FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended: March 31, 1994 Commission File Number: 1-9646
ASR Investments Corporation
_________________________________________________________
(Exact name of Registrant as specified in its Charter)
Maryland
______________________________________________________________
(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
____________________________________________________
(Registrant's telephone number, including area code)
(Not applicable)
____________________________________________________
(Former Name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
/ 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 March 31, 1994:
15,499,993 shares.
<PAGE>
ASR INVESTMENTS CORPORATION
Consolidated Balance Sheets
March 31, 1994 and December 31, 1993
(Dollars in Thousands)
1994 1993
----------- ----------
ASSETS (Unaudited)
Real estate assets, at cost
Land $ 13,681
Buildings and improvements 48,698
Other real estate investments 2,556 $ 3,855
---------- ----------
64,935 3,855
Less: accumulated depreciation (462)
---------- ----------
Real estate investments, net 64,473 3,855
Unrestricted cash and cash equivalents 5,435 10,407
Restricted cash and cash equivalents 25,836 24,306
Mortgage assets - nonequity investments 9,674 10,970
Mortgage instruments and related
pledged under structured financings 1,211,242 1,401,839
Deferred loan and hedging costs 1,390 508
Other 817 1,417
---------- ----------
Total Assets $1,318,867 $1,453,302
========== ==========
LIABILITIES
Notes payable secured by real estate $ 45,643
Notes payable secured by mortgage assets 40,602 $ 42,699
Unsecured notes payable 6,338
Interest payable 833 495
Other 5,231 4,232
Structured financings secured by
mortgage instruments 1,188,054 1,374,928
---------- ----------
Total Liabilities 1,286,701 1,422,354
---------- ----------
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
Deficit (120,681) (121,899)
Common stock in Treasury, at cost; -
743,656 shares (2,311) (2,311)
---------- ----------
Total Stockholders' Equity 32,166 30,948
---------- ----------
Total Liabilities and Stockholders'
Equity $1,318,867 $1,453,302
========== ==========
See notes to consolidated financial statements.
<PAGE>
ASR INVESTMENTS CORPORATION
Consolidated Statements of Operations
For the Quarters Ended March 31, 1994 and 1993
(In Thousands Except Per Share Amounts)
(Unaudited)
1994 1993
Real Estate Operations --------- ---------
Rental income $ 2,666
Other income 141
---------
Total operating income 2,807
---------
Operating expenses
Property operating and maintenance 826
Real estate taxes and insurance 309
---------
Total operating expenses 1,135
---------
Net operating income from real estate 1,672
---------
Mortgage Assets
Income from mortgage assets - prospective yield
method 2,192 $ 1,026
Income on mortgage instruments 51,880
Expenses on structured financings (50,235)
Provision for reserves (12,000)
Other interest income 376 260
--------- ---------
Income from mortgage assets 2,568 (9,069)
--------- ---------
Total operating income 4,240 (9,069)
Interest expense on notes payable (1,950) (1,507)
Operating and administrative expenses (610) (598)
Depreciation expense (462)
--------- ---------
Net Income $ 1,218 ($ 11,174)
========= =========
Net Income (Loss) Per Average Share $0.08 ($0.72)
========= =========
Average Shares Outstanding 15,500 15,568
========= =========
See notes to consolidated financial statements.
