SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 1994 Commission file number: 1-9646
----------------- ------
ASR INVESTMENTS CORPORATION
------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 86-0587826
------------------------------------------------------ -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
335 North Wilmot
Suite 250, Tucson, Arizona 85711
------------------------------------------------------ -----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (520) 748-2111
--------------
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $.01 per share American Stock Exchange
-------------------------------------------- ---------------------------------
Title of each class Name of each exchange on which
registered
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
As of March 24, 1994, 15,799,296 shares of ASR Investments Corporation common
stock were outstanding, and the aggregate market value of the 15,233,275 shares
held by non-affiliates (based upon the closing price of the shares on the
American Stock Exchange) was approximately $52,364,383. Shares of Common Stock
held by each officer and director of the Company and the Manager have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily conclusive.
Documents incorporated by reference:
Portions of the Definitive Proxy Statement to be filed pursuant to Regulation
14A on or before April 30, 1995, are incorporated by reference into Part III.
<TABLE>
TABLE OF CONTENTS
<CAPTION>
Page
<S> <C> <C>
PART I
Item 1. Business 3
Item 2. Properties 28
Item 3. Legal Proceedings 28
Item 4. Submission of Matters to a Vote of Security Holders 28
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 28
Item 6. Selected Financial Data 29
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations 29
Item 8. Financial Statements and Supplementary Data 32
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 32
PART III
Item 10. Directors and Executive Officers of the Registrant 33
Item 11. Executive Compensation 33
Item 12. Security Ownership of Certain Beneficial Owners and Management 33
Item 13. Certain Relationships and Related Transactions 33
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 33
SIGNATURES 35
FINANCIAL STATEMENTS F-1
</TABLE>
PART I
ITEM 1. BUSINESS
INTRODUCTION
ASR Investments Corporation (the "Company") owns apartment communities and
Mortgage Assets as described herein. At December 31, 1994, the Company owned 17
multifamily apartment communities, containing 2,461 apartment units, located in
Tucson, Arizona, Houston, Texas and Albuquerque, New Mexico acquired at a total
cost (including closing expenses) of approximately $61.6 million. The purchase
was financed by the assumption of two existing first mortgage loans totaling
$7.1 million, 15 new first mortgage loans totaling $38.6 million, seller
carryback notes of $6.5 million, and $9.4 million of cash from working capital.
Each of the properties is owned by a newly formed, special purpose subsidiary
which is wholly owned by the Company or one of its subsidiaries. The first
mortgage loans generally are non-recourse obligations of the subsidiary or the
Company.
At December 31, 1994, the Company also owned joint ventures four apartment
communities, containing 928 apartment units, located in Phoenix and Tucson,
Arizona. The properties were purchased for approximately $23.6 million and were
financed by new first mortgage loans totaling $15.6 million. The Company
invested $1,364,000 equal to 15% of the ventures equity and will receive 15% to
51% of its profits and cash flows.
In February 1995, the Company acquired 222 apartment units in Phoenix,
Arizona for $5.7 million with $3.8 million of first mortgage financing and the
balance from working capital. In addition, the Company invested $400,000 for a
15% interest in a joint venture which acquired 163 apartment units in Phoenix.
At December 31, 1994, the net book value of the company's Mortgage Assets
was approximately $19 million. In early 1993, the Company determined to shift
its focus to the ownership of apartment communities from the ownership of
Mortgage Assets commonly called residual interests. The Company does not
currently plan to acquire additional Mortgage Assets. Instead, the Company plans
to utilize its available funds to acquire additional apartment communities. The
Company may continue to hold its Mortgage Assets and to invest the cash flow
generated thereby in apartment communities or to sell such Mortgage Assets and
reinvest the proceeds thereof in additional apartment communities.
Pima Mortgage Limited Partnership (the "Manager") manages the day-to-day
operations of the Company, subject to the supervision of the Company's Board of
Directors, pursuant to the terms of a management agreement. The Company also has
entered into property management agreements with Pima Realty Advisors, Inc. (the
"Property Manager"), an affiliate of the Manager, for each of its current
apartment properties.
The Company has elected to be taxed as a real estate investment trust
("REIT") pursuant to sections 856 through 860 of the Code. The Company generally
will not be subject to tax on its income to the extent that it distributes its
taxable income to its stockholders and it maintains its qualification as a REIT.
See "Business -- Federal Income Tax Considerations."
The Company was incorporated in the State of Maryland on June 18, 1987 and
commenced its operations on August 26, 1987. The Company changed its name from
American Southwest Mortgage Investments Corporation to ASR Investments
Corporation in June 1992. The Company's Common Stock is listed on the American
Stock Exchange under the symbol "ASR."
The principal executive offices of the Company and the Manager are located
at 335 North Wilmot, Suite 250, Tucson, Arizona 85711, telephone number (520)
748-2111. Unless the context otherwise requires, the term Company means ASR
Investments Corporation and its subsidiaries.
OPERATING POLICIES AND STRATEGIES
REAL ESTATE ACTIVITIES
Introduction
The Company has developed various business objectives and operating,
acquisition, financing and investment strategies and policies relative to its
real estate activities. These policies and strategies have been determined by
the directors of the Company and may be amended or revised from time to time at
the discretion of the directors without a vote of the stockholders of the
Company.
Business Objectives
The Company's current business objectives are to increase the cash flow and
value of its existing portfolio of apartment communities and to acquire
additional communities.
Investment Policies
The Company's current portfolio consists of apartment communities in the
Southwestern region of the United States and investments in joint ventures that
own apartment communities. The Company intends to continue to focus on apartment
communities in this region. However, future investments, including the
activities described below, are not limited (as to percentage of assets or
otherwise) to any geographic area or any specific type of property. In this
regard, the Company may expand its current geographic focus and may acquire
other types of income-producing properties including hotels, motels, shopping
centers and office buildings.
The Company believes that attractive opportunities continue to be available
to acquire apartment communities. The Company may enter into agreements to
acquire newly developed properties upon completion or upon achievement of
certain specified occupancy rates. The Company may also develop new apartment
communities for its own account or through joint ventures with others.
The Company may purchase or lease income-producing properties for long-term
investment and improve its properties, or sell such properties, in whole or in
part, when circumstances warrant. The Company also may participate with other
entities in property ownership, through joint ventures or other types of
co-ownership. Equity investments may be subject to existing mortgage financing
and other indebtedness or such financing or indebtedness may be incurred in
connection with acquiring investments. Any such financing or indebtedness will
have a priority over the equity interest of the Company.
While the Company will emphasize equity real estate investments in
properties, it may, in its discretion, invest in mortgages and other real estate
interests or make loans secured by mortgages on or interests in real estate
properties. Its investments in mortgages may include participating or
convertible mortgages if the Company concludes that it may benefit from the cash
flow and/or any appreciation potential in the value of the property. Such
mortgages may be similar to equity participations.
Subject to the percentage of ownership limitations and gross income tests
necessary for REIT qualification (see "Federal Income Tax Considerations"), the
Company also may invest in securities of concerns engaged in real estate
activities or securities of other issuers. The Company in the future may acquire
all or substantially all of the securities or assets of other REITs or similar
entities when it believes such investments would be consistent with the
Company's investment policies. In any event, the Company does not intend that
its investments in securities will require the Company to register as an
"investment company" under the Investment Company Act of 1940, and the Company
intends to divest securities before any such registration would be required.
Future Acquisitions
The Company believes that significant opportunities continue to exist to
purchase additional income-producing properties. The Company believes the
reduced availability of financing for real estate and the liquidity problems
experienced by a significant number of real estate owners and developers has led
to favorable pricing for buyers of income-producing properties and a limited
supply of new construction relative to increasing demand. The Company will
attempt to take advantage of these favorable conditions by continuing to acquire
or develop income-producing properties at attractive prices.
In connection with future acquisitions, the Company will consider such
factors as: (i) the geographic location and type of property; (ii) the age,
construction quality. condition and design of the property; (iii) the current
and projected cash flow of the property and the potential to increase cash flow;
(iv) the potential for capital appreciation of the property; (v) the terms of
tenant leases, including the potential for rent increases; (vi) the potential
for economic growth and the tax and regulatory environment of the community in
which the property is located; (vii) the occupancy and demand by tenants for
properties of similar type in the vicinity; and (viii) the prospects for
liquidity through sale, financing or refinancing of the property.
In acquiring or developing apartment properties in the future, the Company
generally will seek properties that (a) are available at prices below estimated
replacement cost after initial renovations and improvements, or can be developed
at a cost that is below the estimated value upon completion, (b) are
well-located in their markets and (c) are capable of enhanced performance
through intensive asset management and cosmetic improvements.
Operating Strategies
The Company's operating strategies are to (i) achieve and maintain high
occupancy and increase rental rates through effective leasing, reducing turnover
rates and providing quality maintenance and services to maximize tenant
satisfaction; (ii) manage operating expenses and achieve cost reductions through
operating efficiencies and economies of scale generally inherent in the
management of a large property portfolio in a specific region; and (iii)
emphasize regular programs of repairs and capital improvements to enhance the
properties' competitive advantages in their respective markets.
Financing Policies
The Company intends to finance acquisitions with the most appropriate
sources of capital, which may include undistributed funds from operations, the
issuance of equity securities, the sale of assets, bank and other institutional
borrowings and the issuance of debt securities. Future borrowings by the Company
for acquisitions may be either on a secured or unsecured basis.
The Company also may incur indebtedness for purposes other than the
acquisition of properties when the Company believes it is advisable to do so.
For short-term purposes, the Company, from time to time, may arrange for
short-term borrowings from banks or in the commercial paper market or otherwise.
The Company also may arrange for long-term borrowings from institutional lenders
or through public or private offerings or other means. The Company has no
commitments from anyone with respect to any such borrowings, and there is no
assurance that any such borrowings will be available.
In addition, the Company may incur debt secured by equity investments held
in its portfolio. The Company may invest in properties subject to existing loans
secured by mortgages, deeds of trust or similar liens on the properties, or such
financing and other indebtedness may be incurred in connection with acquiring
investments. The Company also may obtain other mortgage financing for
unleveraged or underleveraged properties or may refinance properties acquired on
a leveraged basis. The mortgage financings may be recourse, non-recourse or
cross-collateralized. The Company does not have a policy limiting the number or
amount of mortgages that may be placed on any particular property, but mortgage
financing instruments usually limit additional indebtedness on such properties.
The Company also may determine to finance acquisitions through the exchange of
properties or issuance of stock or other securities.
Policies with Respect to Other Activities
The Company may, but does not presently intend to, make investments other
than as previously described. The Company has authority to offer its Common
Shares or other equity or debt securities in exchange for property and to
repurchase or otherwise reacquire its Common Shares or any other securities and
may engage in such activities in the future. The Company also may in the future
make loans to joint ventures in which it participates. The Company will not
engage in trading, underwriting or the agency distribution or sale of securities
of other issuers. At all times, the Company intends to make investments in such
a manner as to be consistent with the requirements of the Code to qualify as a
REIT unless, because of circumstances applicable to the Company, changes in the
Code (or changes in the regulations promulgated under the Code), the Company
determines that it is no longer in the best interests of the Company to qualify
as a REIT. The Company's policies with respect to such activities may be
reviewed and modified from time to time by the Company without the vote of the
stockholders.
Property Management
The Company has entered into property management agreements with Pima Realty
Advisors, Inc. (the "Property Manager") for each of its current apartment
communities. The Property Manager is an affiliate of the Manager. Each property
management agreement, which has a current term through December 31, 1995, was
approved by the Unaffiliated Directors. Under each agreement, the Property
Manager provides the customary property management services at its cost without
profit or distributions to its owners, subject to the maximum limitation of the
prevailing management fee rates for similar properties in the market. The
Property Manager currently manages over 5,000 apartment units, including those
owned by the Company.
The Property Manager has developed computer, accounting, management,
reporting and control systems to monitor property operations. Detailed annual
budgets are prepared for each property. Monthly, quarterly and annual reports
are prepared addressing occupancy rates, turnover ratios, budget variances,
delinquencies and other operating information. Weekly reports are provided for
each property detailing leasing and occupancy activities. The Property Manager
also maintains and analyzes demographic resident data. Prior to entering into a
lease, the Property Manager generally reviews the credit of the prospective
tenant to attempt to minimize bad credit risks and identify tenants having a
poor rental history. This information is intended to enable the Property Manager
to identify and act quickly on specific conditions affecting individual
properties.
Each of the current properties is operated by a staff, including a resident
manager and a maintenance and apartment preparation staff. Policies and
procedures utilized at the property sites follow established federal and state
laws and regulations, including lease contracts, on-site marketing procedures,
credit collection and eviction standards. As a result of active onsite
management and strict prospective tenant qualification standards, the Company
expects to experience low rent loss to delinquencies or early lease
terminations.
Individual property lease programs are structured to respond to local market
conditions. The Company attempts to balance rent increases with high occupancy
and stabilized turnover costs. None of the current properties is currently
subject to rent control or rent stabilization regulations. Standard lease terms
stipulate due dates for rent payments, late charges, no offset or withholding
provisions, security deposits and damage reimbursement clauses and other
provisions considered favorable to the Company.
Current Properties
As of December 31, 1994, the Company had investments in 21 apartment
communities consisting of 3,389 units located in Arizona, New Mexico and Texas.
All of the apartment communities are owned directly by the Company with the
exception of four which are owned through joint ventures with affiliates of
Citicorp.
The apartment communities are "garden apartments" (two to three story
apartments with ground level parking) with recreational facilities such as pools
and clubhouses. They are well maintained and landscaped and are targeted at
providing an attractive lifestyle at low to moderate rents. Average monthly rent
at year end was $477 per month, with community averages ranging from $354 to
$783.
<TABLE>
The following table set forth certain information regarding the Company's
existing properties. The table does not reflect the value of the Company's
investments.
<CAPTION>
Asset Carrying Value Weighted Average
------------------------------------ ------------------------------
Monthly Rent Average
Per 12/31 Occupancy
Year No. Of Avg. ------------------- Related -------------- -------------
Built Units Size Amount Unit Sq. Ft. Debt 1994 1993 1994 1993
-------- --------- ------------ --------------- -------- --------- --------- ------ ------ ------ ------
(Sq. Ft.) (000s) (000s) (000s)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Wholly-Owned
Apartments
Tucson,
Arizona
Acacia
Hills.... 1986 64 540 $ 1,327 $20.8 $38.37 $ 1,037 $421 $373 96% 95%
Casa del
Norte.... 1984 84 525 1,849 22.0 41.92 1,387 410 383 94% 94%
Desert
Springs.. 1985 248 590 5,785 23.3 39.56 4,647 419 371 96% 95%
Landmark... 1986 176 641 4,564 25.9 40.48 3,067 410 372 94% 92%
Park
Terrace.. 1986 176 579 3,490 19.8 34.24 2,721 405 376 93% 93%
Park
Village.. 1985 60 540 780 13.0 24.07 593 372 351 95% 95%
Posada del
Rio...... 1980 160 621 3,474 21.7 35.00 1,620 434 379 97% 97%
South Point 1984 144 528 2,407 16.7 31.63 1,876 354 333 94% 95%
--------- ---------- --------------- -------- --------- --------- ------ ------ ------ ------
Total
Tucson
.... 1,112 582 23,676 21.3 36.58 16,948 406 368 95% 94%
--------- ---------- --------------- -------- --------- --------- ------ ------ ------ ------
HOUSTON,
TEXAS
Clear Lake
Falls.... 1980 90 1,169 4,168 46.3 39.61 3,152 783 760 92% 94%
The Gallery 1968 101 763 2,496 24.7 32.40 1,655 481 481 90% 92%
Memorial
Bend..... 1967 124 942 2,560 20.6 21.92 1,939 528 518 94% 88%
Nantucket
Square... 1983 106 1,428 3,639 34.3 24.04 2,777 728 700 92% 84%
Prestonwood 1978 156 956 3,595 23.0 24.10 2,489 478 469 92% 89%
Riviera
Pines.... 1979 224 717 4,305 19.2 26.80 3,295 452 437 95% 96%
--------- ---------- --------------- -------- --------- --------- ------ ------ ------ ------
Total
Houston
..... 801 949 20,763 25.9 27.31 15,307 543 532 93% 91%
--------- ---------- --------------- -------- --------- --------- ------ ------ ------ ------
ALBUQUERQUE,
N.M.
