ASR INVESTMENTS CORP, S-3, 1997-08-29

ASR INVESTMENTS CORP
S-3, 1997-08-29
REAL ESTATE INVESTMENT TRUSTS

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As filed with the Securities and Exchange Commission on August 29, 1997
Registration No. 333-
================================================================================

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
----------------

FORM S-3
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
----------------

ASR INVESTMENTS CORPORATION
(Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
Maryland 6511 86-0587826
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
</TABLE>

335 North Wilmot, Suite 250, Tucson, Arizona 85711, (520) 748-2111
(Address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices)
----------------

Jon A. Grove
335 North Wilmot, Suite 250, Tucson, Arizona 85711, (520) 748-2111
(Name, address, including zip code, and telephone number, including area code,
of agent for service)

----------------

Copy to:
Robert S. Kant, Esq.
O'Connor, Cavanagh, Anderson,
Killingsworth & Beshears, P.A.
One East Camelback, Phoenix, Arizona 85012,
(602) 263-2606

Approximate date of Commencement of Proposed Sale to the Public:
As soon as practicable after the Registration Statement becomes effective.

If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]

If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, please check the following box. [X]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]______________

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]______________

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]

CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
========================================================================================================
Amount Proposed Maximum Proposed Maximum
Title of Shares to be Offering Price Per Aggregate Amount of
to be Registered Registered Share(1) Offering Price(1) Registration Fee
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock ...... 374,581 Shares $22.5625 $8,451,484 $2,561.06
========================================================================================================
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c).
----------------

Pursuant to Rule 429 under the Securities Act of 1933, the Prospectus
contained in this Registration Statement also relates to an aggregate of
1,312,737 shares of the Registrant's Common Stock registered on Form S-3,
Registration No. 333-28241, which registration fee has been previously paid.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.

SUBJECT TO COMPLETION DATED AUGUST 29, 1997

PROSPECTUS

1,687,318 Shares

ASR INVESTMENTS CORPORATION

Common Stock
----------------

The 1,687,318 shares of Common Stock, $.01 par value per share ("Common
Stock"), of ASR Investments Corporation (the "Company") are being offered by
certain stockholders of the Company (the "Selling Stockholders"). See
"Principal and Selling Stockholders". To the extent required by applicable law
or Securities and Exchange Commission regulations, this Prospectus shall be
delivered to purchasers upon resale of shares of Common Stock by the Selling
Stockholders The Company will not receive any of the proceeds from the sale of
shares by the Selling Stockholders.

The Common Stock is listed on the American Stock Exchange (the "Amex")
under the Symbol "ASR." On August 25, 1997, the closing price for the Common
Stock on the Amex was $22 9/16 per share.

For a discussion of certain factors that should be considered by
prospective purchasers of Common Stock offered hereby, see "Risk Factors"
beginning at page 10.
----------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.

----------------

The date of this Prospectus is , 1997
<PAGE>
AVAILABLE INFORMATION

The Company has filed with the Securities and Exchange Commission,
Washington, D.C. 20549, a Registration Statement on Form S-3 under the
Securities Act of 1933, with respect to the shares offered hereby. This
Prospectus does not contain all the information contained in the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the Commission. For further information regarding the Company
and the shares of Common Stock offered hereby, reference is made to the
Registration Statement, including the exhibits which are a part thereof, which
may be obtained upon request to the Commission and the payment of the
prescribed fee. Material contained in the Registration Statement may be
examined at the Commission's Washington, D.C. office and copies may be obtained
at the Commission's Washington, D. C. office upon payment of prescribed fees.
Statements contained in this Prospectus are not necessarily complete, and in
each case reference is made to the copy of such contracts or documents filed as
an exhibit to the Registration Statement, each such statement being qualified
by this reference.

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements, and other information may be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N. W.,
Washington, D. C. 20549, and at the following Regional Offices of the
Commission: New York Regional Office, Seven World Trade Center, New York, New
York 10048, and Chicago Regional Office, 500 West Madison Street, Chicago,
Illinois 60661. Copies of such material may be obtained from the Public
Reference Section of the Commission, Room 1024, Judiciary Plaza, 450 Fifth
Street, N. W., Washington, D. C. 20549 upon payment of the prescribed fees. The
Commission also maintains a Web site that contains reports, proxy and
information statements and other materials that are filed through the
Commission's Electronic Data Gathering, Analysis, and Retrieval system. This
Web site can be accessed at http://www.sec.gov. The Common Stock of the Company
is listed on the American Stock Exchange. Reports, proxy or information
statements, and other information concerning the Company may be inspected at
the American Stock Exchange at 86 Trinity Place, New York, NY 10006-1881.

INCORPORATION OF CERTAIN INFORMATION BY REFERENCE

The Company hereby incorporates by reference in this Prospectus the
following documents previously filed with the Commission pursuant to the
Exchange Act: (i) the Company's Annual Report of Form 10-K for the year ended
December 31, 1996, as filed by the Company on March 28, 1997; (ii) the
description of the Company's Common Stock contained in the Registration
Statement on Form 8-A as filed with the Commission on July 31, 1987, (iii) the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997,
as filed on May 14, 1997, (iv) the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997, as filed on August 13, 1997, (v) the Company's
Current Report on Form 8-K as filed with the Commission on May 15, 1997, as
amended on Form 8-K/A filed by the Company on June 16, 1997, (vi) the Company's
Current Report on Form 8-K as filed by the Company on June 18, 1997 and (vii)
the Company's Current Report on Form 8-K as filed by the Company on August 28,
1997.

All reports and other documents subsequently filed by the Company pursuant
to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Prospectus shall be deemed to be incorporated by reference herein and to be a
part hereof from the date of filing of such reports and documents. Any
statement contained in a document incorporated or deemed to be incorporated by
reference herein prior to the date hereof shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statment
contained herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Prospectus.

The information relating to the Company contained in this Prospectus
summarizes, is based upon, or refers to, information and financial statements
contained in one or more of the documents incorporated by reference herein;
accordingly, such information contained herein is qualified in its entirety by
reference to such documents and should be read in conjunction therewith.

The Company will furnish without charge to each person to whom this
Prospectus is delivered, upon the written or oral request of such person, a
copy of any or all of the documents referred to above that have been
incorporated by reference herein (other than exhibits to such documents, unless
such exhibits are specifically incorporated by reference into the information
that this Prospectus incorporates). Requests should be directed to ASR
Investments Corporation, 335 North Wilmot, Suite 250, Tucson, Arizona 85711,
Attention: Secretary.
2
<PAGE>
PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements appearing elsewhere or
incorporated by reference in this Prospectus. Unless otherwise indicated, all
information in this Prospectus (i) assumes no exercise of outstanding stock
options and no conversion of LP Units in the Operating Partnership as described
herein, and (ii) reflects a one-for-five reverse stock split affected in July
1995.

The Company

The Company currently owns and operates 36 apartment communities,
containing 6,347 apartment units, located in Phoenix and Tucson, Arizona;
Houston and Dallas, Texas; Albuquerque, New Mexico; and Pullman, Washington.
The apartment communities are "garden apartments," typically consisting of two-
and three-story buildings in landscaped settings with ground level parking. The
communities are well maintained and targeted to provide attractive lifestyles
at low to moderate rates.

The Company has acquired 17 of its 36 apartment communities since January
1, 1997. The Company's business objectives are to increase the cash flow and
value of its existing portfolio of apartment communities and to continue to
expand its portfolio of apartment communities through the acquisition and
development of additional communities. Key elements of the Company's strategy
to achieve its objectives include (i) enhancing the performance and value of
its existing properties by maintaining high occupancy and favorable rental
rates, managing operating expenses, and emphasizing regular programs of repairs
and capital improvements, (ii) acquiring and developing additional apartment
communities that have strong cash flows and capital appreciation potential,
(iii) focusing on middle income properties located in geographical areas that
the Company believes will experience higher growth rates in population,
household formation, and employment that the national average, and (iv)
disposing of investments that no longer satisfy the Company's objectives.

The Company has elected to be taxed as a REIT under sections 856 through
860 of the Internal Revenue 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 maintains its qualification as a REIT.

The Company owns the apartment communities through wholly owned
subsidiaries or through Heritage Communities L.P., a Delaware limited
partnership ("Heritage LP" or the "Operating Partnership"), or its
subsidiaries. The Company and a wholly owned subsidiary are the sole general
partners of Heritage LP and own an approximately 50.9% interest therein,
consisting of 36% acquired by issuing Common Stock for the Winton Properties
and 14.9% acquired for cash.

The Company was incorporated in the state of Maryland on June 18, 1987.
The principal executive offices of the Company are located at 335 North Wilmot,
Suite 250, Tucson, Arizona 85711, and its telephone number is (520) 748-2111.
Unless the context otherwise requires, the terms "Company" and "ASR" mean ASR
Investments Corporation, its subsidiaries, and the Operating Partnership.

Recent Developments

In March 1997, the Company acquired a 266-unit apartment community in
Houston, Texas for $4,450,000 and expects to invest $700,000 in capital
improvements. The Company obtained a first mortgage loan of $3,700,000. The
Company issued 86,500 shares of Common Stock for net proceeds of $1,622,000 to
pay for the purchase.

In April 1997, the Company acquired (i) the assets and properties of 15
separate limited partnerships owning 13 apartment communities, located in
Dallas and Houston, Texas and Pullman, Washington, containing a total of 2,260
apartment units and an office building located in Seattle, Washington (the
"Winton Properties") in which
3
<PAGE>
Don W. Winton was the general partner (the "Winton Partnerships") and (ii) the
stock of Winton & Associates, Inc. ("Winton & Associates"), the property
manager of the Winton Properties (together the "Winton Acquisition"). In
connection with the acquisition of the Winton Properties, the Company (a)
issued approximately 682,095 shares of its Common Stock, (b) issued limited
partnership interests ("LP Units") in the Operating Partnership, which are
convertible into 943,705 shares of the Company's Common Stock after April 30,
1998, (c) assumed or refinanced existing first mortgage loans of $49,396,000,
and (d) paid $1,250,000 of the transaction costs for the Winton Partnerships.
The Company issued 70,284 shares of its Common Stock in connection with the
acquisition of Winton & Associates.

In April 1997, the Company acquired a 257-unit apartment community in
Houston, Texas, for $6,000,000 and obtained a first mortgage loan for
$4,400,000. The Company expects to invest $500,000 in capital improvements. In
May 1997, the Company acquired a 175-unit apartment community in Seattle,
Washington, for $4,059,000 and obtained a first mortgage loan of $2,900,000.
The Company expects to invest $400,000 in capital improvements. The Company
issued 187,847 shares of Common Stock for total net proceeds of $3,394,000 to
pay for these two purchases.

In May 1997, the Company acquired for $8,233,000 its joint venture
partner's 85% interest in La Privada Apartments, a 350-unit apartment community
in Scottsdale, Arizona. The Company obtained a $3,000,000 loan to pay for the
aquisition. The Company also sold to its partner the Company's 15% interest in
five other joint ventures for total net proceeds of $2,062,000. As a result of
these transactions, the Company owns all of its apartment communities through
the Operating Partnership or subsidiaries.

In connection with the acquisition of the Winton Properties, the Company
also acquired Pima Mortgage Limited Partnership and Pima Realty Advisors, Inc.,
which were affiliates of officers of the Company and served as the manager and
property manager, respectively, of the Company's day-to-day operations and
apartment communities, in exchange for 262,008 shares of its Common Stock (the
"Pima Mergers"). As a result, the Company became a self-administered and
self-managed REIT.

Prior to 1993, the Company invested in mortgage assets ("Mortgage Assets")
entitling it to receive the excess cash flows from a pool of mortgage
instruments over the required payments on the related structured financing. In
early 1993, the Company determined to shift its focus to the acquisition,
development, and operation of apartment communities. In June, 1997, the Company
sold its Mortgage Assets for approximately $13,350,000 with a gain of
$10,950,000. Together with earlier redemptions, the Company received total cash
flows of $14,850,000 during the second quarter of 1997 and $22,350,000 during
1997. As a result of the sale, the Company no longer owns any Mortgage Assets.

