UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended: June 30, 1997 Commission File Number: 1-9646
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ASR Investments Corporation
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(Exact name of Registrant as specified in its Charter)
Maryland
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(State or other jurisdiction of incorporation or organization)
86-0587826
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(I.R.S. Employer Identification No.)
335 N. Wilmot, Suite 250, Tucson, AZ 85711
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(Address of principal executive offices)
(520) 748-2111
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(Registrant's telephone number, including area code)
(Not applicable)
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(Former Name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
X Yes No
---- ----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock (par value $.01) outstanding as of August 11, 1997 were
4,437,611 shares.
<PAGE>
ASR INVESTMENTS CORPORATION
Consolidated Balance Sheets
June 30, 1997 and December 31, 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(Unaudited)
<S> <C> <C>
Assets
Real estate investments, at cost:
Land $ 40,859 $ 15,514
Buildings and improvements 157,165 58,476
Construction in progress 20,368 14,694
Land held for development 925 925
Investments in joint ventures 2,811
Other real estate 565 1,022
--------- ---------
Total real estate investments 219,882 93,442
Accumulated depreciation (9,537) (7,504)
--------- ---------
Real estate investments, net of depreciation 210,345 85,938
Cash and cash equivalents 17,701 2,403
Mortgage assets 5,039
Restricted cash 5,652 2,930
Deferred loan fees 2,118 1,090
Goodwill 1,391
Other assets 1,953 396
--------- ---------
Total assets $ 239,160 $ 97,796
========= =========
Liabilities
Real estate notes payable $ 128,340 $ 48,855
Construction loan payable 12,547 255
Short-term borrowing 2,014
Construction costs payable 214 1,581
Security deposits and deferred rental income 1,730 644
Other liabilities 7,026 4,345
--------- ---------
Total liabilities 149,857 57,694
--------- ---------
Stockholders' Equity
Convertible LP Units (Note 3) 18,910
Common Stock, par value $.01 per share, 40,000,000 shares
authorized; 4,622,353 and 3,307,892 shares issued 45 33
Additional paid in capital 180,813 155,964
Deficit (107,053) (112,964)
Stock note receivable (385) (385)
Treasury stock - 184,742 and 160,742 shares (3,027) (2,546)
--------- ---------
Total stockholders' equity 89,303 40,102
--------- ---------
Total liabilities and stockholders' equity $ 239,160 $ 97,796
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
ASR INVESTMENTS CORPORATION
Consolidated Statements of Operations
For the Quarters and Six Months Ended June 30, 1997 and 1996
(In thousands except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Quarters Six Months
-------- ----------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Real Estate Operations
Rental and other income $ 7,185 $ 3,639 $ 10,888 $ 7,281
-------- -------- -------- --------
Operating and maintenance expenses 2,648 1,301 3,991 2,555
Real estate taxes and insurance 808 359 1,149 719
Interest expense on real estate mortgages 2,254 1,108 3,377 2,190
Depreciation and amortization 1,352 688 2,032 1,368
-------- -------- -------- --------
Total operating expenses 7,062 3,456 10,549 6,832
-------- -------- -------- --------
Income from real estate 123 183 339 449
-------- -------- -------- --------
Gain on sale of real estate 474 474
-------- -------- -------- --------
Mortgage Assets
Prospective yield income 258 799 588 1,569
Income from redemptions and sales 11,311 3,010 16,650 4,987
Interest expense (7) (49) (25) (124)
-------- -------- -------- --------
Income from mortgage assets 11,562 3,760 17,213 6,432
-------- -------- -------- --------
Income Before Administrative Expenses
and Other Income (Expense) 12,159 3,943 18,026 6,881
Administrative expenses (837) (698) (1,944) (1,336)
Aquisition related expenses (6,215) (6,215)
Other income (expense), net 120 81 307 121
-------- -------- -------- --------
Net Income $ 5,227 $ 3,326 $ 10,174 $ 5,666
-------- -------- -------- --------
Net Income Per Share of Common
Stock and Common Stock Equivalents $ 1.11 $ 1.05 $ 2.58 $ 1.80
======== ======== ======== ========
Average Shares of Common Stock and
Common Stock Equivalents 4,708 3,154 3,938 3,154
======== ======== ======== ========
Dividends Declared Per Share $ 0.50 $ 0.50 $ 1.00 $ 1.00
======== ======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
ASR INVESTMENTS CORPORATION
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 1997 and 1996
(In Thousands)
(Unaudited)
1997 1996
-------- --------
OPERATING ACTIVITIES
Net income $ 10,174 $ 5,666
Principal noncash charges
Depreciation and amortization 2,233 1,604
Aquisition related expenses 5,250
Gain on sale of real estate (474)
Increase in deferred compensation 1,099
Increase in stock appreciation rights 672
Increase in other assets (1,557) (198)
Increase in other liabilities 2,522 496
-------- --------
Cash Provided By Operations 19,919 7,568
-------- --------
INVESTING ACTIVITIES
Investment in apartments (10,628) (420)
Construction expenditures (5,674) (3,313)
Proceeds from sale of real estate 2,830
Investment in joint ventures 358 10
Purchase of land for development (60)
Other real estate assets 457 213
Restricted cash (2,722) (304)
Reduction in mortgage assets 5,039 3,014
-------- --------
Cash Used In Investing Activities (10,340) (860)
-------- --------
FINANCING ACTIVITIES
Issuance of real estate notes payable 3,000
Payment of loan costs (1,119) (71)
Proceeds from construction loan 12,292 243
Repayment of real estate notes (346) (207)
Short-term borrowing (2,014) (2,129)
Construction costs payable (1,367) 1,636
Stock options exercised 17
Aquisition of treasury stock (481)
Payment of dividends (3,792) (3,154)
Distributions on LP Units (471)
-------- --------
Cash Provided By (Used In) Financing Activities 5,719 (3,682)
-------- --------
Cash
Increase during the period 15,298 3,026
Balance - beginning of period 2,403 2,421
-------- --------
Balance - end of period $ 17,701 $ 5,447
======== ========
Supplemental Disclosure of Cash Flow Information
Interest paid $ 3,928 $ 2,342
Interest capitalized 482 133
Stock issued for contract termination 5,250
Non-cash transactions associated with acquisitions:
Issuance of common stock 19,594
Issuance of convertible LP Units 18,910
Notes payable assumed 76,305
See Notes to Consolidated Financial Statements.