Dorado
Terrace.. 1986 216 598 6,867 31.8 53.13 5,254 508 479 94% 93%
Villa
Serena... 1986 104 671 3,480 33.5 49.85 2,702 544 517 95% 94%
Whispering
Sands.... 1986 228 789 7,483 32.8 41.60 5,614 521 505 92% 93%
--------- ---------- --------------- -------- --------- --------- ------ ------ ------ ------
Total
Albuq
uerque
..... 548 691 17,830 32.5 47.05 13,570 520 497 93% 93%
--------- ---------- --------------- -------- --------- --------- ------ ------ ------ ------
Restricted
cash &
deferred
loan
fees..... 0.7 0.00
--------- ---------- --------------- -------- ---------
Total owned
apartments
......... 2,461 726 66,506 $ 26.0 $ 34.86 $ 45,825 $ 477 $ 450 94% 93%
========= ========== =============== ======== ========== ========= ====== ======= ====== ======
Investments
in Joint
Ventures... 928 682 1,364
==========
Other real
estate
investments 5,186
Unsecured
real estate
debt....... 4,868
----------- --------------- ---------
Total Real
Estate
Assets..... 3,389 $ 73,056 $ 50,693
=========== =============== =========
JOINT VENTURE
APARTMENTS
TUCSON,
ARIZONA
Woodridge.. 204 579 $ 4,935 $ 24.2 $ 41.79 $ 2,826
The Woods.. 360 658 10,367 28.8 43.79 6,850
PHOENIX,
ARIZONA
Candelero.. 220 842 4,528 20.6 24.44 3,479
Rancho
Encanto.. 144 643 3,944 27.4 42.60 2,489
--------- ---------- --------------- -------- --------- ---------
Total joint
venture
apartments. 928 682 $ 23,774 $ 25.6 $ 37.58 $ 15,644
========= ========== =============== ======== ========= =========
</TABLE>
INFORMATION RESPECTING MORTGAGE ASSETS
Introduction
The Company owns Mortgage Assets entitling the Company to receive cash flow
on Mortgage Instruments including residential mortgage loans ("Mortgage Loans")
and mortgage certificates representing interests in pools of mortgage loans
("Mortgage Certificates") after required payments on Structured Financings as
described herein to which they relate. Structured Financings include
mortgage-collateralized bonds ("Bonds" or "CMOs"), mortgage pass-through
certificates ("Pass-Through Certificates" or "MPCs"), or other mortgage
securities and include Structured Financings issued by the Company, by
subsidiaries of the Company or by other entities ("Issuers"). Mortgage Assets
include interests which are treated for federal income tax purposes as interests
in real estate mortgage investment conduits ("REMICs") under the Code.
The Company's Mortgage Assets generate net cash flows ("Net Cash Flows")
which result primarily from (a) the favorable spread between the interest rates
on the Mortgage Instruments securing or underlying the Structured Financings and
the interest rates of the Structured Financings classes; (b) reinvestment income
in excess of the amount thereof required to be applied to pay the Structured
Financings; and (c) any amounts available from prepayments on the Mortgage
Instruments that are not necessary for the payments on the Structured
Financings. The revenues received by the Company are derived from the Net Cash
Flows received directly by the Company, the Net Cash Flows received by
subsidiaries of the Company and paid to the Company as dividends and the Net
Cash Flows received by partnerships and trusts in which the Company has an
interest to the extent of distributions to the Company as owner of such
interest.
The Manager has entered into a subcontract (the "Subcontract Agreement")
with American Southwest Financial Services, Inc. ("ASFS") pursuant to which ASFS
performs certain services for the Manager in connection with the administration
of Structured Financings relating to the Company's Mortgage Assets. See
"Business Management Agreement -- The Subcontract Agreement."
Current Mortgage Assets
The following table sets forth certain general information relating to the
ownership of the Mortgage Assets by the Company as of December 31, 1994 (in
thousands):
1994
---------------
Mortgage Assets previously presented on a gross basis
Mortgage Instruments and related assets..................... $ 891,567
Structured Financings........................................ (878,879)
---------------
12,688
---------------
Mortgage Assets previously presented on a net basis
Company's share of:
Mortgage Instruments and related assets................... 217,298
Structured Financings...................................... (211,021)
---------------
6,277
---------------
Net investment in Mortgage Assets............................. $ 18,965
===============
Structured Financings bearing variable interest rates........ $ 117,819
===============
DESCRIPTION OF THE OUTSTANDING STRUCTURED FINANCINGS
Structured Financings consisting of CMOs and MPCs typically are issued in
series. Each such series generally consists of several serially maturing classes
secured by or representing interests in Mortgage Instruments. Generally,
payments of principal and interest received on the Mortgage Instruments
(including prepayments on such Mortgage Instruments) are applied to principal
and interest payments on one or more classes of the CMOs or MPCS. Scheduled
payments of principal and interest on the Mortgage Instruments and other
collateral are intended to be sufficient to make timely payments of interest on
such CMOs or MPCs and to retire each class of such CMOs or MPCs by its stated
maturity or final payment date.
Each series of CMOs, other than those issued by one subsidiary of the
Company, constitutes a nonrecourse obligation of the Issuer of such series of
CMOs payable solely from the Mortgage Instruments and any other collateral
pledged to secure such series of CMOs. Each series of the Structured Financings
is structured so that the monthly payments on the Mortgage Instruments pledged
as collateral, together (in certain cases) with the reinvestment income at
assumed rates, will be sufficient to make the required interest and principal
payments on each Class of the Structured Financings on a timely basis.
Interest payments on each Class of the Structured Financings are due and
payable on specified dates, except for zero coupon Classes ("Principal Only
Classes") and compound interest Classes as to which interest accrues but
generally is not paid until other designated Classes are paid in full. Each
Class of the Structured Financings, except the Principal Only Classes, provides
for the payment of interest either at a fixed rate, or at an interest rate which
resets periodically based on a specified spread from (i) the arithmetic mean of
quotations of the London interbank offered rates ("LIBOR") for either one- or
three-month Eurodollar deposits, determined according to the frequency of
payment dates, subject to a specified maximum interest rate, (ii) the Monthly
Weighted Average Cost of Funds Index for Eleventh District Savings Institutions
(the "COF Index"), as published by the Federal Home Loan Bank of San Francisco
(the "FHLB/SF"), subject to a specified maximum interest rate or (iii) other
specified indices.
Principal payments on the Structured Financings are made on each payment
date for such series and generally are allocated to the earlier maturing Classes
until such Classes are paid in full. However, in certain series of Structured
Financings, principal payments on certain Classes are made concurrently with
principal payments on other Classes of such series of Structured Financings in
certain specified percentages (as described in the prospectus supplement or
offering circular for such series of Structured Financings). In addition,
payments of principal on some Classes (referred to as "SAY," "PAC," "Sinker" or
"TAC Classes") occur pursuant to a specified repayment schedule to the extent
funds are available therefor, regardless of which other Classes of the same
series of Structured Financings remain outstanding. Payments of principal on
certain CMO Classes (referred to as "Retail CMOs") are paid only through
redemptions either by the holders of such Retail CMOs or by the Issuer of such
Retail CMOs (subject to certain conditions and priorities as described in the
prospectus supplement for a series of Structured Financings including Retail
CMOs). Each of the Principal Only Classes has been issued at a substantial
discount from par value and receives only principal payments.
Certain Classes of the Structured Financings will be subject to early
redemption (in the case of a series of CMOs) or early termination (in the case
of MPCs) by the Issuer. The Company has certain specified rights as owner of the
residual interest in the REMICs or owner of beneficial interests of the Issuer
to instruct the Issuer of certain series of CMOs to redeem the CMOs early.
Certain Classes which represent the residual interest in the REMIC (referred to
as "Residual Interest Classes") generally also are entitled to additional
amounts, such as the Net Cash Flows from the Mortgage Instruments and the
remaining assets in the REMIC after the payment in full of the other Classes of
the same series of Structured Financings.
Net Cash Flows
Sources of Net Cash Flows
The Net Cash Flows available from the Company's Mortgage Assets are derived
principally from three sources: (i) the favorable spread between the interest
amounts on the Mortgage Instruments securing or underlying Structured Financings
and the interest amounts of the Structured Financings Classes; (ii) reinvestment
income in excess of the amount thereof required to be applied to pay the
principal of and the interest on the Structured Financings; and (iii) any
amounts available from prepayments on the Mortgage Instruments that are not
necessary for the payments on the Structured Financings. The amount of Net Cash
Flows generally decreases over time as the Classes are retired. Distributions of
Net Cash Flows represent both the return on and the return of the investment in
the Mortgage Assets purchased. In addition, the Company may exercise the right
to instruct the Issuer to early redeem part or all of a series of Structured
Financings and sell the related Mortgage Instruments, in which case the net
proceeds (after payment of the Structured Financings and related costs) will be
remitted to the Company. During 1994, the Company exercised redemption rights
associated with four Mortgage Assets at gains totaling $4,263,000 and net
proceeds of $11,227,000.
Factors Affecting Net Cash Flows
The principal factors which influence Net Cash Flows are as follows:
(1) Other factors being equal, Net Cash Flows in each payment period tend to
decline over the life of a series of Structured Financings, because (a) as
normal amortization of principal and principal prepayments occur on the Mortgage
Instruments, the principal balances of the Mortgage Instruments are reduced; (b)
the principal payments on the Mortgage Instruments generally are first used to
pay the principal on the earlier, lower-yielding Classes of such Structured
Financings, thereby resulting in a reduction of the favorable spread between the
interest rate on the Mortgage Instruments and the interest rates on the
outstanding Classes, and (c) the higher coupon Mortgage Instruments are likely
to be prepaid faster, reinforcing the same effect.
(2) The rate of prepayments on the Mortgage Instruments significantly
affects the Net Cash Flows. Because prepayments shorten the life of the Mortgage
Instruments, a higher rate of prepayments normally reduces overall Net Cash
Flows. The rate of prepayments is affected by mortgage interest rates and other
factors. Generally, increases in mortgage interest rates reduce prepayment
rates, while decreases in mortgage interest rates increase prepayment rates.
Because an important component of Net Cash Flows derives from the spread between
the weighted average interest rate on the Mortgage Instruments and the weighted
average interest on the outstanding Classes of the Structured Financings,
prepayments occuring during the early life of such Structured Financings have a
more negative effect on Net Cash Flows than the same volume of prepayments have
at a later date.
(3) With respect to variable rate Classes of Structured Financings,
increases in the interest rate index increase the interest rate payable on such
Classes and thus reduce or, in some instances, eliminate Net Cash Flows, while
decreases in the index decrease the interest rate payable and thus increase Net
Cash Flows.
(4) The interest rate at which the monthly cash flow from the Mortgage
Instruments may be reinvested until payment dates for the Structured Financings
influences the amount of the Net Cash Flows unless such reinvestment income is
not paid to the owner of the related Mortgage Asset.
(5) The administrative expenses of a series of Structured Financings (if
any) may increase as a percentage of Net Cash Flows as the outstanding balances
of the Mortgage Instruments decline, if some of such administrative expenses are
fixed. In later years, it can be expected that fixed expenses will exceed the
available cash flow. Although reserve funds generally are established to cover
such shortfalls, there can be no assurance that such reserves will be sufficient
to cover such shortfalls. In addition, although each series of Structured
Financings generally has an optional redemption provision that allows the Issuer
or the Company, if applicable, to retire the remaining Classes after certain
dates, there can be no assurance that the Issuer or the Company will exercise
such options and, in any event, in a high interest rate environment the market
value of the remaining Mortgage Instruments may be less than the amount required
to retire the remaining outstanding Classes. The Company may be liable for
administrative expenses relating to a series of Structured Financings if
reserves prove to be insufficient. Moreover, any unanticipated liability or
expenses with respect to the Structured Financings could adversely affect Net
Cash Flows.
In addition, if the Company elects to instruct the Issuer to early redeem
part or all of a series of Structured Financings and sell the related Mortgage
Instruments, the net proceeds after the early redemption will depend on the
sales price realized by the Issuer for the Mortgage Instruments.
CAPITAL RESOURCES
Subject to the terms of the Company's Bylaws, the availability and cost of
borrowings, various market conditions and restrictions that may be contained in
the Company's financing arrangements from time to time and other factors as
described herein, the Company increases the amount of funds available for its
activities with the proceeds of borrowings including borrowings under loan
agreements, repurchase agreements and other credit arrangements.
Subject to the foregoing, the Company's borrowings may bear fixed or
variable interest rates, may require additional collateral in the event that the
value of existing collateral declines on a market value basis and may be due on
demand or upon the occurrence of certain events. Repurchase agreements are
agreements pursuant to which the Company sells Mortgage Assets for cash and
simultaneously agrees to repurchase such Mortgage Assets on a specified date for
the same amount of cash plus an interest component. The Company also may
increase the amount of funds available for investment through the issuance of
debt securities.
It can be anticipated that a substantial portion of the assets of the
Company will be pledged to secure indebtedness incurred by the Company.
Accordingly, such assets will not be available for distribution to the
stockholders of the Company in the event of the Company's liquidation except to
the extent that the value of such assets exceeds the amount of such
indebtedness.
On May 28, 1992, a wholly owned limited-purpose subsidiary of the Company
issued $80,000,000 of Secured Notes to a group of institutional investors. The
Secured Notes bore a fixed interest rate of 9.02% per year and were
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 Company
was required to use the net proceeds from the redemption of the Mortgage Assets
to prepay the Notes at a premium. During 1994, the Company made prepayments of
$10,355,000.
On January 25, 1995, the Company caused the early redemption of a Mortgage
Asset and used the net proceeds to prepay $2,800,000 of the Secured Notes. On
February 15, 1995, the Company used $393,000 of its cash and the funds held by
the trustee to prepay the entire balance of the Secured Notes. Accordingly, all
of the Mortgage Assets are unencumbered and their cashflows are now available
for investment and working capital.
On January 12, 1994, as the initial step of the Company's new plan to invest
in apartment communities, the Company acquired 17 apartment communities,
containing a total of 2,461 units, located in Tucson, Arizona, Houston, Texas
and Albuquerque, New Mexico. The total acquisition costs, including closing
costs, were approximately $61.6 million, which was financed by assumption of two
existing first mortgage loans of $7.1 million, 15 new first mortgage loans
totalling $38.6 million, seller carryback notes of $6.5 million and a cash
payment of $9.4 million. Each of the properties is owned by a newly formed,
single-asset subsidiary which is wholly owned by the Company or one of its
subsidiaries. The first mortgage loans are generally non-recourse to the
subsidiary or the Company.
In addition, in 1994 the Company invested $1.4 million into joint ventures
which own four apartment communities consisting of 928 units located in Tucson
and Phoenix, Arizona. These joint ventures have first mortgage consisting of
three fixed rate loans totaling $9,676,000 at an average rate of 8.1% at
December 31, 1994, and two variable rate loans totaling $5,968,000 at an average
rate of 8.5% at December 31, 1994. As the Company owns a 15% equity interest in
these joint ventures, increases in the variable interest rates do not have a
significant effect on the Company's income or cash flows.
In February 1995, the Company exercised an option it held and acquired an
apartment community containing 222 units in Phoenix, Arizona for a price of $5.7
million. The property was financed with a $3.8 million first mortgage loan
bearing a variable interest rate. Additionally, the Company invested $400,000
for a 15% interest in a joint venture that purchased an apartment community in
Phoenix containing 163 units for a price of $6.8 million. The joint ventures'
acquisition was financed with a $4.4 million first mortgage loan bearing a
variable interest rate.
The Company's Bylaws provide that it may not incur indebtedness if, after
giving effect to the incurrence thereof, aggregate indebtedness (other than
Structured Financings and any loans between the Company and its trusts or
corporate subsidiaries), secured and unsecured, would exceed 300% of the
Company's net assets, on a consolidated basis, unless approved by a majority of
the Unaffiliated Directors. For this purpose, the term "net assets" means the
total assets (less intangibles) of the Company at cost, before deducting
depreciation or other non-cash reserves, less total liabilities, as calculated
at the end of each quarter in accordance with generally accepted accounting
principles.
The Company may increase its capital resources by making additional
offerings of its Common Stock or securities convertible into the Company's
Common Stock. The actual or perceived effect of such offerings may be the
dilution of the book value or earnings per share which may result in the
reduction of the market price of shares of the Company's Common Stock. The
Company is unable to estimate the amount, timing or nature of future sales of
its Common Stock as such sales will depend upon market conditions and other
factors. See "Business -- Special Considerations -- Future Offerings of Common
Stock."
OPERATING RESTRICTIONS
The Company presently may not purchase commodities or commodity futures
contracts (other than interest rate futures when used solely for hedging). The
Company may not invest in unimproved real property or underwrite securities of
other issuers. The foregoing restrictions may not be changed without the
approval of the holders of a majority of the outstanding shares of the Company's
Common Stock.
Except as otherwise restricted, the operating policy of the Company is
controlled by its Board of Directors, which has the power to modify or alter
such policy without the consent of the stockholders. Although the Company has no
present intention of modifying its operating policies described herein, the
Board of Directors in the future may conclude that it would be advantageous for
the Company to do so.
COMPETITION
There are numerous real estate companies, insurance companies, financial
institutions, pension funds and other property owners that compete with the
Company in seeking properties for acquisition and in attracting and retaining
tenants.
EMPLOYEES
The Company currently has six full time salaried employees.
MANAGEMENT AGREEMENT
The Manager is an Arizona limited partnership. The Manager is engaged in the
business of advising the Company with respect to various aspects of the
Company's business and operations, managing the overall business and operations
of the Company and representing the Company in its dealings with third parties.
Jon A. Grove, Frank S. Parise, Jr. and Joseph C. Chan have been directors or
officers of general partners of the Manager since its organization.