The Offering

<TABLE>
<S> <C>
Common Stock offered by the Selling Stockholders 1,687,318 shares
Common Stock currently outstanding ............... 4,812,192 shares(1)
Use of proceeds ................................. The Company will not receive any proceeds
of sales by the Selling Stockholders.
Risk factors .................................... See "Risk Factors."
Amex symbol ....................................... ASR
</TABLE>

- ----------
(1) Excludes 358,979 shares of Common Stock reserved for issuance upon the
exercise of outstanding stock options and options that may be granted in
the future under the Company's stock option plans and 971,426 shares of
Common Stock reserved for issuance upon conversion of LP Units issued in
connection with the acquisition of properties. See "Management -- Stock
Option Plans."
4
<PAGE>
Summary Consolidated Financial Data
(In thousands except for per share data)

<TABLE>
<CAPTION>
Six months ended
Years ended December 31, June 30,
---------------------------------------------------------- -----------------------
1992 1993 1994 1995 1996 1996 1997
------------ ------------ ---------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statements of Operations Data
Income from real estate
Rental and other income .................. $12,528 $14,034 $14,581 $ 7,281 $ 10,888
Operating and maintenance expenses,
real estate taxes and insurance ...... (5,497) (6,719) (6,855) (3,274) (5,140)
Interest expense ........................ (3,941) (4,387) (4,348) (2,190) (3,377)
Depreciation and amortization ......... (1,995) (2,692) (2,819) (1,368) (2,032)
-------- -------- -------- -------- --------
Income from real estate ............... 1,095 236 559 449 339
-------- -------- -------- -------- --------
Gain on sale of real estate ............ 474
--------
Income from mortgage assets
Prospective yield income ............... $ 919 $ 7,264 6,433 3,884 2,630 1,569 588
Income from redemptions and sales ...... 4,263 5,302 9,461 4,987 16,650
Interest expense ........................ (5,841) (4,794) (2,596) (347) (181) (124) (25)
Provision for reserves .................. (57,588) (20,286)
--------- --------- -------- -------- -------- -------- --------
Income (loss) from mortgage assets ... (62,510) (17,816) 8,100 8,839 11,910 6,432 17,213
--------- --------- -------- -------- -------- -------- --------
Income (loss) before administrative
expenses and other income ............... (62,510) (17,816) 9,195 9,075 12,469 6,881 18,026
Administrative expenses .................. (3,104) (1,949) (2,216) (2,983) (3,203) (1,336) (1,944)
Acquisition related expenses ............ (6,215)
Other income, net ........................ 739 286 723 462 (425) 121 307
--------- --------- -------- -------- -------- -------- --------
Income (loss) before cumulative effect of
accouting change ........................ (64,875) (19,479) 7,702 6,554 8,841 5,666 10,174
Cumulative effect of accounting change ... (21,091)
--------- --------- -------- -------- -------- -------- --------
Net income .............................. ($ 64,875) ($ 40,570) $ 7,702 $ 6,554 $ 8,841 $ 5,666 $ 10,174
========= ========= ======== ======== ======== ======== ========
Per average outstanding share
Net income (loss) before cumulative
effect of accounting change ............ $ (20.20) $ (6.27) $ 2.48 $ 2.09 $ 2.80 $ 1.80 $ 2.58
Cumulative effect of accounting change* (6.79)
--------- --------- -------- -------- -------- -------- --------
Net income (loss) per share ............ $ (20.20) $ (13.07) $ 2.48 $ 2.09 $ 2.80 $ 1.80 $ 2.58
========= ========= ======== ======== ======== ======== ========
Dividends per share ..................... $ 2.25 $ 1.15 $ 0.50 $ 2.00 $ 2.00 $ 1.00 $ 1.00
========= ========= ======== ======== ======== ======== ========
Weighted average shares outstanding ... 3,209 3,104 3,100 3,141 3,153 3,154 3,938
========= ========= ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------- June 30,
1992 1993 1994 1995 1996 1997
---------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data
Apartment and other real estate assets ... $ 3,855 $73,056 $79,510 $89,958 $210,34
Mortgage assets ........................... $108,623 37,881 18,965 11,877 5,039 --
Total assets .............................. 116,589 54,068 96,745 94,169 97,796 239,16
Real estate notes payable ............... 50,693 49,212 49,110 140,88
Mortgage assets borrowing, net ............ 39,517 22,062 6,422 4,495 2,014 --
Stockholders' Equity ..................... 75,284 30,948 37,100 37,395 40,102 89,30
</TABLE>

- ----------
* Prior to December 1993, the Company followed the practice of writing down the
carrying value of a 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
a mortgage asset be written down to its estimated fair value when its
estimated yield is less than a "risk-free yield." As a result, the Company
wrote down substantially all its mortgage assets in 1993 to their estimated
fair value and recorded a charge of $21,091,000, which was reported as a
cumulative effect of accounting change.
5
<PAGE>
Unaudited Pro Forma Combined Financial Statements

The following unaudited pro forma combined income statements give effect
to the following transactions (collectively the "Transactions") that occurred
during the period from April 1, 1997 to June 30, 1997, (i) the acquisition of
the Winton Properties, (ii) the acquisition of Winton & Associates, (iii) the
acquisition of Pima Mortgage Limited Partnership and Pima Realty Advisors, Inc.
(the "Pima Entities"), (iv) the acquisition of London Park Apartments, (v) the
acquisition of the remaining 85% interest in La Privada Apartments L.L.C. and
the related sale of the interests in the other five joint ventures, (vi) the
acquisitions of Ivystone/Woodsedge Apartments and The Court Apartments, and
(vii) the issuance of 187,847 shares of Common Stock for cash. The pro forma
combined income statements for the year ended December 31, 1996 and the six
months ended June 30, 1997 have been prepared as if the Transactions had been
consummated as of January 1, 1996. Adjustments necessary to reflect these
assumptions and to restate the historical combined financial statements are
presented in the Pro Forma Adjustments columns and are described in the Notes
thereto.

The historical financial information for the Company is derived from the
audited consolidated financial statements of the Company for the year ended
December 31, 1996 and the unaudited consolidated financial statements for the
six months ended June 30, 1997. The historical financial information for the
properties and entities acquired is derived from unaudited financial statements
of the properties or entities, as adjusted to reflect certain preacquisition
transactions.

The unaudited pro forma combined financial statements are not necessarily
indicative of what the actual results of operations for the year ended December
31, 1996 and the six months ended June 30, 1997 had the Transactions occurred
on the assumed dates described above, nor does it purport to present the future
financial position or results of operations of the Company.

Unaudited Pro Forma Combined Income Statement for Year Ended December 31, 1996
(In thousands except for per share data)

<TABLE>
<CAPTION>
ASR Pro Forma Pro Forma
Historical Acquisitions Adjustments Combined
------------ -------------- -------------------- -----------
<S> <C> <C> <C> <C>
Real Estate Operations
Rental income .............................. $ 14,581 $ 21,169 $ 35,750
Property management fees .................. 1,859 ($ 1,103)(A) 756
Commission and other income ............... 34 34
--------- --------- ----------- ---------
Total real estate income ............... 14,581 23,062 (1,103) 36,540
--------- --------- ----------- ---------
Operating and maintenance .................. (5,404) (8,620) 1,103 (A) (12,921)
Real estate taxes and insurance ............ (1,451) (2,558) (4,009)
Interest expense ........................... (4,348) (6,408)(B) (10,756)
Depreciation and amortization ............ (2,819) (4,860)(C) (7,679)
--------- --------- ----------- ---------
Real estate operating expenses ............ (14,022) (11,178) (10,165) (35,365)
--------- --------- ----------- ---------
Real estate operating income ............ 559 11,884 (11,268) 1,175
--------- --------- ----------- ---------
Mortgage Asset Income
Prospective yield income .................. 2,630 193 (D) 2,823
Income from redemptions and sales ......... 9,461 9,461
Interest expense ........................... (181) (181)
--------- --------- ----------- ---------
Income from mortgage assets ............... 11,910 0 193 12,103
--------- --------- ----------- ---------
Other Income and Expenses
Amortization of goodwill .................. (70)(E) (70)
Management fees ........................... 575 (575)(D) 0
Interest and other income .................. (425) 70 (594)(F) (949)
Administrative expenses .................. (3,203) (593) 638 (D) (3,158)
--------- --------- ----------- ---------
Other income and expense ............... (3,628) 52 (601) (4,177)
--------- --------- ----------- ---------
Net Income ................................. $ 8,841 $ 11,936 ($ 11,676) $ 9,101
========= ========= =========== =========
Net Income per share (L) .................. $ 2.80 $ 1.69
Dividends declared per share ............... $ 2.00 $ 2.00
Weighted average common shares outstanding 3,153 5,379
</TABLE>
See Notes to Unaudited Pro Forma Combined Financial Statements.
6
<PAGE>
Unaudited Pro Forma Combined Income Statement for Six Months Ended June 30,
1997
(In thousands except for per share data)
<TABLE>
<CAPTION>
ASR Pro Forma Pro Forma
Historical Acquisitions Adjustments Combined
------------ -------------- ---------------- -----------
<S> <C> <C> <C> <C>
Real Estate Operations
Rental income .............................. $ 10,888 $ 7,002 $ 17,890
Property management fees .................. 520 $ (400)(A)
120
Commission & other income .................. 2 2
--------- -------- ----------- ---------
Total real estate income ............... 10,888 7,524 (400) 18,012
--------- -------- ----------- ---------
Operating & maintenance .................. (3,991) (2,786) 400 (A) (6,377)
Real estate taxes & insurance ............ (1,149) (876) (2,025)
Interest expense ........................... (3,377) (2,071)(B) (5,448)
Depreciation and amortization ............ (2,032) (1,729)(C) (3,761)
--------- -------- ----------- ---------
Total operating expenses ............... (10,549) (3,662) (3,400) (17,611)
--------- -------- ----------- ---------
Real estate operating income ............ 339 3,862 (3,800) 401
--------- -------- ----------- ---------
Gain on sale of real estate ............ 474 474
--------- ---------
Mortgage Asset Income
Prospective yield income .................. 588 52 (D) 640
Income from redemptions and sale ......... 16,650 16,650
Interest expense ........................... (25) (25)
--------- ----------- ---------
Income from mortgage assets ............... 17,213 52 17,265
--------- ----------- ---------
Other Income & Expense
Amortization of goodwill .................. (12) (24)(E) (36)
Management fees ........................... 219 (219)(D) 0
Interest and other income .................. 307 108 (185)(F) 230
Administrative expenses .................. (1,932) (52) 107 (D) (1,877)
Acquisition-related expense ............... (6,215) (6,215)
--------- -------- ----------- ---------
Other income & expense .................. (7,852) 275 (321) (7,898)
--------- -------- ----------- ---------
Net Income ................................. $ 10,174 $ 4,137 ($ 4,069) $ 10,242
========= ======== =========== =========
Net Income per share ........................ $ 2.58 $ 1.90
========= =========
Dividends declared per share ............... $ 1.00 $ 1.00
========= =========
Weighted average common shares outstanding 3,938 5,379
========= =========
</TABLE>
See Notes to Unaudited Pro Forma Combined Financial Statements.
7
<PAGE>
Notes to Unaudited Pro Forma Combined Financial Statements

Pro Forma Combined Income Statement Adjustments For the Year Ended December 31,
1996 and the Six Months Ended June 30, 1997.