<PAGE>
ASR INVESTMENTS CORPORATION
Consolidated Statements of Cash Flows
For the Quarters Ended March 31, 1994 and 1993
(In Thousands Except Per Share Amounts)
(Unaudited)
1994 1993
---------- ----------
OPERATING ACTIVITIES
Net income (loss) $ 1,218 ($ 11,174)
Principal noncash charges (credits)
Depreciation and amortization 462 602
Provision for reserves 12,000
Increase (decrease) in interest payable 338 (36)
Other (82)
---------- ----------
Cash Provided By Operations 2,018 1,310
---------- ----------
INVESTING ACTIVITIES
Purchase of real estate assets (61,080)
Purchase of nonequity mortgage assets (4,447)
Reduction in mortgage instruments and
related assets 190,597 203,749
Reduction in structured financings (186,874) (197,153)
Reduction in nonequity mortage assets 1,296 2,752
(Increase) decrease in deferred hedging costs 305 (2,192)
Other 612
---------- ----------
Cash (Used in) Provided by Investing
Activities (55,144) 2,709
---------- ----------
FINANCING ACTIVITIES
Issuance of notes payable 52,178
Payment of loan costs (1,199)
Repayment of notes payable (2,294) (3,222)
Increase in restricted cash (1,530) (600)
Stock repurchase (148)
Other 999
---------- ----------
Cash Provided By (Used in) Financing
Activities 48,154 (3,970)
---------- ----------
Unrestricted cash and cash equivalents
Increase (decrease) during the period (4,972) 49
Balance - beginning of period 10,407 5,129
---------- ----------
Balance - end of period $ 5,435 $ 5,178
========== ==========
Supplemental Disclosure of Cash Flow
Information
Cash paid for Company's interest expense $ 2,288 $ 1,543
========== ==========
Cash paid by mortgage instruments for
interest on structured financings $ 43,617
========== ==========
See notes to consolidated financial statements.
<PAGE>
ASR INVESTMENTS CORPORATION
Consolidated Statements of Stockholders' Equity
For the Quarter Ended March 31, 1994
(In Thousands)
(Unaudited)
Balance Net Balance
1/1/94 Income 3/31/94
--------- -------- ---------
Number of shares 16,244 16,244
========= =========
Par Value $162 $162
Additional paid-in capital 154,996 154,996
Deficit (121,899) $1,218 (120,681)
Treasury stock - at cost (2,311) (2,311)
--------- ------ ---------
Total $ 30,948 $1,218 $ 32,166
========= ====== =========
See notes to consolidated financial statements.
<PAGE>
ASR INVESTMENTS CORPORATION
Notes to Consolidated Financial Statements
For the Quarter Ended March 31, 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. Operating results for the quarter ended March 31, 1994 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 are stated at cost. Depreciation is calculated
on a straight line basis using 27.5 years for buildings and 7 years for
furniture and equipment.
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 years
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. The purchase 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. Each property is owned by
a wholly owned limited-purpose subsidiary of the Company.
The acquisition cost has been allocated to the individual properties
based on their relative fair values as determined by independent appraisals.
The first mortgage loans are secured nonrecourse loans which and are
not 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.
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.
The tables on the following page contain certain information on the
apartments owned by the Company.
<TABLE>
<CAPTION>
Net Monthly
Rent Income Weight-
(*) ed Cost at March 31, 1994 First Mortgage Loan
----------- Aver- ------------------------------ -----------------------------
Sq. Per age Inter-
Year No. of Total Ft./ Per Sq. Occu- Per Per Balance est
Property Built Units Sq. Ft. Unit unit Ft. pancy Total Unit Sq. Ft. 3/31/94 Rate Maturity
- - ------------------------------------------------------------------ ------------------------------ -----------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TUCSON,
ARIZONA
Acacia
Hills 1986 64 34,577 540 $335 $0.62 95% $ 1,346,000 $21,031 $38.93 $1,034,000 8.5% 01-Feb-04
Casa Del
Norte 1984 84 44,120 525 337 0.64 95% 1,855,000 22,083 42.04 1,385,000 8.5% 01-Feb-04
Desert