TERMS OF THE MANAGEMENT AGREEMENT
The Company and the Manager are parties to a Management Agreement with a
term expiring on December 31, 1995, subject to annual extensions between the
Company and the Manager. The Management Agreement may be terminated by the
Company without cause at any time upon 60 days written notice by a majority vote
of its Unaffiliated Directors or by a vote of the holders of a majority of the
outstanding shares of Common Stock. In addition, the Company has the right to
terminate the Management Agreement for cause in the event of (i) a breach by the
Manager of any provision contained in the Management Agreement occurs; (ii) an
order for relief is entered with respect to the Manager in an involuntary case
under federal or state bankruptcy, insolvency or other similar laws; or (iii)
the Manager (a) ceases or admits in writing its inability to pay its debts as
they become due, or makes a general assignment for the benefit of or enters into
an arrangement with creditors, (b) applies for or consents to the appointment of
a receiver, trustee, assignee, custodian, liquidator or sequestrator, or
proceedings seeking such appointment are commenced, (c) authorizes or files a
voluntary petition in bankruptcy, or applies for or consents to the application
of any bankruptcy, reorganization, arrangement, readjustment of debt,
insolvency, dissolution, liquidation or other similar law, or proceedings to
such end are instituted against the Manager, or (d) permits or suffers all or
any substantial part of its properties or assets to be sequestered or attached
by court order, or (iv) if any two of Messrs. Grove, Parise or Chan shall cease
to be a director, officer or shareholder of at least one partner of the Manager
or if they collectively cease to control the majority of the voting decisions of
the Manager.
The Manager at all times is subject to the supervision of the Company's
Board of Directors and has only such functions and authority as the Company may
delegate to it. The Manager is responsible for the day-to-day operations of the
Company and performs such services and activities relating to the assets and
operations of the Company as may be appropriate, including:
(a) serving as the Company's consultant with respect to formulation of
investment criteria by the Board of Directors;
(b) representing the Company in connection with the purchase of assets;
(c) structuring financings of the Company;
(d) furnishing reports and statistical and economic research to the
Company regarding the Company's activities and the services performed for
the Company by the Manager;
(e) providing the executive and administrative personnel, office space
and services required in rendering services to the Company;
(f) administering the day-to-day operations of the Company and
performing and supervising the performance of such other administrative
functions necessary in the management of the Company as may be agreed upon
by the Manager and the Board of Directors, including the collection of
revenues, the payment of the Company's debts and obligations and maintenance
of appropriate computer services to perform such administrative functions;
(g) communicating on behalf of the Company with the holders of the
equity and debt securities of the Company as required to satisfy the
reporting and other requirements of any governmental bodies or agencies and
to maintain effective relations with such holders;
(h) counseling the Company in connection with policy decisions to be
made by the Board of Directors; and
(i) upon request by and in accordance with the direction of the Board of
Directors, investing or reinvesting any money of the Company.
MANAGEMENT FEE
The Manager receives an annual management fee equal to 3/8 of 1% of the
"Average Invested Assets" of the Company and its subsidiaries for each year. The
Management Agreement provides for a quarterly management fee, although the Board
of Directors has approved payment of the management fee monthly, with
adjustments made quarterly. The term "Average Invested Assets" for any period
means the average of the aggregate book value of the consolidated assets of the
Company and its subsidiaries, including those assets pledged to secure
Structured Financings, invested, directly or indirectly, in equity interests in
and loans secured by real estate, before reserves for depreciation or bad debts
or other similar non-cash reserves, less the book value of the issued and
outstanding Structured Financings of the Company and its subsidiaries computed
by taking the average of such values at the end of each month during such
period.
In the event that the Management Agreement is terminated by the Company or
is not renewed by the Company on terms at least as favorable to the Manager as
the current Management Agreement other than as a result of a termination by the
Company for cause (as specified above and defined in the Management Agreement),
the Manager will be entitled to receive from the Company the management fee that
would have been payable by the Company to the Manager pursuant to such
Management Agreement based on the investments made by the Company prior to the
date on which the Management Agreement is so terminated (or not renewed) for the
12 full fiscal quarters beginning on the date of such termination (or failure to
renew) as more fully described in the Management Agreement.
The Manager's management fee must be calculated by the Manager within 45
days after the end of each quarter, and such calculation must be promptly
delivered to the Company for payment within 60 days of the end of each fiscal
quarter, subject to adjustment at the end of the year.
For information relating to management fees, see Note 7 to consolidated
financial statements.
ADMINISTRATION FEES
The Manager also performs certain analysis and other services in connection
with the administration of Structured Financings issued by the Company or by any
other Issuer with respect to which the Company acquires an interest in the net
cash flows from the underlying Mortgage Instruments, including working with the
Master Servicer, if any, and the Company or the other Issuer to ensure proper
servicing and administration. For such activities, the Company currently pays
the Manager an annual administration fee of $10,000 for each such series of
Structured Financings acquired before 1991, $20,000 for the series of Structured
Financings acquired in 1991 and $20,000 for the series of Structured Financings
acquired in 1992.
EXPENSES
The Manager is required to pay employment expenses of its personnel, rent,
telephone, utilities and other office expenses (except those relating to a
separate office or office facilities, if any, maintained by the Company or its
subsidiaries, if any), and certain travel and miscellaneous administrative
expenses of the Manager. The Company is required to pay all other expenses of
operation (as set forth in the Management Agreement) up to an amount per year
with respect to certain of such expenses equal to the greater of 2% of the
Company's Average Invested Assets or 25% of the Company's Net Income for that
year. Expenses in excess of such amount will be paid by the Manager, unless the
Unaffiliated Directors determine that, based upon unusual or non-recurring
factors, a higher level of expenses is justified for such fiscal year. In the
event that the Company's operating expenses for any fiscal year total less than
the greater of 2% of the Company's Average Invested Assets or 25% of its Net
Income for that fiscal year, then, within 120 days after the end of such fiscal
year, with the consent of the Unaffiliated Directors, the Manager will be repaid
all compensation previously reimbursed by the Manager to the Company on account
of operating expenses having exceeded the greater of 2% of its Average Invested
Assets or 25% of its Net Income during one or more prior fiscal years, except
that the amount of any repayment of compensation to the Manager may not, when
added to all other operating expenses of the Company for such fiscal year,
exceed the greater of 2% of the Company's Average Invested Assets or 25% of its
Net Income for that fiscal year. The Manager's right to repayment of previously
reimbursed compensation will be cumulative, and the amount of previously
reimbursed compensation which has not been repaid to the Manager will be carried
forward to and be repaid to the Manager in subsequent fiscal years. Prior to any
such repayment, the Unaffiliated Directors must determine that the Company's
operating expenses which were in excess of the limitation set forth above in one
or more prior fiscal years were reasonable when incurred in connection with the
operations of the Company.
RIGHT OF FIRST REFUSAL
The Manager has granted the Company a right of first refusal, for as long as
the Manager or an affiliate of the Manager acts as the Company's manager
pursuant to the Management Agreement or any extension thereof, to purchase any
assets held by the Manager or its affiliates prior to any sale, conveyance or
other transfer, voluntarily or involuntarily, of such assets by the Manager or
its affiliates. See "Business -- Special Considerations -- Potential Conflicts
of Interest."
LIMITS OF RESPONSIBILITY
Pursuant to the Management Agreement, the Manager will not assume any
responsibility other than to render the services called for thereunder and will
not be responsible for any action of the Company's Board of Directors in
following or declining to follow its advice or recommendations. The Manager, the
partners of the Manager and any of their partners, directors, officers,
stockholders and employees will not be liable to the Company, any other Issuer,
any subsidiary of the Company, the Unaffiliated Directors, the Company's
stockholders or any subsidiary's stockholders for acts performed in accordance
with and pursuant to the Management Agreement, except by reason of acts
constituting bad faith, willful misconduct, gross negligence or reckless
disregard of their duties under the Management Agreement. The Company has agreed
to indemnify the Manager, the partners of the Manager and any of their partners,
directors, officers, stockholders and employees, with respect to all expenses,
losses, damages, liabilities, demands, charges and claims arising from any of
their acts or omissions not constituting bad faith, willful misconduct, gross
negligence or reckless disregard of duties, performed in good faith in
accordance with and pursuant to the Management Agreement. The Management
Agreement does not limit or restrict the right of the Manager, the partners of
the Manager or any of their partners, directors, officers, stockholders,
employees or affiliates from engaging in any business or rendering services of
any kind to any other person, including the purchase of, or rendering advice to
others purchasing, assets which meet the Company's policies and criteria, except
that the Manager (but not its partners or any of their partners, directors,
officers, stockholders, employees or agents) is not permitted to provide any
such services to any residential mortgage REIT other than the Company and its
subsidiaries. The Manager has the right to subcontract with third parties,
including affiliates of the Manager, to provide services to the Manager and the
Company. Any payment of fees to such third parties will be the sole
responsibility of the Manager.
THE SUBCONTRACT AGREEMENT
The Manager and American Southwest Financial Services ("ASFS"), Inc., are
parties to a Subcontract Agreement pursuant to which ASFS performs certain
services for the Manager in connection with the administration of Structured
Financings issued by the Company or by any Issuer affiliated with ASFS with
respect to which the Company receives net cash flows or owns the underlying
Mortgage Instruments. Under the Subcontract Agreement, ASFS charges an
administration fee for each series of CMOs of $12,500 per year ($20,000 prior to
May 1994).
The Subcontract Agreement extends through December 31, 1995. Thereafter,
successive extensions, each for a period not to exceed one year, may be made by
agreement between the Manager and ASFS. The Subcontract Agreement may be
terminated by either party upon six months prior written notice, except that the
Manager may terminate the Subcontract Agreement at any time upon 60 days written
notice in the event the Company no longer retains the Manager. In addition, the
Manager has the right to terminate the Subcontract Agreement upon the happening
of certain specified events, including a breach by ASFS of any provision
contained in the Subcontract Agreement.
ASFS is wholly owned by American Southwest Holdings, Inc., a privately held
Arizona corporation, which also owns American Southwest Financial Corporation
and American Southwest Finance Co., Inc. (collectively the "ASW Companies"). No
shareholder owns more than 10% of the stock of American Southwest Holdings, Inc.
Pursuant to the Subcontract Agreement, ASFS will not assume any
responsibility other than to render the services called for therein. ASFS and
its directors, officers, stockholders and employees will not be liable to the
Company, the Manager, or any of their directors or stockholders for any acts or
omissions by ASFS, its directors, officers, stockholders or employees under or
in connection with the Subcontract Agreement, except by reason of acts
constituting bad faith, willful misconduct, gross negligence or reckless
disregard of their duties under the Subcontract Agreement. The Company has
agreed to indemnify and hold harmless American Southwest Financial Corporation,
American Southwest Finance Co., Inc., ASFS and their officers and directors from
any action or claim brought or asserted by any party by reason of any allegation
that American Southwest Financial Corporation, American Southwest Finance Co.,
Inc. or ASFS is an affiliate or is otherwise accountable or liable for the debts
or obligations of the Company or its affiliates. The Company has no
affiliations, agreements or relationships with the ASW Companies or ASFS, except
for (i) the Subcontract Agreement with ASFS, (ii) the indemnification granted by
the Company to the ASW Companies and ASFS and their officers and directors
against certain liabilities, (iii) one common director and officer and (iv) the
indirect ownership by a general partner of the Manager of 6.7% of the voting
stock of American Southwest Holdings, Inc.
PROPERTY MANAGEMENT AGREEMENT
The Company has entered into property management agreements with Pima Realty
Advisors, Inc. (the "Property Manager") for each of its current properties. The
Property Manager is an affiliate of the Manager. Each property management
agreement, which has a current term through December 31, 1995, was approved by
the Unaffiliated Directors. Under the 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 Property Manager
currently manages over 5,000 apartment units, including those owned by the
Company.
The Property Manager has developed computer, accounting, management,
reporting and control systems to monitor property operations. Detailed annual
budgets are prepared for each property. Monthly, quarterly and annual reports
are prepared addressing occupancy rates, turnover ratios, budget variances,
delinquencies and other operating information. Weekly reports are provided for
each property detailing leasing and occupancy activities. The Property Manager
also maintains and analyzes demographic resident data. Prior to entering into a
lease, the Property Manager generally reviews the credit of the prospective
tenant to attempt to minimize bad credit risks and identify tenants having a
poor rental history. This information is intended to enable the Property Manager
to identify and act quickly on specific conditions affecting individual
properties.
Each of the current properties is operated by a staff including a resident
manager and a maintenance and apartment preparation staff. Policies and
procedures utilized at the property sites follow established federal and state
laws and regulations, including lease contracts, on-site marketing procedures,
credit collection and eviction standards. As a result of active onsite
management and strict prospective tenant qualification standards, the Company
expects to experience low rent loss to delinquencies or early lease
terminations.
SPECIAL CONSIDERATIONS
REAL ESTATE INVESTMENT CONSIDERATIONS
General
Real property investments are subject to varying degrees of risk. The yields
available from equity investments in real estate depend on the amount of income
earned and capital appreciation generated by the related properties as well as
the expenses incurred. If the properties do not generate income sufficient to
meet operating expenses, including debt service and capital expenditures, the
Company's income will be adversely affected. Income from the properties may be
adversely affected by the general economic climate (including unemployment
rates), local conditions such as oversupply of competing properties or a
reduction in demand for properties in the area, the attractiveness of the
properties to tenants, competition from other available properties, the
affordability of single family homes, the ability of the Company to provide
adequate maintenance and insurance and increased operating costs (including real
estate taxes). Certain significant expenditures associated with an investment in
real estate (such as mortgage payments, real estate taxes and maintenance costs)
generally are not reduced when circumstances cause a reduction in income from
the investment. In addition, income from properties and real estate values are
also affected by a variety of other factors, such as governmental regulations
and applicable laws (including real estate, zoning and tax laws), interest rate
levels and the availability of financing. Furthermore, real estate investments
are relatively illiquid and, therefore, will tend to limit the Company's ability
to vary its portfolio promptly in response to changes in economic or other
conditions.
Potential Environmental Liability
Under various federal, state and local laws, ordinances and regulations, an
owner of real estate may be held liable for the costs of removal or remediation
of certain hazardous or toxic substances located on or in the property. These
laws often impose such liability without regard to whether the owner knew of, or
was responsible for, the presence of the hazardous or toxic substances. The
presence of such substances, or the failure to remediate such substances
properly, may adversely affect the owner's ability to sell or rent the property
or to borrow using the property as collateral. Other federal and state laws
require the removal of damaged asbestos-containing material in the event of
remodeling or renovation.
All of the current properties have been subject to a Phase I environmental
site assessment and limited asbestos survey (which involve inspection without
soil or groundwater analysis) by independent environmental consultants
undertaken in 1993. As a result the findings of the Phase I environmental
assessment, a Phase II assessment involving soil and groundwater testing was
performed at four properties by independent environmental consultants. The
assessment shows that the groundwater at one of the properties is contaminated.
Based on the report of the environmental engineers, the Company believes that
the contamination has been caused by a nearby service station and that the owner
of the station has commenced clean up procedures under the direction of the
local governmental authority. The Company has informed the local governmental
authority of the groundwater contamination and asked the authority to expand the
clean up procedures to include the Company's property. The Company believes that
the environmental liability for its property would not have a material adverse
effect on the Company's business or results of operations. The Company will
engage environmental engineers to perform annual soil and water analysis at
those four properties.
The Company has determined that there are minor amounts of
asbestoscontaining materials ("ACMs") in five of the Company's properties. The
Company maintains an Operations and Maintenance Program that details operating
procedures with respect to ACMs prior to any renovation and that requires
periodic inspection by the Company's employees for any change in condition of
existing ACMs.
Except as set forth above, the reports have not revealed any environmental
liability, nor is the Company aware of any environmental liability, that the
Company believes would have a material adverse effect on the Company's business,
assets or results of operation. No assurance, however, can be given that these
reports reveal all environmental liabilities, or that no prior owner created any
material environmental condition not known to the Company or that future uses
and conditions (including changes in applicable environmental laws and
regulations) will not result in imposition of environmental liability. In the
event the Company discovers a material environmental condition relating to any
of its properties, the Company could be required to expend funds to remedy such
condition.
Uninsured Loss
The Company will carry comprehensive liability, fire, flood (where
applicable), extended coverage and rental loss insurance with policy
specifications, limits and deductibles customarily carried for similar
properties. There are, however, certain types of extraordinary losses (such as
losses resulting from earthquakes) that may be either uninsurable or not
economically insurable. Should an uninsured loss occur, the Company could lose
its investment in and anticipated profits and cash flow from a property and
would continue to be obligated on any mortgage indebtedness on the property.
Americans with Disabilities Act
The Company's properties must comply with Title III of the Americans with
Disabilities Act (the "ADA") to the extent that the properties are "public
accommodations" and/or "commercial facilities" as defined by the ADA. Compliance
with the ADA requirements could require removal of structural barriers to
handicapped access in certain public access areas of the Company's properties,
where such removal is readily achievable. The ADA does not, however, consider
residential properties, such as apartment communities to be public accommodation
or commercial facilities, except to the extent portions of such facilities, such
as a leasing office, are open to the public. Noncompliance with the ADA could
result in imposition of fines or an award of damages to private litigants. If
required changes involve a greater expenditure than the Company currently
anticipates, or if the changes must be made on a more accelerated basis than it
anticipates, the Company's operations could be adversely affected. No specific
regulations have been promulgated under the ADA and, thus, it is uncertain how
enforcement of the ADA would affect specific building attributes. However, the
Company believes that the properties comply with all present requirements under
the ADA.
