FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended: June 30, 1994 Commission File Number: 1-9646
ASR Investments Corporation
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(Exact name of Registrant as specified in its Charter)
Maryland
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(State or other jurisdiction of incorporation or organization)
86-0587826
------------------------------------
(I.R.S. Employer Identification No.)
335 N. Wilmot, Suite 250, Tucson, AZ 85711
------------------------------------------
(Address of principal executive offices)
(602) 748-2111
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(Registrant's telephone number, including area code)
(Not applicable)
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(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.
/ X / Yes / / No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock (par value $.01) outstanding as of June 30, 1994:
15,499,993 shares.
<PAGE>
ASR INVESTMENTS CORPORATION
Consolidated Balance Sheets
June 30, 1994 and December 31, 1993
(Dollars in Thousands)
1994 1993
----------- -----------
ASSETS (Unaudited)
Real estate assets, at cost
Land $ 13,681
Buildings and improvements 49,023
Other real estate investments 1,627 $ 3,855
----------- -----------
64,331 3,855
Less: accumulated depreciation (935)
----------- -----------
Real estate investments, net 63,396 3,855
Unrestricted cash and
cash equivalents 9,164 10,407
Restricted cash and
cash equivalents 33,002 24,306
Mortgage assets -
nonequity investments 8,280 10,970
Mortgage
Mortgage instruments and related
assets pledged under structured
financings 1,019,065 1,424,482
Deferred loan costs 1,306 508
Other 853 1,417
----------- -----------
Total Assets $ 1,135,066 $ 1,475,945
=========== ===========
LIABILITIES
Notes payable secured by real estate $ 45,776
Notes payable secured by mortgage assets 38,505 $ 42,699
Unsecured notes payable 5,848
Interest payable 787 495
Other 5,823 4,232
Structured financings secured
by mortgage instruments 1,003,463 1,397,571
----------- -----------
Total Liabilities 1,100,202 1,444,997
----------- -----------
STOCKHOLDERS' EQUITY
Common Stock, par Value $.01 per
share; 40,000,000 shares authorized;
16,243,649 shares issued; 162 162
Additional paid-in-capital 154,996 154,996
Accumulated deficit and
cumulative dividends (117,983) (121,899)
Common stock in
treasury, at cost; - 743,656 shares (2,311) (2,311)
----------- -----------
Total Stockholders' Equity 34,864 30,948
----------- -----------
Total Liabilities and
Stockholders' Equity $ 1,135,066 $ 1,475,945
=========== ===========
See notes to consolidated financial statements.
<PAGE>
<TABLE>
ASR INVESTMENTS CORPORATION
Consolidated Statements of Operations
For the Quarters and Six Months Ended June 30, 1994 and 1993
(In Thousands Except Per Share Amounts)
(Unaudited)
<CAPTION>
Quarters Six Months
--------------------- -------------------
1994 1993 1994 1993
--------- -------- ------- --------
<S> <C> <C> <C> <C>
Real Estate
Operations
Rental income $ 3,040 $ 5,706
Other income 165 306
-------- --------
Total operating income 3,205 6,012
-------- --------
Operating expenses
Property operating and maintenance 1,128 1,954
Real estate taxes and insurance 346 655
Depreciation 473 935
-------- --------
Total operating expenses 1,947 3,544
-------- --------
Net operating income from real estate 1,258 2,468
-------- --------
Mortgage Assets
Income from mortgage assets 1,577 $ 2,237 3,769 $ 4,908
Provision for reserves (3,570) (15,570)
Gain on redemption of mortgage assets 2,554 2,554
Other interest income 274 207 650 467
-------- -------- -------- --------
Income from mortgage assets 4,405 (1,126) 6,973 (10,195)
-------- -------- -------- --------
Operating and administrative expenses (982) (238) (1,592) (836)
-------- -------- -------- --------
Total operating income (loss) 4,681 (1,364) 7,849 (11,031)
Interest on real estate notes payable (951) (1,889)
Interest on notes payable secured
by mortgage assets (919) (1,513) (1,824) (3,020)
Interest on unsecured notes payable (113) (220)
-------- -------- -------- --------
Net Income (Loss) $ 2,698 ($ 2,877) $ 3,916 ($14,051)
======== ======== ======== ========
Net Income (Loss) Per Average Share $ 0.17 ($ 0.19) $ 0.25 ($ 0.90)
======== ======== ======== ========
Average Shares Outstanding 15,500 15,507 15,500 15,537
======== ======== ======== ========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
ASR INVESTMENTS CORPORATION
Consolidated Statements of
Cash Flows For the Quarters and Six Months Ended June 30, 1994 and 1993
(In Thousands Except Per Share Amounts)
(Unaudited)
<CAPTION>
Quarters Six Months
----------------------- -----------------------
1994 1993 1994 1993
