufactured home
community with respect to 148 unoccupied homesites. The Company will pay
$17,000 to the former owner for each newly occupied homesite. During August
and September 2000, the Company paid $34,000 for homesites that became
occupied. At September 30, 2000, there were 136 homesites subject to the
earnout.
o The Company has agreed to acquire from time-to-time homesites subject to
ground leases. The purchase price for each homesite will be equal to the
base annual rent provided for in the ground lease divided by 9%. The
Company is not required to acquire these homesites in groups of less than
10. The maximum number of homesites the Company might purchase is
approximately 500 for total consideration of approximately $20 million.
The Company purchased no homesites during August and September 2000.
During the current quarter, the Company terminated its obligation under
this agreement effective January 1, 2001. As a result, the maximum number
of homesites the Company might acquire is approximately 30 for a total
consideration of $1 million.
o The Company has agreed to invest an additional $680,000 in a real estate
joint venture in four equal, annual installments of $170,000 beginning in
November 2000.
o The Company has agreed to pay the former owner of a property an amount
equal to the increase in the property's net operating income divided by
9.5% until the Company pays a total of $2,160,000. No amount was paid
during August and September 2000.
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
- 13 -
<PAGE>
Commercial Assets and Commercial Assets' recent reincorporation in Delaware. In
November 1999, these lawsuits were consolidated into a single lawsuit. In March
2000, the parties entered into a settlement agreement. The settlement agreement
specified that the Company and Commercial Assets would amend the merger
agreement in the following respects: (1) to provide for the election by
Commercial Assets stockholders, other than the Company and the officers and
directors of the Company and Commercial Assets, to receive $5.75 in cash,
subject to proration, per share of Commercial Assets common stock, with a
maximum of 3,549,868 shares of Commercial Assets common stock to receive cash;
and (2) to increase the percentage of votes of the Commercial Assets common
stock necessary to adopt the merger agreement from a simple majority to
two-thirds. At a settlement hearing on August 3, 2000, the Delaware Court of
Chancery approved the settlement agreement. There were no objections to the
settlement.
L. 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.
M. 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
September 30, 2000, $738,000 of the notes were nonrecourse and $244,000 were
recourse to the respective directors or executive officers.
During each of the three-month periods ended September 30, 2000 and 1999, the
Company paid quarterly dividends of $0.25 per share on Common Stock and OP
Units. During each of the nine-month periods ended September 30, 2000 and 1999,
the Company paid dividends of $0.75 per share on Common Stock and OP Units.
N. Other Matters
The Commercial Assets Management Agreement was extended through December 31,
2000; however, the agreement terminated on August 1, 2000 as a result of the
Company's acquisition of Commercial Assets. The Company earned management fees
under the Commercial Assets Management Agreement (net of elimination for the
Company's approximate 27% interest in Commercial Assets) as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Management fees $ 49,000 $ 134,000 $ 335,000 $ 418,000
</TABLE>
As of August 1, 2000, (the date of the Company's acquisition of Commercial
Assets) the net book value of the Commercial Assets Management Agreement was
$638,000, and the Company expensed this amount in August 2000.
- 14 -
<PAGE>
O. Recent Accounting Developments
In December 1999, the Securities and Exchange Commission staff issued Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements,
which is effective beginning in the fourth quarter of 2000. The SAB spells out
four basic criteria that must be met before registrants can record revenue.
These are: (a) persuasive evidence that an arrangement exists; (b) delivery has
occurred or services have been rendered; (c) the seller's price to the buyer is
fixed or determinable; and (d) collectibility is reasonably assured. The Company
does not expect the SAB to have a significant impact on its financial position
or results of operations.
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 American
Land Lease, Inc., 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, 2000, we held interests as owner or ground lessee in 31
manufactured home communities and two recreational vehicle parks with a total
of:
o 6,044 developed homesites (sites with homes in place);
o 3,850 undeveloped homesites; and
o 216 recreational vehicle sites.
- 15 -
<PAGE>
Our shares of common stock are listed on the New York Stock Exchange under the
symbol "ANL." Prior to August 11, 2000, our name was Asset Investors Corporation
and our shares of common stock were listed 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,
2000, we owned 87% of the Operating Partnership. Prior to our merger in August
2000 with Commercial Assets, Inc., a publicly-traded REIT, the Operating
Partnership also owned approximately 27% of Commercial Assets' common stock.
Commercial Assets was 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 performed these
services for Commercial Assets, for which Commercial Assets paid us a management
fee.