4
<PAGE>
ASR INVESTMENTS CORPORATION
Consolidated Statement of Stockholders' Equity
For the Six Months Ended June 30, 1997
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Common
Additional Stock in
Number of Number of LP Par Paid-In Notes Treasury -
Shares LP Units Units Value Capital Deficit Receivable at Cost Total
--------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 3,308 $ 33 $ 155,964 ($112,964) ($ 385) ($ 2,546) $ 40,102
Net income 10,174 10,174
Dividends declared (4,263) (4,263)
Stock issuance (repurchase) 1,314 944 $ 18,910 12 24,849 (481) 43,290
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Balance, June 30, 1997 4,622 944 $ 18,910 $ 45 $ 180,813 ($107,053) ($ 385) ($ 3,027) $ 89,303
--------- --------- --------- --------- --------- --------- --------- --------- ---------
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE>
ASR INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarters and Six Months Ended June 30, 1997 and 1996
1. BASIS OF PRESENTATION
The accompanying interim consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries and Heritage
Communities L.P. (collectively the "Company"). Investments in joint ventures in
which the Company does not own a controlling interest are accounted for under
the equity method. All significant inter-company balances and transactions have
been eliminated. In the opinion of management, all adjustments (consisting of
normal recurring adjustments) considered necessary for a fair presentation have
been included. They do not include all of the information and disclosures
generally required for annual financial statements. These interim operating
results are not necessarily indicative of the results that may be expected for
the entire year. These interim consolidated financial statements should be read
in conjunction with the December 31, 1996 audited consolidated financial
statements and notes thereto.
Reclassification - Certain reclassification has been made to conform
the prior year with the current year presentation.
New Accounting Standard - In February 1997, the Financial Accounting
Standards Board issued FASB No. 128, "Earnings Per Share," which establishes new
standards for computing and presenting earnings per share (EPS). It replaces the
presentation of primary EPS with a presentation of basic EPS. It also requires
dual presentation of basic and diluted EPS on the face of the income statement
for all entities with complex capital structures and requires a reconciliation
of the numerator and denominator of the basic EPS computation to the numerator
and denominator of the diluted EPS computation. The new statement is effective
for financial statements for both interim and annual periods ending after
December 15, 1997. Adoption of SFAS No. 128 will not result in any material
change to the earnings per share amounts for the quarters and six months ended
June 30, 1997 and 1996.
FASB No. 129 - Disclosure of information about Capital Structure, FASB
No. 130 - Reporting Comprehensive Income, and FASB No. 131 - Disclosures about
Segments of an Enterprise and Related Information were also issued during the
first six months of 1997. These new statements are effective for financial
statements for both interim and annual periods ending after December 15, 1997.
Adoption of these statements will not have any material effect on the Company's
consolidated financial statements for the
6
<PAGE>
ASR INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarters and Six Months Ended June 30, 1997 and 1996
quarters and six months ended June 30, 1997 and 1996.
Convertible LP Units - The limited partnership units of Heritage
Communities L.P. held by non-affiliates of the Company are accounted for as a
part of stockholders' equity. Distributions on the units are subtracted from
deficit as declared. LP units held by non-affiliates are considered common stock
equivalents in the determination of earnings per share. See Note 3 for
additional description of the Partnership and the limited partnership units.
Gain on Sale of Real Estate - Gains on sales of properties are
recognized by the Company when the recognition criteria set forth by generally
accounting principles have been met.
Forward-Looking Statements - This Form 10Q report contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. The Company's actual results could differ materially from those set
forth in the forward-looking statements as a result of, among other things, the
risk factors set forth in the Company's filings with the Securities and Exchange
Commission, changes in general economic conditions and changes in the
assumptions used in making such forward-looking statements.