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 2,698 ($ 2,877) $ 3,916 ($ 14,051)
Principal noncash charges (credits)
Depreciation and amortization 473 312 935 489
Provision for reserves 3,570 15,570
Increase (decrease) in interest payable (46) (107) 292 (143)
Other (5) 337
--------- --------- --------- ---------
Cash Provided By Operations 3,125 893 5,143 2,202
--------- --------- --------- ---------
INVESTING
ACTIVITIES
Purchase of real estate assets (1,624) (62,704)
Sale of other real estate 2,228 2,228
Purchase of nonequity mortgage assets (4,447)
Reduction in mortgage instruments
and related assets 214,820 176,909 405,417 380,658
Reduction in structured financings (207,234) (170,602) (394,108) (367,755)
Reduction in nonequity mortgage assets 1,394 2,374 2,690 5,126
(Increase) decrease in deferred hedging costs 96 (617) 401 (2,808)
Other (48) 564
--------- --------- --------- ---------
Cash (Used in) Provided by
Investing Activities 9,632 8,064 (45,512) 10,774
--------- --------- --------- ---------
FINANCING ACTIVITIES
Issuance of real estate notes payable 52,178
Payment of loan costs (1,199)
Repayment of notes payable (2,454) (8,113) (4,748) (11,335)
Increase in restricted cash (7,166) 750 (8,696) 150
Stock repurchase (52) (200)
Other 592 1,591
--------- --------- --------- ---------
Cash (Used in) Provided By
Financing Activities (9,028) (7,415) 39,126 (11,385)
--------- --------- --------- ---------
Unrestricted cash and cash equivalents
Increase (decrease) during
the period 3,729 1,542 (1,243) 1,591
Balance - beginning of period 5,435 5,178 10,407 5,129
--------- --------- --------- ---------
Balance - end of period $ 9,164 $ 6,720 $ 9,164 $ 6,720
========= ========= ========= =========
Supplemental Disclosure of Cash Flow Information
Cash paid for Company's interest expense 2,029 1,620 3,641 3,163
========= ========= ========= =========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
ASR INVESTMENTS CORPORATION
Consolidated Statement of Stockholders' Equity
For the Six Months Ended June 30, 1994
(In Thousands)
(Unaudited)
Balance Net Balance
1/1/94 Income 6/30/94
--------- --------- ---------
Number of shares 16,244 16,244
========= =========
Par Value $ 162 $ 162
Additional paid-in capital 154,996 154,996
Accumulated deficit and cumulative
dividends (121,899) $ 3,916 (117,983)
Treasury stock - at cost (2,311) (2,311)
--------- --------- ---------
Total $ 30,948 $ 3,916 $ 34,864
========= ========= =========
See notes to consolidated financial statements.
<PAGE>
ASR INVESTMENTS CORPORATION
Notes to Consolidated Financial Statements
For the Quarter Ended June 30, 1994
NOTE 1 - BASIS OF PRESENTATION
The accompanying interim consolidated financial statements do not
include all of the information and disclosures generally required for annual
financial statements. They include the accounts of the Company and its wholly
owned subsidiaries (collectively the "Company"). All significant inter-company
balances and transactions have been eliminated. In the opinion of management,
all adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation have been included. These interim operating
results are not necessarily indicative of the results that may be expected for
the entire year. These interim consolidated financial statements should be read
in conjunction with the December 31, 1993 consolidated financial statements and
notes thereto.
Real Estate Investments
Real estate investments consist primarily of seventeen apartment
properties acquired on January 12, 1994. The total purchase price, including
closing costs, has been allocated to the individual properties based on their
relative fair values as determined by independent appraisals.
Mortgage Assets
The mortgage assets entitle the Company to receive the excess of the
cash flow on the mortgage instruments over the required payments of the related
structured financings. Prior to December 1993, if a mortgage asset was impaired
(i.e. the estimated future net cash flow was less than the net carrying value),
the Company ceased recording income and charged income to reduce the net
carrying value to the undiscounted net cash flow amount. Effective as of
December 1993, a mortgage asset is impaired if the yield on the net carrying
value is less than the risk-free yield; if a mortgage asset is impaired, the net
carrying value is written down to its estimated fair value and income is then
accrued on the net carrying value using the prospective yield method. In
December 1993, the Company reduced the net carrying value of substantially all
of its mortgage assets to their estimated fair value. As a result, the Company
accrues income for 1994 on all mortgage assets (regardless of the balance sheet
presentation) based on the net carrying value using the prospective yield
method.