Fair Housing Amendments Act of 1988
The Fair Housing Amendments Act of 1988 (the "FHA") requires multifamily
residential properties first occupied after March 13, 1991 to be accessible to
the handicapped. Noncompliance with the FHA could result in the imposition of
fines or an award of damages to private litigants. The Company believes that its
properties that are subject to the FHA are in compliance with such law.
MARKET RISKS RELATING TO MORTGAGE ASSETS
General
The results of the Company's operations depend, among other things, on the
level of Net Cash Flows generated by the Company's Mortgage Assets. The
Company's Net Cash Flows vary primarily as a result of changes in mortgage
prepayment rates, short-term interest rates, reinvestment income and borrowing
costs, all of which involve various risks and uncertainties as set forth below.
Prepayment rates, interest rates, reinvestment income and borrowing costs depend
upon the nature and terms of the Mortgage Assets, the geographic location of the
properties securing the mortgage loans included in or underlying the Mortgage
Assets, conditions in financial markets, the fiscal and monetary policies of the
United States Government and the Board of Governors of the Federal Reserve
System, international economic and financial conditions, competition and other
factors, none of which can be predicted with any certainty. See "Management's
Discussion and Analysis of Financial Conditions and Results of Operations --
General" and "Business -- Operating Policies and Strategies -- Net Cash Flows."
The projected rates of return to the Company on its Mortgage Assets will be
based upon assumed levels of prepayments on the underlying Mortgage Instruments,
assumed rates of interest or pass-through rates on the Structured Financings
that bear variable interest rates, and assumed rates of reinvestment income and
expenses with respect to such Structured Financings. The actual levels of
interest rates on Structured Financings bearing variable interest rates,
prepayment rates, reinvestment income and administration expenses will affect
the level of the Company's Net Cash Flows. To the extent that the assumptions
employed by the Company vary from actual experience, the actual Net Cash Flows
received by the Company may vary significantly from those projected by the
Company as to timing and amount over the lives of such Structured Financings and
from one period to another, and such returns could be negative under certain
circumstances.
Prepayment Risks
Mortgage prepayment rates vary from time to time and may cause declines in
the amount and duration of the Company's Net Cash Flows. Prepayments of Mortgage
Instruments generally increase when then current mortgage interest rates fall
below the interest rates on the fixed-rate mortgage loans included in such
Mortgage Instruments. Conversely, prepayments decrease when then current
mortgage interest rates exceed the interest rates on the mortgage loans included
in such Mortgage Instruments. See "Business -- Special Considerations -- Market
Risks -- Interest Rate Fluctuation Risks." Prepayment experience also may be
affected by the geographic location of the mortgage loans included in Mortgage
Instruments, the types (whether fixed or adjustable rate) and assumability of
such mortgage loans, conditions in the mortgage loan, housing and financial
markets, and general economic conditions.
In general, without regard to the interest rates payable on classes of a
series of Structured Financings, prepayments on Mortgage Instruments bearing a
net interest rate higher than or equal to the highest interest rate on the
related series of Structured Financings will have a negative impact on the Net
Cash Flows of the Company because such principal payments eliminate or reduce
the favorable interest spread earned on the Mortgage Instruments.
Net Cash Flows on Mortgage Instruments also tend to decline over the life of
the Structured Financings because the classes of such Structured Securities with
earlier stated maturities or final payment dates tend to have lower interest
rates. In addition, because an important component of the Net Cash Flows derives
from the favorable spread between the weighted average interest rate on such
Mortgage Instruments and the weighted average interest rate on the Structured
Financings, a given volume of prepayments concentrated during the early life of
a series of Structured Financings would reduce the weighted average lives of the
earlier maturing classes of such Structured Financings bearing lower interest
rates. Thus, an early concentration of prepayments would have a greater negative
impact on the Net Cash Flows of the Company than the same volume of prepayments
at a later date.
Mortgage prepayments also shorten the life of the Mortgage Instruments,
thereby reducing the overall Net Cash Flows and causing an inherent decline in
the Company's income as described under "Business -- Special Considerations
-Risks of Decline in Net Cash Flows and Income."
No assurance can be given as to the actual prepayment rate of mortgage loans
included in or underlying the Mortgage Instruments in which the Company has an
interest.
Interest Rate Fluctuation Risks
Changes in interest rates affect the performance of the Company and its
Mortgage Assets. A portion of the Outstanding Structured Financings bears
variable interest rates. As of December 31, 1994, $117 million of the $1.2
billion of the Outstanding Structured Financings relating to the Company's
Mortgage Assets bore variable interest rates. Consequently, changes in
short-term interest rates significantly influence the Company's net income.
Increases in short-term interest rates increase the interest cost on
variable rate Structured Financings and decrease the Company's Net Cash Flows.
Conversely, decreases in short-term interest rates decrease the interest cost on
the variable rate Structured Financings and increase the Company's Net Cash
Flows. No assurances can be given as to the amount or timing of changes in
interest rates or their effect on the Company's Mortgage Assets or income
therefrom.
Reinvestment Income and Expense Risks
In the event that actual reinvestment rates decrease over the term of a
series of Structured Financings, reinvestment income will be reduced, which in
turn will adversely affect the Company's Net Cash Flows. The Company may also be
liable for the expenses relating to such Structured Financings including
administrative, trustee, legal and accounting costs and, in certain cases, for
any liabilities under indemnifications granted to the underwriters, trustees or
other Issuers. These expenses are used in projecting Net Cash Flows; however, to
the extent that these expenses are greater than those assumed, such Net Cash
Flows will be adversely affected. Moreover, in later years, Mortgage Instruments
may not generate sufficient cash flows to pay all of the expenses incident to
such Structured Financings. Although reserve funds generally are established to
cover such future expenses, there can be no assurance that such reserves will be
sufficient. In addition, the Company may be liable for the amount of the
obligations represented by any Structured Financings issued by it.
No assurance can be given as to the actual reinvestment rates or the actual
expenses incurred with respect to such Structured Financings.
Risks of Decline in Net Cash Flows and Income from Mortgage Assets
The Company's income derives primarily from the Net Cash Flows received on
its Mortgage Assets, which decline over time. This decline in Net Cash Flows
over time occurs as (i) the scheduled principal payments and prepayments occur,
the principal balances of the Mortgage Instruments decline over time; (ii)
interest rates on Structured Financings classes receiving principal payments
first generally are lower than those on later classes, the relative interest
cost of the Structured Financings increases over time; and (iii) mortgage
prepayments on Mortgage Instruments with higher interest rates tend to be higher
than on those with lower interest rates, the relative interest income on the
Mortgage Instruments decreases over time. See "Business -- Operating Policies
and Strategies -- Net Cash Flows."
For both tax and accounting purposes, the Company's Net Cash Flows consist
of two components -- one representing return of a portion of the purchase price
of the Net Cash Flow Interest (the "Cost Component") and one representing income
on the investment in Net Cash Flow Interest (the "Income Component"). Based on
assumptions made at the time of the purchase with respect to prepayment rates,
interest rates, expense levels and other factors, a Net Cash Flow Interest is
expected to generate a specified rate of return. If actual experience with
respect to all of such factors proves to be the same as reflected in the
assumptions and the Net Cash Flow Interest is held to maturity, the expected
rate of return from the Net Cash Flow Interest will be achieved. However, for
both tax and accounting purposes, the Income Component will be highest in years
immediately following the purchase of the Net Cash Flow Interest and will
decline over time even if actual experience with respect to all of the factors
occurs. In addition, to the extent that actual mortgage prepayments experienced
exceed those assumed, this inherent decline in Net Cash Flows and income is
accelerated. See "Business -- Special Considerations -- Market Risks --
General."
As the Company has made the determination to reinvest the Net Cash Flows in
income-producing properties which may have a lower current yield than Mortgage
Assets, without regard to the mortgage prepayment rates and variable interest
rates, the Company may report declining operating income over time without the
effect of any gain or loss on the sale of the properties. See "Business --
Special Considerations -- Competition."
Inability to Predict Effects of Market Risks
Because none of the above factors including changes in prepayment rates,
interest rates, reinvestment income, expenses and borrowing costs are
susceptible to accurate projection, the Net Cash Flows generated by the
Company's Mortgage Assets, and thus distributions to the Company's stockholders,
cannot be predicted.
BORROWING RISKS
Subject to the terms of the Company's Bylaws, the availability and cost of
borrowings, various market conditions, restrictions that may be contained in the
Company's financing arrangements from time to time and other factors, the
Company increases the amount of funds available for its activities with funds
from borrowings including borrowings under loan agreements, repurchase
agreements and other credit facilities. The Company's borrowings may bear fixed
or variable interest rates, may require additional collateral in the event that
the value of existing collateral declines on a market value basis and may be due
on demand or upon the occurrence of certain events. To the extent that the
Company's borrowings bear variable interest rates, changes in short-term
interest rates will significantly influence the cost of such borrowings and can
result in losses in certain circumstances. See "Business--Special Considerations
-- Market Risks -- Interest Rate Fluctuation Risks." The Company also may
increase the amount of its available funds through the issuance of debt
securities.
The Company's Bylaws limit borrowings, excluding the liability represented
by Structured Financings, to no more than 300% of the amount of its net assets
(as described herein) unless borrowings in excess of that amount are approved by
a majority of the Unaffiliated Directors (as defined herein). See "Business --
Operating Policies and Strategies -- Capital Resources." As of December 31,
1994, the Company had borrowings totaling $6,422,000 (net of funds held by
trustee of $21,583,000 and including accrued costs of $3,152,000) secured by
Mortgage Assets, $45,825,000 secured by apartment communities and $4,868,000 of
unsecured loans relating to real estate acquisitions.
No assurance can be given as to the actual effect of borrowings by the
Company.
PLEDGED ASSETS
A substantial portion of the Company's assets currently are and in the
future can be expected to be pledged to secure its borrowings. Therefore, such
assets will not be available to the stockholders in the event of the liquidation
of the Company except to the extent that the market value thereof exceeds the
amounts due to the creditors. However, the market value of the Mortgage Assets
is uncertain because the market for Mortgage Assets of the type owned by the
Company is not well developed and fluctuates rapidly as the result of numerous
market factors (including interest rates and prepayment rates) as well as the
supply of and demand for such assets.
COMPETITION
There are numerous real estate companies, insurance companies, financial
institutions, pension funds and other property owners that compete with the
Company in seeking properties for acquisition and in attracting and retaining
clients.
MARKET PRICE OF COMMON STOCK
The market price of the Company's Common Stock has been extremely sensitive
to a wide variety of factors including the Company's operating results, dividend
payments (if any), actual or perceived changes in short-term and mortgage
interest rates and their relationship to each other, actual or perceived changes
in mortgage prepayment rates, and any variation between the net yield on the
Company's assets and prevailing market interest rates. It can be expected that
the performance of the Company's income-producing properties will have an
increasingly important effect on the market price of the Company's Common Stock.
Any actual or perceived unfavorable changes in the real estate market and other
factors may adversely affect the market price of the Company's Common Stock.
FUTURE OFFERINGS OF COMMON STOCK
The Company in the future may increase its capital resources by making
additional offerings of its Common Stock or securities convertible into its
Common Stock. The actual or perceived effect of such offerings may be the
dilution of the book value or earnings per share of the Company's Common Stock
which may result in the reduction of the market price of the Company's Common
Stock. The Company is unable to estimate the amount, timing or nature of future
sales of its Common Stock as such sales will depend upon market conditions and
other factors such as its need for additional equity, its ability to apply or
invest the proceeds of such sales of its Common Stock, the terms upon which its
Common Stock could be sold.
MANAGEMENT FEES
The Manager advises the Company with respect to various aspects of the
Company's business and operations, manages the Company's overall business and
operations, and represents the Company in its dealings with third parties
pursuant to the terms of the Management Agreement. In the event that the
Management Agreement is terminated by the Company or is not renewed by the
Company on terms at least as favorable to the Manager as the current Management
Agreement other than as a result of a termination by the Company for cause (as
specified above and defined in the Management Agreement), the Manager will be
entitled to receive from the Company the management fee that would have been
payable by the Company to the Manager pursuant to such Management Agreement
based on the investments made by the Company prior to the date on which the
Management Agreement is so terminated (or not renewed) for the 12 full fiscal
quarters beginning on the date of such termination (or failure to renew) as more
fully described in the Management Agreement.
POTENTIAL CONFLICTS OF INTEREST
The Company is subject to potential conflicts of interest arising from its
relationship with the Manager, the Property Manager and ASFS under the
"Subcontract Agreement." The Management Agreement does not limit or restrict the
right of the Manager, the partners of the Manager or any of their directors,
officers or employees from engaging in any business or rendering services of any
kind to any other person except that the Manager (but not its partners or their
directors, officers or employees) are not permitted to provide any such services
to any residential mortgage REIT other than the Company. The Company may
purchase assets from entities which may be affiliates of the Manager. Although
certain agreements and activities must be approved by the Unaffiliated directors
(as described below), the day-to-day transactions between the Company and the
Manager and the Property Manager are not subject to the specific pre-approval of
the Unaffiliated Directors. See "Business -- Management Agreement -- Terms of
Management Agreement" and "Business -- Property Management Agreement."
The Company's Articles of Incorporation limit the liability of its directors
and officers to the Company and its stockholders to the fullest extent permitted
by Maryland law, and both the Company's Articles and Bylaws provide for
indemnification of the directors and officers to such extent. The Management
Agreement also limits the responsibilities and liabilities of the Manager, the
partners of the Manager and any of their partners, directors, officers,
stockholders and employees and provides for their indemnification against
liabilities except in certain circumstances. See "Business -- Management
Agreement -- Terms of the Management Agreement -- Limits of Responsibility." The
Property Management Agreement also limits the responsibilities and liabilities
of the Property Manager. See "Business -- Property Management Agreement." In
addition, the Subcontract Agreement limits the responsibilities of ASFS and
provides for the indemnification of ASFS, its affiliates and their directors and
officers against various liabilities. See "Business -- Management Agreement --
The Subcontract Agreement."
Counsel to the Company has furnished, and in the future may furnish, legal
services to the Manager, affiliates of the Manager and certain Issuers
(including those affiliated with ASFS). There is a possibility that in the
future the interests of certain of such parties may become adverse, and counsel
may be precluded from representing one or all of such parties. If any situation
arises in which the interests of the Company appear to be in conflict with those
of the Manager, or its affiliates, additional counsel may be retained by one or
more of the parties.
With a view toward protecting the interests of the Company's stockholders,
the Bylaws of the Company provide that a majority of the Board of Directors (and
a majority of each committee of the Board of Directors) must not be "Affiliates"
of the Manager or "Advisors," as these terms are defined in the Bylaws, and that
the investment policies of the Company must be reviewed annually by these
directors (the "Unaffiliated Directors"). Moreover, the annual renewals of the
Management Agreement and the Property Management Agreement require the
affirmative vote of a majority of the Unaffiliated Directors. In addition, a
majority of such Unaffiliated Directors may terminate the Management Agreement
or the Property Management Agreement at any time upon 60 days' notice. See
"Business -- The Management Agreement."
CERTAIN CONSEQUENCES OF AND FAILURE TO MAINTAIN REIT STATUS
In order to maintain its qualification as a REIT for federal income tax
purposes, the Company must continually satisfy certain tests with respect to the
sources of its income, the nature and diversification of its assets, the amount
of its distributions to stockholders and the ownership of its stock. See
"Business -- Federal Income Tax Considerations -- Qualification of the Company
as a REIT." Among other things, these restrictions may limit the Company's
ability to acquire certain types of assets that it otherwise would consider
desirable, limit the ability of the Company to dispose of assets that it has
held for less than four years if the disposition would result in gains exceeding
specified amounts, limit the ability of the Company to engage in hedging
transactions that could result in income exceeding specified amounts, and
require the Company to make distributions to its stockholders at times that the
Company may deem it more advantageous to utilize the funds available for
distribution for other corporate purposes (such as the purchase of additional
assets or the repayment of debt) or at times that the Company may not have funds
readily available for distribution.
The Company's operations from time to time generate taxable income in excess
of its net income for financial reporting purposes. The Company also may
experience a situation in which its taxable income is in excess of the actual
cash receipts. See "Business -- Federal Income Tax Considerations -- Activities
of the Company." To the extent that the Company does not otherwise have funds
available, either situation may result in the Company's inability to distribute
substantially all of its taxable income as required to maintain its REIT status.
See "Business -- Federal Income Tax Considerations." Alternatively, the Company
may be required to borrow funds to make the required distributions which could
have the effect of reducing the yield to its stockholders, to sell a portion of
its assets at times or for amounts that are not advantageous, or to distribute
amounts that represent a return of capital which would reduce the equity of the
Company. In evaluating assets for purchase, the Company considers the
anticipated tax effects of the purchase including the possibility of any excess
of taxable income over projected cash receipts.
