FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended: September 30, 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 September 30, 1994:
15,499,993 shares.
<PAGE>
ASR INVESTMENTS CORPORATION
Consolidated Balance Sheets
September 30, 1994 and December 31, 1993
(Dollars in Thousands)
1994 1993
---------- ----------
ASSETS (Unaudited)
Real Estate Investments, at cost
Land $ 13,681
Buildings and improvements 49,843
Accumulated depreciation (1,461)
Joint ventures and other investments 3,157 $ 3,855
Restricted cash and deferred loan costs 4,076
---------- ----------
Real estate investments, net 69,296 3,855
---------- ----------
Mortgage Assets
Mortgage instruments pledged under
structured financings and related assets 941,364 1,435,452
Restricted cash and cash equivalents 22,005 24,306
---------- ----------
Total mortgage assets 963,369 1,459,758
---------- ----------
Unrestricted cash and cash equivalents 9,231 10,407
Other assets 897 1,925
---------- ----------
Total Assets $1,042,793 $1,475,945
========== ==========
LIABILITIES
Real estate notes payable
Secured notes payable $ 45,912
Unsecured notes payable 5,381
---------- ----------
Total real estate notes payable 51,293
---------- ----------
Mortgage asset liabilities
Structured financings 920,999 1,397,571
Notes payable secured by mortgage assets 27,776 43,194
---------- ----------
Total mortgage asset liabilities 948,775 1,440,765
---------- ----------
Other liabilities 5,786 4,232
---------- ----------
Total Liabilities 1,005,854 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 (115,908) (121,899)
Common stock in treasury, at cost; -
743,656 shares (2,311) (2311)
---------- ----------
Total Stockholders' Equity 36,939 30,948
---------- ----------
Total Liabilities and Stockholders' Equity $1,042,793 $1,475,945
========== ==========
See notes to consolidated financial statements.
<PAGE>
ASR INVESTMENTS CORPORATION
Consolidated Statements of Operations
For the Quarters and Nine Months Ended September 30, 1994 and 1993
(In Thousands Except Per Share Amounts)
(Unaudited)
Quarters Nine Months
--------------- ----------------
1994 1993 1994 1993
---- ---- ---- ----
Real Estate Operations
Rental income $3,075 $8,780
Other income 162 469
------ ------
Total operating income 3,237 9,249
------ ------
Property operating and maintenance 1,176 3,130
Real estate taxes and insurance 345 1,000
Depreciation 526 1,461
------ ------
Total operating expenses 2,047 5,591
------ ------
Income from real estate 1,190 3,658
------ ------
Mortgage Assets
Income from mortgage assets 1,418 $1,300 5,187 $6,208
Gain on redemption of mortgage assets 1,366 3,920
Other interest income 408 246 1,059 713
Provision for reserves (1,016) (16,586)
------ ------ ------ ------
Income from mortgage assets 3,192 530 10,166 (9,665)
------ ------ ------ ------
Operating and administrative expenses (425) (592) (2,017) (1,462)
------ ------ ------ ------
Total operating income (loss) 3,957 (62) 11,807 (11,127)
Interest on real estate notes payable (1,129) (3,238)
Interest on notes payable secured by
mortgage assets (754) (1,258) (2,578) (4,278)
------ ------ ------ ------
Net Income (Loss) $2,074 ($1,320) $5,991 ($15,405)
====== ====== ====== ======
Net Income (Loss) Per Average Share $ 0.13 ($0.09) $ 0.39 ($0.99)
====== ====== ====== ======
Average Shares Outstanding 15,500 15,507 15,500 15,537
====== ====== ====== ======
See notes to consolidated financial statements.