Reclassification
Certain reclassifications have been made to conform the prior year with
the current year presentation.
NOTE 2 - REAL ESTATE INVESTMENTS AND RELATED NOTES PAYABLE
Real estate investments consist primarily of seventeen apartment
properties acquired on January 12, 1994. The total purchase price, including
closing costs, was approximately $61,600,000 and was financed by a combination
of new mortgage loans and the assumption of existing mortgage loans totalling
$45,700,000, seller carryback financing of $6,500,000 and cash of approximately
$9,400,000. The first mortgage loans are nonrecourse and non-cross
collateralized. The principal and interest payments on the loans are
approximately $356,000 per month. In addition, the Company is required to
deposit specified monthly amounts ($110,000 per month for 1994) with the lenders
to be used for specified capital replacement expenditures. At June 30, 1994, the
restricted cash balance included $2,800,000 held by the lenders for capital
replacement expenditures and payment of property taxes and insurance premiums.
The seller carryback notes are unsecured notes and bear a fixed
interest rate of 7.5%. The principal balance on the notes is amortized over a
three-year period ending on February 1, 1997 with monthly principal and interest
payments of $202,000.
In July 1994, the Company acquired a 220-unit apartment property in
Phoenix, Arizona, for $4,500,000. The purchase price was funded by a first
mortgage loan of $3,500,000 and cash investment of $1,000,000.
The table on the following page contains certain information on the
apartments owned by the Company as of June 30, 1994.
<PAGE>
<TABLE>
ASR INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 1994
(UNAUDITED)
<CAPTION>
Book Value at June 30, 1994
6/30/94 ---------------------------------
Rental Rates
----------------
Property Aver-
Sq. age
Year No. of Total Ft./ Per Per Sq. Occu- Per Per
Built Units Sq. Ft. Unit unit Ft. pancy Total Unit Ft. Sq. Ft.
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TUCSON, ARIZONA
Acacia Hills 1986 64 34,577 540 $389 $0.72 95% $ 1,334,095 $20,845 $38.58
Casa Del Norte 1984 84 44,120 525 410 0.78 94% 1,840,097 21,906 41.71
Desert Springs 1985 248 146,240 590 395 0.67 96% 5,808,582 23,422 39.72
Landmark 1986 176 112,749 641 397 0.62 95% 4,514,252 25,649 40.04
Park Terrace 1986 176 101,944 579 400 0.69 96% 3,492,307 19,843 34.26
Park Village 1985 60 32,388 540 372 0.69 93% 770,435 12,841 23.79
Posada Del Rio 1980 160 99,280 621 403 0.65 96% 3,523,124 22,020 35.49
South Point 1984 144 76,082 528 354 0.67 96% 2,422,645 16,824 31.84
----------------------------------------------------------------------------------------
Total Tucson 1,112 647,380 582 392 0.67 96% 23,705,538 21,318 36.63
----------------------------------------------------------------------------------------
HOUSTON, TEXAS
Clear Lake Falls 1980 90 105,208 1,169 722 0.65 92% 4,135,496 45,950 39.31
The Gallery 1968 101 77,037 763 418 0.63 92% 2,003,131 19,833 26.00
Memorial Bend 1967 124 116,804 942 445 0.55 93% 2,525,038 20,363 21.62
Nantucket Square II 1983 106 151,406 1,428 632 0.50 93% 3,661,306 34,541 24.18
Prestonwood 1978 156 149,204 956 409 0.49 93% 3,549,965 22,756 23.79
Riviera Pines 1979 224 160,608 717 395 0.61 93% 4,304,495 19,216 26.80
----------------------------------------------------------------------------------------
Total Houston 801 760,267 949 534 0.56 93% 20,179,431 25,193 26.54
----------------------------------------------------------------------------------------
ALBUQUERQUE, NEW MEXICO
Dorado Terrace 1986 216 129,200 598 431 0.83 93% 6,883,215 31,867 53.28
Villa Serena 1986 104 69,816 671 474 0.79 91% 3,500,260 33,656 50.14
Whispering Sands 1986 228 179,880 789 445 0.66 91% 7,500,557 32,897 41.70
----------------------------------------------------------------------------------------
Total Albuquerque 548 378,896 691 513 0.74 92% 17,884,032 32,635 47.20
----------------------------------------------------------------------------------------
TOTAL / AVERAGE 2,461 1,786,543 726 $465 $0.64 94% $61,769,000 $25,028 $34.48
========================================================================================
</TABLE>
<PAGE>
NOTE 3 - MORTGAGE INSTRUMENTS AND RELATED ASSETS
PLEDGED UNDER STRUCTURED FINANCINGS
Below is the net investment in the mortgage assets at June 30, 1994 and