If the Company should not qualify as a REIT in any tax year, it would be
taxed as a regular domestic corporation and, among other consequences,
distributions to the Company's stockholders would not be deductible by the
Company in computing its taxable income. Any such tax liability could be
substantial and would reduce the amount of cash available for distributions to
the Company's stockholders. See "Business -- Federal Income Tax Considerations."
In addition, the unremedied failure of the Company to be treated as a REIT for
any one year would disqualify the Company from being treated as a REIT for the
four subsequent years.
EXCESS INCLUSIONS
A portion of the dividends paid by the Company constitutes unrelated
business taxable income to certain otherwise tax-exempt stockholders which will
constitute a floor for the taxable income of stockholders not exempt from tax,
and will not be eligible for any reduction (by treaty or otherwise) in the rate
of income tax withholding in the case of nonresident alien stockholders. See
"Business -- Federal Income Tax Considerations -- Tax Consequences of Common
Stock Ownership -- Excess Inclusion Rule."
MARKETABILITY OF SHARES OF COMMON STOCK AND RESTRICTION ON OWNERSHIP
The Company's Articles of Incorporation prohibit ownership of its Common
Stock by tax-exempt entities that are not subject to tax on unrelated business
taxable income and by certain other persons (collectively "Disqualified
Organizations"). Such restrictions on ownership exist so as to avoid imposition
of a tax on a portion of the Company's income from excess inclusions.
Provisions of the Company's Articles of Incorporation also are designed to
prevent concentrated ownership of the Company which might jeopardize its
qualification as a REIT under the Code. Among other things, these provisions
provide (i) that any acquisition of shares that would result in the
disqualification of the Company as a REIT under the Code will be void, and (ii)
that in the event any person acquires, owns or is deemed, by operation of
certain attribution rules set out in the Code, to own a number of shares in
excess of 9.8% of the outstanding shares of the Company's Common Stock ("Excess
Shares"), the Board of Directors, at its discretion, may redeem the Excess
Shares. In addition, the Company may refuse to effectuate any transfer of Excess
Shares and certain stockholders, and proposed transferees of shares, may be
required to file an affidavit with the Company setting forth certain information
relating, generally, to their ownership of the Company's Common Stock. These
provisions may inhibit market activity and the resulting opportunity for the
Company's stockholders to receive a premium for their shares that might
otherwise exist if any person were to attempt to assemble a block of shares of
the Company's Common Stock in excess of the number of shares permitted under the
Articles of Incorporation. Such provisions also may make the Company an
unsuitable investment vehicle for any person seeking to obtain (either alone or
with others as a group) ownership of more than 9.8% of the outstanding shares of
Common Stock. Investors seeking to acquire substantial holdings in the Company
should be aware that this ownership limitation may be exceeded by a stockholder
without any action on such stockholder's part in the event of a reduction in the
number of outstanding shares of the Company's Common Stock.
FEDERAL INCOME TAX CONSIDERATIONS
QUALIFICATION OF THE COMPANY AS A REIT
General
The Company has made an election to be treated as a real estate investment
trust ("REIT"). Thus, if the Company satisfies certain tests in each taxable
year with respect to the nature of its income, assets, share ownership and the
amount of its distributions, among other things, it generally should not be
subject to tax at the corporate level on its income to the extent that it
distributes cash in the amount of such income to its stockholders.
The Internal Revenue Service completed an audit of the Company and the
revenue agent conducting the audit issued a report in which he recommended that
the Company lose its REIT election commencing with the 1989 taxable year. The
Internal Revenue Service claimed that the Company did not meet the statutory
requirements to be taxed as a REIT for the years ending December 31, 1989, 1990
and 1991 because it claimed that the Company did not demand certain shareholder
information from one shareholder of record pursuant to Regulation section
1.857-8 promulgated under the Internal Revenue Code within the specified 30 day
period after each of the Company's applicable year ends. In September 1994, the
IRS withdrew this proposed adjustment of taxes due. The audits for those years
have been completed and no other proposed adjustments have been made.
Generally, the unremedied failure of the Company to be treatd as a REIT for
any taxable year could materially and adversely affect the stockholders as net
income of the Company would be taxed at ordinary corporate rate (currently a
maximum of 34 percent), and the Company would not receive a deduction for any
dividends to the stockholders and thus cause a material reduction of the cash
available for distribution to the stockholders as dividends.
In order to maintain its qualification as a REIT for federal income tax
purposes, the Company must continually satisfy certain tests with respect to the
sources of its income, the nature and diversification of its assets, the amount
of its distributions, and the ownership of the Company. The following is a
summary discussion of those various tests.
Sources of Income
The Company must satisfy three separate income tests for each taxable year
with respect to which it intends to qualify as a REIT: (i) the 75% income test;
(ii) the 95% income test; and (iii) the 30% income test.
Under the first test, at least 75% of the Company's gross income for the
taxable year must be derived from certain qualifying real estate related
sources. The 95% income test requires that at least 95% of the Company's gross
income for the taxable year must be derived from the items of income that either
qualify under the 75% test or are from certain other types of passive
investments. Finally, the 30% income test requires the Company to derive less
than 30% of its gross income for the taxable year from the sale or other
disposition of (1) real property, including interests in real property and
interests in mortgages on real property, held for less than four years, other
than foreclosure property or property involuntarily converted through
destruction, condemnation or similar events, (2) stock or securities or swap
agreements held for less than one year, and (3) property in "prohibited
transactions." A prohibited transaction is a sale or disposition of dealer
property that is not foreclosure property or, under certain circumstances, a
real estate asset held for at least four years.
If the Company inadvertently fails to satisfy either the 75% income test or
the 95% income test, or both, and if the Company's failure to satisfy either or
both tests is due to reasonable cause and not willful neglect, the Company may
avoid loss of REIT status by satisfying certain reporting requirements and
paying a tax equal to 100% of any excess nonqualifying income. See "Business --
Federal Income Tax Considerations -- Taxation of the Company." There is no
comparable safeguard that could protect against REIT disqualification as a
result of the Company's failure to satisfy the 30% income test.
The Company anticipates that its gross income will continue to consist
principally of the income that satisfies the 75% income test. The composition
and sources of the Company income should allow the Company to satisfy the income
tests during each year of its existence. Certain short-term reinvestments,
however, may generate qualifying income for purposes of the 95% income test but
nonqualifying income for purposes of the 75% income test, and certain hedging
transactions could give rise to income that, if excessive, could result in the
Company's disqualification as a REIT for failing to satisfy the 30% income test,
the 75% income test, and/or the 95% income test. The Company intends to monitor
its reinvestments and hedging transactions closely to attempt to avoid
disqualification as a REIT.
Nature and Diversification of Assets
At the end of each quarter of the Company's taxable year, at least 75% of
the value of the Company's assets must be cash and cash items (including
receivables), federal government securities and qualifying real estate assets.
Qualifying real estate assets include interests in real property, and mortgages,
equity interests in other REITs, any stock or debt instrument for so long as the
income therefrom is qualified temporary investment income and, subject to
certain limitations, interests in REMICs. The balance of the Company's assets
may be invested without restriction, except that holdings of the securities of
any one non-governmental issuer may not exceed 5% of the value of the Company's
assets or 10% of the outstanding voting securities of that issuer.
If the Company fails to satisfy the 75% asset test at the end of any quarter
of its taxable year as a result of its acquisition of securities or other
property during that quarter, the failure can be cured by a disposition of
sufficient nonqualifying assets within 30 days after the close of that quarter.
The Company will take such action as may be required to cure any failure to
satisfy the 75% asset test within 30 days after the close of any quarter. The
Company may not be able to cure any failure to satisfy the 75% asset test,
however, if assets that the Company believes are qualifying assets for purposes
of the 75% asset test are later determined to be nonqualifying assets.
Distributions
Each taxable year the Company must distribute as dividends to its
stockholders an amount at least equal to (i) 95% of its REIT taxable income
(determined before the deduction of dividends paid and excluding any net capital
gain) plus (ii) 95% of the excess of its net income from foreclosure property
over the tax imposed on such income by the Code, less (iii) any excess noncash
income (as determined under the Code).
Generally, a distribution must be made in the taxable year to which it
relates. A portion of the required distribution, however, may be made in the
following year if certain guidelines are followed. Further, if the Company fails
to meet the 95% distribution requirement as a result of an adjustment to the
Company's tax returns by the Internal Revenue Service ("IRS"), the Company may,
if the deficiency is not due to fraud with intent to evade tax or a willful
failure to file a timely tax return, retroactively cure the failure by paying a
deficiency dividend to stockholders and certain interest and penalties to the
IRS. The Company intends to make distributions to its stockholders on a basis
that will allow the Company to satisfy the distribution requirement. In certain
instances, however, the Company's predistribution taxable income may exceed its
cash flow and the Company may have difficulty satisfying the distribution
requirement. The Company intends to monitor closely the relationship between its
pre-distribution taxable income and its cash flow. It is possible, although
unlikely, that the Company may decide to terminate its REIT status as a result
of any such cash shortfall. Such a termination would have adverse consequences
to the stockholders. See "Business -- Federal Income Tax Considerations --
Status of the Company as a REIT."
The Company has a net operating loss carryforward for income taxes (the
"NOL") at December 31, 1994 of approximately $75 million. Under REIT tax rules,
the Company is allowed to offset taxable income (except for Excess Inclusion
Income) by the available NOL and thus, under most circumstances, is not
currently required to make distributions to stockholders except for Excess
Inclusion Income. The NOL expires in 2009 (1999 for state tax purposes).
Ownership of the Company
Shares of the Company's Common Stock must be held by a minimum of 100
persons for at least 335 days in each taxable year after the Company's first
taxable year. Further, at no time during the second half of any taxable year
after the Company's first taxable year may more than 50% of the Company's shares
be owned, actually or constructively, by five or fewer individuals (including
pension funds and certain other types of tax-exempt entities). To evidence
compliance with these requirements, the Company is required to maintain records
that disclose the actual ownership of its outstanding shares. Each year, in
order to satisfy that requirement, the Company will demand written statements
from record holders owning designated percentages of Common Stock disclosing,
among other things, the identities of the actual owners of such shares. The
Company's Articles of Incorporation contain repurchase provisions and transfer
restrictions designed to prevent violation of the latter requirement. Therefore,
the Company believes that its shares of Common Stock currently are owned by a
sufficient number of unrelated persons to allow the Company to satisfy the
ownership requirements for REIT qualification.
TAXATION OF THE COMPANY
For any taxable year in which the Company qualifies and elects to be treated
as a REIT under the Code, it generally will not be subject to federal income tax
on that portion of its taxable income that is distributed to its stockholders in
or with respect to that year. Regardless of distributions to stockholders,
however, the Company may become subject to a tax on certain types of income.
The Company uses the calendar year both for tax purposes and for financial
reporting purposes. Due to the differences between tax accounting rules and
generally accepted accounting principles, the Company's REIT Taxable Income will
vary from its net income for financial reporting purposes.
TAX CONSEQUENCES OF COMMON STOCK OWNERSHIP
The federal income tax consequences of ownership in the Company's common is
a complex matter and may vary depending on the income tax status of the
stockholder. Accordingly, the following discussion is intended to be general in
nature. Stockholders should consult their own tax advisors regarding the income
tax considerations with respect to their investments in the Company.
Dividend Income
Distributions to stockholders out of the Company's current or accumulated
earnings and profits will be taxable as "portfolio income" in the year received
and not as income from a passive activity. With respect to any dividend declared
by the Company in October, November or December of any calendar year and payable
to stockholders of record as of a specified date prior to the end of the year,
however, that dividend will be deemed to have been received by the stockholder
on December 31 if the dividend is actually paid in January of the following
calendar year.
The Company's dividends will not be eligible for the dividends-received
deduction for corporations. If the Company's total distributions for a taxable
year exceed its current and accumulated earnings and profits, a portion of each
distribution will be treated first as a return of capital, reducing a
stockholder's basis in his shares (but not below zero), and then as capital gain
in the event such distributions are in excess of a stockholder's adjusted basis
in his shares.
Distributions properly designated by the Company as "capital gain dividends"
will be taxable to the stockholders as long-term capital gain, to the extent
those dividends do not exceed the Company's actual net capital gain for the
taxable year, without regard to the stockholder's holding period for his shares.
The Company will notify stockholders after the close of its taxable year
regarding the portions of the distributions that constitute ordinary income,
return of capital and capital gain. The Company also will notify shareholders
regarding their reported share of excess inclusion income.
See "Excess Inclusion Rule" below.
Excess Inclusion Rule
Ownership by the Company of residual interests in REMICs may adversely
affect the federal income taxation of the Company and of certain stockholders to
the extent those residual interests generate "excess inclusion income." The
Company's excess inclusion income during a calendar quarter generally will equal
the excess of its taxable income from residual interests in REMICs over its
"daily accruals" with respect to those residual interests for the calendar
quarter. The daily accruals are calculated by multiplying the adjusted issue
price of the residual interest by 120 percent of the long-term federal interest
rate in effect on the REMIC's startup date. It is possible that the Company will
have excess inclusion income without associated cash. In taxable years in which
the Company has both a net operating loss and excess inclusion income it will
still have to report a minimum amount of taxable income equal to its excess
inclusion income. In order to maintain its REIT status, the Company will be
required to distribute at least 95 percent of its taxable income, even if its
taxable income is comprised exclusively of excess inclusion income and otherwise
has a net operating loss.
In general, each stockholder is required to treat the stockholder's
allocable share of the portion of the Company's "excess inclusions" that is not
taxable to the Company as an "excess inclusion" received by such stockholder.
The portion of the Company's dividends that constitute excess inclusions
typically will rise as the degree of leveraging of the Company's activities
increase. Therefore, all or a portion of the dividends received by the
stockholders may be excess inclusion income. Excess inclusion income will
constitute unrelated business taxable income for tax-exempt entities and may not
be used to offset deductions or net operating losses from other sources for most
other taxpayers.
TAX-EXEMPT ORGANIZATIONS AS STOCKHOLDERS
The Code requires a tax-exempt stockholder of the Company to treat as
unrelated business taxable income its allocable share of the Company's excess
inclusions. The Company is likely to receive excess inclusion income. See
"Excess Inclusion Rule," above. The Company's Common Stock may not be held by
tax-exempt entities which are not subject to tax on unrelated business taxable
income.
TAXATION OF FOREIGN STOCKHOLDERS
Distributions of cash generated by the Company in its operations that are
paid to foreign persons generally will be subject to United States withholding
tax rate at a rate of 30 percent or at a lower rate if a foreign person can
claim the benefit of a tax treaty. Notwithstanding the foregoing, distributions
made to foreign stockholders will not be subject to treaty withholding
reductions to the extent of their allocable shares of the portion of the
Company's excess inclusions that are not taxable to the Company for the period
under review. It is expected that the Company will continue to have excess
inclusions. Distributions to foreign persons of cash attributable to gain on the
Company's sale or exchange of real properties, if any, generally will be subject
to full United States taxation and withholding. If a foreign person holds more
than five percent of the shares of the Company, gain from the sale of the
person's shares could be subject to full United States taxation if the Company
held any real property interests and was not a domestically controlled REIT.
The federal income taxation of foreign persons is a highly complex matter
that may be affected by many considerations. Accordingly, foreign investors in
the Company should consult their own tax advisors regarding the income and
withholding tax considerations with respect to their investments in the Company.
Foreign governments and organizations, and their instrumentalities, may not
invest in the Company.
BACKUP WITHHOLDING
The Company is required by the Code to withhold from dividends 20% of the
amount paid to stockholders, unless the stockholder (i) files a correct taxpayer
identification number with the Company, (ii) certifies as to no loss of
exemption from backup withholding and (iii) otherwise complies with the
applicable requirements of the backup withholding rules. The Company will report
to its stockholders and the IRS the amount of dividends paid during each
calendar year and the amount of tax withheld, if any. Stockholders should
consult their tax advisors as to the procedure for insuring that the Company
dividends to them will not be subject to backup withholding.
STATE AND LOCAL TAXES
The discussion herein concerns only the federal income tax treatment likely
to be accorded the Company and its stockholders. No discussion has been provided
regarding the state or local tax treatment of the Company and its stockholders.
The state and local tax treatment may not conform to the federal income tax
treatment described above and each investor should discuss such issues with his
state and local tax advisor.
ITEM 2. PROPERTY
See "Business -- Operating Policies and Strategies -- Real Estate
Activities -- Current Properties."
The principal executive offices of the Company and the Manager are located
at 335 North Wilmot, Suite 250, Tucson, Arizona 85711, telephone (520) 748-
2111.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is listed and principally traded on the American
Stock Exchange ("AMEX") under the symbol the "ASR". The following table sets
forth for the periods indicated the high and low sales prices of the Company's
Common Stock as reported by the AMEX and the cash dividends paid per share on
the Company's Common Stock for the periods indicated.