7
<PAGE>
ASR INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarters and Six Months Ended June 30, 1997 and 1996
2. REAL ESTATE ACQUISITIONS AND DEVELOPMENT
At December 31, 1996, the Company owned directly 19 apartment
communities (3,093 units) located in Arizona, Texas, and New Mexico. In March
1997, the Company acquired a 266-unit apartment community in northwest Houston,
Texas for $4,450,000. The Company plans to spend $700,000 on numerous
substantive improvements to the community. The Company obtained a first mortgage
loan of $3,700,000 with a fixed rate of 8.39%. The Company issued 86,500 shares
of common stock for net proceeds of $1,622,000 to provide for the cash used in
the acquisition.
In April 1997, the Company acquired a 257-unit community in Houston,
Texas, for $6,000,000 and obtained a first mortgage loan for $4,400,000 with an
interest rate of 8.57%. The Company plans to spend $600,000 on numerous
substantive improvements to the community. On May 9, 1997, the Company acquired
a 176-unit apartment community in Seattle, Washington, for $4,059,000 and
obtained a first mortgage loan of $2,900,000 with an interest rate of 8.67%. The
Company plans to spend $400,000 on numerous substantive improvements to the
community. The Company issued 187,847 shares of common stock for total net
proceeds of $3,394,000 to pay for the two purchases.
In March 1996, the Company began construction of a 356-unit apartment
community, Finisterra Apartments, in Tempe, Arizona. The total cost is estimated
to be approximately $21,000,000. As of June 30, 1997 and December 31, 1996, the
Company had invested $20,368,000 and $14,694,000 in construction in progress.
The Company has obtained a $15,350,000 construction loan of which $12,547,000
was outstanding at June 30, 1997. The Company has begun the lease-up phase and
anticipates construction to be substantially completed at the end of the third
quarter.
On April 30, 1997, the Company completed the acquisition of 13
apartment communities containing 2,260 units located in Houston and Dallas,
Texas and Pullman, Washington, and one office building located in Seattle
Washington (the "Winton Properties"). The acquisitions were made pursuant to a
Master Combination and Contribution Agreement dated November 8, 1996. The
sellers were 15 separate limited partnerships in which Don W. Winton was the
general partner. The total purchase price of the properties was approximately
$83,223,000. The Company (i) assumed or refinanced first mortgage loans
totalling $49,396,000, (ii) issued 682,095 shares of
8
<PAGE>
ASR INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarters and Six Months Ended June 30, 1997 and 1996
common stock, (iii) issued limited partnership units ("LP Units") convertible to
943,705 shares of common stock of the Company after April 30, 1998 and (iv) paid
the sellers $1,250,000 for transaction costs. As a part of the acquisition, the
Company issued 70,284 shares of common stock to acquire the entire interests in
Winton & Associates, the property management company for the Winton Properties.
The acquisitions of the Winton properties and Winton & Associates have
been accounted for under the purchase method. The common stock and the LP Units
are recorded at $20.038 per share, the average closing price of the Company's
common stock for the ten days preceding the announcement the acquisitions on
November 19, 1996. The excess of the cost of the purchase price of Winton &
Associates over the net tangible assets acquired is recorded as goodwill that is
amortized over 20 years.
Prior to May 1997, the Company owned six apartment communities (1,441
units) located in Arizona through joint ventures with a pension plan affiliate
of Citicorp. The Company was a 15% equity partner and the managing partner or
managing member of the joint ventures. On May 1, 1997, the Company acquired the
remaining interest in one of the joint ventures, La Privada Apartments L.L.C.,
for $8,233,000. The La Privada Apartments is a 350-unit community in Scottsdale,
Arizona. The Company obtained a $3,000,000 loan to pay for the acquisition. The
loan bears interest at 3% over LIBOR. The purchase increased the Company's
investment in apartments by approximately $25,500,000 and real estate notes
payable by $19,000,000. The Company sold to its partner the Company's entire
interests in the other five joint ventures for total net proceeds of $2,062,000.
The Company recorded a gain of $474,000 on the sale of the interests in the
joint ventures.
As of June 30, 1997, the Company owns 36 apartment communities
containing 6,346 units and an office building.
The following selected unaudited pro forma results of operations data
for the six months ended June 30, 1997 have been prepared as if the 1997
acquisitions described above had occurred at January 1, 1997. The proforma data
are provided for information purposes only and are not indicative of the results
that would have occurred or which may occur in the future (dollars in thousands,
except per share amounts).
9
<PAGE>
ASR INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarters and Six Months Ended June 30, 1997 and 1996
Real estate revenues $18,012
Real estate operating expenses:
Operating expenses (8,402)
Depreciation (3,761)
Interest (5,448)
-------
Income from real estate 401
Income from mortgage assets 17,265
Administrative expenses (8,039)
Other income 615
-------
Net Income $10,242
=======
Pro Forma Net Income Per Share $1.90
=====
3. HERITAGE COMMUNITIES L.P.
The Company formed Heritage Communities L.P. ("Heritage LP"), an
operating partnership, for the purpose of acquiring the Winton Properties and
other apartment communities. Heritage is a Delaware limited partnership in which
the Company and a wholly owned subsidiary of the Company, Heritage SGP, are the
sole general partners. To the extent that Heritage LP has sufficient operating
cash flows, holders of limited partnership units ("LP Units") will receive
quarterly distributions per unit equal to the per share dividend on the
Company's common stock. To the extent that Heritage LP has insufficient cash to
pay the distributions, the holders of LP units will be credited for the unpaid
distribution and interest on the unpaid distribution; such unpaid balances will
be given priority for future distributions.