December 31, 1993 (in thousands):
1994 1993
---------- ----------
Mortgage instruments
Principal balance $ 973,197 $1,333,165
Accrued interest 7,811 11,790
Cash held by trustee 38,057 79,527
---------- ----------
1,019,065 1,424,482
---------- ----------
Structured financings
Principal balance ( 999,380) (1,395,737)
Accrued interest ( 12,657) ( 17,069)
Valuation adjustments 8,574 15,235
---------- ----------
(1,003,463) (1,397,571)
---------- ----------
Equity mortgage assets, net 15,602 26,911
Nonequity mortgage assets 8,280 10,970
---------- ----------
Total net mortgage assets $ 23,882 $ 37,881
========== ==========
In the second quarter of 1994, the Company redeemed two series of
structured financing at par and sold the related mortgage certificates for a
gain of $2,554,000. At June 30, 1994, the estimated effective yield based on the
total net carrying value of the Company's mortgage assets was approximately 27%.
In July, the Company redeemed one series of structured financing at par and sold
the related mortgage loans for net proceeds of $1,550,000.
NOTE 4 - NOTES PAYABLE SECURED BY MORTGAGE ASSETS
The notes payable secured by mortgage assets were issued by a wholly
owned limited-purpose subsidiary of the Company. The notes bear a fixed interest
rate of 9.02% per year and are collateralized by all of the mortgage assets of
the subsidiary and funds held by the trustee (restricted cash).
Depending on the level of certain specified financial ratios relating
to the collateral, the excess of the cash flow from the mortgage assets over the
scheduled principal and interest payments is used to prepay the notes at par or
is remitted to the Company for its unrestricted use. The Company expects to make
a prepayment of $1,893,000 on the August 15, 1994 payment date. In addition,
pursuant to the terms of the notes agreement, the Company used the net proceeds
from the redemption of two series of structured financing (see Note 3) to prepay
$6,550,000 of the notes in August 1994. As a result, the scheduled principal
payment is reduced to $1,681,000 per quarter beginning with the August 15, 1994
payment.
At June 30, 1994 and December 31, 1993, the net carrying value of the
mortgage assets pledged and the funds held by the trustee totalled $48,274,000
and $54,459,000, respectively.
NOTE 5 - RELATED PARTY TRANSACTIONS
The management fees paid to Pima Mortgage L.P. (the "Manager) for the
quarters and six months ended June 30, 1994 and 1993 were as follows (in
thousands):
Quarter Six Months
-------------- ---------------
1994 1993 1994 1993
---- ---- ---- ----
Base management fee $ 145 $ 169 $ 281 $ 351
====== ====== ====== ======
Administration fee $ 64 $ 65 $ 129 $ 130
====== ====== ====== ======
The Company has entered into a property management agreement with Pima
Realty Advisors, Inc. (the "Property Manager"), an affiliate of the Manager, for
each of the apartment properties acquired in January 1994. Under the property
management agreements, which have a current term through December 31, 1994, the
Property Manager provides the customary property management services at its cost
without profit or distributions to its owners, subject to the limitation of the
prevailing management fee rates for similar properties in the market. The costs
are allocated to the Company monthly based on the ratio of the number of units
(currently 2,461) owned by the Company relative to the total apartment units
(currently over 5,000) managed by the Property Manager. For the six months ended
June 30, 1994, the costs allocated to the Company were $68,000 (approximately
1.1% of real estate income), which was net of an allocated credit (applicable
only in 1994) of $144,000.
NOTE 6 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosures of the estimated fair value of financial
instruments is made in accordance with the requirements of FASB Statement No.
107, "Disclosures about Fair Value of Financial Instruments." Although
management uses its best judgment in estimating the fair value of these
financial instruments, there are inherent limitations in any estimation
technique. Therefore, the fair value estimates presented herein are not
necessarily indicative of the amounts which the Company could realize in a
current transaction. The fair value disclosure requirements do not apply to real
estate investments.