DIVIDEND
HIGH LOW PER SHARE
----- ----- ---------
1994
First quarter...................................... 2-1/16 1-1/2 --
Second quarter..................................... 3 1-7/16 --
Third quarter...................................... 2-3/4 2-1/16 --
Fourth quarter..................................... 2-13/16 1-7/8 .10
1993
First quarter...................................... 3-3/16 2 --
Second quarter..................................... 2-3/16 1-3/16 --
Third quarter...................................... 1-7/8 1-1/4 .05
Fourth quarter..................................... 2-3/16 1-1/2 .18
1992
First quarter...................................... 7-5/8 5-5/8 .25
Second quarter..................................... 6-5/8 4-1/4 .20
Third quarter...................................... 5-1/4 2-1/8 --
Fourth quarter..................................... 3-3/16 2-1/2 --
On March 24, 1995, the closing sales prices for shares of the Company's
Common Stock on the AMEX Composite Tape was $37/16 per share. The approximate
number of holders of common shares on March 24, 1995 was 2,000.
<TABLE>
ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS EXCEPT PER SHARE DATA)
The following selected financial data are qualified in its entirety by, and
should be read in conjunction with, the consolidated financial statements and
notes thereto appearing elsewhere herein. The data below have been derived from
the audited consolidated financial statements of the Company.
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------
1994 1993 1992 1991 1990
------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Income from real estate, before
depreciation.......................... $ 7,031
Depreciation............................ (1,995)
Interest income from mortgage assets.... 10,696 $ (13,022) $ (56,669) $ 31,775 $ 26,518
Other income............................ 723 286 739
Operating expenses...................... (2,216) (1,949) (3,104) (6,355) (4,164)
Interest expense........................ (6,537) (4,794) (5,841) (6,594) (10,290)
Cumulative effect of accounting change.. (21,091)
------------ ------------- ------------- ------------- -------------
Net income (loss)....................... $ 7,702 $(40,570) $ (64,875) $ 18,826 $ 12,064
============ ============= ============= ============= =============
Per average outstanding share
Net income (loss) before cumulative
effect of accounting
change.............................. $ 0.50 $ (1.25) $ (4.04) $ 1.25 $ 0.84
Cumulative effect of accounting....... (1.36)
------------ ------------- ------------- ------------- -------------
Net income per share.................... $ 0.50 $ (2.61) $ (4.04) $ 1.25 $ 0.84
============ ============= ============= ============= =============
Dividends per share..................... $ 0.10 $ 0.23 $ 0.45 $ 1.44 $ 0.95
============ ============= ============= ============= =============
Weighted average shares outstanding..... 15,500 15,552 16,043 15,033 14,434
============ ============= ============= ============= =============
AS OF DECEMBER 31,
------------------------------------------------------------------------
1994 1993 1992 1991 1990
------------ ------------- ------------- ------------- -------------
BALANCE SHEET DATA
Apartments and other real estate assets. $ 73,056 $ 3,855
Mortgage assets......................... 18,965 37,881 $ 108,623 $ 215,747 $ 226,812
Total assets............................ 96,745 54,068 116,589 219,582 229,104
Real estate notes payable............... 50,693
Mortgage assets notes payable, net...... 6,422 22,062 39,517 61,527 82,884
Stockholders' Equity.................... 37,100 30,948 75,284 149,585 138,542
</TABLE>
ITEM 7. MANAGEMENT'S 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. The Company now uses its net cash flows for apartment
acquisition and development.
On January 12, 1994, the Company acquired 17 apartment properties totaling
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 Company's objectives in purchasing apartment communities are to earn
operating income and appreciation in the value of the communities. The Company
estimates that its apartments have increased in value by over $11 million. For
financial accounting purposes the Company does not recognize any such
appreciation in the consolidated statements of operations until the communities
are sold.
Operating income from apartments is affected primarily by rental rates,
occupancy rates and operating expenses. Rental rates and occupancy rates are
affected by the strength of the local economy and the supply of and demand for
new apartment properties.
In addition to owned apartment communities, the Company has invested
$1,364,000 in joint ventures which own four apartment communities in Phoenix and
Tucson, Arizona totalling 928 units. The Company's investment equalled 15% of
the joint ventures equity and the Company will receive 15% to 51% of the
ventures profits and cash flows.
The Company's Mortgage Assets entitle it to the right to receive the excess
of the cash flow from the underlying Mortgage Instruments over cash payments
required on the related Structured Financing. Mortgage Assets are amortizing
assets and the cash flows decline over time. Income and cash flows from Mortgage
Assets are affected primarily by mortgage prepayment rates and short-term
interest rates. Higher mortgage prepayment rates or higher short-term 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 year, prepayment rates
reached record levels in 1992 and 1993. In 1994, the trend reversed with
increases in mortgage interest rates and decreases in the actual and estimated
prepayment rates.
RESULTS OF OPERATIONS
1994 Compared to 1993
The Company had net income of $7,702,000 in 1994 compared with a net loss of
$40.6 million in 1993. The income in 1994 resulted from operating income
generated by the apartments and the existing Mortgage Assets.
In 1994, net operating income (before depreciation) from the apartments was
$7,031,000 which, after deducting related interest expense, amounted to an
annualized return of 20% on the average invested equity. As a result of high
demand, rental rates in the Company's apartment communities increased during
1994 by 10% in Tucson, 5% in Albuquerque and 2% in Houston while maintaining the
occupancy rates.
Interest income from Mortgage Assets decreased due to capital returns of
$18,916,000, mitigated by a higher yield in 1994 due to significantly lower
mortgage prepayment rates. The average yield on the Mortgage Assets for 1994 was
approximately 24%. The Company realized gains in 1994 of $4,263,000 from the
redemption of four Mortgage Assets and the sale of the underlying Mortgage
Instruments. The provision for reserve for 1993 was due to the decrease in the
estimated future cash flows of certain Mortgage Assets. The charge for the
cumulative effect of accounting change in 1993 was due to adoption of SFAS No.
115 which resulted in reducing the net carrying values of substantially all of
the Mortgage Assets to their estimated fair market values. Both the provision
for reserve and the cumulative effect of accounting change were caused by very
low mortgage interest rates which resulted in historically high levels of
mortgage prepayment rates.
Based on current prepayment and short-term interest rate assumptions, the
prospective yield on the Mortgage Assets at December 31, 1994 is 29%.
Interest and other income increased due to higher interest rates on
investments and a write down of a short-term investment ($254,000) in 1993.
Operating expenses increased in 1994 due to the accrual in 1994 of expenses
relating to the stock appreciation rights ($324,000) and dividend equivalent
payments on the options and stock appreciation rights ($200,000), offset by a
reduction in the 1994 management fees of $81,000, the Company's efforts to
reduce operating expenses and a reduction in the 1993 expenses of $470,000
relating to the legal fees reimbursement by the insurance carriers for the class
action suit settled in 1992.
Real estate interest expenses increased because of borrowing incurred in
connection with the acquisition of the apartments in January 1994. Interest
expenses related to Mortgage Assets decreased due to a decrease in the notes
payable balance.
1993 Compared to 1992
The Company had a net loss after giving effect to the accounting change of
$40.6 million ($2.61 per share) compared to a net loss of $64.9 million ($4.04
per share) in 1992. The losses for both years were primarily the result of
record levels of mortgage prepayment rates. The Company recorded provisions for
reserves ($20.3 million in 1993 and $57. 6 million in 1992) to reduce the
carrying values of substantially all of the Mortgage Assets to their estimated
cash flows. Additionally in 1993, as a result of the adoption of SFAS Statement
No. 115, the Company recorded a charge for the cumulative effect of accounting
change of $21.1 million to further reduce the carrying value of the Mortgage
Assets to their estimated fair values.
Income from Mortgage Assets (before provision for reserves or the effect of
the accounting change) increased in 1993 as a result of higher yield on the
Mortgage Assets resulting from lower mortgage prepayments in 1993. Interest and
other income declined in 1993 as a result of lower interest rates on investments
and a write down of a short-term investment ($254,000) in 1993. Interest expense
declined due to reduction of the amount of Secured Notes outstanding by $21.1
million during 1993.
Operating and administrative expenses declined as a result of (i) lower
management fees during 1993, (ii) reduction of 1993 expenses of $470,000 as a
result of reimbursement received by insurance carriers of legal expenses
incurred in connection with a class action suit settled in 1992 and (iii) the
Company's efforts to reduce operating expenses in 1993.
LIQUIDITY, CAPITAL RESOURCES AND COMMITMENTS
The Company currently depends primarily on the cash flows generated from its
existing Mortgage Assets to fund its acquisition of apartment properties. During
1994, the Mortgage Assets generated cash flows of $29,612,000 which were used
for debt service payments, acquisition of apartment communities, capital
improvements on existing properties and short-term investments. Below is a
summary of the cash generated for investment and dividends in 1994 (in
thousands):
Funds from operations.......... $ 9,785
Amortization of Mortgage Assets 18,916
Repayment of debt (net)........ (17,125)
Asset sales.................... 2,228
Other sources of funds, net.... 2,802
-------------
Funds generated for investment
and dividends................ $ 16,606
=============
<TABLE>
As previously discussed, future cash flows from the Company's Mortgage
Assets are influenced by short term interest rates and mortgage prepayment
rates. Below are estimates of future cash flows from the Mortgage Assets using
three assumptions as to the level of such rates. Case 2 represents approximate
interest rates and forecasts of prepayments rates made by market participants at
December 31, 1994. The percentage shown for assumed mortgage prepayments
represents the average of annual prepayments assumed for the underlying
mortgages. Amounts are in thousands:
<CAPTION>
Case 1 Case 2 Case 3
------------ ------------ ------------
<S> <C> <C> <C>
Assumed one month LIBOR.................................... 4% 6% 8%
Assumed prepayments........................................ 21.3% 10.6% 6.9%
Estimated cash flows (before debt service)
1995..................................................... $ 11,685 $ 10,555 $ 9,417
1996..................................................... 6,782 6,081 5,133
1997..................................................... 5,000 5,020 4,560
1998..................................................... 3,695 4,151 4,019
1999..................................................... 2,782 3,425 3,547
2000-2018................................................ 20,279 37,687 55,069
------------ ------------ ------------
Total.................................................... $ 50,223 $ 66,919 $ 81,745
============ ============ ============
</TABLE>
At December 31, 1994, the Company had unrestricted cash of $4,129,000 and
short-term real estate notes receivable of $2,344,000. The Company intends to
use such funds for acquisition of apartments, capital improvements on existing
properties and working capital. In February 1995, the Company used $393,000 of
unrestricted cash and applied the funds held by the trustee to prepay the entire
balance of the Notes secured by Mortgage Assets. As a result, the Mortgage
Assets are no longer encumbered and their entire cash flows are available for
investments or dividends 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 December 31, 1994. The principal and interest
payments on these loans are approximately $357,000 per month. In addition, the
Company is required to deposit $50,000 per month 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 December 31, 1994, the restricted cash balance included $2,983,000
held by lenders for capital replacement expenditures and payments of property
taxes and insurance premiums.
The first mortgage loans on the properties held by the joint ventures
consist of three fixed rate loans totalling $9,676,000 at an average rate of
8.1% at December 31, 1994 and two variable rate loans totalling $5,968,000 at an
average rate of 8.5% at December 31, 1994. As the Company owns a 15% equity
interest in these joint ventures, increases in the variable interest rates do
not have a significant effect on the Company's income or cash flows.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the financial statements, the report thereon, the notes
thereto and the supplementary data commencing at page F-1 of this report, which
financial statements, report, notes and data are incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated herein by reference to
the definitive proxy statement to be filed pursuant to Regulation 14A.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to
the definitive proxy statement to be filed pursuant to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference to
the definitive proxy statement to be filed pursuant to Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference to
the definitive proxy statement to be filed pursuant to Regulation 14A.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER EXHIBIT
------ -------
3(a) First Amended and Restated Articles of Incorporation of the
Registrant(1)
3(b) Articles of Amendment to the First Amended and Restated
Articles of Incorporation of the Registrant(3)
3(c) Bylaws of the Registrant(1)
4 Specimen Certificate representing $.01 par value Common
Stock(1)
10(a) Management Agreement between the Registrant and ASMA Mortgage
Advisors Limited Partnership (5)
10(b) Subcontract Agreement between ASMA Mortgage Advisors Limited
Partnership and American Southwest Financial Services,
Inc.(3)
10(c) Right of First Refusal between the Company and the Manager(3)
10(d) Limited Partnership Agreement of Southwest Capital Mortgage
Funding Limited Partnership(2)
10(e) Amended and Restated Stock Option Plans(4)
10(f) Indemnification and Use of Name Agreement Between the Company
and American Southwest(4)
10(g) Indenture dated May 28, 1992 between CIMSA Financial
Corporation and State Street Bank and Trust Company(5)
10(h) Dividend Reinvestment and Stock Purchase Plan(3)
10(i) Agreement for Purchase and Sale of Apartments ("Purchase
Agreement") dated July 15, 1993 by and between Buyer and
Seller.(6)
10(j) First Amendment to Purchase Agreement dated August 18, 1993,
by and between Buyer and Seller.(6)
10(k) Second Amendment to Purchase Agreement dated September 21,
1993 by and between Buyer and Seller.(6)
10(l) Third Amendment to Purchase Agreement dated October 27, 1993
by and between Buyer and Seller.(6)
10(m) Master Property Management Agreement with Pima Realty
Advisors, Inc. for the year ending December 31, 1994 and the
signature page for each of the properties.(6)
10(n) Deed of Trust, Security Agreement, Financing Statement and
Assignment of Leases and Rents dated as of January 11, 1994
made by the following entities for the benefit of Lexington
Mortgage Company(6):
ASV-I Properties, Inc.
ASV-III Properties, Inc.
ASV-IV Properties, Inc.
ASV-V Properties, Inc.
ASV-VI Properties, Inc.
ASV-VII Properties, Inc.
ASV-VIII Properties, Inc.
ASV-IX Properties, Inc.
ASV-X Properties, Inc.
ASV-XI Properties, Inc.
ASV-XII Properties, Inc.
ASV-XIII Properties, Inc.
ASV-XIV Properties, Inc.
ASV-XV Properties, Inc.
ASV-XVI Properties, Inc.
11 Statement re: Computation of Per Share Earnings
22 Subsidiaries of the Registrant
27 Financial Data Schedule
--------------
(1) Incorporated herein by reference to Registrant's Registration Statement on
Form S-11 (No. 33-15232) filed August 19, 1987 and declared effective on
August 19, 1987.
(2) Incorporated herein by reference to Registrant's Registration Statement on
Form S-11 (No. 33-20429) filed March 16, 1988 and declared effective on
March 17, 1988.
(3) Incorporated herein by reference to Registrant's Form 10-K for the year
ended December 31, 1988 as filed with the Commission on or about March 30,
1989.
(4) Incorporated herein by reference to Registrant's Registration Statement on
Form S-3 (33-42923) filed on September 30, 1991 and declared effective on
October 1, 1991.
(5) Incorporated herein by reference to Registrant's Form 10-K for the year
ended December 31, 1992.
(6) Incorporated herein by reference to Registrant's Report on Form 8-K filed
with the Commission on or about March 29, 1994.
(b) Financial Statements and Financial Statement Schedules filed as part of
this report:
1. Financial Statements of the Company -- as listed in the "Index to
Financial Statements" on page F-1 of this Annual Report Form 10-K.
2. Financial Statement Schedules -- Schedule XI. No other schedules are
required because of the absense of conditions under which they are
required or because the information is given in the financial
statements and notes beginning on page F-1 of this Annual Report on
Form 10-K.
(c) Reports on Form 8-K:
No Current Reports on Form 8-K were filed by the Company during the
fourth quarter of 1995.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ASR INVESTMENTS CORPORATION
Date: March 30, 1995
By: /s/ Jon A. Grove
---------------------------------------
Jon A. Grove
<TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Jon A. Grove Director, Chairman of the Board, President and Chief March 30, 1995
--------------------------------------- Executive Officer (Principal Executive Officer)
Jon A. Grove
/s/ Frank S. Parise, Jr. Director, Vice Chairman, Chief Administrative Officer March 30, 1995
--------------------------------------- and Secretary
Frank S. Parise, Jr.
/s/ Joseph C. Chan Director, Executive Vice President and Chief March 30, 1995
--------------------------------------- Operating Officer (Principal Financial and Accounting
Joseph C. Chan Officer)
/s/ Earl M. Baldwin Director March 30, 1995
---------------------------------------
Earl M. Baldwin
/s/ John J. Gisi Director March 30, 1995
---------------------------------------
John J. Gisi
/s/ Raymond L. Horn Director March 30, 1995
---------------------------------------
Raymond L. Horn
/s/ Frederick C. Moor Director March 30, 1995
---------------------------------------
Frederick C. Moor
</TABLE>
<TABLE>
ASR INVESTMENTS CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Report...................................................... F-2
Consolidated Balance Sheets as of December 31, 1994 and 1993...................... F-3
Consolidated Statements of Operations for the years ended December 31, 1994, 1993
and 1992........................................................................ F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31,
1994, 1993 and 1992............................................................. F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1993
and 1992........................................................................ F-6
Notes to Consolidated Financial Statements........................................ F-7
</TABLE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of ASR Investments Corporation.