Springs 1985 248 146,240 590 347 0.59 98% 5,866,000 23,653 40.11 4,641,000 8.5% 01-Feb-04
Landmark 1986 176 112,749 641 351 0.55 97% 4,545,000 25,824 40.31 3,063,000 8.5% 01-Feb-04
Park
Terrace 1986 176 101,944 579 335 0.58 97% 3,523,000 20,017 34.56 2,717,000 8.5% 01-Feb-04
Park
Village 1985 60 32,388 540 318 0.59 96% 774,000 12,900 23.90 592,000 8.5% 01-Feb-04
Posada Del
Rio 1980 160 99,280 621 360 0.58 98% 3,551,000 22,194 35.77 1,618,000 10.1% 31-Dec-97
South Point 1984 144 76,082 528 297 0.56 96% 2,443,000 16,965 32.11 1,874,000 8.5% 01-Feb-04
--------------------------------------------------------------------------------------------------
Total Tucson 1,112 647,380 582 338 0.58 97% 23,903,000 21,496 36.92 16,924,000 8.7%
--------------------------------------------------------------------------------------------------
HOUSTON,
TEXAS
Clear Lake 01-Feb-04
Falls 1980 90 105,208 1,169 722 0.62 94% 4,170,000 46,333 39.64 3,148,000 8.5%
The Gallery 1968 101 77,037 763 418 0.55 92% 1,947,000 19,277 25.27 1,653,000 8.5% 01-Feb-04
Memorial 01-Feb-04
Bend 1967 124 116,804 942 445 0.47 93% 2,516,000 20,290 21.54 1,936,000 8.5%
Nantucket 01-Feb-04
Square II 1983 106 151,406 1,428 632 0.44 94% 3,666,000 34,585 24.21 2,773,000 8.5%
Prestonwood 1978 156 149,204 956 409 0.43 93% 3,521,000 22,571 23.60 2,485,000 8.5% 01-Feb-04
Riviera 01-Feb-04
Pines 1979 224 160,608 717 395 0.55 94% 4,157,000 18,558 25.88 3,291,000 8.5%
--------------------------------------------------------------------------------------------------
Total Houston 801 760,267 949 485 0.51 94% 19,977,000 24,940 26.28 15,286,000 8.5%
--------------------------------------------------------------------------------------------------
ALBUQUERQUE,
NEW MEXICO
Dorado
Terrace 1986 216 129,200 598 431 0.72 94% 6,929,000 32,079 53.63 5,247,000 8.5% 01-Feb-04
Villa
Serena 1986 104 69,816 671 474 0.71 92% 3,531,000 33,952 50.58 2,698,000 8.5% 01-Feb-04
Whispering
Sands 1986 228 179,880 789 445 0.56 93% 7,578,000 33,237 42.13 5,488,000 8.9% 01-Apr-01
--------------------------------------------------------------------------------------------------
Total Albuquerque 548 378,896 691 445 0.64 93% 18,038.000 32,916 47.61 13,433,000 8.7%
--------------------------------------------------------------------------------------------------
TOTAL / AVERAGE 2,461 1,786,543 726 $410 $0.56 95% $61,918,000 $25,028 $34.48 $45,643,000 8.6%
==================================================================================================
* - The net rental income is the actual income collected and
is net of vacancies,
employee units, concessions, uncollectible rents and other
deductions.
</TABLE>
<PAGE>
NOTE 3 - MORTGAGE INSTRUMENTS AND RELATED ASSETS
PLEDGED UNDER STRUCTURED FINANCINGS
Below is the net investment in the mortgage assets at March 31, 1994
and December 31, 1993 (in thousands):
1994 1993
---------- ----------
Mortgage instruments
Principal balance $1,148,043 $1,333,165
Accrued interest 10,204 11,790
Cash held by trustee 52,995 79,524
---------- ----------
1,211,242 1,424,482
---------- ----------
Structured financings
Principal balance (1,190,930) (1,395,737)
Accrued interest ( 14,745) ( 17,069)
Valuation adjustments 17,621 15,235
---------- ----------
(1,188,054) (1,397,571)
---------- ----------
Equity mortgage assets, net 23,188 26,911
Nonequity mortgage assets 9,674 10,970
---------- ----------
Total net mortgage assets $ 32,862 $ 37,881
========== ==========
At March 31, 1994, the estimated effective yield based on the total
net carrying value of the Company's mortgage assets was approximately
25%.
During the quarter ended March 31, 1993 the Company charged operations
by $12,000,000 for impairment in certain mortgage assets. There were no
such charges to operations in 1994.
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 to a group of institutional
investors. The notes bear a fixed interest rate of 9.02% per year.
Principal repayments are $2,097,222 per quarter. The notes are
collateralized by all of the mortgage assets of the subsidiary and funds
held by the trustee (including the reserve fund and the collection account).