<PAGE>
ASR INVESTMENTS CORPORATION
Consolidated Statements of Cash Flows
For the Quarters and Nine Months Ended September 30, 1994 and 1993
(In Thousands Except Per Share Amounts)
(Unaudited)
Quarters Nine
Months
1994 1993 1994 1993
OPERATING ACTIVITIES
Net income (loss) $ 2,074 ($1,320) $ 5,991 ($15,405)
Principal noncash charges
(credits)
Depreciation and
amortization 552 156 1,529 645
Provision for reserves 1,016 16,586
Other (190) 794
-------- -------- -------- --------
Cash Provided By
Operations 2,626 (338) 7,520 2,620
-------- -------- -------- --------
INVESTING ACTIVITIES
Purchase of real estate
assets (2,350) (65,054)
Sale of other real estate 2,228
Purchase of mortgage assets (4,447)
Reduction in net mortgage
assets 3,116 13,814 17,516 31,843
(Increase) decrease in
deferred hedging costs (1,105) (3,913)
(Increase) decrease in other
assets 357 (3,719) 921 (4,332)
-------- -------- -------- --------
Cash (Used in) Provided
by Investing Activities 1,123 8,990 (44,389) 19,151
-------- -------- -------- --------
FINANCING ACTIVITIES
Issuance of notes payable 52,178
Payment of loan costs (1,199)
Repayment of notes payable (11,847) (2,104) (16,303) (13,582)
(Increase) decrease in
restricted cash 8,201 (4,750) (495) (4,570)
Stock repurchase (200)
Payment of Dividends (774) (774)
Increase (decrease) in other
liabilities (36) 1,512
-------- -------- -------- --------
Cash Provided By (Used
in) Financing Activities (3,682) (7,628) 35,693 (19,126)
-------- -------- -------- --------
Unrestricted cash and
cash equivalents
Increase (decrease)
during the period 67 1,024 (1,176) 2,645
Balance - beginning of
period 9,164 6,720 10,407 5,129
-------- -------- -------- --------
Balance - end of period $ 9,231 $ 7,744 $ 9,231 $ 7,774
======== ======== ======== ========
Supplemental Disclosure of
Cash Flow Information
Cash paid for Company's
interest expense $ 1,984 $ 1,206 $ 5,625 $ 4,102
======== ======== ======== ========
Supplemental Disclosure of
Noncash Activities
Cash paid by mortgage
instruments for principal
and interest on structured
financings $ 82,494 $256,413 $476,602 $624,168
======== ======== ======== ========
See notes to consolidated financial statements.
<PAGE>
ASR INVESTMENTS CORPORATION
Consolidated Statement of Stockholders' Equity
For the Nine Months Ended September 30, 1994
(In Thousands)
(Unaudited)
Balance Net Balance
1/1/94 Income 9/30/94
--------- ------- ---------
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) $ 5,991 (115,908)
Treasury stock - at cost (2,311) (2,311)
--------- ------- ---------
Total $ 30,948 $ 5,991 $ 36,939
========= ======= =========
See notes to consolidated financial statements.
<PAGE>
ASR INVESTMENTS CORPORATION
Notes to Consolidated Financial Statements
For the Quarter Ended September 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. In December 1993, the Company reduced the net
carrying value of substantially all of its mortgage assets to their
estimated fair value. Beginning in 1994, the Company accrues income 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 September 30, 1994, the restricted cash balance included $2,796,000 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.
The table on the following page contains certain information on the
apartments owned directly by the Company as of September 30, 1994.
<TABLE>
ASR INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 1994
(UNAUDITED)
<CAPTION>
Book Value at Sept. 30, 1994 9/30/93 9/30/93
------------------------------ ----------------------- ----------------
Rental Rates Rates
---------------
Year of Total Sq. Ft./ Per Per Per Per Occu- Per Occu-
Property Built Units Sq. Ft. Unit Total Unit Sq. Ft. Unit Sq. Ft. pancy Sq. Ft. pancy
- --------------------------- -------------------------- ------------------------------- ----------------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TUCSON, ARIZONA
Acacia Hills 1986 64 34,577 540 $ 1,333,387 $20,834 $38.56 $405 $0.75 96% $0.67 97%
Casa Del Norte 1984 84 44,120 525 1,836,153 21,859 41.62 410 0.78 96% 0.73 97%
Desert Springs 1985 248 146,240 590 5,804,486 23,405 39.69 407 0.69 95% 0.62 93%
Landmark 1986 176 112,749 641 4,542,440 25,809 40.29 404 0.63 93% 0.58 92%
Park Terrace 1986 176 101,944 579 3,495,613 19,861 34.29 405 0.70 95% 0.64 89%
Park Village 1985 60 32,388 540 775,934 12,932 23.96 372 0.69 96% 0.62 88%
Posada Del Rio 1980 160 99,280 621 3,473,167 21,707 34.98 416 0.67 96% 0.59 97%
South Point 1984 144 76,082 528 2,416,539 16,782 31.76 354 0.67 96% 0.62 95%
-------------------------------------------------------------------------------------------------
Total Tucson 1,112 647,380 582 23,677,719 21,293 36.57 399 0.69 95% 0.62 93%
-------------------------------------------------------------------------------------------------
HOUSTON, TEXAS
Clear Lake Falls 1980 90 105,208 1,169 4,162,032 46,245 39.56 783 0.67 94% 0.67 93%
The Gallery 1968 101 77,037 763 2,246,684 22,244 29.16 481 0.63 90% 0.63 94%