Heritage LP's items of income, gain, loss and deduction are allocated
among its partners, subject to certain special allocations, in a similar manner
for purposes of both book gain or loss and tax gain or loss. Net income is
allocated (i) first, to each limited partner to the extent that, on a cumulative
basis, net losses previously allocated to the limited partners exceed net income
previously allocated to limited partners, (ii) second, to each limited partner
to the extent that such limited partner has been allocated on a cumulative
basis, net income equal to the sum of the distributions paid to such limited
partner and the unreturned balances in the accrual accounts and the unpaid
distribution accounts maintained with respect to the LP Units held by such
limited partner, and (iii)
10
<PAGE>
ASR INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarters and Six Months Ended June 30, 1997 and 1996
the general partners on a pro rata basis. Notwithstanding the allocations in (i)
and (ii) above, at least one percent of each item of gain, loss, income and
deduction for each year is allocated to the general partners.
Net losses are allocated to the partners in accordance with their
respective percentage interests in Heritage LP, except that net losses are not
allocated to any limited partner to the extent that such allocation would cause
the limited partner to have an adjusted capital account deficit at the end of
the taxable year. All net losses in excess of such limitations will be allocated
to the general partners on a pro rata basis
After April 30, 1998, the first anniversary of the Partnership
Agreement, each LP Unit will be convertible to one share of the Company's Common
Stock. If an LP Unit is converted prior to April 30, 2007, the holder will also
be paid any unpaid balances in the holder's distribution account. An LP Unit
holder who exercises the conversion after April 30, 2007 will not be paid any
unpaid balance in the holder's distribution account if the market value of the
Company's common stock is equal to at least 110% of the sum of the initial
contribution and the unpaid balance.
Holders of LP Units do not have the right to take part in the
management or control of the business or affairs of Heritage L.P. Amendment of
the partnership agreement would require the consent of the general partners and
more than 50% of the LP Units. Heritage L.P. will be dissolved upon the
occurrence of certain specified and limited events or December 31, 2086.
In connection with the acquisition of the Winton Properties, Heritage
LP issued 943,705 LP Units to the sellers and 705,386 LP Units to the Company.
In connection with the acquisition of three apartment communities in April and
May, 1997, Heritage LP issued an additional 274,350 LP Units to the Company. As
of June 30, 1997, Heritage LP had 1,923,441 LP Units outstanding, of which
979,736 Units (50.94%) were owned by the Company. Heritage LP declared a
distribution of $0.50 per Unit for the quarter ended June 30, 1997 that was paid
in July.
11
<PAGE>
ASR INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarters and Six Months Ended June 30, 1997 and 1996
4. MORTGAGE ASSETS
In April 1997, the Company redeemed two assets for proceeds of $715,000
and income of $341,000. In June 1997, the Company sold all of its remaining
mortgage assets for $13,350,000 and a gain of $10,970,000. The Company paid off
the related short-term borrowing of $500,000. During the first six months of
1997, the Company received a total of $20,880,000 from the sale of the mortgage
assets and realized total redemption income of $16,650,000. During the first six
months of 1996, the Company received a total of $6,000,000 from the sale or
redemption of mortgage assets and realized total redemption income of
$4,987,000.
5. NOTES PAYABLE
During the second quarter of 1997, the Company obtained new mortgage
loans or assumed existing mortgage loans totalling $75,605,000 in connection
with its apartment acquisitions. At June 30, 1997, the total permanent mortgage
loans had a weighted average stated rate of 8.2%.
As discussed in Note 2, the Company has obtained a $15,350,000
construction loan to finance the construction of its Finisterra apartment
community. The loan bears interest at 1% per annum above the bank's prime rate
(8.5%). At June 30, 1997 and December 31, 1996, the amount outstanding on the
loan was $12,547,000 and $255,000, respectively.
6. RELATED PARTY TRANSACTIONS
From the inception of the Company through April 30, 1997, Pima Mortgage
L.P. (the "Manager"), managed the operations of the Company pursuant to a
management agreement. The Company also had a property management agreement with
Pima Realty Advisors, Inc. (the "Property Manager") for each of its apartment
communities. The Manager and the Property Manager were owned by three principal
executive officers of the Company. On April 30, 1997, pursuant to the approval
of the Company's stockholders, the Company acquired the entire interests in the
Manager and the Property Manager for 262,008 shares of common stock. The shares
are recorded at $20.038 per share which was the average closing price of the
common stock for the ten days preceding the public announcement of
12
<PAGE>
ASR INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarters and Six Months Ended June 30, 1997 and 1996
the acquisition. In addition, the Company also paid the three principal
executive officers $802,700 in connection with the acquisition of the Winton
Properties. As the contracts with the Pima entities were effectively terminated,
the cost of the Pima entities and the amounts paid to the executive officers
were recorded as an acquisition related expense in the accompanying statements
of income.