The excess, if any, of the income portion of the cash flow from the
collateral pledged (determined on the Federal income tax basis) over the
interest and other expenses on the notes is remitted to the Company. The
principal portion of the cash flow (i.e. total cash flow in excess of the
income portion) is used to make the scheduled principal and interest
payments, if necessary. Depending on the level of certain specified
financial ratios relating to the collateral, any remaining principal portion
of the cash flow over the scheduled principal payment is required to either
prepay the notes at par or is remitted to the Company for its unrestricted
use.
At March 31, 1994 and December 31, 1993, the net carrying value of the
mortgage assets pledged was $26,733,000 and $30,153,000, respectively, and
the funds held by the trustee (including the reserve fund) was $23,545,000
and $24,306,000, respectively.
NOTE 5 - RELATED PARTY TRANSACTIONS
The management fees paid to Pima Mortgage L.P. (the "Manager) for the
quarters ended March 31, 1994 and 1993 were as follows (in thousands):
1994 1993
------ ------
Base management fee $ 145 $ 182
====== ======
Administration fee $ 65 $ 65
====== ======
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 quarter ended March 31, 1994, the costs
allocated to the Company were $49,000 (approximately 1.8% of rental income),
which was net of an allocated credit (which is applicable only in 1994)
of $54,000.
NOTE 6 - INCOME TAXES
The Company estimates that it incurred a net tax loss of $11,000,000
during the quarter ended March 31, 1994, which includes "excess inclusion"
income of $412,000 from the residual interest in certain real estate
mortgage investment conduits ("REMICs"). At March 31, 1994, the Company had
an estimated net operating loss carryover of approximately $79,000,000 which
can be carried forward to offset ordinary income (other than excess
inclusion income) for 15 years. Although the Company may incur additional
net tax losses in 1994, it expects to realize additional excess inclusion
income which is required to be distributed as dividends.
In March 1994, following a routine audit of the Company by the IRS for
1989, 1990 and 1991, the IRS sent to the Company a Proposed Adjustment (the
"Proposed Adjustment") of taxes due of $13,834,000. 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 shareholder information and, thus, failed to qualify as a real
estate investment trust for those years. The Company believes that it has
met the requirements under the Internal Revenue Code and that the IRS's
position is without merit. The Company intends to vigorously defend its
position. Accordingly, the Company has made no provision for this
uncertainty in the accompanying consolidated financial statements.
NOTE 7 - 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 mortgage instruments collateralize the structured financings and
cannot be sold or otherwise be disposed of so long as the structured
financings are outstanding. The Company cannot cause an early redemption of
the structured financings directly or indirectly, except in limited and
specified conditions. As of March 31, 1994, the mortgage assets had a total
net carrying value (i.e., net of structured financings) of $32,862,000 and
an aggregate estimated fair value of $31,000,000. This estimate 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 March 31,
1994 was as follows (dollars in thousands):
Estimated
Carrying Fair
Amount Value
-------- ---------
Cash and cash equivalents $31,271 $ 31,271
Notes Payable 92,583 92,583
Other liabilities 5,231 5,231
1. Restricted and unrestricted cash and cash equivalents, interest
payable and other liabilities - The carrying values of these items are a
reasonable estimate of their fair values.
2. Notes payable - Interest rates that are currently available to the
Company for issuance of debt with similar terms and remaining maturities are
used to estimate fair value of the notes which are not quoted on an
exchange.
NOTE 8 - CASH FLOW INFORMATION ON MORTGAGE ASSETS
The Company's mortgage assets generate amounts of cash flows ("Net Cash
Flows"). The amount of the Net Cash Flows depends primarily on the factors
described under "Assumptions" below. The Net Cash Flows have been
calculated assuming that the structured financings will remain outstanding
beyond its optional redemption date until its expected maturity. The Net
Cash Flow amounts 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, hedging costs, 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 2.69% 2.69% 3.69% 5.69% 5.69% 3.69%
3-Month LIBOR 2.94% 2.94% 3.94% 5.94% 5.94% 3.94%
COFI 3.45% 3.45% 4.25% 5.85% 5.85% 4.33%
The interest rate assumptions under Case 3 and 6 are based on the
actual interest rates on March 31, 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 April 1994.