(A) Winton & Associates provided property management services relating to the
Winton Properties, and Pima Realty provided property management services
on the Company's properties. The adjustments to eliminate the property
management fees previously charged are as follows (in thousands):

<TABLE>
<CAPTION>
1996 1997
-------- -----
<S> <C> <C>
Pima Realty ............ $ 472 $190
Winton & Associates ...... 631 210
------- -----
$1,103 $400
======= =====
</TABLE>

(B) The pro forma adjustments to the interest expense reflecting the interest
on the mortgage loans obtained or assumed relating to the properties
acquired.

(C) Increase in depreciation and amortization charges to reflect depreciation
and amortization based on ASR's acquisition costs calculated utilizing an
estimated life of 27.5 years on the property, seven years on personal
property and improvements, and the remaining life on loan costs.
Acquisition costs are allocated 15% to land and 85% to buildings and
improvements in accordance with ASR's estimated allocations.

(D) Pima Mortgage provided advisory and bond administration services to the
Company on a fee basis pursuant to a management agreement. The Company
has entered into employment agreements with the three officers of the
corporate partners of Pima Mortgage. The Company expects to eliminate the
expenses incurred by Pima Mortgage (consisting of salaries to the
officers of the corporate partners) offset by costs incurred by the
Company under the employment agreements. The adjustments to reflect
elimination of the advisory and bond administration fees, elimination of
the Pima Mortgage expenses, and the addition of salaries to be paid by
the Company are as follows (in thousands):

<TABLE>
<CAPTION>
1996 1997
---------- ---------
<S> <C> <C>
Elimination of bond administration fees expense ......... $ 193 $ 52
====== ======
Elimination of management fee income
Bond administration fee income ........................ ($ 193) ($ 52)
Management fee income ................................. (382) (167)
------ ------
Total ............................................. ($ 575) ($ 219)
====== ======
Elimination of management fees expense and
addition of salary expense
Elimination of management fee expense .................. $ 382 $ 167
Elimination of Pima Mortgage salary expenses ......... 593 52
Addition of salaries under employment agreements ...... (337) (112)
------ ------
Reduction in operating expenses ..................... $ 638 $ 107
====== ======
</TABLE>
8
<PAGE>
(E) To amortize the recorded purchase price of Winton & Associates over a
20-year period.

(F) To eliminate interest and dividend income on certain assets of the Pima
Entities not acquired by the Company and to reduce the Company's interest
income to reflect cash used in the Transactions (in thousands).

<TABLE>
<CAPTION>
1996 1997
------ -----
<S> <C> <C>
Elimination of the Pima Entities' income ......... $ 70 $ 12
Reduction of the Company's interest income ...... 520 173
----- -----
Reduction of other income ..................... $594 $185
===== =====
</TABLE>
9
<PAGE>
RISK FACTORS

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 Company's properties do not generate
revenues sufficient to meet operating expenses, including debt service and
capital expenditures, the Company's cash flow and ability to make distributions
to its stockholders will be adversely affected. The revenues from and value of
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 and utilities). Certain significant
expenditures associated with an investment in real estate (such as mortgage
payments, real estate taxes, insurance, and maintenance costs) generally are
not reduced when circumstances cause a reduction in revenue from the
investment. If a property is mortgaged to secure payment of indebtedness and
the Company is unable to meet its mortgage payments, a loss could be sustained
as a result of foreclosure on the property by the mortgage. 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.

Illiquidity of Real Estate

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. In addition, the Internal Revenue Code
of 1986, as amended (the "Code"), places limits on the Company's ability to
sell properties held for fewer than four years, which may affect the Company's
ability to sell properties without adversely affecting returns to holders of
Common Stock.

Dependence on Specific Regions

The Company's properties are concentrated in the southwestern region of
the United States (particularly in Arizona, New Mexico, Texas, and Washington)
and consist entirely of multifamily properties. The Company's performance will
be limited to economic conditions in those areas and in the market for
multifamily properties located in those areas.

Operating Risks

The Company's properties are subject to all operating risks common to
apartment communities in general. These risks include competition from other
apartment communities and alternative housing; new construction of competing
properties or increases in unemployment in the areas in which the Company's
properties are located, either or both of which may adversely affect occupancy
or rental rates; increases in operating costs resulting from inflation and
other factors, which increases may not necessarily be offset by increased
rents; the inability or unwillingness of residents to pay rent increases;
future enactment of rental control laws or other laws regulating multifamily
housing, including current and possible future laws relating to access by
disabled persons; and disagreements with joint venture partners or other real
estate co-investors. If operating expenses increase, the local rental market
may limit the extent to which rents may be increased to meet increased expenses
without decreasing occupancy rates. The occurrence of any of these factors
could adversely affect the Company's operating performance and its
distributions to stockholders.

Future Acquisitions

The Company continually evaluates potential acquisitions of properties and
enterprises owning properties. There can be no assurance, however, that the
Company will be able to acquire any additional
10
<PAGE>
properties or property owners, that any acquisitions that are completed will be
on terms favorable to the Company, that costs of improvements will not exceed
original estimates, that any acquired properties will perform in accordance
with expectations or improve the overall performance of the Company, or that
the Company's systems, controls, management, financial and other resources,
will be adequate to support such expansion. Expansion into new markets may
present operating and marketing challenges that are different from those
currently encountered by the Company in its existing markets. There can be no
assurance that the Company will anticipate all of the changing demands that
expanding operations will impose on its management.

Potential Environmental Liabilities

Under various federal, state, and local laws, ordinances and regulations,
an owner or operator 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 or operator 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. In
addition to investigation and clean-up actions brought by federal, state, and
local agencies, the presence of hazardous wastes on a property could result in
personal injury or similar claims by private plaintiffs. The Company has not
been notified by any governmental authority of any noncompliance, liability, or
other claim in connection with its properties. 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 engaged
by the Company at the time of acquisition. As a result of 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 has determined that there are minor amounts of
asbestos-containing 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.

In addition, the apartment site under development in Tempe, Arizona was
formerly used for agricultural purposes and a portion of the site was used as
the runway for a pesticide aerial application firm located adjacent to the
apartment site. The site of the pesticide aerial application firm is currently
a subject of remediation by the U.S. Environmental Protection Agency ("EPA")
and the Arizona Department of Environmental Quality ("ADEQ"). Extensive soil
tests on the apartment site revealed that a few samples contained minor amounts
of toxaphene above the regulatory level. The Company engaged an independent
environmental consulting firm to conduct a "site specific risk assessment" to
evaluate the potential threat to human health based on exposures and conditions
unique to the site. The consulting firm's report indicates that the potential
threat is minimal and no further action is necessary prior to the development
of the site as an apartment community. The EPA and ADEQ have not required the
Company to take any remedial actions on the site. The agencies also have not
informed the Company of any regulatory actions on the site.

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
11
<PAGE>
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 carries comprehensive liability, fire, flood (where
applicable), extended coverage, and rental loss insurance with policy
specifications, hits, 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 accommodations or commercial facilities, except to the extent por- tions
of such facilities, such as a leasing office, are open to the public. The
Company believes that the properties comply with all present requirements under
the ADA. 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.

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.

Risks of Real Estate Development

The Company plans to seek selective opportunities for development. The
real estate development business involves significant risks in addition to
those involved in the acquisition, ownership, and operation of established
apartment communities. The development risks include the availability of
construction financing on favorable terms for development, construction delays,
construction costs in excess of the budgeted amounts, the achievement and
maintenance of anticipated rental rates and occupancy levels in the market,
availability of long-term permanent financing upon completion, shortages of
materials or skilled labor, labor disputes, unforeseen environmental or
engineering problems, work stoppages, fire and other natural disasters, and
weather interferences. In addition, the unavailability of permanent financing
on acceptable terms to repay construction financing could result in delays,
increased costs, or the loss of developed properties. New development
activities, regardless of their ultimate success, typically require a
substantial amount of management's time and attention. Development activities
also are subject to risks relating to the inability to obtain, or delays in
obtaining,all necessary zoning, land use, building, occupancy, and other
required governmental permits and authorizations.

Risk of Management Business

The Company manages on a fee basis properties owned by third parties.
Risks associated with the management of properties owned by third parties
include the possibility that management contracts
12
<PAGE>
(which generally are cancellable upon short notice or upon the sale of the
property) will be terminated by the property owner or will be cancelled in
connection with the sale of the property, that contracts may not be renewed
upon expiration or will be renewed on less favorable terms or that rental
revenues upon which the management fees are based will decline as a result of
general market conditions or specific market factors affecting the properties
being managed, in either case resulting in decreased management fee income.

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. The Company also
may increase the amount of its available funds through the issuance of debt
securities.

The Company's Bylaws limit borrowings 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 and Properties -- Capital Resources." Each of the
Company's 36 apartment communities and one office building has been pledged to
secure a first mortgage loan. As of June 30, 1997, real estate mortgage loans
totalled $141 million.

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 liquidation value
thereof exceeds the amounts due to the creditors. However, the liquidation
value of the Company's assets is uncertain and may fluctuate rapidly as a
result of numerous market factors 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
tenants for properties.

Market Price of Common Stock

The market price of the Company's Common Stock in the future could be
subject to wide fluctuations in response to quarterly variations in operating
results of the Company, changes in analysts' estimates of the Company's
financial performance, actual and anticipated dividend payments, prevailing
interest rates, general industry conditions, changes in the real estate market,
local economic factors, governmental regulations, modifications of tax laws or
tax rates, and other events and factors. An increase in market interest rates
may lead purchasers of the Company's Common Stock to demand a higher yield on
the price paid for shares from dividend distribution by the Company.

Shares Eligible for Future Sale

Sales of Common Stock in the public market could adversely affect
prevailing market prices. A total of 1,687,318 shares of Common Stock are
eligible for resale in the public market. In addition, 943,705 limited
partnership interests ("LP Units") in the Operating Partnership will be
convertible into 943,705 shares of Common Stock at any time after April 30,
1998.
13
<PAGE>
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, and
the terms upon which its Common Stock could be sold.

Potential Conflicts of Interest

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.

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 Company and that the investment policies of the Company
must be reviewed annually by these directors (the "Unaffiliated Directors").

Certain Consequences of and Failure to Maintain REIT Status

In order to maintain its qualification as a real estate investment trust
("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 "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 "Federal Income Tax Considerations." 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 "Federal Income Tax
Considerations." Alteratively, the Company may be required to borrow funds to
make the required distributions that 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 that 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." 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
14
<PAGE>
of income tax withholding in the case of nonresident alien stockholders. For
1996, the entire ordinary income portion ($0.17 per share) of the dividend was
excess inclusion income. See "Federal Income Tax Considerations -- Tax
Consequences of Common Stock Ownership."

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 that 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 Incorpo- ration. 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.

Cautionary Statement Regarding Forward-Looking Information

Certain statements and other information contained herein concerning
future, proposed, and intended activities of the Company or other matters that
are not historical facts are forward-looking statements (as defined in the
Securities Act). When used herein, the words "believe," "expect," "anticipate,"
"estimate," and similar expressions are intended to identify foward-looking
statements. By their nature, forward-looking statements are subject to certain
risks, uncertainties, and assumptions. Should one or more of these risks or
uncertainties materialize or should underlying assumptions prove incorrect,
actual results may vary materially from those expressed or implied by such
forward-looking statements. Factors that could cause actual results to differ
materially include those discussed under "Risk Factors."
15
<PAGE>
USE OF PROCEEDS

The Company will not receive any proceeds of sales of shares by the Selling
Stockholders.