As of June 30, 1994, the aggregate fair value of the mortgage assets
was estimated to approximate the net carrying value (i.e., net of structured
financings) of $23,882,000. The estimated fair value is made based on the
present value of the estimated net cash flows from the mortgage assets.
The estimated fair value of other financial instruments as of June 30,
1994 approximated their carrying values.
NOTE 7 - CASH FLOW INFORMATION ON MORTGAGE ASSETS
The Company's mortgage assets generate significant amounts of cash
flows ("Net Cash Flows"). The Net Cash Flow amounts presented below are intended
to illustrate (i) the amount of cash flows from the mortgage assets calculated
using the current market prepayment rate estimates and short-term interest rates
and (ii) the effects on the Net Cash Flow of certain changes in the prepayment
rates and short-term interest rates. The calculated Net Cash Flows are not
intended to predict the net Cash Flows to be received or income to be recognized
by the Company or to represent amounts that will be available for distribution
as dividends to stockholders. The calculated Net Cash Flows also do not reflect
the required principal repayments and interest expenses on the Company's notes
payable, operating expenses, other asset acquisitions by the Company, various
market conditions or other factors which could materially affect the Net Cash
Flows. The interest rate and prepayment assumptions described below do not
purport to represent the Company's expectation of the interest rates and
prepayment rates that may occur. There will be differences between the
calculated Net Cash Flows and the actual Net Cash Flows received by the Company
as the actual factors will be different than those set forth in the assumptions,
and such differences may be material.
The assumed interest rates relating to the variable rate structured
financings associated with the Company's mortgage assets are as follows:
Case 1 Case 2 Case 3 Case 4 Case 5 Case 6 1-Month LIBOR 3.56%
3.56% 4.56% 6.56% 6.56% 4.56% 3-Month LIBOR 3.88% 3.88% 4.88% 6.88% 6.88% 4.88%
COFI 2.93% 2.93% 3.73% 5.33% 5.33% 3.73%
The interest rate assumptions under Case 3 and 6 are based on the
actual interest rates on June 30, 1994.
The prepayment assumptions for the Net Cash Flows for Cases 1 to 5 are
used in the following manner. The actual rates are used for July 1994. The
average of the estimates prepared by two investment banks for August through
December 1994, as indicated in the following table, are used for those months.
The prepayment rates are then assumed to change ratably from those estimates to
the rates indicated in the following table (terminal rates) over the first six
months of 1995, and then remain at these terminal rates thereafter. For Case 6,
the rates indicated in the following table are used for all years.
<PAGE>
Assumed Prepayment Rates (PSA%)
-----------------------------------------
Mortgage Coupon 8/94- Cases
Instruments Rate 12/94 Case 1 2,3&4 Case 5 Case 6
- ----------- ------ ------ ------ ----- ------ ------
FHLMC 9.00% 342 360 262 161 262
FHLMC 9.50 391 376 294 176 294
FHLMC 10.50 391 409 335 210 335
FHLMC 11.00 380 422 350 223 350
FHLMC 11.50 380 451 374 238 374
FNMA 8.00 194 301 205 150 205
FNMA 8.50 205 366 233 162 233
GNMA 8.00 132 191 136 85 136
GNMA 9.00 242 328 206 134 206
GNMA 9.50 330 344 250 144 250
GNMA 10.00 372 376 295 160 295
GNMA 10.50 378 399 320 181 320
GNMA 11.00 343 381 316 187 316
GNMA 11.50 337 383 317 188 317
GNMA 12.00 335 383 317 188 317
Private Sec. 9.50 391 376 294 176 294
Whole loans 9.00 342 360 262 161 262
Whole loans 9.50 391 376 294 176 294
RMA 3 & 5 141 207 146 94 146
The prepayment assumptions for Cases 2, 3, 4 and 6 are the averages of
the long-term prepayment estimates of a number of major securities dealers as
published by Knight-Ridder on June 30, 1994.
CALCULATED NET CASH FLOWS
Below are the Net Cash Flow amounts calculated based on the assumptions
described above. The amounts for 1994 include only the estimated amounts
beginning with July 1994 (in thousands).