The Company paid the Manager management fee and administrative fee of
$84,000 and $219,000 for the quarter and six months ended June 30, 1997 and
$165,000 and $313,000 for the same periods of 1996. The Company paid the
Property Manager $45,000 and $190,000 for the quarter and six months ended June
30, 1997 and $90,000 and $202,000, for the same periods of 1996.
13
<PAGE>
ASR INVESTMENTS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
For the Quarters and Six Months Ended June 30, 1997 and 1996
General
ASR Investments Corporation (the "Company") is a real estate investment
trust engaged primarily in the acquisition and operation of apartment
communities in the southwestern United States. At December 31, 1996, the Company
owned 3,093 units. In March 1997, the Company acquired a 266-unit apartment
community. In April 1997, the Company acquired a 257-unit apartment community.
On April 30, 1997, the Company acquired 13 apartment communities containing
2,260 units and one office building (the "Winton Properties"). In May 1997, the
Company acquired two apartment communities totalling 526 units and sold its
investment in joint ventures. At June 30, 1997, the Company owned 36 apartment
communities with a total of 6,347 units and an office building. As the Company
acquired these new properties throughout the quarter, its operating results for
the quarter ended June 30, 1997 include only a partial quarter's operating
results of the new properties acquired. Their full quarterly results will be
reflected in the quarter ending September 30, 1997.
In connection with the acquisition of the Winton Properties, on April
30, 1997, the Company also acquired (i) Winton Associates (the property
management company for the Winton Properties), (ii) Pima Realty Advisors, Inc.
(the Company's Property Manager) and (iii) Pima Mortgage L.P. (the Company's
Manager).
In June 1997, the Company sold all its remaining mortgage assets for
$13,350,000 for a gain of $10,970,000. For the six months ended June 30, 1997,
the Company received $22,277,000 from the mortgage assets. The Company plans to
invest a majority of this amount in additional apartment communities. As a
result of the sale of all of its mortgage assets, the Company will not realize
any mortgage asset cash flows or income in future periods.
14
<PAGE>
ASR INVESTMENTS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
For the Quarters and Six Months Ended June 30, 1997 and 1996
Results of Operations
Comparison of Quarters Ended June 30, 1997 and 1996
Real Estate Operations - Real estate operating income and expenses
increased substantially primarily due to acquisitions made on April 30, 1997.
Below are the operating results of the new communities for the period owned by
the Company during the second quarter of 1997 (in thousands):
Rental and other income $ 3,432
Property management income 46
--------
Total real estate revenues 3,478
--------
Operating & maintenance expenses 1,166
Property management expenses 63
Real estate taxes & insurance expenses 451
Interest expense 1,072
Depreciation expense 683
--------
Total real estate operating expenses 3,435
--------
Income from real estate $ 43
========
On the "same store" basis (i.e., for properties owned by the Company
during the second quarter of 1996), the Company realized (i) an increase of
$65,000 in rental income (primarily in the Houston market) and (ii) an increase
of $29,000 in operating expenses (primarily in the Albuquerque market). As a
result of the sale of the Company's interest in joint ventures, income from the
joint ventures decreased by $16,000.
The gain on sale of real estate of $474,000 resulted from the sale of
the Company's interest in the joint ventures in May of 1997. The Company had no
sales of real estate in 1996.
Mortgage Assets - Prospective yield income decreased due to the
decrease in the mortgage asset balance as a result of amortization and
redemptions and to the sale of the entire mortgage asset portfolio in June 1997.
Interest expense on mortgage assets decreased due to lower short-term borrowing
as well as the full repayment in June 1997.
15
<PAGE>
ASR INVESTMENTS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
For the Quarters and Six Months Ended June 30, 1997 and 1996
Administrative Expenses, Acquisition Related Expenses and Other Income
Administrative expenses increased by $139,000 primarily as a result of (i) an
increase in expense accruals for stock appreciation rights of $93,000 due to an
increase in the Company's common stock price and (ii) an increase of
approximately $44,000 in accounting and tax consulting fees. Acquisition related
expenses of $6,215,000 relates to (i) the acquisition of the Company's Manager
and Property Manager for $5,250,000 (see Note 6), (ii) $802,700 paid its three
principal executive officers who are also owners of the Manager and Property
Manager in connection with the acquisition of the Winton Properties (see Note 6)
and (iii) $162,000 in other expenses related to the Winton Properties. Other
income increased by $39,000 due to interest earned on the Company's cash balance
which was higher during the 1997 quarter compared with the 1996 quarter.
Comparison of Six Months Ended June 30, 1997 and 1996
Real Estate Operations - Real estate operating income and expenses
increased substantially primarily due to acquisitions made on April 30, 1997.
Below are the operating results of the new communities for the period owned by
the Company during the first six months of 1997 (in thousands):
Rental and other income $ 3,441
Property management income 46
---------
Total real estate revenues 3,487
---------
Operating & maintenance expenses 1,253
Property management expenses 63
Real estate taxes & insurance expenses 451
Interest expense 1,072
Depreciation expense 683
---------
Total real estate operating expenses 3,522
---------
Income from real estate ($ 35)
=========
On the "same store" basis (i.e., for properties owned by the Company
during the first six months of 1996), the Company realized (i) an increase of
$105,000 in rental income (primarily in the Houston market) and (ii) an increase
of $99,000 in operating expenses. As a result of the sale of the Company's
interest in joint ventures, income from the joint ventures decreased by $10,000.