The average of the estimates prepared by two investment banks for May
through September 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 fourth quarter of 1994 and first quarter of 1995, and then
remain at these terminal rates thereafter. As a result, the assumed
prepayment rates for May 1994 through March 1995 are substantially higher
than the terminal rates indicated in the following table. For Case 6, the
rates indicated in the following table are used for all years.
Assumed Prepayment Rates (PSA%)
-----------------------------------------
Mortgage Coupon 5/94- Cases
Instruments Rate 9/94 Case 1 2,3&4 Case 5 Case 6
- - ----------- ------ ------ ------ ------ ------- ------
FHLMC 9.50% 583 562 440 255 440
FHLMC 10.50 490 540 445 273 445
FHLMC 11.00 469 520 434 272 434
FHLMC 11.50 469 516 430 269 430
FNMA 8.00 520 514 305 207 305
FNMA 8.50 532 600 375 234 375
GNMA 8.00 321 314 195 118 195
GNMA 9.00 525 493 325 187 325
GNMA 9.50 521 480 360 189 360
GNMA 10.00 554 468 360 192 360
GNMA 10.50 528 450 358 200 358
GNMA 11.00 476 415 341 200 341
GNMA 11.50 480 406 334 196 334
GNMA 12.00 474 406 334 196 334
Private Sec. 9.50 583 562 440 255 440
Whole loans 9.00 621 569 430 246 430
Whole loans 9.50 583 562 440 255 440
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 March 31, 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 April 1994 (in thousands).
Year Case 1 Case 2 Case 3 Case 4 Case 5 Case 6
- - ---- ------- ------- ------- ------- ------- -------
1994 $14,129 $14,124 $13,453 $12,100 $12,083 $13,624
1995 13,087 13,420 12,455 10,518 10,802 13,561
1996 8,660 9,676 9,034 7,733 8,904 9,884
1997 5,732 6,958 6,545 5,698 7,402 7,158
1998 4,286 5,020 4,750 4,210 6,136 5,200
1999 2,916 4,020 3,847 3,494 5,100 4,084
2000 1,908 2,897 2,796 2,588 4,265 3,059
2001 1,280 2,049 1,995 1,882 3,630 2,184
2002 895 1,488 1,456 1,387 3,164 1,579
2003 2,107 1,115 1,092 1,044 2,590 1,183
2004-08 5,215 6,361 6,368 6,390 7,492 6,433
2009-13 672 3,937 3,990 4,003 9,682 4,310
2014-20 1,232 2,865 4,430 9,361 13,828 4,729
------- ------- ------- ------- ------- -------
Total $62,119 $73,930 $72,211 $70,408 $95,078 $76,988
======= ======= ======= ======= ======= =======
PRESENT VALUE OF CALCULATED NET CASH FLOWS
The table below sets forth the present value, on a semi-annual
equivalent basis as of March 31, 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% $62,119 $73,930 $72,211 $70,408 $95,078 $76,988
5% 52,307 59,460 56,983 52,482 67,277 60,742
10% 45,681 50,578 48,049 43,098 52,972 51,182
15% 40,848 44,506 42,112 37,326 44,424 44,809
20% 37,131 40,024 37,799 33,322 38,687 40,167
25% 34,161 36,533 34,470 30,311 34,508 36,577
30% 31,719 33,709 31,793 27,926 31,293 33,686
35% 29,667 31,364 29,576 25,969 28,722 31,290
40% 27,912 29,376 27,702 24,325 26,611 29,265
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 the first quarter of 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. The income and cash flows from the
mortgage assets are affected primarily by the actual and expected 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.
As illustrated in Note 8 to the consolidated financial statements, the
cash flow from the mortgage assets decline over time. 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 net investment is being
amortized.
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 the 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 March 31, 1994 and December 31, 1993
provide a meaningful presentation of its assets and liabilities and are
helpful for understanding the financial condition and results of the
Company. (In thousands.)