We have audited the accompanying consolidated balance sheets of ASR
Investments Corporation as of December 31, 1994 and 1993, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at December 31,
1994 and 1993, and the results of its operations and cash flows for each of the
three years in the period ended December 31, 1994 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Tucson, Arizona
February 15, 1995
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS
December 31, 1994 and 1993 (Dollars in Thousands)
--------------------------------------------------------------------------------
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Assets
Real estate investments (Notes 2 and 4)
Apartments, net of depreciation ............................................ $66,506
Investment in joint ventures ............................................... 1,364
Other real estate .......................................................... 5,186 $ 3,855
------- -------
Total real estate investments ...................................... 73,056 3,855
Mortgage assets (Notes 3 and 4) .................................................... 18,965 37,881
Cash ............................................................................... 4,129 10,407
Other assets ....................................................................... 595 1,925
------- -------
Total assets ....................................................... $96,745 $54,068
======= =======
Liabilities
Real estate notes (Note 4)
Secured .................................................................... $45,825
Unsecured .................................................................. 4,868
-------
Total real estate notes ............................................ 50,693
Notes payable secured by mortgage assets, net of funds
held by trustee of $21,583 and $24,306 ..................................... 6,422 $22,062
Other liabilities .................................................................. 2,530 1,058
------- -------
Total liabilities .................................................. 59,645 23,120
Stockholders' Equity (40,000,000 shares of $.01 Common
Stock authorized;
16,243,649 shares issued with 743,656 held in Treasury) ............................ 37,100 30,948
------- -------
Total liabilities and stockholders equity ................................. $96,745 $54,068
======= =======
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
ASR INVESTMENTS
For the Years Ended December 31, 1994, 1993 and 1992
(In Thousands Except Per Share Amounts)
-------------------------------------------------------------------------------
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Real Estate Operations
Rental income and other income .......................................... $ 12,528
--------
Operating and maintenance expenses ...................................... 4,255
Real estate taxes and insurance ......................................... 1,242
Depreciation and amortization ........................................... 1,995
--------
Total operating expenses ........................................ 7,492
--------
Income from real estate ................................................. 5,036
--------
Mortgage Assets (Notes 1 and 3)
Interest income from mortgage assets .................................... 6,433 $ 7,264 $ 919
Gain on redemption of mortgage assets ................................... 4,263
Provision for reserves .................................................. (20,286) (57,588)
-------- -------- --------
Income from mortgage assets ............................................. 10,696 (13,022) (56,669)
-------- -------- --------
Operating and administrative expenses (Note 7) .................................. (2,216) (1,949) (3,104)
-------- -------- --------
Total Operating Income (Loss) ................................................... 13,516 (14,971) (59,773)
Interest expense and other income
Interest and other income ............................................... 723 286 739
Interest on real estate notes payable ................................... (4,358)
Interest on notes payable secured by mortgage assets .................... (2,179) (4,794) (5,841)
-------- -------- --------
Income (Loss) before cumulative effect of
accounting change ......................................................... 7,702 (19,479) (64,875)
Cumulative effect of accounting change (Note 1) ................................. (21,091)
-------- -------- --------
Net Income (Loss) ............................................................... $ 7,702 $(40,570) $(64,875)
======== ======== ========
Per Share Amounts
Income (Loss) before cumulative effect of accounting change ............. $ 0.50 $ (1.25) $ (4.04)
Cumulative effect of accounting change .................................. (1.36)
-------- -------- --------
Net Income (Loss) Per Common Share .............................................. $ 0.50 $ (2.61) $ (4.04)
======== ======== ========
Average Shares of Common Stock Outstanding ...................................... 15,500 15,522 16,043
======== ======== ========
Dividends Declared Per Share .................................................... $ 0.10 $ 0.23 $ 0.45
======== ======== ========
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ASR INVESTMENTS CORPORATION
For the Years Ended December 31, 1994, 1993 and 1992 (In Thousands)
-------------------------------------------------------------------------------
<CAPTION>
Common
Additional Stock in
Number of Par Paid-in Treasury-
Shares Value Capital Deficit at cost Total
------ ----- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1992 .............................. 16,244 $ 162 $ 155,007 $ (5,584) $ 0 $ 149,585
Stock (repurchase) .................................... (11) (2,110) (2,121)
Net (loss) ............................................ (64,875) (64,875)
Dividends declared .................................... (7,305) (7,305)
------ ----- --------- --------- ---------- ---------
Balance, December 31, 1992 ............................ 16,244 162 154,996 (77,764) (2,110) 75,284
Stock (repurchase) .................................... (201) (201)
Net (loss) ............................................ (40,570) (40,570)
Dividends declared .................................... (3,565) (3,565)
------ ----- --------- --------- ---------- ---------
Balance, December 31, 1993 ............................ 16,244 162 154,996 (121,899) (2,311) 30,948
Net income ............................................ 7,702 7,702
Dividends declared .................................... (1,550) (1,550)
------ ----- --------- --------- ---------- ---------
Balance, December 31, 1994 ............................ 16,244 $ 162 $ 154,996 $(115,747) $ (2,311) $ 37,100
====== ===== ========= ========= ========== =========
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
ASR INVESTMENTS CORPORATION
For the Years Ended December 31, 1994, 1993 and 1992
(in Thousands Except Per Share Amounts)
--------------------------------------------------------------------------------
<CAPTION>
1994 1993 1992
--------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) ................................................... $ 7,702 $(40,570) $(64,875)
Principal noncash charges (credits)
Depreciation and amortization ............................... 2,083
Provision for reserves ...................................... 20,286 57,133
Cumulative effect of accounting changes ..................... 21,091
Other ....................................................... 1,961
--------- -------- --------
Cash Provided by (Used in) Operations ............................... 9,785 2,768 (7,742)
--------- -------- --------
INVESTING ACTIVITIES
Investment in apartments ............................................ (67,247)
Investment in joint ventures ........................................ (1,364)
Investment in other real estate assets .............................. (3,559) (3,855)
Sale of other real estate ........................................... 2,228
Purchases of mortgage assets ........................................ (4,447) (13,898)
Sales of mortgage assets ............................................ 2,587
Repayment of mortgage assets ........................................ 18,916 35,520 61,302
Decrease (Increase) in other assets ................................. 1,330 912 (498)
--------- -------- --------
Cash Provided by (Used in) Investing Activities ..................... (49,696) 28,130 49,493
--------- -------- --------
FINANCING ACTIVITIES
Issuance of notes payable
Real estate notes ........................................... 52,178
Notes secured by mortgage assets ............................ 65,498
Payment of loan costs ............................................... (1,342)
Repayment of notes payable
Real estate notes ........................................... (1,485)
Notes secured by mortgage assets ............................ (15,640) (21,124) (87,508)
Stock repurchases ................................................... (201) (2,121)
Payment of Dividends ................................................ (1,550) (3,565) (13,315)
Increase (Decrease) in other liabilities ............................ 1,472 (730) (672)
--------- -------- --------
Cash Provided by (Used in) Financing Activities ..................... 33,633 (25,620) (38,118)
--------- -------- --------
Unrestricted cash and cash equivalents
(Decrease) Increase during the year ......................... (6,278) 5,278 3,633
Balance -- beginning of year ................................ 10,407 5,129 1,496
--------- -------- --------
Balance -- end of year ...................................... $ 4,129 $ 10,407 $ 5,129
========= ======== ========
Supplemental Disclosure of Cash Flow Information
Cash paid for Company's interest expense .................... $ 7,367 $ 5,121 $ 5,859
========= ======== ========
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ASR INVESTMENTS CORPORATION
For the Years Ended December 31, 1994, 1993 and 1992
--------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies
Business - ASR Investments Corporation (the Company) is a real estate investment
trust engaged in the acquisition and operation of apartment properties in the
Southwestern United States. At December 31, 1994, the Company owned 21 apartment
properties (including four owned through joint ventures), located in Arizona,
Texas and New Mexico. In addition, the Company continues to own mortgage assets
(Note 3). The Company uses cash flows from the mortgage assets for apartment
acquisition and other corporate purposes.
Principles of Consolidation - The accompanying consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries.
Investments in joint ventures in which the Company does not own a controlling
interest are accounted for under the equity method. All significant intercompany
balances and transactions have been eliminated in the consolidated financial
statements.
Real Estate - Real estate is recorded at cost. Depreciation is computed on a
straight line basis over the estimated remaining useful lives of the assets,
which are 27-1/2 years for buildings and improvements and 7 years for furniture,
fixture and equipment. Expenditures for ordinary maintenance and repairs are
charged to operations as incurred and significant renovations and improvements
that improve or extend the useful life of the asset are capitalized. Rental
income is recorded when due from tenants.
Deferred Loan Costs - Deferred loan costs are amortized using the interest
method over the terms of the related debt.
Mortgage Assets - The Company owns mortgage interests which entitle it to
receive the excess of the cash flow on pools of mortgage instruments over the
required payments on a series of structured financings which they secure. The
Company also has the right to cause the early redemption of the structured
financing under specified limited conditions; in such event, the mortgage
instruments would be sold and the net proceeds, if any, after the redemption of
the structured financing would be remitted to the Company. The mortgage
instruments are owned by independent third parties which issued the structured
financing. The Company is not liable for such structured financing which is
payable solely from the principal and interest payments on the underlying
mortgage instruments.
Presentation and Income Recognition. Mortgage assets are stated at their net
investment amounts (see Note 3). Income is recognized using the prospective
yield method prescribed by EITF 89-4. Under this method, an effective yield is
calculated for each mortgage asset at the beginning of each accounting period
using the then net carrying value and the estimated future net cash flow from
the asset. The estimated future net cash flow is calculated using current
variable interest rates and current projected mortgage prepayment rates for the
underlying mortgages. The calculated yield is used to accrue income for that
asset for that accounting period. Actual cash flow received is first applied to
the accrued income and any remaining amount is used to reduce the carrying value
of the asset.
Write-down or reserves for impairment. Prior to December 1993, the Company
followed the practice of writing down the carrying value of each mortgage asset
(including an allocated portion of the deferred hedging cost) to its estimated
future cash flows. In December 1993, the Company adopted SFAS No. 115 which
requires that the carrying value of each mortgage asset be written down to its
estimated fair value when its estimated yield is less than a risk-free yeld. As
a result, the Company wrote down substantially all its mortgage assets to their
estimated fair value and recorded a charge of $21,091,000 which was reported as
a cumulative effect of accounting change.
Income Taxes The Company has elected to be taxed as a real estate investment
trust (REIT) under the Internal Revenue Code of 1986, as amended. As a REIT, the
Company must distribute at least 95% of its annual taxable income, including
excess inclusion income, to its stockholders. Accordingly, no provision has been
made for income taxes in the accompanying consolidated financial statements.
Earnings Per Share Earnings per share are computed using the weighted average
number of shares of common stock and common stock equivalents (if dilutive)
outstanding during the year.
Reclassification Certain reclassification has been made to conform the prior
years with the current year presentation.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ASR INVESTMENTS CORPORATION
For the Years Ended December 31, 1994, 1993 and 1992
--------------------------------------------------------------------------------
2. Real Estate Investments
The Company purchased its initial portfolio of apartment properties on January
12, 1994. The Company purchased four additional apartment complexes through
joint ventures in the third and fourth quarters of 1994. Accordingly, the real
estate operating results represent less than a full year of operations.
At December 31, 1994, apartments consisted of the following (in thousands):
Land $13,681
Building and Improvements 50,583
Accumulated Depreciation (1,995)
Restricted Cash and
Deferred Loan Fees 4,237
-------
Apartments, net $66,506
=======
The Company is a 15% equity partner and the managing partner or managing
member of the joint ventures. The Company will receive 15%-51% of the total
profits and cash flows depending on the ultimate financial performance of the
joint ventures. The condensed combined financial statements for the joint
ventures are as follows (in thousands):
Condensed Combined Balance Sheets
December 31, 1994
Real estate, at cost net
of depreciation $23,774
Cash and other assets 1,428
-------
Total Assets $25,202
=======
Notes payable $15,644
Other liabilities 424
-------
Total Liabilities 16,068
-------
Equity
The Company 1,364
Joint venture partner 7,770
-------
Total Equity 9,134
-------
Total Liabilities and Equity $25,202
=======
Condensed Combined Statements of Operations
For the Year Ended December 31, 1994
Revenues $1,263
Operating expenses (551)
Depreciation (283)
Interest expenses (373)
-------
Net Income $ 56
=======
Allocation of Net Income
The Company $ 8
Joint Venture Partner $ 48
As of December 31, 1994, $9,676,000 of the notes payable of the joint
ventures bear fixed interest rates at an average of 8.1% and $5,968,000 bear
variable interest rates at an average of 8.5%. Other real estate investments at
December 31, 1994 included the following:
Short-term real estate loans $2,344
Land development projects 1,942
Other 900
------
Total $5,186
======
In December 1994, the Company entered into a joint venture to develop and
construct a 356-unit apartment property in the Phoenix, Arizona. The Company has
committed to contribute $2,670,000 for its 50% equity interest in the joint
venture.
--------------------------------------------------------------------------------
3. Mortgage Assets
(a) Balance sheet data
In prior years, certain of the Company's mortgage assets were presented on a
gross basis under which the underlying mortgage instruments and structured
financings were presented as assets and liabilities. Beginning in 1994 when the
Company began recording income on the prospective yield method, the Company's
balance sheets present all of the mortgage assets at the net invested amount and
the 1993 financial statements have been reclassified to this basis of
presentation. Below is certain information relating to the Company's mortgage
assets as of December 31, 1994 and 1993 (in thousands):
1994 1993
---- ----
Mortgage assets previously
presented on a gross basis
Mortgages instruments
and related assets ................ $ 891,567 $ 1,401,839
Structured financings ................ (878,879) (1,374,928)
----------- ------------
Net investment ....................... 12,688 26,911
Mortgage assets previously
presented on a net basis ............... 6,277 10,970
----------- ------------
Total .................................... $ 18,965 $ 37,881
=========== ============
At December 31, 1994, the effective prospective yield, based on the estimated
future cash flows and the net carrying value, on the net mortgage assets was
approximately 29%.
As of December 31, 1994 and 1993, approximately $117,819,000 and $258,354,000
of structured financings (including those underlying mortgage assets previously
presented on a net basis) bear variable interest rates.
(b) Income statement data
During 1994, the Company exercised redemption rights associated with four
mortgage assets and sold the underlying mortgage collateral at gains totaling
$4,263,000 and net proceeds of $11,227,000.
(c) Hedging transactions
In 1992, the Company purchased "Cap Agreements" to protect against the negative
effect on mortgage asset cash flows in 1994 that would result if interest rates
were to increase from their then levels. The "Cap Agreements", purchased for
$2,459,000, called for payments to the Company equal to the excess of one-month
LIBOR over 5.5% on specified dates during 1994 (generally monthly) times
$240,000,000. The effect of the Cap Agreements was to provide that interest
rates on structured financings equal to the stated amount would be based on a
LIBOR rate of the lower of 5.5% or the actual rate during 1994.
Also in 1992, the Company executed short sales of Eurodollar Futures
Contracts on the International Monetary Market exchange. The effect of the
Futures Contracts was to "fix" the interest rate on $190,000,000 of the
structured financings at approximately 6.75% for 1995. In 1993, the Company
recorded losses of $4,168,000 on the Future Contracts. In 1994, the Company
closed out its Futures Contract position and realized a gain of $1,152,000 which
was recorded as set forth below.
Both the Cap Agreements and the Futures Contracts were entered into as hedges
against the interest rate impact on mortgage asset cash flows in 1994 and 1995.
The cost of the Cap Agreements ($2,459,000) and the losses incurred on the
Futures Contracts during 1993 ($4,168,000) were accounted for as additional
costs of the mortgage assets and were written off in connection with the
adoption of SFAS No. 115 in December 1993. Such amounts are included in the
"Cumulative effect of accounting change" in the accompanying Income Statement.
The 1994 gain on the Futures Contracts ($1,152,000) was recorded as a reduction
in the carrying value of the mortgage assets.
Because of (1) the decline in importance of the Company's mortgage assets
investments as a result of its emphasis on apartment acquisitions and (2) the
decline in the amount of variable rate structured financings underlying the
mortgage assets, the Company no longer plans to invest in hedging the interest
rate impact on mortgage assets and had no such investments at December 31, 1994.
--------------------------------------------------------------------------------
4. Notes Payable
Real estate notes payable -- The apartment properties acquired on January 12,
1994 were financed by a combination of new first mortgage loans and the
assumption of existing first mortgage loans totaling $45,700,000 and seller
carryback financing of $6,500,000. The first mortgage loans are nonrecourse and
non-cross collateralized. They generally have a ten year term and bear fixed
interest rates ranging from 8.5% to 10.1%, with a weighted average fixed rate of
8.6% at December 31, 1994. The seller carryback notes are unsecured notes and
bear a fixed interest rate of 7.5%. The notes are amortized over a three-year
period ending on February 1, 1997 with monthly principal and interest payments
of $202,000. Amortization of deferred loan cost was $ 88,000 for 1994.