16
<PAGE>
ASR INVESTMENTS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
For the Quarters and Six Months Ended June 30, 1997 and 1996
The gain on sale of real estate of $474,000 resulted from the sale of
the Company's interest in the joint ventures in May of 1997. The Company had no
sales of real estate in 1996.
Mortgage Assets - Prospective yield income decreased due to the
decrease in the mortgage asset balance as a result of (i) amortization and
redemptions in 1996 and the first quarter of 1997 and (ii) the sale of the
entire mortgage asset portfolio in June 1997. Interest expense on mortgage
assets decreased due to lower short-term borrowing as well as the full repayment
in June 1997.
Administrative Expenses, Acquisition Related Expenses and Other Income
Administrative expenses increased by $608,000 for the six months ended June 30,
1997 primarily as a result of an increase in expense accruals for stock
appreciation rights of $672,000 due to an increases in the Company's common
stock price. The increases were mitigated by a decrease in management fees of
$39,000 as the management contract was terminated on April 30,1997. Acquisition
related expenses of $6,215,000 relates to (i) the acquisition of the Company's
Manager and Property Manager for $5,250,000 (see Note 6), (ii) $802,700 paid its
three principal executive officers who are also owners of the Manager and
Property Manager in connection with the acquisition of the Winton Properties
(see Note 6) and (iii) $162,000 in other expenses related to the Winton
Properties. Other income increased by $186,000 due to interest earned on the
Company's cash balance which was higher during the first six months of 1997
compared with the same period in 1996.
Income from Mortgage Redemption and Sales - As discussed above, the
Company has, from time to time, redeemed or sold mortgage assets. In June 1997,
the Company sold all of its remaining mortgage assets for approximately
$13,350,000 and a gain of $10,970,000. As a result of the sale, the Company no
longer owns any mortgage assets and will not realize any additional cash flow or
income from mortgage assets. The Company plans to use the proceeds to purchase
additional apartment communities that are under evaluation.
The Company expects net income for future periods will decrease
substantially because of the additional depreciation expense from the new
apartment communities and the absence of income from mortgage assets.
17
<PAGE>
ASR INVESTMENTS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
For the Quarters and Six Months Ended June 30, 1997 and 1996
Funds From Operations - The Company believes that funds from operations
("FFO") is one of the appropriate measures of performance of an equity REIT. FFO
is generally defined as net income plus certain non-cash charges (primarily
depreciation and amortization), less gains from sales of assets and after
adjustments for unconsolidated partnerships and joint ventures. As a result, FFO
provides a view of a REIT's performance without regard to depreciation and
amortization and gains on sales of assets. The Company has made the following
adjustments in calculating FFO, as modified: (i) income from redemptions and
sales of mortgage assets is excluded as the Company considers such income to be
similar in nature to gains from sales of real estate; certain non-recurring
charges are added back as the charges relate to a defined and limited period;
and (iii) while the stock options that carry dividend equivalent rights ("DERs")
are anti-dilutive, they are included in the FFO per share calculation as the
Company believes the options are likely to be exercised by their expiration date
of December 16, 1998 because the exercise price is substantially below the
current stock price.
As not all REITs and financial analysts calculate FFO in the same
manner, FFO as reported herein may not be comparable to similarly titled
measures as reported by other REITs. FFO, as modified, should not be considered
as an alternative to net income (determined in accordance with generally
accepted accounting principles) as an indication of Company's financial
performance or to cash flow through operating activities (determined in
accordance with generally accepted accounting principles) as FFO excludes income
from sales and redemptions of mortgage assets that are included in cash flow
through operating activities and (ii) FFO is not adjusted for changes in accrual
as is cash flow from operating activities. FFO is not necessarily indicative of
available cash flow to fund all of the Company's needs. The Company believes
that in order to facilitate a clear understanding of the consolidated historical
operating results of the Company, FFO should be considered in conjunction with
net income as presented in the consolidated financial statements.
Calculation of FFO, as modified, for the six months ended June 30, 1997
is as follows (in thousands except per share amounts):
18
<PAGE>
ASR INVESTMENTS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
For the Quarters and Six Months Ended June 30, 1997 and 1996
Pro Forma
Combined (**)
Six Months Six Months
---------- -----------
Net Income $ 10,174 $ 10,242
Depreciation and amortization 2,146 3,875
Certain non-recurring charges (*) 6,953 6,953
Dividend equivalent rights 340 340
Income from redemptions and sales of
mortgage assets (16,650) (16,650)
Gain on sale of real estate (474) (474)
-------- --------
Funds from operations $ 2,489 $ 4,286
======== ========
Average shares of common stock and
common stock equivalents 3,938 5,379
Effect of assumed exercise of stock options 188 188
-------- --------
Assumed number of shares 4,126 5,567
======== ========
FFO per share $ 0.60 $ 0.77
======== ========
(*) - Non-recurring charges relate to stock appreciation rights for
certain employees, acquisition-related expenses and contract
termination expense.