CAPITALIZATION

The following table sets forth the capitalization of the Company as of
June 30, 1997 and as adjusted to reflect the issuance of 374,581 shares of
Common Stock and LP Units convertible into 27,721 shares of Common Stock. This
table should be read in conjunction with the Consolidated Financial Statements,
including the notes thereto, included elsewhere in this Prospectus. (Dollars in
thousands.)
<TABLE>
<CAPTION>
Actual As Adjusted
------------- ------------
<S> <C> <C>
Convertible LP Units .................................... $ 18,910 $ 19,486
Common Stock, par value $0.01, 40,000,000 shares authorized;
4,622,353 shares issued (actual);
4,996,934 shares issued (adjusted) ..................... 45 49
Additional paid-in capital .............................. 180,813 189,144
Deficit ................................................... (107,053) (107,053)
Stock notes receivable .................................... (385) (385)
Treasury stock -- 184,742 shares ........................ (3,027) (3,027)
---------- ----------
Total stockholders' equity .............................. $ 89,303 $ 98,214
========== ==========
</TABLE>

PRICE RANGE OF COMMON STOCK

The Company's Common Stock is listed and principally traded on the 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 on the Amex and the cash dividends paid per share.
<TABLE>
<CAPTION>
Dividend
High Low per share
------------ ------------- ----------
<S> <C> <C> <C>
1994
First quarter ......... $10 15/16 $ 7 1/2 --
Second quarter ...... 15 5 15/16 --
Third quarter ......... 13 3/4 6 1/4 --
Fourth quarter ...... 14 1/16 9 3/8 $0.50
1995
First quarter ......... 20 10 15/16 0.50
Second quarter ...... 19 3/8 16 1/4 0.50
Third quarter ......... 20 1/2 17 3/4 0.50
Fourth quarter ...... 18 3/8 15 0.50
1996
First quarter ......... 17 3/4 15 3/8 0.50
Second quarter ...... 18 3/8 16 7/8 0.50
Third quarter ......... 19 3/4 17 1/2 0.50
Fourth quarter ...... 22 3/8 18 7/8 0.50
1997
First quarter ......... 24 3/4 20 1/4 0.50
Second quarter ...... 23 3/4 18 5/8 0.50
Third quarter (through
August 25, 1997) ... 23 7/8 21 7/8
</TABLE>

On August 25, 1997, the closing sales price of the Common Stock on the Amex
was $22 9/16 per share and the approximate number of holders of record of Common
Stock was 2,000.
16
<PAGE>
SELECTED FINANCIAL INFORMATION
(In thousands except for per share data)

The selected consolidated financial data presented below as of and for the
five years ended December 31, 1996 are derived from the Company's audited
consolidated financial statements. The selected historical financial data as of
and for the six months ended June 30, 1996 and 1997 are derived from the
Company's unaudited financial statements. The historical financial data for the
six months ended June 30, 1996 and 1997, in the opinion of management, include
all adjustments, consisting solely of normal recurring adjustments, necessary
for a fair presentation for such periods. The results of operations for the six
months ended June 30, 1997 are not necessarily indicative of results to be
expected for the year ending December 31, 1997. These selected financial data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's consolidated
financial statements and the notes thereto appearing elsewhere in this
Prospectus.

<TABLE>
<CAPTION>
Six months ended
Years ended December 31, June 30,
---------------------------------------------------------- -----------------------
1992 1993 1994 1995 1996 1996 1997
------------ ------------ ---------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statements of Operations Data
Income from real estate
Rental and other income .................. $12,528 $14,034 $14,581 $ 7,281 $ 10,888
Operating and maintenance expenses,
real estate taxes and insurance ...... (5,497) (6,719) (6,855) (3,274) (5,140)
Interest expense ........................ (3,941) (4,387) (4,348) (2,190) (3,377)
Depreciation and amortization ......... (1,995) (2,692) (2,819) (1,368) (2,032)
-------- -------- -------- -------- --------
Income from real estate ............... 1,095 236 559 449 339
-------- -------- -------- -------- --------
Gain on sale of real estate ............... 474
--------
Income from mortgage assets
Prospective yield income ............... $ 919 $ 7,264 6,433 3,884 2,630 1,569 588
Income from redemptions and sales ...... 4,263 5,302 9,461 4,987 16,650
Interest expense ........................ (5,841) (4,794) (2,596) (347) (181) (124) (25)
Provision for reserves .................. (57,588) (20,286)
--------- --------- -------- -------- -------- -------- --------
Income (loss) from mortgage assets ... (62,510) (17,816) 8,100 8,839 11,910 6,432 17,213
--------- --------- -------- -------- -------- -------- --------
Income (loss) before administrative
expenses and other income ............... (62,510) (17,816) 9,195 9,075 12,469 6,881 18,026
Administrative expenses .................. (3,104) (1,949) (2,216) (2,983) (3,203) (1,336) (1,944)
Acquisition related expenses ............ (6,215)
Other income, net ........................ 739 286 723 462 (425) 121 307
--------- --------- -------- -------- -------- -------- --------
Income (loss) before cumulative effect of
accouting change ........................ (64,875) (19,479) 7,702 6,554 8,841 5,666 10,174
Cumulative effect of accounting change ... (21,091)
--------- --------- -------- -------- -------- -------- --------
Net income .............................. ($ 64,875) ($ 40,570) $ 7,702 $ 6,554 $ 8,841 $ 5,666 $ 10,174
========= ========= ======== ======== ======== ======== ========
Per average outstanding share
Net income (loss) before cumulative
effect of accounting change ............ $ (20.20) $ (6.27) $ 2.48 $ 2.09 $ 2.80 $ 1.80 $ 2.58
Cumulative effect of accounting change* (6.79)
--------- --------- -------- -------- -------- -------- --------
Net income (loss) per share ............ $ (20.20) $ (13.07) $ 2.48 $ 2.09 $ 2.80 $ 1.80 $ 2.58
========= ========= ======== ======== ======== ======== ========
Dividends per share ..................... $ 2.25 $ 1.15 $ 0.50 $ 2.00 $ 2.00 $ 1.00 $ 1.00
========= ========= ======== ======== ======== ======== ========
Weighted average shares outstanding ... 3,209 3,104 3,100 3,141 3,153 3,154 3,938
========= ========= ======== ======== ======== ======== ========
</TABLE>

<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------- June 30,
1992 1993 1994 1995 1996 1997
---------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data
Apartment and other real estate assets ...... $ 3,855 $73,056 $79,510 $89,958 $210,34
Mortgage assets .............................. $108,623 37,881 18,965 11,877 5,039 --
Total assets ................................. 116,589 54,068 96,745 94,169 97,796 239,16
Real estate notes payable .................. 50,693 49,212 49,110 140,88
Mortgage assets borrowing, net ............... 39,517 22,062 6,422 4,495 2,014 --
Stockholders' Equity ........................ 75,284 30,948 37,100 37,395 40,102 89,30
</TABLE>

- ------------
* Prior to December 1993, the Company followed the practice of writing down the
carrying value of a 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
a mortgage asset be written down to its estimated fair value when its
estimated yield is less than a "risk-free yield." As a result, the Company
wrote down substantially all its mortgage assets in 1993 to their estimated
fair value and recorded a charge of $21,091,000, which was reported as a
cumulative effect of accounting change.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

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.

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):

<TABLE>
<S> <C>
Rental and other income ........................ $3,441
Property management income ..................... 46
-------
Total real estate revenues ............... 3,487
-------
Operating & maintenance expenses ............... 1,253
Property management expenses .................. 63
Real estate taxes and insurance expenses ...... 451
Interest expense .............................. 1,072
Depreciation expense ........................... 683
-------
Total real estate operating expenses ...... 3,522
-------
Income from real estate ........................ ($ 35)
=======
</TABLE>

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.

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
18
<PAGE>
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.

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.
19
<PAGE>
Calculation of FFO, as modified, for the six months ended June 30, 1997 is
as follows (in thousands except per share amounts):

<TABLE>
<CAPTION>
Pro Forma
Combined (**)
Six Months Six Months
------------ --------------
<S> <C> <C>
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
========= =========
</TABLE>

- ------------
(*) -- 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 to
Consolidated Financial Statements). 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.

1996 Compared to 1995

Real Estate Operations -- Rental and other income increased $547,000 in
1996 primarily as a result of (i) $346,000 from rental rate increases
(attributable primarily to a 3% increase in the Houston communities), (ii)
$201,000 from higher occupancy rates (attributable primarily to the Tucson
communities), (iii) $242,000 from prior rental increases becoming effective as
leases are renewed or the apartment is re-leased, and (iv) $69,000 from
communities acquired through joint ventures. The increases were mitigated by
$238,000 from rental concessions (attributable primarily to the Albuquerque
communities). Operating and maintenance expense increased $145,000 (2.8%) as a
result of the community acquired in February 1995 and to increased payroll
expense (attributable primarily to the Tucson communities). Real estate taxes
and insurance remained flat as there were no increases or decreases in rates.
Depreciation and amortization increased by $127,000 (4.7%) primarily as a
result of the community acquired in February 1995 and capital improvements on
the apartment communities. Interest expense on real estate mortgages decreased
due to lower principal balances resulting from monthly payments.

Mortgage Assets -- As a result of amortization of the investment in and
redemption and sales of mortgage assets in 1995 and 1996, the 1996 prospective
yield income decreased by $1,254,000. The average balance of mortgage assets
decreased from $14,827,000 for 1995 to $8,118,000 for 1996. The decrease in
income was mitigated by an increase in the average prospective yield from 28%
for 1995 to 35% for 1996. Redemptions and sales of nine mortgage assets in 1996
generated total income of $9,461,000. In 1995, redemptions and sales of five
mortgage assets generated total income of $2,882,000. In addition, the Company
recorded income of $2,420,000 in 1995 from the reversal of the excess yield
maintenance
20
<PAGE>
payment accrued in 1993 on notes payable secured by mortgage assets which were
paid off in February 1995. Interest expense related to the mortgage assets
decreased due to lower short-term borrowing and the payoff of a note in April
1995.

Operating Expenses and Other Income -- Administrative expenses increased
in 1996 primarily as a result of an increase in expense accruals for stock
appreciation rights of $151,000 as a result of price increases in the Company's
Common Stock. Other expenses increased in 1996 as a result of $380,000 in
expenses related to future acquisitions and to $380,000 in write offs of
cancelled real estate projects. The income in 1995 included a gain of $311,000
from the early payoff of a note payable and a $180,000 gain from the sale of an
asset. The 1995 income was offset by a $350,000 reserve on a real estate
investment.

1995 Compared to 1994

Real Estate Operations -- Income and expenses from real estate operations
increased in 1995 as a result of the acquisition of an apartment community in
February 1995 as well as new investments in joint ventures. Rental and other
income increased by $1,506,000 as a result of $931,000 in revenues from the
acquired community, a $569,000 increase in revenues from communities owned by
the Company, and a $60,000 increase in joint venture income. Operating expenses
increased as a result of $403,000 in expenses incurred by the Company in
connection with the acquired community as well as higher operating expenses in
the other communities owned by the Company, which resulted from a decrease in
occupancy rates from 94% in 1994 to 91% in 1995 (mostly in Tucson) and the
corresponding turnover, marketing and payroll expenses incurred by the Company
as a result of such decrease in occupancy rates. Depreciation expenses
increased as a result of the Company's acquisition of an apartment community in
February 1995 and capital expenditures incurred in 1994 and 1995. Interest
expense on real estate mortgages also increased in 1995 as a result of the
Company's borrowing of additional funds for the acquisition in February 1995.

Mortgage Assets -- As a result of amortization of the investment in and
redemption of mortgage assets 1994 and 1995, the average balance of mortgage
assets decreased from $26,691,000 for 1994 to $14,827,000 for 1995. While the
average prospective yield was 28% for 1995 compared with 24% for 1994, the
prospective yield income decreased by $2,549,000. Income from redemptions in
1995 totaled $5,302,000, consisting of $2,882,000 from redemption of five
mortgage assets and $2,420,000 from the reversal of the yield maintenance
payment accrued in 1993 on notes payable. Income from redemptions of $4,263,000
in 1994 resulted from the redemption of four mortgage assets. Interest expense
related to the mortgage assets decreased as a result of the prepayment of the
notes payable secured by mortgage assets in February 1995 and the prepayment of
a note in April 1995.