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 were provided the option of
electing to receive $5.75 per share in cash for up to 3,551,000 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 agreement
required the approval of a majority of our outstanding shares of common stock
and two-thirds of the outstanding shares of Commercial Assets common stock. We
owned approximately 27% of the outstanding shares of Commercial Assets common
stock prior to the merger 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 owned. In August 2000, the merger was
approved by the stockholders of both Asset Investors and Commercial Assets. In
the merger we:
o converted our 2,761,000 Commercial Assets shares into 1,125,000 of our
shares, which are now held as treasury stock,
o purchased 3,551,000 Commercial Assets shares for $20,418,000 cash,
o issued 1,664,000 of our shares for 4,085,000 Commercial Assets shares,
with an assigned value of $20,067,000
o cancelled 114,000 of our shares previously held by Commercial Assets, and
o incurred $3,992,000 of other costs related to the merger.
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
- 16 -
<PAGE>
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; 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
- 17 -
<PAGE>
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.
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 amenities 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 61%
of our properties are in Florida and 31% 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
- 18 -
<PAGE>
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.
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 approximately 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.
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<PAGE>
In the third quarter of 1998, Commercial Assets entered the manufactured home
community business and subsequently acquired interests in 12 communities at a
cost of approximately $70 million. As a result of the merger with Commercial
Assets, the management agreement terminated in August 2000. 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 Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Base Fees $ 66,000 $ 181,000 $ 457,000 $ 375,000
Acquisition Fees -- 3,000 -- 197,000
Incentive Fees -- -- -- --
------------ ------------ ------------ ------------
$ 66,000 $ 184,000 $ 457,000 $ 572,000
============ ============ ============ ============
</TABLE>
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 the composition of our income
and assets, 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 depended upon
Commercial Assets' qualification as a REIT prior to the merger.
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.
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<PAGE>
RESULTS OF OPERATIONS FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000
Comparison of Three Months Ended September 30, 2000 to Three Months Ended
September 30, 1999
Rental Property Operations
Rental and other property revenues from our owned properties totaled $5,591,000
for the three months ended September 30, 2000 compared to $3,822,000 for the
three months ended September 30, 1999, an increase of $1,769,000 or 46%. The
increase was primarily a result of rent increases at our communities, our
purchase of communities in January 2000 and our acquisition of Commercial Assets
in August 2000.
Property operating expenses from our owned properties totaled $2,269,000 for the
three months ended September 30, 2000 compared to $1,341,000 for the same period
in 1999, an increase of $928,000 or 69%. The increase was primarily due to
higher expenses at our communities, our purchase of communities in January 2000
and our acquisition of Commercial Assets in August 2000.
Loss on participating mortgages and leases was $73,000 for the three months
ended September 30, 2000 compared to income of $688,000 for the three months
ended September 30, 1999. During the first quarter of 2000, we purchased
manufactured home communities which secured the participating mortgages. A
portion of the purchase price was paid by cancellation of participating
mortgages. 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 $1,507,000 during the three months ended September 30,
2000 compared to $983,000 during the same period in 1999. The increase was due
to acquisitions of manufactured home communities during 1999 and 2000 and our
acquisition of Commercial Assets in August 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 September 30, 2000, we had income of $61,000 from sales operations.
During the three months ended September 30, 2000, we finalized the purchase
price allocation for assets acquired earlier in the year. This resulted in a
reduction of $250,000 of previously reported cost of home sales.
Service Operations
Property management income was $29,000 for the three months ended September 30,
2000 compared to $54,000 for the same period in 1999. This income was primarily
received from providing services to properties owned by independent third
parties. As a result of our acquisition of Commercial Assets in August 2000, we
no longer receive income from these properties. Property management income is
expected to decrease significantly in the future.
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<PAGE>
Fee revenue from managing Commercial Assets was $49,000 and $134,000 for the
three months ended September 30, 2000 and 1999, respectively. As a result of our
acquisition of Commercial Assets in August 2000, we no longer receive these
fees.
Amortization of management contracts was $834,000 and $689,000 for the three
months ended September 30, 2000 and 1999, respectively. The increase is due to
the expensing of our contract to manage Commercial Assets in connection with our
acquisition of Commercial Assets in August 2000. As a result of our acquisition
of Commercial Assets in August 2000, this item of expense no longer occurs.
Equity in Earnings of Commercial Assets
Income from our approximate 27% interest in Commercial Assets was $192,000 for
the three months ended September 30, 2000 compared to $154,000 for the same
period in 1999. As a result of our acquisition of Commercial Assets in August
2000, this item of income no longer occurs.
General and Administrative Expenses
Our general and administrative expenses totaled $538,000 for the three months
ended September 30, 2000 compared to $459,000 for the same period of 1999. The
increase in expense is primarily due to higher franchise taxes, our merger with
Commercial Assets, and closing our Denver office.