(**) - The selected unaudited pro forma data for the six months ended
June 30, 1997 have been prepared as if the 1997 acquisitions, described below
under "1997 Acquisitions", had occurred at January 1, 1997 (See Note 2). The
proforma data are provided for information purposes only and are not indicative
of the results that would have occurred or which may occur in the future.
The Company expects its FFO to increase as (i) it completes the
construction of its Finisterra Apartments in September 1997 and (ii) it invests
the proceeds from the sale of the mortgage assets. The above FFO data, however,
are not necessarily indicative of the FFO amounts for future periods as they
will depend on the performance of the existing apartment communities and as well
as new communities.
19
<PAGE>
ASR INVESTMENTS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
For the Quarters and Six Months Ended June 30, 1997 and 1996
Liquidity, Capital Resources and Commitments
Comparison of Six Months Ended June 30, 1997 and 1996 - Cash provided
by operations for the six months ended June 30, 1997 was $19,919,000 compared
with $7,568,000 for the same period in 1996. The increase was primarily a result
of a $11,663,000 increase in income from redemptions and sales of mortgage
assets ($16,650,000 for the six months ended June 30, 1997 compared to
$4,987,000 for the same period in 1996), which was mitigated by a $981,000
decrease in prospective yield income on the mortgage assets.
Cash used in investing activities for the six months ended June 30,
1997 was $10,340,000 compared with $860,000 for the same period in 1996. The
increase in cash usage of $9,480,000 reflects (i) an increase of $10,208,000 in
investments in apartments primarily as a result of the acquisitions made in
1997, while making no acquisitions in 1996, (ii) an increase of $2,361,000 of
construction expenditures for the Company's Finisterra apartment community and
(iii) an increase of $2,418,000 in restricted cash related primarily to the 1997
acquisitions of apartment communities. The increase in cash usage was mitigated
by (i) an increase of $2,025,000 in the reduction in mortgage assets, (ii)
$3,178,000 from joint venture distributions and proceeds resulting from the sale
of the Company's interest in such joint ventures and (iii) net increase of
$304,000 in cash provided by other real estate and land held for development.
Cash provided by financing activities for the six months ended June 30,
1997 was $5,719,000 compared with cash used in financing activities of
$3,682,000 for the same period in 1996. The increase of $9,401,000 reflects (i)
an increase in the issuance of real estate notes payable of $3,000,000 related
to the acquisitions made during 1997, with no similar purchases in 1996, (ii) an
increase of $12,049,000 in proceeds from the Finisterra Apartment's construction
loan and (iii) an increase of $17,000 from the exercise of stock options. The
increase was mitigated by (i) an increase of $638,000 in payments of dividends
due to the stock issuance in 1997, (iv) an increase in distributions on LP Units
of $471,000 as the LP Units did not exist in 1996, (iii) a decrease in the
accrued construction cost payable of $3,003,000 for the Finisterra Apartment
community, (iv) an increase of $1,048,000 in loan fees related to the properties
acquired in 1997, (v) an increase of $481,000 in the acquisition of treasury
stock and (vi) a net increase in payments on real estate loans and short-term
borrowing of $24,000.
20
<PAGE>
ASR INVESTMENTS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
For the Quarters and Six Months Ended June 30, 1997 and 1996
1997 Acquisitions - In March 1997, the Company acquired a 266-unit
apartment community for $4,450,000 and obtained a first mortgage loan of
$3,700,000 with a fixed rate of 8.39%. The Company issued 86,500 shares of
common stock for net proceeds of $1,622,000 to provide for the cash used in the
acquisition. The Company plans to spend $700,000 on numerous substantive
improvements to the community.
On April 30, 1997, the Company completed the acquisition of 13
apartment communities containing 2,260 units located in Houston and Dallas,
Texas and Pullman, Washington, and one office building located in Seattle,
Washington (the "Winton Properties"). The sellers were 15 separate limited
partnerships in which Don W. Winton was the general partner. The total purchase
price of the properties was approximately $83,223,000. The Company (i) assumed
or refinanced first mortgage loans totalling $49,396,000, (ii) issued 682,095
shares of common stock, (iii) issued operating partnership units convertible to
943,705 shares of common stock of the Company after one year, and (iv) paid the
sellers $1,250,000 for transaction costs. As a part of the acquisition, the
Company issued 70,284 shares of common stock to acquire the entire interests in
Winton & Associates, the property management company for the Winton Properties.
In April 1997, the Company acquired an apartment community for
$6,000,000 and obtained a first mortgage loan for $4,400,000 with a fixed rate
of 8.57%. On May 9, 1997, the Company acquired an apartment community for
$4,059,000 and obtained a first mortgage loan of $2,900,000 with a fixed rate of
8.67%. The Company expects to invest $1,000,000 in capital improvements in these
two communities. The Company issued 187,847 shares of common stock for total net
proceeds of $3,394,000 to pay for the two purchases.
On May 1, 1997, the Company acquired the remaining interest in La
Privada Apartments L.L.C. for $8,233,000. The La Privada Apartments is a
350-unit community in Scottsdale, Arizona. The Company also sold to its partner
the Company's entire interests in the other five joint ventures for total net
proceeds of $2,062,000. The Company obtained a $3,000,000 loan that bears
interest at LIBOR plus 3%.