Operating Expenses and Other Income -- Administrative expenses increased
in 1995 primarily as a result of an increase in expense accruals for stock
appreciation rights of $381,000 caused by higher stock price and dividend
equivalent payments on stock options of $600,000. The higher stock appreciation
rights and dividend equivalent expenses were mitigated by a decrease in
management fees of $170,000 in 1995 compared to 1994.

Other income decreased in 1995 as a result of the use of the cash held by
the trustee to prepay the notes payable secured by mortgage assets in February
1995.

Income from Redemption and Sales of Mortgage Assets

The Company's income includes income from redemption and sales of mortgage
assets of $5,338,000 and $1,977,000 for the quarters ended March 31, 1997 and
1996, and $9,461,000, $5,302,000, and $4,263,000 for the years ended December
31, 1996, 1995, and 1994, respectively. In June 1997, the Company sold all of
its remaining mortgage assets for approximately $13,350,000 and a gain of
$10,950,000. 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.

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.

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
22
<PAGE>
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 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 and depreciation
expense, (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.

Comparison of the Years Ended December 31, 1996, 1995 and 1994

Cash provided by operations for 1996 was $12,968,000 compared with
$7,867,000 for the same period in 1995. The increase was primarily a result of
a $4,159,000 increase in income from redemptions and sales of mortgage assets
($9,461,000 for 1996 compared to $5,302,000 for 1995, which included a non-cash
credit of $2,420,000 for the reversal of accrued excess yield maintenance
payment on notes payable) offset by a $1,254,000 decrease in prospective yield
income on the mortgage assets. Cash provided by operations in 1995 was lower
than 1994 as a result of lower net income and a non-cash credit described in
the preceding sentence.

Cash used in investing activities totaled $6,916,000 in 1996 compared to
$2,160,000 and $49,696,000 in 1995 and 1994, respectively. The increase in cash
usage of $4,756,000 in 1996 compared to 1995 primarily reflects the $11,753,000
of construction expenditures for the Company's Finisterra apartment community.
The increase was mitigated by (i) a decrease of $5,502,000 in investments in
apartments as the Company purchased an apartment community in February 1995 and
did not make any purchases in 1996, (ii) a decrease of $1,830,000 in investment
in joint ventures as the Company made investments in new joint ventures in 1995
to acquire two apartment communities and made no investments in new joint
ventures in 1996, (iii) a decrease of $250,000 in the amortization in the
carrying value of the mortgage assets, and (iv) a net decrease of $85,000 in
other real estate investments. Cash used in investing activities in 1995 were
lower than 1994 due to the Company acquiring its initial portfolio of 17
apartment communities in 1994 while acquiring only one apartment community in
1995. The decrease in 1994 cash used for the acquisition apartments was
mitigated by lower mortgage cash flow for 1995 as a result of amortization and
redemptions.

Cash used in financing activities was $6,070,000 in 1996 compared to
$7,415,000 in 1995. The decrease was primarily due to the repayment of real
estate notes of $7,955,000 in 1995, the construction costs payable of
$1,581,000 and a net decrease of $1,678,000 from other financing activities.
The decrease was mitigated by real estate borrowing of $6,895,000 to finance
real estate acquisitions in 1995 and a net increase of $2,974,000 (cash used
for) in borrowing secured by mortgage assets. Cash used in financing activities
was $7,415,000 in 1995 compared with cash provided by financing activities of
$33,309,000 in 1994. The decrease of $40,724,000 in the cash provided by
financing activities resulted primarily from (i) a decrease of $43,941,000 in
real estate borrowing related to the acquisition of apartment communities, (ii)
an increase of $6,470,000 in the repayment of real estate notes, (iii) an
increase of $4,754,000 in
23
<PAGE>
dividend payment as the Company reinstated the regular quarterly dividend in
1995, and (iv) a decrease of $1,692,000 from other financing activities. The
decrease in cash provided by financing activities was mitigated by (a) a
decrease of $11,638,000 in the repayment of borrowing secured by mortgage
assets, and (b) an increase of $4,495,000 in short-term borrowing.

Cash Flow Information

The Company has realized substantial cash flows from mortgage assets to
fund its apartment acquisitions and development. A majority of the mortgage
cash flows was generated from redemption and sales. During 1996, the mortgage
assets generated cash flow of $18,929,000, including $13,625,000 from the
redemption and sales of nine mortgage assets. The Company used a portion of the
proceeds to reduce short-term borrowing by $2,481,000. During the first three
months of 1997, the mortgage assets generated total cash flow of $7,420,000,
including $6,815,000 from the redemption of three mortgage assets. The Company
used a portion of the proceeds to reduce short-term borrowing by $1,514,000. In
April 1997, the Company redeemed two additional mortgage assets for proceeds of
approximately $700,000. In June 1997, the Company sold all of its remaining
mortgage assets for approximately $13,350,000.

At June 30, 1997, the Company had cash of $17,701,000. The Company intends
to use such funds to pay for capital improvements on existing apartment
communities, to acquire additional apartment communities, and to pay dividends
and operating expenses.

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. 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 affected.
24
<PAGE>
BUSINESS AND PROPERTIES

Introduction

The Company currently owns and operates one office building in Seattle,
Washington, and 36 apartment communities, containing 6,347 apartment units,
located in Phoenix and Tucson, Arizona; Houston and Dallas, Texas; Albuquerque,
New Mexico; Seattle and Pullman, Washington. The apartment communities are
"garden apartments," typically consisting of two- and three-story buildings in
landscaped settings with ground level parking. The communities are well
maintained and targeted to provide attractive lifestyles at low to moderate
rates.

The apartment communities were built between 1967 and 1997 and have a
weighted average age by number of apartment units of approximately 13 years. The
number of units per apartment community ranges from 60 to 356 and averages 176
units. Average size per unit approximates 796 square feet. Average rent at June
30, 1997 was $552 per month, with community averages ranging from $375 to $997
per month. As of June 30, 1997, the communities had an average occupancy rate of
approximately 89%. The average occupancy rate of 89% at June 30, 1997 was lower
than 93% at March 31, 1997 because the Company's two communities in Pullman,
Washington are occupied primarily by college students. The average occupancy
rate for those two communities was 51% at June 30, 1997 compared with 96% at
March 31, 1997. The Company expects the occupancy rates of those two communities
to increase substantially after August when the university is in session. Tenant
leases generally are from six to 12 months and require security deposits. The
apartment communities typically provide residents with attractive amenities,
including a clubhouse, swimming pool, other recreational facilities, laundry
facilities, cable television access, patio or balconies, and mini-blinds.
Certain communities offer additonal amenities, such as fireplaces, storage and
walk-in closets, microwave ovens, alarms, and limited access gates.

Growth Strategy

The Company's business objectives are to increase the cash flow and value
of its existing portfolio of apartment communities and to expand its portfolio
of apartment communities through the acquisition and development of additional
communities. Key elements of the Company's strategy to achieve its objectives
include (i) enhancing the performance and value of its existing properties by
maintaining high occupancy and favorable rental rates, managing operating
expenses, and emphasizing regular programs of repairs and capital improvements,
(ii) acquiring and developing apartment communities that have strong cash flows
and capital appreciation potential, (iii) focusing on middle income properties
located in geographical areas that the Company believes will experience higher
growth rates in population, household formation, and employment than the
national average, and (iv) disposing of investments that no longer satisfy the
Company's objective.

Investment Policies

The Company intends to continue to focus on apartment communities in
Arizona, New Mexico, Texas, and Washington. However, future investments 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.

The Company believes that attractive opportunities continue to be
available to acquire apartment communities. The Company may enter into
agreements to acquire newly developed communities upon completion or upon
achievement of certain specified occupancy rates. The Company also intends to
develop new apartment communities for its own account directly or through joint
ventures with others.

The Company may purchase or lease properties for long-term investment and
to 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.
25
<PAGE>
Acquisition and Development Policies

The Company acquired 35 of its 36 apartment communities, of which 17 were
acquired in 1997.

In evaluating acquisitions, the Company considers 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 through lower debt
service requirements, enhanced management, and other factors; (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
apartment properties, the Company generally seeks properties that (a) are
available at prices below estimated replacement cost after initial renovations
and improvements, (b) are well-located in their markets, and (c) are capable of
enhanced performance through intensive asset management and cosmetic
improvements.

In determining whether to develop an apartment community, the Company
considers many of the same factors relevant to a potential apartment community
acquisition. In addition, the Company considers whether the property can be
developed at a cost that is below the estimated value upon completion based
upon land acquisition costs; construction costs; terms of available financing;
and the availability of property acquisitions opportunities in the area.

In March 1996, the Company commenced the development of a luxury apartment
community located in Tempe, Arizona. The community is being built on 20 acres
and is planned for 356 units with an average size of 919 square feet. The total
estimated cost of the community is approximately $21,000,000, and the Company
has obtained a construction loan for $15,350,000 of which $12,547,000 was
outstanding at June 30, 1997. Leasing of the project began in December 1996. As
of June 30, 1997, the Company had invested $20,368,000. The Company has
acquired two other parcels of land for future development of apartment
communities. The Company may develop or sell one or more of these parcels. As
of June 30, 1997, the Company had invested $925,000.

In acquiring or developing apartment communities, the Company focuses on
geographic markets that it believes will experience higher growth rates in
population, household formation, and employment than national averages. The
Company also seeks to concentrate its properties in specific geographical areas
to achieve economies of scale in management and operations.

Operating Policies

The Company seeks 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.

The Company utilizes 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 Company also maintains and
analyzes demographic resident data. Prior to entering into a lease, the Company
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 Company 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.
26
<PAGE>
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.

Financing Policies

The Company intends to finance acquisitions and developments 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 for acquisitions and developments 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

While the Company will emphasize equity investments in apartment
communities, 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.

The Company has authority to offer its Common Stock or other equity or
debt securities in exchange for property and to repurchase or otherwise
reacquire its Common Stock 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.
27
<PAGE>
Current Properties

The following table sets forth certain information regarding the
Company's existing apartment communities and office building.