Interest and Other Income
During the three months ended September 30, 2000 and 1999, interest and other
income were $235,000 and $274,000, respectively. The decrease occurred because
of an income tax benefit realized in 1999 of $150,000, partially offset by
interest and other income earned on investments acquired in connection with the
merger with Commercial Assets.
Interest Expense
During the three months ended September 30, 2000, interest expense was $
1,217,000 Interest expense for the three months ended September 30, 1999 was
$955,000. The increase in interest expense was primarily due to higher
outstanding balances in the 2000 period, increased interest rates on short-term
borrowing, and increased interest expense related to the sales operations.
Comparison of Nine Months Ended September 30, 2000 to Nine Months Ended
September 30, 1999
Rental Property Operations
Rental and other property revenues from our owned properties totaled $14,489,000
for the nine months ended September 30, 2000 compared to $11,075,000 for the
nine months ended September 30, 1999, an increase of $3,414,000 or 31%. The
increase was primarily a result of rent increases at our communities, our
purchase of communities in January 2000 and our acquisition of Commercial Assets
in August 2000.
Property operating expenses from our owned properties totaled $5,695,000 for the
nine months ended September 30, 2000 compared to $3,991,000 for the same period
in 1999, an increase of $1,704,000 or 43%. The increase was primarily due to
higher expenses at our communities, our purchase of communities in January 2000
and our acquisition of Commercial Assets in August 2000.
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<PAGE>
Income on participating mortgages and leases was $610,000 for the nine months
ended September 30, 2000 compared to income of $2,302,000 for the nine months
ended September 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 $3,836,000 during the nine months ended September 30,
2000 compared to $2,827,000 during the same period in 1999. The increase was due
to acquisitions of manufactured home communities during 1999 and 2000 and our
acquisition of Commercial Assets in August 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 nine
months ended September 30, 2000, we had a loss of $731,000 from sales
operations.
Service Operations
Property management income was $141,000 for the nine months ended September 30,
2000 compared to $158,000 during the same period in 1999. This income was
primarily received for services provided to properties owned by Commercial
Assets. As a result of our acquisition of Commercial Assets in August 2000, we
no longer receive income from these properties. Property management income is
expected to decrease significantly in the future.
Fee revenue from managing Commercial Assets was $335,000 for the nine months
ended September 30, 2000 compared to $418,000 during the same period in 1999. As
a result of our acquisition of Commercial Assets in August 2000, we no longer
receive these fees.
Amortization of management contracts was $1,866,000 and $2,067,000 for the nine
months ended September 30, 2000 and 1999, respectively. As a result of our
acquisition of Commercial Assets in August 2000, this item of expense no longer
occurs.
Equity in Earnings of Commercial Assets
Income from our 27% interest in Commercial Assets was $686,000 for the nine
months ended September 30, 2000 compared to $714,000 for the same period in
1999. As a result of our acquisition of Commercial Assets in August 2000, this
item of income no longer occurs.
General and Administrative Expenses
Our general and administrative expenses were $1,420,000 for the nine months
ended September 30, 2000 compared to $1,168,000 for the same period in 1999. The
increase is primarily due to an increase in franchise tax expense and increases
in the number of personnel and related expenses, primarily due to our merger
with Commercial Assets.
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<PAGE>
Interest and Other Income
During the nine months ended September 30, 2000 and 1999, interest and other
income was $891,000 and $477,000, 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 nine months ended September 30, 2000, interest expense was
$3,027,000. Interest expense for the nine months ended September 30, 1999 was
$2,928,000. The increase in interest expense was primarily due to higher
outstanding balances in the 2000 period, increased interest rates on short-term
borrowing increased interest expense related to the sales operations, partially
offset by capitalized interest on our undeveloped homesites during the 2000
period.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000, we had cash and cash equivalents of $2,406,000. 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 $4.5 million during the nine
months ended September 30, 2000, compared to $5.1 million during the same period
in 1999. The decrease was primarily a result of a $0.7 million loss from home
sales operations.
During the nine months ended September 30, 2000, the net cash used in investing
activities was $2.2 million compared with a net use of $4.2 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 of $3.4 million, offset by items
related to the merger with Commercial Assets resulting in a net use of $1.6
million in the 2000 period.
During the nine months ended September 30, 2000, net cash used in financing
activities was $0.5 million compared with uses of $0.7 million for the same
period in 1999. The decrease in uses is primarily because of net proceeds
received by the Company from secured long-term notes payable and short-term
notes payable of $4.4 million in the 1999 period, compared to $3.1 million in
the 2000 period, offset by contributions for minority interest in subsidiary of
$1.8 million in the 2000 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.