Year Case 1 Case 2 Case 3 Case 4 Case 5 Case 6
- ---- ------- ------- ------- ------- ------- -------
1994 $ 6,727 $ 6,727 $ 6,419 $ 5,802 $ 5,802 $ 6,422
1995 10,893 11,013 10,167 8,475 8,567 10,361
1996 7,766 8,314 7,734 6,574 7,192 7,913
1997 5,513 6,288 5,892 5,106 6,145 6,032
1998 3,889 4,786 4,519 3,974 5,223 4,625
1999 2,799 3,583 3,416 3,079 4,442 3,501
2000 2,273 2,715 2,616 2,420 3,773 2,684
2001 1,624 2,284 2,227 2,118 3,231 2,233
2002 1,205 1,760 1,725 1,657 2,765 1,779
2003 906 1,399 1,374 1,323 2,341 1,416
2004-08 5,609 3,892 3,895 3,911 7,839 4,017
2009-13 4,499 8,272 8,283 8,272 9,466 8,295
2014-20 4,178 6,635 8,710 15,054 20,218 8,800
------- ------- ------- ------- ------- -------
Total $57,881 $67,668 $66,977 $67,765 $87,004 $68,078
======= ======= ======= ======= ======= =======
<PAGE>
PRESENT VALUE OF CALCULATED NET CASH FLOWS
The table below sets forth the present value, on a semi-annual
equivalent basis as of June 30, 1994, of the calculated Net Cash Flows using the
indicated discount rates. The present value of the calculated Net Cash Flows are
not necessarily indicative of the amounts which the Company could realize on a
current transaction.
(In thousands.)
Rate Case 1 Case 2 Case 3 Case 4 Case 5 Case 6
- ------- ------- -------- -------- -------- -------- --------
0% $57,881 67,668 66,977 67,765 87,004 68,078
5% 44,138 49,825 48,019 45,064 56,055 48,849
10% 36,319 40,106 38,132 34,388 41,452 38,799
15% 31,247 34,012 32,126 28,415 33,347 32,682
20% 27,622 29,759 28,016 24,548 28,187 28,491
25% 24,851 26,562 24,962 21,768 24,557 25,375
30% 22,636 24,036 22,567 19,628 21,825 22,930
35% 20,807 21,972 20,618 17,907 19,674 20,941
40% 19,264 20,245 18,992 16,482 17,926 19,281
<PAGE>
ITEM II - Management Discussion and Analysis of Financial Condition and Results
of Operations
General
In early 1993, the Company determined to shift its focus to the
ownership of income-producing properties from the ownership of mortgage assets.
Accordingly, the Company decided to invest its available funds in
income-producing properties. The Company may hold its existing mortgage assets
and continue to receive the net cash flows, or it may decide to dispose of some
or all of the mortgage assets and invest the net proceeds in income-producing
properties.
On January 12, 1994, the Company acquired 17 apartment properties
consisting of 2,461 units located in Tucson, Arizona, Houston, Texas, and
Albuquerque, New Mexico for a total cost of $61,600,000. As a result, the income
and cash flows for 1994 were derived from real estate investments as well as
mortgage assets.
The operating income from the apartments is affected primarily by
rental rates, occupancy rates and operating expenses. Rental rates and occupancy
rates are affected primarily by the strength of the local economy and the supply
of and demand for new apartment properties.
The Company's mortgage assets entitle it the right to receive the
excess of the cash flow from the mortgage instruments over the cash payments
required on the structured financings. They are amortizing assets and the cash
flow from the mortgage assets declines over time (see Note 7 to the consolidated
financial statements). Thus, without regard to changes in the yield on the
mortgage assets, the amount of income on the mortgage assets will decline over
time as the cash flows are received. In addition, the income and cash flows from
the mortgage assets are affected primarily by mortgage prepayment rates and
short-term interest rates. Higher mortgage prepayment rates or higher short-term
interest rates reduce the income and total cash flows over the life of the
mortgage assets. Prepayment rates are affected primarily by mortgage interest
rates. As mortgage interest rates dropped to their lowest level in twenty years,
prepayment rates have been at record levels since the middle of 1992. With the
recent increase in mortgage interest rates, market prepayment rate estimates
have declined; however, it is too soon to estimate the magnitude of the decline
in prepayment rates and the resulting benefits to the Company. The benefits of a
sustained decline in prepayment rates may be mitigated by the negative effects
of an increase in short-term interest rates.
The Company may exercise the optional redemption right for a series of
structured financing if the net proceeds from selling the mortgage instruments
exceed the benefits from continuing to hold the mortgage assets. In such a case,
the Company will realize a higher amount of current income from the redemption
but lower income in the future.
Although the Company is required by generally accepted accounting
principles to present the mortgage instruments and structured financings
relating to certain mortgage assets as assets and liabilities on the
consolidated balance sheet, it considers its assets to be an investment in the
net cash flows. The Company is not liable in any manner for those structured
financings which were issued by independent third parties. Except in limited
specified circumstances, the structured financings cannot be prepaid to take
advantage of any appreciation in the value of the mortgage instruments.