<TABLE>
<CAPTION>
Asset Carrying Value
Or Acquisition Costs
-------------------------------
Per
Year No. of Avg. --------------------
Built Units Size Amount Unit Sq. Ft.
------- -------- ----------- ---------- ---------- ---------
(Sq. Ft.) (000) (000)(5) (5)
<S> <C> <C> <C> <C> <C> <C>
Tucson, Arizona
Acacia Hills ..................... 1986 64 540 $ 1,243 $19.4 $35.97
Casa Del Norte .................. 1984 84 525 1,729 20.6 39.21
Desert Springs .................. 1985 248 590 5,494 22.2 37.55
Landmark ........................ 1986 176 641 4,355 24.7 38.60
Park Terrace ..................... 1986 176 579 3,243 18.4 31.82
Park Village ..................... 1985 60 540 731 12.2 22.56
Posado Del Rio .................. 1980 160 621 3,221 20.1 32.42
South Point ..................... 1984 144 528 2,233 15.5 29.37
------ ------ --------- ------ -------
Total Tucson .................. 1,112 582 22,249 20.0 34.36
------ ------ --------- ------ -------
Phoenix, Arizona
Contempo Heights ............... 1978 222 595 6,083 27.4 46.05
Finisterra(1) .................. 1997 356 918 20,368
La Privada ........................ 1987 350 1,195 24,946 71.3 59.64
------ ------ --------- ------ -------
Total Phoenix .................. 928 945 51,397 54.2 56.38
------ ------ --------- ------ -------
Houston, Texas
Clear Lake Falls ............... 1980 90 1,169 3,907 43.4 37.14
The Gallery ..................... 1968 101 763 2,451 24.3 31.81
Memorial Bend .................. 1967 124 942 2,613 21.1 22.37
Nantucket Square ............... 1983 106 1,428 3,455 32.6 22.83
Prestonwood ..................... 1978 156 956 3,402 21.8 22.81
Riviera Pines .................. 1979 224 717 4,411 19.7 27.46
Briar Park(2) .................. 1983 80 915 2,331 29.1 31.84
Country Club Place(2)(4) ......... 1985 169 814 5,497 32.5 39.96
Chelsea Park(2) .................. 1983 204 829 5,802 28.4 34.31
Marymont(2) ..................... 1983 128 875 4,497 35.1 40.15
Riverway(2) ..................... 1985 152 740 1,942 12.8 17.27
Timbercreek Landing(2) ......... 1984 204 775 5,650 27.7 35.74
Ivystone/Woodsedge(2) ............ 1983 266 771 4,939 18.6 24.08
London Park(2) .................. 1983 257 814 6,253 24.3 29.89
------ ------ --------- ------ -------
Total Houston .................. 2,261 857 57,150 25.3 29.51
------ ------ --------- ------ -------
Dallas, Texas
Aspen Court(2) .................. 1986 140 742 4,672 33.4 44.97
Greenwood Creek(2)(4) ............ 1984 328 720 7,982 24.3 33.80
Highlands of Preston(2) ......... 1985 220 786 9,140 41.5 52.86
Montfort Townhomes(2) ............ 1986 83 1,112 5,726 69.0 62.04
Springfield(2)(4) ............... 1985 218 844 8,757 40.2 47.59
------ ------ --------- ------ -------
Total Dallas .................. 989 798 36,277 36.7 45.96
------ ------ --------- ------ -------
Albuquerque, New Mexico
Dorado Terrace .................. 1986 216 598 6,773 31.4 52.44
Villa Serena ..................... 1986 104 671 3,345 32.2 47.93
Whispering Sands ............... 1986 228 789 7,016 30.8 39.00
------ ------ --------- ------ -------
Total Albuquerque ............... 548 691 17,134 31.3 45.23
------ ------ --------- ------ -------
Pullman, Washington
Campus Commons-North(2) ......... 1985 234 913 11,135 47.6 52.12
Campus Common-South(2) ......... 1972 100 1,066 4,173 41.7 39.15
------ ------ --------- ------ -------
Total Pullman .................. 334 959 15,308 45.8 47.80
------ ------ --------- ------ -------
Seattle, Washington
Pacific South Center(2)(3) ...... 1975 5,492 74.99
The Court(2) ..................... 1980 175 590 4,135 23.6 40.07
------ ------ --------- ------ -------
Total Seattle .................. 175 590 9,627 23.6 40.07
------ ------ --------- ------ -------
Other real estate ............... 1,203
---------
Total .............................. 6,347 796 $210,345 $30.6 $38.78
====== ====== ========= ====== =======

<CAPTION>
Average
Monthly Rent Occupancy
-------------- -------------
6/30 12/31 6/30 12/31
Debt 1997 1996 1997 1996
---------- ------ ------- ------ ------
(000)
<S> <C> <C> <C> <C> <C>
Tucson, Arizona
Acacia Hills ..................... $ 1,013 $437 $437 94% 94%
Casa Del Norte .................. 1,357 433 433 89% 93%
Desert Springs .................. 4,546 435 435 91% 93%
Landmark ........................ 3,001 428 415 81% 93%
Park Terrace ..................... 2,662 433 433 85% 92%
Park Village ..................... 580 393 393 86% 95%
Posado Del Rio .................. 1,579 458 448 94% 95%
South Point ..................... 1,836 375 357 95% 91%
--------- ----- ----- --- ---
Total Tucson .................. 16,574 427 421 89% 93%
--------- ----- ----- --- ---
Phoenix, Arizona
Contempo Heights ............... 3,780 462 456 97% 92%
Finisterra(1) .................. 12,547
La Privada ........................ 19,027 870 856 89% 94%
--------- ----- ----- --- ---
Total Phoenix .................. 35,354 712 647 91% 95%
--------- ----- ----- --- ---
Houston, Texas
Clear Lake Falls ............... 3,084 856 833 97% 95%
The Gallery ..................... 1,619 558 546 95% 91%
Memorial Bend .................. 1,897 597 584 92% 89%
Nantucket Square ............... 2,717 774 760 95% 90%
Prestonwood ..................... 2,435 530 509 94% 91%
Riviera Pines .................. 3,224 501 491 96% 93%
Briar Park(2) .................. 1,396 563 526 96% 94%
Country Club Place(2)(4) ......... 3,568 556 556 93% 88%
Chelsea Park(2) .................. 3,386 543 533 97% 94%
Marymont(2) ..................... 2,537 575 572 98% 93%
Riverway(2) ..................... 1,183 362 364 83% 78%
Timbercreek Landing(2) ......... 3,383 505 490 96% 93%
Ivystone/Woodsedge(2) ............ 3,718 432 420 89% 85%
London Park(2) .................. 4,427 498 469 92% 93%
--------- ----- ----- --- ---
Total Houston .................. 38,574 535 483 94% 91%
--------- ----- ----- --- ---
Dallas, Texas
Aspen Court(2) .................. 2,036 568 568 97% 89%
Greenwood Creek(2)(4) ............ 5,027 452 448 93% 88%
Highlands of Preston(2) ......... 4,859 630 630 88% 96%
Montfort Townhomes(2) ............ 4,052 997 987 88% 93%
Springfield(2)(4) ............... 5,482 631 625 92% 88%
--------- ----- ----- --- ---
Total Dallas .................. 21,456 593 590 91% 90%
--------- ----- ----- --- ---
Albuquerque, New Mexico
Dorado Terrace .................. 5,140 530 519 91% 92%
Villa Serena ..................... 2,643 561 561 87% 94%
Whispering Sands ............... 5,503 539 539 91% 91%
--------- ----- ----- --- ---
Total Albuquerque ............... 13,286 539 535 90% 92%
--------- ----- ----- --- ---
Pullman, Washington
Campus Commons-North(2) ......... 6,668 758 758 50% 96%
Campus Common-South(2) ......... 2,749 726 722 55% 94%
--------- ----- ----- --- ---
Total Pullman .................. 9,417 748 747 51% 95%
--------- ----- ----- --- ---
Seattle, Washington
Pacific South Center(2)(3) ...... 3,223
The Court(2) ..................... 2,921 469 416 87% 93%
--------- ----- ----- --- ---
Total Seattle .................. 6,144 469 416 87% 93%
--------- ----- ----- --- ---
Other real estate ............... 82
---------
Total .............................. $140,887 $552 $540 89% 92%
========= ===== ===== === ===
</TABLE>
- ------------
(1) Under construction
(2) Acquired in 1997.
(3) Office building
(4) Subject to substantial rehabilitation during 1996
(5) Occupied primarily by college students. Occupancy rates are much higher
when the university is in session after August.
28
<PAGE>
The following tables set forth certain additional information regarding
each of the Company's existing
apartment communities.

<TABLE>
<CAPTION>
Number
Of Units
----------
<S> <C>
Tucson, Arizona
Acacia Hills ............ 64
Casa Del Norte ......... 84
Desert Springs ......... 248
Landmark ............... 176
Park Terrace ............ 176
Park Village ............ 60
Posada Del Rio ......... 160
Southpoint ............ 144
------
Total Tucson ......... 1,112
------
Phoenix, Arizona
Contempo Heights ...... 222
Finisterra ............ 356
La Privada ............ 350
------
Total Phoenix ......... 928
------
Houston, Texas
Briar Park ............ 80
Clearlake Falls ......... 90
Country Club ............ 169
Chelsea Park ............ 204
Ivystone ............... 266
London Park ............ 257
The Gallery ............ 101
Marymont ............... 128
Memorial Bend ......... 124
Nantucket Square ...... 106
Prestonwood ............ 156
Riverway ............... 152
Riviera Pines ......... 224
Timbercreek ............ 204
------
Total Houston ......... 2,261
------
Dallas, Texas
Aspen Court ............ 140
Greenwood Creek ......... 328
Highlands of Preston ... 220
Montfort ............... 83
Springfield ............ 218
------
Total Dallas ......... 989
------
Albuquerque, New Mexico
Dorado Terrace ......... 216
Villa Serena ............ 104
Whispering Sands ......... 228
------
Total Albuquerque ...... 548
------
Pullman, Washington
Campus Common N. ...... 234
Campus Common S. ...... 100
------
Total Pullman ......... 334
------
Seattle, Washington
The Court ............... 175
------
Grand Total ............ 6,347
======

<CAPTION>
Apartment Amenities
-----------------------------------------------------------------------------
Washer/Dryer Large
Connections Upper Unit Storage
And/Or Vaulted Or Walk-in Microwave
Equipment Fireplaces Ceilings Closets Ovens Icemakers
-------------- ------------- ------------ ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Tucson, Arizona
Acacia Hills ............ -- -- Some Some -- --
Casa Del Norte ......... -- -- Some Some -- --
Desert Springs ......... -- -- -- Some -- --
Landmark ............... -- -- -- Some -- --
Park Terrace ............ -- -- Some Some -- --
Park Village ............ -- -- Some Some -- --
Posada Del Rio ......... All Some -- Some -- --
Southpoint ............ -- -- -- Some -- --
Total Tucson .........
Phoenix, Arizona
Contempo Heights ...... -- -- -- Some --
Finisterra ............ All Some Some All All All
La Privada ............ All -- -- All -- --
Total Phoenix .........
Houston, Texas
Briar Park ............ All 95% All All -- All
Clearlake Falls ......... All -- Some -- -- --
Country Club ............ All 67% All All -- All
Chelsea Park ............ All 80% All -- -- All
Ivystone ............... All Some All -- -- Some
London Park ............ All Some All All -- --
The Gallery ............ -- -- -- All -- --
Marymont ............... All -- -- 75% All All
Memorial Bend ......... Some -- -- All -- --
Nantucket Square ...... All All -- All All All
Prestonwood ............ All -- -- Some -- --
Riverway ............... All 53% All 45% All All
Riviera Pines ......... All Some Some All -- --
Timbercreek ............ All 57% All All -- --
Total Houston .........
Dallas, Texas
Aspen Court ............ 94% 57% All 91% All All
Greenwood Creek ......... All 73% -- All -- All
Highlands of Preston ... All All All All -- All
Montfort ............... All All All All All All
Springfield ............ All All All All -- All
Total Dallas .........
Albuquerque, New Mexico
Dorado Terrace ......... -- -- Some All -- --
Villa Serena ............ -- -- Some All -- --
Whispering Sands ......... -- -- -- All -- --
Total Albuquerque ......
Pullman, Washington
Campus Common N. ...... -- -- All -- -- --
Campus Common S. ...... All -- All -- -- --
Total Pullman .........
Seattle, Washington
The Court ............... None None -- -- -- --
Grand Total ............

<CAPTION>
Other Features
--------------------------------------
<S> <C>
Tucson, Arizona
Acacia Hills ............
Casa Del Norte .........
Desert Springs .........
Landmark ............... Intrusion alarms
Park Terrace ............ Intrusion alarms
Park Village ............
Posada Del Rio ......... Covered parking
Southpoint ............
Total Tucson .........
Phoenix, Arizona
Contempo Heights ...... Pass thru-kitchen
Finisterra ............ Roman tubs, breakfast nook, TV in
kitchen
La Privada ............
Total Phoenix .........
Houston, Texas
Briar Park ............
Clearlake Falls ......... TH, alarms, garages, covered
parking, gates
Country Club ............
Chelsea Park ............ Limited access gates
Ivystone ...............
London Park ............
The Gallery ............ Covered parking, access gates
Marymont ............... Limited access gates
Memorial Bend .........
Nantucket Square ...... Townhome, garages, covered parking
Prestonwood ............
Riverway ...............
Riviera Pines ......... Storage, access gates
Timbercreek ............ Covered parking, limited access gates
Total Houston .........
Dallas, Texas
Aspen Court ............ Intrusion alarms
Greenwood Creek ......... Limited access gates
Highlands of Preston ...
Montfort ............... Garages, alarms, covered parking,
limited access gates
Springfield ............ Limited access gates
Total Dallas .........
Albuquerque, New Mexico
Dorado Terrace .........
Villa Serena ............ Intrusion alarms
Whispering Sands ......... Intrusion alarms
Total Albuquerque ......
Pullman, Washington
Campus Common N. ......
Campus Common S. ......
Total Pullman .........
Seattle, Washington
The Court ............... Pass thru bar in kitchen
Grand Total ............
</TABLE>

- ----------
1. All units have cable TV connections and miniblinds.