Memorial Bend 1967 124 116,804 942 2,543,107 20,509 21.77 518 0.55 90% 0.53 97%
Nantucket Square II 1983 106 151,406 1,428 3,644,705 34,384 24.07 728 0.51 92% 0.49 84%
Prestonwood 1978 156 149,204 956 3,591,326 23,021 24.07 478 0.50 86% 0.49 93%
Riviera Pines 1979 224 160,608 717 4,299,618 19,195 26.77 452 0.63 97% 0.61 97%
-------------------------------------------------------------------------------------------------
Total Houston 801 760,267 949 20,487,472 25,577 26.95 545 0.57 92% 0.56 94%
-------------------------------------------------------------------------------------------------
ALBUQUERQUE, NEW
MEXICO
Dorado Terrace 1986 216 129,200 598 6,885,904 31,879 53.30 496 0.83 93% 0.77 95%
Villa Serena 1986 104 69,816 671 3,502,506 33,678 50.17 544 0.81 95% 0.74 93%
Whispering Sands 1986 228 179,880 789 7,509,064 32,934 41.74 521 0.66 93% 0.62 95%
-------------------------------------------------------------------------------------------------
Total Albuquerque 548 378,896 691 17,897,474 32,660 47.24 516 0.75 93% 0.69 95%
-------------------------------------------------------------------------------------------------
TOTAL / AVERAGE 2,461 1,786,543 726 $62,062,665 $25,028 $34.48 $472 $0.65 94% $0.61 94%
=================================================================================================
</TABLE>
NOTE 3 - MORTGAGE INSTRUMENTS AND RELATED ASSETS
PLEDGED UNDER STRUCTURED FINANCINGS
Below is the net investment in the mortgage assets at September 30,
1994 and December 31, 1993 (in thousands):
1994 1993
---------- ----------
Mortgage assets
Principal balance $ 901,705 $1,333,165
Accrued interest 7,820 11,790
Cash held by trustee 25,070 79,527
Nonequity mortgage assets 6,769 10,970
---------- ----------
941,364 1,435,452
---------- ----------
Structured financings
Principal balance ( 915,523) (1,395,737)
Accrued interest ( 11,841) ( 17,069)
Valuation adjustments 6,365 15,235
---------- ----------
( 920,999) (1,397,571)
---------- ----------
Total net mortgage assets $ 20,365 $ 37,881
========== ==========
During the third quarter of 1994 and the nine months ended September
30, 1994, the Company had a gain of $1,366,000 and $3,920,000 from the
exercise of call rights on mortgage assets and the sale of the underlying
mortgage collateral. At September 30, 1994, the estimated effective yield
based on the total net carrying value of the Company's mortgage assets was
approximately 27%.
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 is
also required to use the net proceeds from the redemption of mortgage assets
pledged to prepay the notes. During the third quarter of 1994, the Company
made prepayments of $9,380,000 using the net proceeds from the redemption of
the mortgage assets in 1994. As a result of the prepayments made, the
scheduled principal payment is $1,614,000 per quarter beginning with the
November 15, 1994 payment.
At September 30, 1994 and December 31, 1993, the net carrying value of
the mortgage assets pledged and the funds held by the trustee totalled
$37,899,000 and $54,459,000, respectively.
NOTE 5 - RELATED PARTY TRANSACTIONS
Pima Mortgage L.P. (the "Manager"), manages the day-to-day operations of
the Company pursuant to a management agreement which has a current term
through December 31, 1994. The Management fees paid to the Manager for the
quarters and nine months ended September 30, 1994 and 1993 were as follows
(in thousands):
Quarter Nine Months
---------------- ----------------
1994 1993 1994 1993
------ ------ ------ ------
Base management fee $ 142 $ 154 $ 423 $ 505
====== ====== ====== ======
Administration fee $ 60 $ 60 $ 189 $ 190
====== ====== ====== ======
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 its apartment properties acquired in January 1994. Under the
property management agreements, 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 managed by the
Property Manager. For the nine months ended September 30, 1994, the costs
allocated to the Company were $95,000 (approximately 1% of real estate
operating income), which was net of an allocated credit (applicable only in
1994) of $221,000.
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 September 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 $20,365,000. The estimated fair value is 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 September 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 estimates presented below are
intended to illustrate (i) the amount of cash flows from the mortgage assets
calculated using the various 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 required principal and interest payments on
the Company's notes payable or operating expenses. Various market conditions
or other factors 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 4.06% 4.06% 5.06% 7.06% 7.06% 5.06%
3-Month LIBOR 4.50% 4.50% 5.50% 7.50% 7.50% 5.50%
COFI 3.15% 3.15% 3.95% 5.55% 5.55% 3.95%
The interest rate assumptions under Case 3 and 6 are based on the
actual interest rates on September 30, 1994.