Accordingly, the Company believes that the following summarized balance sheet
data as of June 30, 1994 and December 31, 1993 provide a meaningful presentation
of its assets and liabilities and are helpful for understanding the financial
condition of the Company. (In thousands.)
1994 1993
-------- --------
ASSETS
Real estate investments, net $ 63,396
Mortgage assets, net of
structured financings 23,882 $ 37,881
Unrestricted cash and
cash equivalents 9,164 10,407
Other assets 4,959 5,780
-------- --------
Total Assets $101,401 $ 54,068
======== ========
LIABILITIES
Notes payable secured by real estate $ 45,776
Notes payable secured by mortgage
assets, net of funds held by trustee 8,303 $ 18,888
Unsecured notes payable 5,848
Other liabilities 6,610 4,232
-------- --------
Total Liabilities 66,537 23,120
STOCKHOLDERS' EQUITY 34,864 30,948
-------- --------
Total Liabilities and
Stockholders' Equity $101,401 $ 54,068
======== ========
Results of Operations
The Company had net income of $2,698,000 ($.17 per share) for the
second quarter of 1994 and $3,916,000 ($.25 per share) for the first six months
of 1994 compared with net losses of $2,877,000 ($.19 per share) and $14,051,000
($.90 per share) for the same periods in 1993. The income in 1994 resulted from
operating income generated by the apartments acquired in January 1994 as well as
the existing mortgage assets.
During the first six months of 1994, the net operating income from the
apartments was $3,403,000 which, after deducting the interest expense, amounted
to an annualized return of over 20% on the average invested equity. As a result
of the high demand for apartments, the Company was able to raise the average
rental rates in Tucson and Albuquerque by over 5% during 1994 while maintaining
the occupancy rates. The Company expects to continue to increase the rental
rates in Tucson and Albuquerque. The rental rates and the occupancy rates for
the properties in Houston during the first half of 1994 were stable and are
expected to remain stable in the remainder of the year.
For the first six months of 1994, the Company accrued income on
mortgage assets at an annualized yield of 24%. In the second quarter of 1994,
the Company redeemed two series of structured financing at par and sold the
related mortgage certificates for a gain of $2,554,000. As a result of the
redemption and the regular monthly cash flows received, the net carrying value
of the mortgage assets decreased by $14,000,000 during the year to $23,882,000
at June 30, 1994. Based on the current prepayment and short-term rate
assumptions, the prospective yield on the mortgage assets at June 30, 1994 is
approximately 27%.
The losses for 1993 resulted primarily from the non-accrual of income
on a majority of the mortgage assets and charges of $3,570,000 and $15,570,000
in the second quarter and first six months of 1993 to reduce the net carrying
value of certain mortgage assets to their estimated future cash flow amount,
which resulted in a zero yield.
Interest expenses increased because of the borrowing incurred in
connection with the acquisition of the apartments in January 1994.
Operating expenses for 1994 were higher because (i) the Company accrued
expenses on the stock appreciation rights as a result of the increase in the
price of the Company's common stock and (ii) the expenses for 1993 had been
reduced by $470,000 of legal fees reimbursement by the insurance companies
relating to the class action suit settled in 1992.
Liquidity, Capital Resources and Commitments
The Company derives its cash flows from its real estate investments and
mortgage assets. Below is the summary information of the cash flows generated by
real estate operations and by mortgage assets (after debt payments and before
corporate operating expenses) for the quarter and six months ended June 30, 1994
(in thousands):
Quarter Six Months
------- ----------
Real estate operations:
Net operating income $ 1,731 $ 3,403
Debt payments (1,351) (2,685)
Sale of other real estate 2,228 2,228
------- --------
Net cash flow generated $ 2,608 $ 2,946
======= ========
Mortgage assets:
Income $ 4,405 $ 6,973
Amortization of carrying value 8,980 14,000
Debt payments (9,673) (11,913)
------- --------
Net cash flow generated $ 3,712 $ 9,060
======= ========
At June 30, 1994, the Company had unrestricted cash and temporary
investments of $9,164,000. In addition, the Company expects to generate net cash
flow (after debt service payments on the notes payable) of $1,000,000 from its
existing real estate properties and $3,200,000 from its mortgage assets in the
remainder of 1994 for its unrestricted use. The Company intends to use such
funds for acquisition of income-producing properties, capital improvements on
existing properties and working capital. In July, the Company acquired a
220-unit apartment property in Phoenix, Arizona, for $4,500,000 and obtained a
first mortgage loan of $3,500,000.