2. All units in all of the communities (except for Clearlake Falls and Memorial
Bend) have a patio or balcony. Some of the units in Clearlake Falls and
Memorial Bend have a patio or balcony.
29
<PAGE>
<TABLE>
<CAPTION>
Community Features
-----------------------------------------------------------------------------------------
Swimming Fitness
Clubhouse Pool Center Spa Other Features
----------- ---------- -------- ----- -------------------------------------------
<S> <C> <C> <C> <C> <C>
Tucson, Arizona
Acacia Hills ......... -- Yes -- Yes BBQ, Picnic area
Casa Del Norte ......... -- Yes -- Yes BBQ, Picnic area
Desert Springs ......... Yes Yes Yes Yes Sauna, tennis courts, BBQ, racquetball
Landmark ............... Yes Yes Yes Yes BBQ, Racquetball
Park Terrace ......... Yes Yes Yes Yes BBQ, Picnic area, Racquetball, Playground
Park Village ......... -- Yes -- -- BBQ, Picnic area
Posada Del Rio ......... Yes Yes Yes Yes BBQ, Picnic area, Racquetball
Southpoint ............ Yes Yes Yes Yes BBQ
Phoenix, Arizona
Contempo Heights ...... Yes Yes -- -- BBQ
Finisterra ............ Yes Yes Yes Yes Access gates, water features
La Privada ............ Yes Yes Yes Yes
Houston, Texas
Briar Park ............ Yes Yes Yes Yes Sauna, playground
Clearlake Falls ...... Yes Yes -- Yes Access gates, water volleyball, playground
Country Club ......... Yes Yes -- Yes Golf course frontage
Chelsea Park ......... Yes Yes Yes Yes Playground
Ivystone ............... Yes Yes -- Yes
London Park ............ Yes Yes -- Yes Ponds w/gazebo, fountain
The Gallery ............ Yes Yes Yes Yes Access gates
Marymont ............... -- Yes -- -- Volleyball court
Memorial Bend ......... Yes Yes -- Yes
Nantucket Square ...... -- -- -- --
Prestonwood ............ -- Yes -- -- BBQ, playground
Riverway ............... Yes Yes -- Yes Tennis/volleyball courts, playground
Riviera Pines ......... Yes Yes -- Yes Access gates
Timbercreek ............ -- Yes -- Yes
Dallas, Texas
Aspen Court ............ Yes Yes Yes -- Tanning bed, sport court
Greenwood Creek ...... Yes Yes Yes Yes Volleyball court
Highlands of Preston ... Yes Yes Yes Yes
Montfort ............... -- Yes -- Yes
Springfield ............ Yes Yes Yes Yes Sauna
Albuquerque, New Mexico
Dorado Terrace ......... Yes Yes -- Yes BBQ, Racquetball
Villa Serena ......... Yes Yes -- Yes Racquetball
Whispering Sands ...... Yes Yes -- Yes BBQ, Picnic Ramada, Playground
Pullman, Washington
Campus Common North . Yes Yes Yes Yes Tanning beds
Campus Common South . Yes Yes Yes -- Sauna
Seattle, Washington
The Court ............ -- Yes -- Yes Tennis court, sauna, sport court
</TABLE>
30
<PAGE>
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 mortgage loans, short-term
borrowing and other credit arrangements. 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.

The Company has obtained a first mortgage loan for each of its properties.
At June 30 , 1997, the mortgage loans totalled $128,340,000, which bear fixed
interest rates that averaged 8.2%. The mortgage loans generally are
non-recourse to the Company and are not cross-collateralized.

The Company has obtained a $15,350,000 construction loan for the
development of its Finisterra apartment community. At June 30, 1997,
$12,547,000 was outstanding on the loan.

The Company's Bylaws provide that it may not incur indebtedness if, after
giving effect to the incurrence thereof, aggregate indebtedness, 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 "Risk Factors -- 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 248 full-time salaried employees.
31
<PAGE>
MANAGEMENT

Directors and Executive Officers

The following table sets forth certain information regarding the Company's
directors and executive officers.

<TABLE>
<CAPTION>
Name Age Position(s) With The Company
- ---------------------- ----- -------------------------------------------------------------------------
<S> <C> <C>
Jon A. Grove 53 Chairman of the Board, President, Chief Executive Officer and Director
Frank S. Parise, Jr. 45 Vice Chairman, Executive Vice President, Chief Administrative Officer,
and Director
Joseph C. Chan 45 Executive Vice President, Chief Operating Officer, Secretary, Treasurer
and Director
Don W. Winton 43 Executive Vice President and Director
Dale A. Webber 36 Vice President
Roger A. Karber 42 Vice President, Property Development
Thomas A. Heeringa 43 Vice President
Mary C. Clements 30 Controller
Earl M. Baldwin 53 Director
Steven G. Davis 46 Director
John J. Gisi 51 Director
Raymond L. Horn 67 Director
Frederick C. Moor 65 Director
</TABLE>

Jon A. Grove has been Chairman of the Board of Directors, President, Chief
Executive Officer and a director of the Company since its organization in June
1987. Mr. Grove also served as the President of one of the general partners of
the Manager and was a director and principal stockholder of Pima Realty
Advisors, Inc. (the "Property Manager") from their respective organizations
until their acquisition by the Company in April 1997. From 1974 to 1989, Mr.
Grove was employed with The Estes Co. (now called GWS), a company which founded
the Company and which develops, constructs, and sells residential,
multi-family, commercial and industrial real estate, most recently as executive
vice president and chief operating officer. Mr. Grove also has been Chairman of
the Board and a Director of American Southwest Holdings, Inc. and its
affiliates since their organization; these companies are Arizona-based
corporations involved in the issuance and administration of
mortgage-collateralized bonds.

Frank S. Parise, Jr. has been Vice Chairman of the Board of Directors,
Executive Vice President, and Chief Administrative Officer of the Company since
December 1988 and a director of the Company since its organization. Mr. Parise
also has served as the President of one of the general partners of the Manager
and was the President, a director and principal stockholder of the Property
Manager from their respective organizations until their acquisition by the
Company in April 1997 since its organization in November 1993. From 1985 to
1989, Mr. Parise was employed by The Estes Co., most recently as President of
its Financial Services Division and Multifamily Development Division. From 1982
to 1985, Mr. Parise was the President of E. Allen Development Corporation, a
company that acquired and managed apartments.

Joseph C. Chan has been a director of the Company since February 1989,
Executive Vice President and Chief Operating Officer since December 1988,
Treasurer since April 1994, and Secretary since March 1996. Mr. Chan served as
the Vice President and Treasurer of the Company from its organization until
December 1988. Mr. Chan also served as the President of one of the general
partners of the Manager since its organization and was a director and principal
stockholder of the Property Manager from their respective organizations until
their acquisition by the Company in April 1997. From 1986 to 1987, Mr. Chan
served as an officer of The Estes Co.

Don W. Winton has been an Executive Vice President and a director of the
Company since April 1997. Mr. Winton served as the general partner of each of
the Winton Partnerships and as the President of Winton & Associates, Inc., an
apartment property management company, for more than five years prior to the
acquisition of the properties of the Winton Partnerships and Winton &
Associates, Inc. by the
32
<PAGE>
Company in April 1997. Mr. Winton currently is the general partner in
partnerships that own 3,216 apartment units, 44 townhome/condominium units, two
office buildings and eight single family lots.

Dale A. Webber has been a Vice President of the Company since September
1987.

Roger A. Karber has been Vice President, Property Development of the
Company since January 1995. From 1989 to 1994, Mr. Karber was president of
Festival Markets, Inc., a company that developed specialty retail centers. From
1979 to 1989, Mr. Karber was employed by The Estes Co., where he was
instrumental in establishing its apartment operations, which included
developing over 1,500 apartment units.

Thomas A. Heeringa has been a Vice President of the Company since March
1996. He has been employed by the Company since December 1988.

Mary C. Clements has been Controller of the Company since May 1994. Ms.
Clements was employed by Deloitte & Touche LLP, an international accounting
firm, from her graduation in May 1990 until she joined the Company in May 1994.

Earl M. Baldwin has been a director of the Company since its organization.
Since 1985, Mr. Baldwin has been president of Baldwin Financial Corp., a risk
management consulting service company for mortgage lenders specializing in
hedging and secondary market strategy. From 1973 to 1985, Mr. Baldwin was
employed by Security Pacific Mortgage Corporation ("SPMC"), a mortgage banking
company, serving most recently as its executive vice president.

Steven G. Davis has been a director of the Company since May 1997. He
currently serves as a director of ROC Communities, Inc., a public REIT that owns
and operates manufactured home communities. Mr. Davis was a founding shareholder
of ROC and served as its Executive Vice President, Chief Financial Officer,
Secretary, and Treasurer from 1993 to 1997. From 1990 to 1993, Mr. Davis was
President and a director of The Windsor Corporation, which was merged with ROC.
From 1985 to 1990, Mr. Davis was responsible for the real estate investment
banking division of LPL Financial Services.

John J. Gisi has been a director for the Company since February 1989. Mr.
Gisi has served as the President and Chief Executive Officer of National
Bancorp of Arizona, Inc., a wholly owned subsidiary of Zions Bancorporation,
and as the Chairman of the Board, President and Chief Executive Officer of
National Bank of Arizona since September 1984. Mr. Gisi also serves as a
director of several subsidiaries of Zions Bancorporation.

Raymond L. Horn has been a director of the Company since its organization.
Mr. Horn serves as tax advisor to several Phoenix-based real estate companies.
Mr. Horn, a certified public accountant and lawyer, presently is in private
practice after retiring from Deloitte Haskins & Sells (now Deloitte & Touche
LLP) as the partner-in-charge of that firm's Arizona tax practice. Mr. Horn is
a member of numerous professional and business associations including the
American Institute of Certified Public Accountants and the American Bar
Association.

Frederick C. Moor has been a director of the Company since February 1989.
Mr. Moor presently is retired after 33 years of employment with The Valley
National Bank of Arizona (now Bank One, Arizona), most recently as Vice
President and Banking Services Manager for the Eastern Division.

All directors are elected at each annual meeting of the Company's
stockholders and hold office until their successors are elected and qualified.
All officers serve at the discretion of the Board of Directors.

Compensation of Directors

During the fiscal year ended December 31, 1996, the Company paid an annual
director's fee to each Unaffiliated Director equal to $24,000 and a fee of $500
for each meeting of the Board of Directors attended by each Unaffiliated
Director and reimbursement of costs and expenses of all directors for attending
such meetings. Additionally, each member of the Audit Committee and the
Compensation Committee received a fee of $300 for each meeting attended by the
member. Affiliated Directors do not receive any fees for serving on the Board
of Directors.
33
<PAGE>
Executive Compensation

The following table sets forth the cash compensation paid to the Company's
executive officers whose total cash and cash equivalent remuneration exceed
$100,000 for the year ended December 31, 1996.