The prepayment assumptions for the Net Cash Flows for Cases 1 through 5
are used in the following manner. The actual rates are used for October
1994. The average of the estimates prepared by two investment banks for
November 1994 through March 1995, as indicated in the following table, are
used for those months. The prepayment Terminal Rates are then assumed to
change ratably from those estimates to the rates indicated in the following
table over the next six months of 1995, and then remain at these terminal
rates thereafter. For Case 6, the Terminal Rates are used for all periods.
Assumed Prepayment Rates (PSA%)
Mortgage Coupon 11/94- Cases
Instruments Rate 3/95 Case 1 2,3&4 Case 5 Case 6
- ----------- ------ ------ ------ ----- ------ ------
FHLMC 9.00% 248 306 215 146 215
FHLMC 9.50 305 309 241 150 241
FHLMC 10.50 326 335 268 172 268
FHLMC 11.00 321 418 338 221 338
FNMA 8.00 165 233 175 135 175
FNMA 8.50 203 276 193 142 193
GNMA 8.00 118 158 123 77 123
GNMA 9.00 173 244 158 112 158
GNMA 9.50 246 275 190 124 190
GNMA 10.00 262 298 230 134 230
GNMA 10.50 308 341 269 161 269
GNMA 11.00 303 355 287 179 287
GNMA 11.50 295 355 287 179 287
GNMA 12.00 296 355 287 179 287
Whole loans 9.00 248 306 215 146 215
Whole loans 9.50 305 309 241 150 241
RMA 3 & 5 125 169 131 85 131
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 September 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 October 1994 (in thousands).
Year Case 1 Case 2 Case 3 Case 4 Case 5 Case 6
- ---- ------- ------- ------- ------- ------- -------
1994 $ 3,163 $ 3,163 $ 3,069 $ 2,883 $ 2,880 $ 3,067
1995 10,035 10,069 9,246 7,602 7,616 9,320
1996 7,526 7,881 7,293 6,118 6,425 7,395
1997 5,602 6,200 5,783 4,947 5,585 5,863
1998 4,178 4,907 4,600 3,991 4,829 4,663
1999-03 9,341 12,609 12,079 11,015 15,927 12,250
2004-08 4,369 4,400 4,298 4,111 7,519 4,350
2009-13 6,713 8,659 8,721 8,824 9,156 8,739
2014-20 6,793 9,075 11,513 18,802 23,244 11,582
- ---- ------- ------- ------- ------- ------- -------
Total $57,720 $66,963 $66,602 $68,293 $83,181 $67,229
======= ======= ======= ======= ======= =======
PRESENT VALUE OF CALCULATED NET CASH FLOWS
The table below sets forth the present value of the calculated Net Cash
Flows as of September 30, 1994 using the indicated discount rates. (In
thousands.)
Rate Case 1 Case 2 Case 3 Case 4 Case 5 Case 6
- ------- ------- ------- ------- ------- ------- -------
0% $57,720 66,963 66,602 68,293 83,181 67,229
5% 42,504 48,056 46,355 43,708 52,232 46,824
10% 34,479 38,240 36,288 32,630 38,114 36,666
15% 29,584 32,343 30,445 26,730 30,560 30,760
20% 26,232 28,359 26,587 23,071 25,898 26,858
25% 23,737 25,432 23,792 20,522 22,690 24,029
30% 21,773 23,155 21,636 18,603 21,846 22,930
35% 20,169 21,314 19,902 17,080 18,454 21,846
40% 18,824 19,785 18,467 15,832 16,956 18,636
ITEM II - Management Discussion and Analysis of Financial Condition and
Results of Operations
General
In early 1993, the Company determined to become an apartment real
estate investment trust and invest all of its available funds in apartments.
The Company holds its existing mortgage assets as cash investments and uses
the net cash flows to fund its apartment acquisitions.
On January 12, 1994, the Company acquired 17 apartment properties
containing 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 to the right to receive the
excess of the cash flow from the mortgage assets 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.