1994 1993
-------- --------
ASSETS
Real estate investments, net $ 64,473
Mortgage assets, net of
structured financings 32,862 $ 37,881
Unrestricted cash and
cash equivalents 5,435 10,407
Other assets 4,498 5,780
-------- --------
Total Assets $107,268 $ 54,068
======== ========
LIABILITIES
Notes payable secured by real estate $ 45,643
Notes payable secured by
mortgage assets, net
of funds held by trustee 17,057 $ 18,888
Unsecured notes payable 6,338
Other liabilities 6,064 4,232
-------- --------
Total Liabilities 75,102 23,120
STOCKHOLDERS' EQUITY 32,166 30,948
-------- --------
Total Liabilities and
Stockholders' Equity $107,268 $ 54,068
======== ========
Results of Operations
The Company had net income of $1,218,000 ($.08 per share) for the first
quarter of 1994 compared with a net loss of $11,174,000 ($.72 per share) for
the first quarter of 1993. The return to profitability resulted from
operating income generated by the apartments acquired on January 12, 1994 as
well as the existing mortgage assets. The average occupancy rate of the
apartments acquired was 95% and the net rental income (i.e. net of
vacancies, employee units, concessions, bad debts and other deductions)
averaged $.56 per square foot. As a result of the high demand for
apartments, in the first quarter of 1994, the Company was able to raise the
average rental rates in Tucson and Albuquerque by approximately 12% while
maintaining or raising the occupancy rates. For the properties in Houston,
the Company generally maintained the rental rates and the occupancy rates
during the first quarter of 1994.
For the first quarter of 1994, the mortgage assets had a yield of
approximately 24% based on the average net carrying value (i .e., net of the
structured financings) of $36,767,000. At March 31, 1994, the net carrying
value of the mortgage assets was $32,862,000 and the prospective yield based
on the current prepayment and short-term rate assumptions was approximately
25%.
The loss for 1993 resulted primarily from the non-accrual of income on
a majority of the mortgage assets and a charge of $12,000,000 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 debts incurred in connection
with the apartment acquisition .
Taxable Loss and Dividends
The Company incurred an estimated tax loss of $11,000,000 in the first
quarter of 1994 because of the tax losses generated by the mortgage assets.
The tax loss included $412,000 of "excess inclusion" income from the
residual interest in certain real estate mortgage investment conduits
("REMICs"). Such "excess inclusion" income cannot be offset by operating
losses and deductions from other sources and, under the current tax law for
REITs, is required to be distributed as dividends. As of March 31, 1994,
the Company had an estimated net operating loss of $79,000,000 which can be
carried forward to offset ordinary income (other than excess inclusion
income) for 15 years.
Liquidity, Capital Resources and Commitments
The Company derives its cash flows from its real estate investments and
mortgage assets . The real estate investments consist of 17 apartment
properties acquired in January 1994. Each of the 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 March 31, 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.
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. Under the agreement, the excess, if any, of the
income portion of the cash flow from the collateral pledged (determined on
the Federal income tax basis) over the interest and other expenses on the
notes is remitted to the Company. The principal portion of the cash flow
(total cash flow in excess of the income portion) is used to make the
scheduled principal payment and interest payment, if necessary. Depending on
the level of certain specified financial ratios relating to the collateral,
any remaining principal portion of the cash flow is required to either
prepay the notes at par or is remitted to the Company for its unrestricted
use.
The reserve fund balance reached its specified maximum of $20,000,000
during the first quarter of 1993. The reserve fund is used to make the
scheduled payments on the notes if the cash flow available from the
collateral is not sufficient to make the scheduled payments.
At March 31, 1994, the Company had unrestricted cash and temporary
investments of approximately $5.4 million. In addition, the Company expects
to generate net cash flow (after debt service payments on the notes payable)
of $1.5 million from its existing real estate properties and $5 million 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.
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.
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 plans to file 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
None
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
The Company filed a report on Form 8-K dated March 28, 1994, reporting
the acquisition of seventeen apartment properties.
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
/s/ Joseph C. Chan May 13, 1994
__________________________ _________________
Joseph C. Chan Date
Executive Vice President,
Chief Operating Officer,
Chief Financial and
Accounting Officer