The scheduled maturities of the real estate notes payable are as follows (in
thousands):
1995 $ 2,855
1996 2,703
1997 2,571
1998 288
1999 498
Thereafter 41,778
-------------
Total $ 50,693
=============
Mortgage assets notes payable -- In 1992, the Company issued $80,000,000 of
Secured Notes ("Notes") to a group of institutional investors. The Notes bear a
fixed interest rate of 9.02% per year. The Notes are collateralized by all of
the mortgage assets of the subsidiary and funds held by the trustee. The Company
is required to use the net proceeds from the redemption of the mortgage interest
to prepay the Notes at a premium. During 1994, the Company made prepayments of
$10,355,000.
On January 25, 1995, the Company caused the early redemption of a mortgage
asset and used the net proceeds to prepay $2,800,000 of the Notes. On February
15, 1995, the Company used $393,000 of its cash and the funds held by the
trustee to prepay the entire balance of the Notes. Accordingly, the funds held
by the trustee ($21,583,000 and $24,306,000 at December 31,1994 and 1993) were
presented as a reduction of the Notes balance in the consolidated balance
sheets. The Company recorded a credit in February 1995 to income of $2,420,000
for the excess prepayment premium accrued in 1993.
Amortization of deferred loan cost was $549,000 for 1993 and $762,000 for
1992.
--------------------------------------------------------------------------------
5. Stock Options
The Company has two stock option plans which are administered by the Board of
Directors. The purpose of the plans is to provide a means of performance based
compensation to attract and retain directors and key personnel.
Under the plans, options to acquire a maximum of 700,000 shares of the
Company's common stock may be granted at an exercise price not less than the
fair market value of the stock. The options expire ten years after the date of
grant. Upon exercise of the options, the Company can elect to distribute cash in
lieu of shares.
Information on stock options granted under the plans is summarized below:
Number of Option Price
Shares Per Share
---------- ------------
Outstanding at
December 31, 1992 ................ 450,659 $2.63-$5.25
Options granted .......................... 16,046 $1.63-$2.19
Outstanding at
December 31, 1993 ................ 466,705 $1.63-$5.25
Options and DERs canceled ................ (24,503) $2.63-$5.25
Options granted .......................... 70,000 $2.25
Outstanding at
December 31, 1994 ................ 512,202 $1.63-$5.25
In addition, in connection with the renewal of the management agreement for
1994, the Company and the Manager agreed to eliminate the incentive management
fee provision and the Company granted to the partners of the Manager
non-qualified options to purchase 1,549,000 shares of common stock and 451,000
shares of stock appreciation rights ("SARs") with an exercise price of $1.72 per
share. The exercise price was 10% above the closing market price of the common
stock on the grant date. The holders will also receive payments equal to the
product of the per share dividend amount times the number of options and SARs
outstanding. The options and SARs will expire in December 1998. As of December
31, 1994, two-thirds of the options and SARs were exercisable and one-third will
be exercisable in December 1995; none of the options and SARs have been
exercised.
--------------------------------------------------------------------------------
6. Fair Value of Financial Instruments
(a) General -- The following disclosure of the estimated fair value of financial
instruments is made in accordance with requirements of SFAS No. 107,
"Disclosures about Fair Values of Financial Instruments." Although management
uses its best judgement in estimating the fair value of these instruments, there
are inherent limitations in any estimation technique and the estimates are thus
not necessarily indicative of the amounts which the Company could realize on a
current transaction.
(b) Basis of Estimates -- Mortgage Assets. The fair value of mortgage assets is
generally dependent on (1) the characteristics of the asset, (2) estimates of
future cash flows and (3) the discount rate used to calculate the present value
of the cash flows. The market for mortgage assets is illiquid and the traded
prices are determined on a privately negotiated basis. Based on estimates of
cash flows and the carrying values at December 31, 1994, the prospective yield
on the Company's mortgage assets was 29% (excluding the redemption of a series
in January 1995 at a gain of $784,000). The Company has used the carrying value
of mortgage assets as their fair value.
Based on estimates of mortgage asset cash flows at December 31, 1994,
prepared using interest rates and estimated mortgage prepayment rates at that
time, the net present value of the mortgage assets (including the proceeds of a
series redeemed in January 1995) using various discount rates would be (amounts
in thousands):
Discount Net
Rate Present Value
------- -------------
10% $34,112
15% 28,318
25% 22,101
Real Estate Notes Payable. The Company has used the carrying value of real
estate notes payable as their fair value. At December 31, 1994, the interest
rates on the Company's notes payable were the market rates for debt instruments
with similar terms and maturities.
Mortgage Assets Notes Payable. As the Company prepaid the notes payable in
February 1995, their fair value is based on the payoff amount including accrued
interest.
(c) Estimated Fair Values
Carrying Estimated
Amount Fair Value
-------- ----------
Mortgage assets ................................ $18,965 $18,965
Real estate notes payable ...................... 50,693 50,693
Mortgage assets notes payable .................. 6,422 3,986
--------------------------------------------------------------------------------
7. Operating Expenses
Related Party Transactions -- Subject to the supervision of the Company's Board
of Directors, Pima Mortgage Limited Partnership (the "Manager") manages the
day-to-day operations of the Company pursuant to a management agreement which
has a current term through December 31, 1995. Pursuant to the agreement, the
Manager receives a base management fee of 3/8 of 1% per annum of the Company"s
average invested assets (net of structured financing). The management fees for
1994, 1993 and 1992 were $544,000, $625,000 and $842,000, respectively.
Under the agreement, the Manager must reimburse the Company for any
management fees received for the year to the extent that the operating expenses
(as defined) for the year exceed the greater of 2% of the Company's average
invested assets or 25% of its net income (as defined), unless the unaffiliated
directors determine that a higher level of expenses is justified for such year.
Additionally, if the agreement is terminated without cause (as defined) or not
renewed on terms as favorable to the Manager, the Manager will be entitled to
receive for a three-year period the management fees relating to the invested
assets purchased prior to the termination date, which would have been payable
had the agreement remained in effect.
The Manager also performs certain analyses and other services in connection
with the administration of structured financing related to the Company's
mortgage assets. For such services, the Company paid the Manager $247,500 for
1994, $260,000 for 1993 and $244,000 for 1992 plus reimbursed costs.
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. 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 a maximum 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 owned by the Company relative to the total apartment units managed by the
Property Manager. The allocation to the Company for 1994 was $184,000
(approximately 1.5% of real estate operating income), which was net of an
allocated credit (applicable only in 1994) of $246,000.
Operating Expenses -- Operating expenses in 1994 included an accrual for the
cost of the stock appreciation rights of $324,000 and dividend equivalent
expenses of $200,000 on the stock options and SARs. Operating expenses for 1993
have been reduced by $470,000 as a result of the reimbursement received from the
insurance carriers for legal fees incurred in defending the Company in the
previously disclosed class action lawsuit. Operating expenses for 1992 were
reduced by $400,000 as a result of the reversal of deferred compensation expense
on stock options.
--------------------------------------------------------------------------------
8. Taxable Income (Loss) (unaudited)
As of December 31, 1994, the Company had an estimated net operating loss
carryforward of $75,000,000 which can be used to offset taxable income other
than excess inclusion income through 2009 (1999 for state taxes). Substantially
all of the dividends for 1994, 1993 and 1992 constitute ordinary income. During
these years, the Company had excess inclusion income from the residual interest
in certain real estate mortgage investment conduits ("REMICs") which cannot be
used to offset operating losses and deductions from other sources or the net
operating loss and under the current tax law for REITs, excess inclusion income
is required to be distributed as dividends. Excluding the effect of excess
inclusion income, the Company incurred an estimated taxable loss of $7,500,000
million for 1994.
Net income reported in the accompanying consolidated financial statements is
different than the taxable income due to the reporting of some income and
expense items in different periods for income tax purposes. The difference
consists primarily of (1) difference in income recognition of mortgage assets;
(2) reserves on mortgage assets which are not currently deductible; and (3)
excess inclusion income for tax purposes. These timing differences will reverse
in future years.
Taxable income for 1994 is subject to change when the Company prepares and
files its income tax returns. The taxable income amounts also are subject to
adjustments, if any, resulting from audits of the Company's tax returns by the
Internal Revenue Service (the "IRS").
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. In September 1994, the IRS withdrew
this proposed adjustment of taxes due. The audits for those years have been
completed and no other proposed adjustments have been made.
--------------------------------------------------------------------------------
9. Quarterly Financial Data (unaudited)
(Dollars in Thousands Except Per Share Amounts)
Total Income Net Income (Loss) Dividends
(Loss) Amount Per Share Per Share
------------ ---------- --------- ---------
1994
First ............. $ 5,263 $ 1,218 $ 0.08 $ --
Second ............ 7,369 2,699 0.17 --
Third ............. 6,228 2,074 0.13 --
Fourth ............ 5,087 1,711 0.12 0.10
1993
First ............. $ (9,069) $ 11,174 $ (0.72) $ --
Second ............ (1,126) (2,877) (0.19) --
Third ............. 530 (1,320) (0.09) .05
Fourth ............ (3071) (25,199) (1.62) .18
1992
First ............. $ 4,947 $ 2,815 $ 0.17 $ 0.25
Second ............ (5,222) (7,560) (0.47) 0.20
Third ............. (36,543) (38,732) (2.41) --
Fourth ............ (19,112) (21,398) (1.36) --
<PAGE>
<TABLE>
ASR INVESTMENTS CORPORATION
SCHEDULE XI -- REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1994
(DOLLARS IN THOUSANDS)
<CAPTION>
Initial Cost to Company
-----------------------------
Cost
Building Capitalized
Year and Subsequent to
Apartment Property Built Encumbrances Land Improvements Acquisition
------------------ ----- ------------ ------- ------------ -------------
<S> <C> <C> <C> <C> <C>
TUCSON, ARIZONA
Acacia Hills, 1986 $ 1,036 $ 255 $ 1,089 $ 27
Casa Del Norte 1984 1,387 386 1,453 73
Desert Springs 1985 4,647 1,115 4,754 106
Landmark 1986 3,067 409 4,138 181
Park Terrace 1986 2,721 316 3,191 118
Park Village 1985 593 92 672 46
Posada Del Rio 1980 1,620 534 3,022 41
South Point 1984 1,876 291 2,135 72
------------ ------- ------------- -------------
Total Tucson 16,947 3,398 20,454 664
------------ ------- ------------- -------------
HOUSTON, TEXAS
Clear Lake Falls 1980 3,152 867 3,261 173
The Gallery 1988 1,655 732 1,196 627
Memorial Bend 1987 1,939 1,187 1,287 149
Nantucket Square II 1983 2,777 686 2,925 147
Prestonwood 1978 2,489 761 2,696 261
Riviera Pines 1979 3,295 1,025 3,073 337
------------ ------- ------------- --------------
Total Houston 15,307 5,258 14,438 1,694
------------ ------- ------------- --------------
ALBUQUERQUE, NEW MEXICO
Dorado Terrace 1986 5,254 2,700 4,224 103
Village Serena 1986 2,702 883 2,647 61
Whispering Sands 1986 5,614 1,442 6,149 148
------------ ------- ------------ --------------
Total Albuquerque 13,570 5,025 13,020 313
------------ ------- ------------ --------------
TOTAL $45,824 $13,681 $47,912 $2,671
============ ======= ============ ==============
</TABLE>
<PAGE>
<TABLE>
ASR INVESTMENTS CORPORATION
SCHEDULE XI -- REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1994
(DOLLARS IN THOUSANDS)
(Continued)
<CAPTION>
Gross Amount at Which Carried at December 31, 1994
-----------------------------------------------------------
Building Depreciable
and Accumulated Year Lives
Apartment Property Land Improvements Depreciation Built Years
------------------ ------- ------------ ------------ ----- -----------
<S> <C> <C> <C> <C> <C>
TUCSON, ARIZONA
Acacia Hills, $ 255 $ 1,116 $ 44 1986 27.5
Casa Del Norte 386 1,526 63 1984 27.5
Desert Springs 1,115 4,860 191 1985 27.5
Landmark 409 4,319 165 1986 27.5
Park Terrace 316 3,309 133 1986 27.5
Park Village 92 718 31 1985 27.5
Posada Del Rio 534 3,063 123 1980 27.5
South Point 291 2,207 92 1984 27.5
------- ------------ ------------
Total Tucson 3,398 21,118 842
------- ------------ ------------
HOUSTON, TEXAS
Clear Lake Falls 867 3,434 133 1980 27.5
The Gallery 732 1,823 59 1988 27.5
Memorial Bend 1,187 1,436 63 1987 27.5
Nantucket Square II 686 3,072 118 1983 27.5
Prestonwood 761 2,957 123 1978 27.5
Riviera Pines 1,025 3,410 129 1979 27.5
------- ------------ ------------
Total Houston 5,258 16,132 625
------- ------------ ------------
ALBUQUERQUE, NEW MEXICO
Dorado Terrace 2,700 4,327 160 1986 27.5
Village Serena 883 2,709 111 1986 27.5
Whispering Sands 1,442 6,297 257 1986 27.5
------- ------------ ------------
Total Albuquerque 5,025 13,333 528
------- ------------ ------------
TOTAL $13,681 $50,583 $1,995
======= ============ ============
(a) The aggregate cost of real estate investments for federal income tax
purposes is approximately $62,269 at December 31, 1994
(b) All of the above apartment properties were acquired in 1994.
(c) Building and improvements are depreciated using 27.5 years while furniture
and fixtures are depreciated using seven years.
</TABLE>
<PAGE>
ASR INVESTMENTS CORPORATION
SCHEDULE XI -- REAL ESTATE AND ACCUMULATED DEPRECIATION
(IN THOUSANDS)
A summary of activity for real estate investments and accumulated
depreciation is as follows:
1994
------
Balance, beginning of year ................................ $ 0
Acquisitions ............................................ 61,593
Improvements ............................................ 2,671
Dispositions and other .................................. 0
-------
Balance, end of year ...................................... $64,264
=======
Balance, beginning of year ................................ $ 0
Depreciation ............................................ 1,995
Dispositions and other .................................. 0
-------
Balance, end of year ...................................... $ 1,995
=======
Exhibit 11
<TABLE>
ASR INVESTMENTS CORP.
CALCULATION OF EARNING PER SHARE
FOR THE QUARTERS AND YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS)
<CAPTION>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER YEAR
-------------- --------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
PRIMARY EARNINGS PER SHARE
Number Average common shares
outstanding................ 15,499,993 15,499,993 15,499,993 15,499,993 15,499,993
============== =============== =============== ============== ==============
Net Income................... $1,218,000 $2,699,000 $2,074,000 $1,711,000 $7,702,000
Primary Earnings per Share... $0.08 $0.17 $0.13 $0.12 $0.50
============== =============== =============== ============== ==============
FULLY DILUTED EARNINGS PER SHARE
Number Average common shares
outstanding................ 15,499,993 15,499,993 15,499,993 15,499,993 15,499,993
-------------- --------------- --------------- -------------- --------------
Exercisable, in the money,
stock options.............. 12,088 245,570 418,333 403,246 312,979
-------------- --------------- --------------- -------------- --------------
Total Shares............. 15,512,081 15,903,239 15,745,563 15,918,326 15,812,972
============== =============== =============== ============== ==============
Net Income................... $1,218,000 $2,699,000 $2,074,000 $1,711,000 $7,702,000
Fully Diluted Earnings per
Share...................... $0.08 $0.17 $0.13 $0.11 $0.49
============== =============== =============== ============== ==============
</TABLE>
Exhibit 22
SUBSIDIARIES OF THE REGISTRANT
Name of Subsidiary State of Incorporation
------------------ ----------------------
CIMSA Financial Corporation........................... Arizona
ASR Finance Corporation............................... Arizona
ASR Mortgage Acceptance, Inc.......................... Arizona
Residential Mortgage Acceptance, Inc.................. Delaware
ASR Properties, Inc................................... Arizona
ASV -- II Properties, Inc............................. Arizona
ASV -- XVII Properties, Inc........................... Arizona
RMA Investments Holding, Inc.......................... Arizona
ASC -- I Properties, Inc.............................. Arizona
ASC -- II Properties, Inc............................. Arizona
ASC -- III Properties, Inc............................ Arizona
ASC -- IV Properties, Inc............................. Arizona
ASC -- V Properties, Inc.............................. Arizona
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM CONSOLIDATED FINANCIAL STATEMENTS AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<EXCHANGE-RATE> 1
<CASH> 4129
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4129
<PP&E> 64264
<DEPRECIATION> 1995
<TOTAL-ASSETS> 96745
<CURRENT-LIABILITIES> 0
<BONDS> 0
<COMMON> 37100
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 96745
<SALES> 0
<TOTAL-REVENUES> 23224
<CGS> 0
<TOTAL-COSTS> 9708
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6537
<INCOME-PRETAX> 7702
<INCOME-TAX> 0
<INCOME-CONTINUING> 7702
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7702
<EPS-PRIMARY> .50
<EPS-DILUTED> .49
</TABLE>