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<PAGE>
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 (9.5% at September 30, 2000) and is secured by three
manufactured home communities and one recreational vehicle park which have a
combined net book value of $17,070,000 at September 30, 2000. 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 manufactured
home communities, undeveloped homesites, inventory, and other assets in January
2000 and (b) a $6.0 million recourse note payable due in April 2001.
In August 2000, the Company entered into a $14,300,000 term loan that bears
interest at a fixed rate of 8.57% and matures in August 2002. The term loan is
secured by three manufactured home communities which have a combined net book
value of $16,400,000 at September 30, 2000. Proceeds from the term loan were
used to extinguish existing first mortgage debt of approximately $10 million and
provide additional working capital.
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.
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.
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<PAGE>
For the three and nine months ended September 30, 2000 and 1999, our FFO was (in
thousands):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30 Ended September 30
------------------ ------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income (loss) before minority interest in Operating Partnership $ (242) $ 699 $ 828 $ 2,163
Real estate depreciation 1,507 983 3,836 2,827
Amortization of management contracts 834 689 1,866 2,067
Gain on sale of real estate -- -- (109) --
Equity in Commercial Assets' adjustments for FFO 55 124 316 209
----------- ---------- ----------- -----------
Funds From Operations (FFO) $ 2,154 $ 2,495 $ 6,737 $ 7,266
=========== ========== =========== ===========
Weighted average common shares and OP Units outstanding 7,682 6,559 6,979 6,563
=========== ========== =========== ===========
</TABLE>
For the nine months ended September 30, 2000 and 1999, net cash flows were as
follows (in thousands):
<TABLE>
<CAPTION>
Nine Months
Ended September 30
--------------------------------------
2000 1999
------------- -----------
<S> <C> <C>
Cash provided by operating activities $ 4,528 $ 5,089
Cash used in investing activities (2,223) (4,194)
Cash used in financing activities (469) (717)
</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 a $14.0 million fixed rate, partially amortizing, secured term loan that
matures in August 2002. In the event the loan is refinanced at maturity and the
rate available exceeds the current fixed rate by 1%, then our annual net income
and cash flows would decrease by $134,000 due to increased interest expense.
We have $68.0 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 $5.4 million of fixed rate, partially amortizing, non-recourse, secured
long-term notes payable that mature in 2007 and 2009. We do not have significant
exposure to changes in interest rates since the interest rate is fixed for
several years.
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<PAGE>
We have a $3.9 million fixed rate, recourse, secured long-term note payable that
is repayable in two annual installments. The implied interest rate on this note
is 7.0%. We do not have significant exposure to changing interest rates on this
note as the rate is fixed and the note is fully amortizing. In the future, we
intend to borrow additional non-recourse, secured, fixed rate, fully amortizing
debt in connection with the refinancing of the existing note payable. 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 June
2002.
PART II
OTHER INFORMATION
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(a) Common stock, par value $.01 per share - Ownership of shares
of the Company's common stock by any person, subject to the
board of directors power to grant specific exemptions, may not
exceed 5% of the shares outstanding of the Company's common
stock.
Item 4. SUBMISSION OF MATERS TO A VOTE OF SECURITY HOLDERS.
A special meeting of the Company's stockholders was held on
August 1, 2000. At the meeting, the following matters were
approved by stockholders:
<TABLE>
<CAPTION>
Number of Votes Cast
--------------------
"Abstentions
"For" "Against" and Non-votes"
----- --------- --------------
<S> <C> <C> <C>
o Merger with Commercial Assets 3,730,118 83,023 1,866,328
o Name change to American Land Lease, Inc. 4,633,762 98,900 946,807
o New stock ownership limitations 3,176,448 616,972 1,886,049
</TABLE>
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).
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<PAGE>
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).
3.2 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).
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).
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<PAGE>
10.14 Promissory Note dated August 10, 2000, between Asset Investors
Operating Partnership, L.P. and U. S. Bank National Association.
10.14(a) Term Loan Agreement dated August 10, 2000, between Asset
Investors Operating Partnership, L.P. and U. S. Bank National
Association.
10.14(b) Security Agreement dated August 10, 2000, between Asset
Investors Operating Partnership, L.P. and U. S. Bank National
Association.
10.14(c) Mortgage, Security Agreement, Financing Statement and Absolute
Assignment of Rents and Revenues dated August 10, 2000, between
Asset Investors Operating Partnership, L.P. and U. S. Bank
National Association.
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:
Current Report on Form 8-K dated August 11, 2000 reporting our
acquisition of Commercial Assets, Inc.
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.
AMERICAN LAND LEASE INC.
(Registrant)
Date: November 14, 2000 By /s/Bruce E. Moore
--------------------------------------
Bruce E. Moore
President and Chief Financial Officer
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