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 September 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 $ 69,296
Mortgage assets, net of
structured financings 20,365 $ 37,881
Unrestricted cash and
cash equivalents 9,231 10,407
Other assets 897 5,780
-------- --------
Total Assets $ 99,789 $ 54,068
======== ========
LIABILITIES
Notes payable secured by real estate $ 45,912
Unsecured notes payable 5,381
Notes payable secured by mortgage
assets (net of funds held by trustee
of $22,005 and $24,306) 5,771 $ 18,888
Other liabilities 5,786 4,232
-------- --------
Total Liabilities 62,850 23,120
STOCKHOLDERS' EQUITY 36,939 30,948
-------- --------
Total Liabilities and
Stockholders' Equity $ 99,789 $ 54,068
======== ========
Results of Operations
The Company had net income of $2,074,000 ($.13 per share) for the third
quarter of 1994 and $5,991,000 ($.39 per share) for the first nine months of
1994 compared with net losses of $1,320,000 ($.09 per share) and $15,405,000
($.99 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 nine months of 1994, the net operating income (before
depreciation) from the apartments was $5,119,000 which, after deducting the
interest expense, amounted to an annualized return of approximately 18% on
the average invested equity. As a result of the high demand for apartments,
during the nine months ended September 30, 1994, the rental rates in the
Company's apartment properties increased by 8.7% in Tucson, 2.2% in
Albuquerque and 1.8% in Houston while maintaining the occupancy rates.
For the first nine months of 1994, the Company accrued income on
mortgage assets at an average annualized yield of 25%. During the third
quarter of 1994 and the nine months ended September 30, 1994, the Company
had a gain of $1,366,000 and $3,920,000 from the exercise of call rights on
mortgage assets and the sale of underlying mortgage collateral. Based on
current prepayment and short-term rate assumptions, the prospective yield on
the mortgage assets at September 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 $1,016,000 and
$16,586,000 in the third quarter and first nine 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.
Other interest income of $408,000 and $1,059,000 for the quarter and
nine months ended September 30, 1994 increased from the same periods in 1993
as a result of higher interest rates and higher cash balances in 1994.
Real estate interest expense increased because of the borrowing
incurred in connection with the acquisition of the apartments in January
1994. Interest expense related to mortgage assets decreased due to a
decrease in the balance of the related note.
Operating expenses for the first nine months of 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. The Company has adopted a strategy of investing its cash
flows in additional apartments. During the quarter and nine months ended
September 30, 1994, the Company generated net cash flows from the mortgage
assets (after debt service payments) of $2,309,000 and $8,707,000.
At September 30, 1994, the Company had unrestricted cash and temporary
investments of $9,231,000. The Company intends to use such funds for
acquisition of apartments, capital improvements on existing properties and
working capital.
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 September 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 September 30, 1994, the restricted cash balance included
$2,796,000 held by lenders for capital replacement expenditures and payments
of property taxes and insurance premiums.
Structured financings are issued by independent third parties and are
collateralized by mortgage instruments and related assets. The Company is
not liable for the financings. Principal and interest payments on these
financings are payable solely from the principal and interest payments from
the underlying mortgage instruments. 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 is also required to use the
net proceeds from the redemption and sale of mortgage assets to prepay the
notes. The Company made prepayments of $9,380,000 during the third quarter
of 1994 using net proceeds from the redemption of the mortgage assets. As a
result, the scheduled principal payment is $1,614,000 per quarter beginning
with the November 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.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
In September 1994, the Internal Revenue Service (IRS) withdrew its
proposed adjustment of taxes due of $13,834,000 for 1989, 1990, and 1991.
The IRS made the proposed adjustment in March of 1994 following a routine
audit of the Company. The audits for those years have been completed and no
other proposed adjustments have been made.
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 - Not applicable
Item 5. Other Information - Not applicable
Item 6. Exhibits and Reports on Form 8-K -
* * * * * * * * * * * * * * *
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/ Mary C. Swanton /s/ Joseph C. Chan
- ------------------------- -------------------------
Mary C. Swanton Joseph C. Chan
Controller Executive Vice President,
November 14, 1994 Chief Operating Officer,
Chief Financial and
Accounting Officer
November 14, 1994
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THE SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM THE CONSOLIDATED
FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JUL-01-1994
<PERIOD-END> SEP-30-1994
<PERIOD-TYPE> QTR-3
<EXCHANGE-RATE> 1
<CASH> 9,231
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 9,231
<PP&E> 63,524
<DEPRECIATION> 1,461
<TOTAL-ASSETS> 1,042,793
<CURRENT-LIABILITIES> 0
<BONDS> 948,775
<COMMON> 36,939
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,042,793
<SALES> 0
<TOTAL-REVENUES> 19,415
<CGS> 0
<TOTAL-COSTS> 7,608
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,816
<INCOME-PRETAX> 5,991
<INCOME-TAX> 0
<INCOME-CONTINUING> 5,991
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,991
<EPS-PRIMARY> .39
<EPS-DILUTED> .38
</TABLE>