With the above acquisitions, the total monthly principal and interest
payments on the real estate mortgage loans are approximately $1,023,000, and the
monthly deposits to loan escrow accounts for property taxes, insurance and
capital replacements are
21
<PAGE>
approximately $464,000. The Company estimates that it will spend approximately
$1,674,000 during the remainder of 1997 in capital replacement and improvement
expenditures.
Concurrent with the acquisition of the Winton Properties, the Company
acquired the entire interests in Pima Mortgage and Pima Realty (collectively the
"Pima Entities") in exchange for 262,008 shares of its common stock. The cost of
the acquisition of $5,250,000 is assigned to the contracts between the Company
and the Pima Entities. In addition, the Company paid its three principal
executive officers who are also owners of the Pima Entities $802,700 in
connection with the acquisition of the Winton Properties. As the contracts with
the Pima Entities were effectively terminated, the cost of the Pima Entities and
the amounts paid to the executive officers were recorded as acquisition related
expenses in the second quarter of 1997.
The Company anticipates that the above acquisitions will result in (i)
significant increases in the Company's gross income and operating expenses, (ii)
an increase in interest expenses on real estate mortgages, (iii) a decrease in
administrative expenses resulting from the replacement of management fees
previously paid to the Pima Entities by Company with salaries that are now paid
to the owners of the managers who have become employees of the Company as of May
l, 1997.
Cash Balances - At June 30, 1997, the Company had cash of $17,701,000.
The Company intends to use such funds for acquiring apartment communities,
making capital improvements on existing apartment communities, paying dividends
and other corporate uses.
Other Information
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.
22
<PAGE>
ASR INVESTMENTS CORPORATION
QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended June 30, 1997
PART II
OTHER INFORMATION
Item 1. Legal Proceedings - None
-----------------
Item 2. Changes in Securities - Not applicable
---------------------
Item 3. Defaults Upon Senior Securities - Not applicable
-------------------------------
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
(a) A special meeting of the stockholders of the Company was held on
April 23, 1997 at 9:00 a.m., at the Viscount Suite Hotel, 4855 E. Broadway,
Tucson, Arizona. There were 3,147,150 shares outstanding on the date of record
for the special meeting.
(b) As described in the Proxy Statement dated March 27, 1997, the
Company entered into a Master Combination and Contribution Agreement pursuant to
which the Company would acquire up to 13 apartment communities, one office
building and a related property management company as well as the Company's
manager and property manager. The proposals were approved and the votes were as
follows:
Proposal 1a, the approval of the Combination Proposal:
FOR AGAINST ABSTAIN BROKER NON-VOTE
--- ------- ------- ---------------
829,750 119,500 60,603 1,455,268
Proposal 1b(i), the approval of the acquisition of the 14 properties,
related management company and other related components of the Combination
Proposal:
FOR AGAINST ABSTAIN BROKER NON-VOTE
--- ------- ------- ---------------
760,235 111,174 32,263 1,561,235
23
<PAGE>
Proposal 1 b(ii), the approval of the components related to the mergers
of the Company's manager and property management company and the amendment to
Section 3.08 of the Bylaws of the Company.
FOR AGAINST ABSTAIN BROKER NON-VOTE
--- ------- ------- ---------------
747,197 119,081 37,611 1,561,235
Proposal 2, approval and adoption of the Amendment and Restatement of
the Amended and Restated Articles of Incorporation of the Company to include
additional provisions designed to further protect the Company's status as a real
estate investment trust:
FOR AGAINST ABSTAIN BROKER NON-VOTE
--- ------- ------- ---------------
2,351,432 76,326 37,363 0
Item 5. Other Information - Not applicable
-----------------
Item 6 Exhibits and Reports on Form 8-K -
--------------------------------
(a) Exhibits - 27.1 Financial Data Schedule (For SEC use only)
(b) Reports on Form 8-K:
A report on Form 8-K dated April 30, 1997 and filed on May 15, 1997,
reporting the acquisition of 14 properties and the related property management
company (Winton & Associates), the Company's manager (Pima Mortgage L.P.) and
the Company's property manager (Pima Realty Advisors, Inc.).
A Form 8-K/A-1, dated April 30, 1997, was filed on June 6 , 1997
amending the Form 8-K filed on May 15, 1997 to include (i) historical summary of
revenues and certain operating expenses for the year ended December 31, 1996 and
the three months ended March 31, 1997, (ii) proforma combined financial
statements for the quarter ended March 31, 1997 and the year ended December 31,
1996 and (iii) other financial information and exhibits for the acquisitions
described in the 8-K.
A Form 8-K, dated June 4, 1997, was filed on June 17, 1997, reporting
the sale of all the Company's mortgage assets.
24
<PAGE>
* * * * * * * * * * * * * * * *
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ASR INVESTMENTS CORPORATION
Mary C. Clements Joseph C. Chan
- ------------------------- ------------------
Mary C. Clements Joseph C. Chan
Controller Executive Vice President,
August 13, 1997 Chief Operating Officer,
Chief Financial and Accounting Officer
August 13, 1997
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