Each of the real estate properties is pledged to secure a nonrecourse
and non-cross collateralized first mortgage loan. The loans bear fixed interest
rates which averaged 8.6% at June 30, 1994. The principal and interest payments
on these loans are approximately $356,000 per month. In addition, the Company is
required to deposit specified monthly amounts ($110,000 per month for 1994) with
the lender to be used for specified capital replacement expenditures. The
Company is also required to make principal and interest payments of $202,000 per
month on the unsecured notes payable. At June 30, 1994, the restricted cash
balance included $2,800,000 held by the lenders for capital replacement
expenditures and payments of property taxes and insurance premiums.
Structured financings are collateralized by mortgage instruments and
related assets and are nonrecourse to the Company. Principal and interest
payments on these financings are payable solely from the principal and interest
payments from the underlying mortgage instruments. Substantially all of the
Company's mortgage assets are pledged as collateral for the notes payable issued
in May 1992. Depending on the level of certain specified financial ratios
relating to the collateral, any cash flow from the mortgage assets pledged in
excess of the scheduled principal and interest payments is used to prepay the
notes at par or is remitted to the Company for its unrestricted use. The Company
expects to make a prepayment of $1,893,000 on the August 15, 1994 payment date.
In addition, the Company used the net proceeds from the redemption of
two series of structured financing to prepay $6,550,000 of the notes in August
1994. As a result, the scheduled principal payment is reduced to $1,681,000 per
quarter beginning with the August 15, 1994 payment.
Other Information
The apartment leases generally are for terms of six to 12 months.
Management believes that such short-term leases lessen the impact of inflation
as a result of the ability to adjust rental rates to market levels as leases
expire. To the extent that the inflation rate influences federal monetary policy
and results in rising short-term interest rates or declines in mortgage interest
rates, the income and cash flows from the mortgage assets would be adversely
affected.
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
In March 1994, following a routine audit of the Company by the
Internal Revenue Service (IRS) for 1989, 1990 and 1991, the IRS sent to the
Company a Proposed Adjustment (the "Proposed Adjustment") of taxes due of
$1,212,309 for 1989, $5,183,922 for 1990 and $7,438,132 for 1991. The Proposed
Adjustment did not include any amounts for interest which might be owed by the
Company.
The IRS claims that the Company did not comply with the legal
requirements of Regulation Section 1.857-8 under the Internal Revenue Code with
respect to the demand for certain stockholder information and, thus, failed to
qualify as a real estate investment trust for those years. The Company disagrees
with the revenue agent's report and has filed a protest with the District
Director of the IRS challenging the Proposed Adjustment. The Company believes
that it has made all of the requisite demands of its stockholders for each
applicable year and has met the requirements under the Internal Revenue Code.
The Company also believes that the IRS incorrectly applied the rules in
Regulation section 1.857-8. The Company believes that the IRS's position is
without merit and intends to vigorously defend its position.
Item 2. Changes in Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders of the Company was held
on Wednesday, June 15, 1994 at 9:00 a.m., at the Viscount Suite Hotel-Tucson,
4855 E. Broadway, Tucson, Arizona. There were 15,499,993 shares outstanding on
the date of record for the annual meeting.
(b) The Board of Directors as listed in the May 2, 1994 proxy
statement was duly elected to serve until the next annual meeting or until their
successors are duly elected and ratified. The votes were as follows:
FOR WITHHELD
---------- --------
Earl M. Baldwin 13,466,309 444,136
Joseph C. Chan 13,440,118 470,327
John J. Gisi 13,466,903 443,542
Jon A. Grove 13,446,838 463,607
Raymond L. Horn 13,465,628 444,817
Frederick C. Moor 13,465,894 444,551
Frank S. Parise, Jr. 13,451,159 459,286
(c) The appointment of Deloitte & Touche as the Company's
independent accountants for the fiscal year ending December 31, 1994 was
ratified. The votes were as follows:
FOR 13,552,434
AGAINST 188,557
ABSTAIN 169,454
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
None
* * * * * * * * * * * * *
SIGNATURES
Pursuant to the requirements 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.
ASR INVESTMENTS CORPORATION
Joseph C. Chan August 11, 1994
- ------------------------- ------------------
Joseph C. Chan Date
Executive Vice President,
Chief Operating Officer,
Chief Financial and
Accounting Officer