Summary Compensation Table
<TABLE>
<CAPTION>

Long Term Compensation
--------------------------------
Awards Payouts
Annual Compensation ----------------------- --------
Name and Principal ------------------------------- Restricted Options/ LTIP All Other
Position Year Salary Bonus Other Stock SARs Payout Compensation
- -------------------------- ------ ---------- --------- ---------- ------------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Jon A. Grove (1) 1996 $179,114 -- --
Chairman, President, 1995 180,431 -- --
and Chief Executive 1994 251,747 -- --
Officer
Frank S. Parise, Jr. (1) 1996 $179,114 -- --
Vice Chairman, 1995 180,431 -- --
Executive Vice 1994 251,747 -- --
President,
and Chief
Administrative
Officer
Joseph C. Chan (1) 1996 $179,114 -- --
Director, Executive 1995 180,431 -- --
Vice President, 1994 251,747 -- --
Secretary, and
Chief Operating
Officer
Dale A. Webber 1996 $141,729 -- -- 70,000 --
Vice President 1995 108,447 -- -- -- --
1994 108,147 -- -- 8,000 --
Roger A. Karber 1996 $117,835 -- -- 50,000 --
Vice President 1995 100,000 $15,000 -- -- -- --
</TABLE>

- ------------
(1) Messrs. Grove, Parise, and Chan were not salaried employees of the Company
and did not receive any cash or cash equivalent compensation directly from
the Company during the three-year period ended December 31, 1996. They
received their compensation from the Manager, the partners of which are
corporations owned by these individuals. See "Certain Relationships and
Related Transactions." The amounts listed under Other Compensation
represent the total cash payments received or receivable from the Manager
by these individuals and the corporations owned by them. Effective in May
1997, each of Messrs. Grove, Parise, and Chan entered into an employment
agreement with the Company. See "Management -- Employment Agreements."
34
<PAGE>
Option Grants

The following table sets forth certain stock option information concerning
the officers included in the above table.

Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential Realizable
Value
% Of Total at Assumed Annual Rates
Options/ Options/SARs Of Stock Price
SARs Granted To Exercise Appreciation
Granted Employees In Or Base Expiration For Option Term
(#) Fiscal Year Price Date 5%(1) 10%(1)
---------- -------------- ---------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Jon A. Grove None N/A N/A N/A N/A N/A
Frank S. Parise, Jr. None N/A N/A N/A N/A N/A
Joseph C. Chan None N/A N/A N/A N/A N/A
Dale A. Webber 70,000 42% $16.625 12/16/98 $119,547 $244,563
Roger A. Karber 50,000 30% $16.50 12/16/98 118,738 233,800
</TABLE>

- ------------
(1) This amount is the calculated future value of the stock options as of
December 16, 1998 assuming stock price appreciation rates of 5% and 10%
per year as specified in Item 402(c)(2) of Regulation S-K.

Option Exercises and Holdings

The following table represents certain information respecting the options
held by the officers included in the above table.

Aggregated Option/SAR Exercises in Last Fiscal Year
and Fiscal Year-End Option/SAR Values
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
Shares at FY-End (#) at FY-End ($)
Acquired Value Exercisable/ Exercisable/
Name On Exercise Realized Unexercisable Unexercisable
- ---------------------- ------------- ---------- --------------- --------------
<S> <C> <C> <C> <C>
Jon A. Grove -- -- 138,581 $1,589,234
-- --
Frank S. Parise, Jr. -- -- 140,287 1,653,343
-- --
Joseph C. Chan -- -- 138,581 1,589,234
-- --
Dale A. Webber 2,666 $19,995 47,930 191,194
23,334 90,419
Roger A. Karber -- -- 33,332 133,328
16,668 66,672
</TABLE>

Compensation Committee Interlocks and Insider Participation

The Compensation Committee of the Board of Directors performs the
functions of making recommendations to the Board concerning the Company's
compensation policies applicable to its executive officers. Messrs. Grove,
Parise and Chan serve as both directors and the principal executive officers of
the Company. All compensation matters relating to the Company's principal
executive officers, however, are decided by the Unaffiliated Directors,
consisting of Messrs. Baldwin, Gisi, Horn and Moor. The principal executive
officers make recommendation to the Board concerning the compensation of other
executive officers of the Company. None of the Unaffiliated Directors are, or
have ever been, officers or employees of the Company or any of its
subsidiaries. Messrs. Grove, Parise and Chan abstain from participating in the
deliberations of the Board of Directors concerning the approval of the
Management Agreement, the Property Management Agreements, the pending
acquisition of the Manager and the
35
<PAGE>
Property Manager by the Company (see "Business -- Pending Transaction"), or any
other matters relating to their compensation. In addition, during 1996 none of
the executive officers, including Messrs. Grove, Parise and Chan, served on the
board of directors or the compensation committee of the entities that employed
any of the Unaffiliated Directors.

Stock Option Plans

The Company has a nonstatutory stock option plan (the "Nonstatutory Stock
Option Plan") and an incentive stock option plan (the "Incentive Stock Option
Plan") (together the "Stock Option Plans"). The purpose of the Stock Option
Plans is to provide a means of performance-based compensation in order to
attract and retain qualified personnel and to provide incentive to others whose
job performance affects the Company. The Incentive Stock Option Plan provides
for incentive stock options which are intended to meet the requirements of
Section 422A of the Internal Revenue Code, (the "Code") ("ISOs") and which may
be granted to the officers and key personnel of the Company. The Nonstatutory
Stock Option Plan provides for non-qualified stock options which may be granted
to the Company's directors and key personnel of the Manager.

The Stock Option Plans are administered by the Board of Directors, which
determines whether such options will be granted, whether such options will be
ISOs or non-qualified options, which directors, officers and key personnel will
be granted options and the number of options to be granted, subject to the
maximum amount of shares issuable under the Stock Option Plans set forth below.
In making such determinations, the Board of Directors takes into account the
duties and responsibilities of the participants, their present and potential
contribution to the success of the Company and such other factors as the Board
deems relevant in connection with accomplishing the purpose of the Plan. Under
current law, ISOs cannot be granted to directors who are not also employees or
to directors or employees of entities unrelated to the Company.

Under the Stock Option Plans, options to purchase a maximum of 140,000
shares of the Company's Common Stock may be granted to the Company's directors,
officers and key personnel as well as to the directors, officers and key
personnel of the Manager. The exercise price for any option granted may not be
less than 100% of the fair market value of shares of Common Stock at the time
the option is granted. The optionholder may pay the exercise price in cash or
by delivery of previously acquired shares of Common Stock of the Company.
Generally, one-third of the options granted at any one time are immediately
exercisable, one-third are exercisable one year after the date of grant and the
remaining one-third become exercisable two years after the date of grant. The
options expire 10 years after the date of grant. No option may be granted under
the Stock Option Plans to any person who, assuming exercise of all options held
by such person, would own or be deemed to own more than 9.8% of the total
outstanding shares of Common Stock of the Company.

Under each of the Stock Option Plans, an exercising optionholder has the
right to require the Company to purchase some or all of the optionholder's
shares of the Company's Common Stock. That redemption right is exercisable by
the optionholder only with respect to shares that he has acquired by exercise
of an option granted under the Stock Option Plans which are restricted from
transfer by federal securities law as a result of grants or exercise of options
under the Stock Option Plans and such right must be exercised during the six
months immediately following the expiration of any such restriction.

No option granted under the Stock Option Plans is exercisable for a period
in excess of the term of the option as provided in the Stock Option Plans,
subject to earlier termination in the event of termination of employment,
retirement or death of the optionholder. An option may be exercised in full or
in part at any time or from time to time during the term of the option or
provide for its exercise in stated installments at stated times during the
option term.

The Board of Directors may amend the Stock Option Plans at any time,
except that approval by the Company's stockholders is required for any
amendment that increases the aggregate number of shares that may be issued
pursuant to the Stock Option Plans, changes the class of persons eligible to
receive such options, modifies the period within which the options may be
exercised or the terms upon which options may be exercised, or increases the
material benefits accruing to the participants under the Stock Option Plans.
Unless previously terminated by the Board of Directors, the Stock Option Plans
will terminate in August 1997.
36
<PAGE>
As of December 31, 1996, options to purchase 43,278 shares of Common Stock
were outstanding and options to purchase 5,901 shares were available for grant
under the Plans.

In connection with the renewal of the Management Agreement beginning with
1994, the Manager and the Company agreed to eliminate the incentive management
fee provision. On December 16, 1993, the Company granted to Messrs. Grove,
Parise and Chan options to purchase 309,800 shares of the Company's Common
Stock and stock appreciation rights ("SARs") covering 90,200 shares of the
Company's Common Stock. The exercise price is $8.60 per share, which was 110%
of the market price of the Common Stock on the grant date. If dividends are
declared during the period the stock options or SARs are outstanding, the
holder of the options and SARs can elect to receive currently or upon exercise
cash in an amount equal to the product of the per share dividend amount times
the number of options or SARs outstanding. In 1996, the Company paid Messrs.
Grove, Parise and Chan $266,667 each based on the total dividends of $2.00 per
share paid in 1996. All of the options and SARs are currently exercisable. The
options will expire on December 16, 1998. The options were subject to early
termination if the Management Agreement was terminated by the Manager or was
terminated by the Company for cause pursuant to the terms of the Management
Agreement. As the Company acquired the entire interests in the Manager and
effectively terminated the Management Agreement, these options will remain
effective until December 16, 1998. In February 1997, Messrs. Chan and Parise of
the Manager exercised their share of SARs (30,067 each) and received
approximately $440,000 each.

In 1996, Mr. Webber exercised options to purchase a total of 2,666 shares
of the Company's Common Stock by executing a full recourse promissory note for
$30,000 to the Company. The note is due on December 31, 1998 and can be repaid
by delivering to the Company shares of Common Stock owned by Mr. Webber based
on the then market price of the Common Stock. During 1996, Messrs. Chan and
Webber repaid the notes of $297,000 using 12,011 shares of Common Stock and
cash of $61,842.

Employment Agreements

Each of Messrs, Grove, Parise, Chan, and Winton has entered into an
employment agreement (collectively, the "Employment Agreements") with the
Company. Under the Employment Agreements, each of Messrs. Grove, Parise, Chan,
and Winton receive compensation of $100,000 per annum and are eligible to
receive an annual bonus in such amount, if any, as may be determined by the
non-management directors of the Company and fringe benefits generally made
available from time to time to employees of the Company.

Each of Messrs. Grove, Parise, Chan, and Winton is employed under the
Employment Agreements for a term of five years commencing from the date of the
Employment Agreements and from year-to-year thereafter until terminated by
either party. The Company may terminate the Employment Agreements during the
initial five-year term without penalty only for cause as defined in the
agreements. The Employment Agreements also contain provisions that (i) prohibit
Messrs. Grove, Parise, Chan, and Winton from competing with the business of the
Company while employed by the Company and for 12 months after the termination
of employment, and (ii) prohibit Messrs. Grove, Parise, Chan, and Winton,
during the term of employment and for a period of 12 months after termination
of employment, from directly or indirectly, for themselves or on behalf of any
other person, seeking to hire or hiring any of the Company's personnel or
employees. The Employment Agreements also require Messrs. Grove, Parise, Chan,
and Winton to take all necessary precautions to prevent any unauthorized
disclosure of any "Confidential Information" of the Company, as that term is
defined in the Employment Agreements.

In connection with the acquisition of the Winton Properties, the Company
paid each of Messrs. Grove, Chan and Parise a bonus of approximately $267,000.
Winton & Associates received commissions from the sellers of approximately
$927,000, of which approximately $268,000 was paid to employees of Winton &
Associates and $659,000 was paid to Mr. Winton. The bonuses paid to Messrs.
Grove, Chan and Parise were approved by the Unaffiliated Directors.
37
<PAGE>
Meetings and Committees

During the year ended December 31, 1996, the Board of Directors of the
Company held a total of five meetings. No director attended fewer than 75% of
the meetings of the Board of Directors.

The Company's Bylaws authorize the Board of Directors to appoint among its
members an executive committee, an audit committee and other committees. A
majority of the members of any committee so appointed must be Unaffiliated
Directors. The Board of Directors has appointed an Audit Committee and a
Compensation Committee. Messrs. Gisi and Horn serve as the members of the
Company's Audit Committee and Compensation Committee. The Audit Committee
reviews the annual financial statements, any significant accounting issues and
the scope of the audit with the Company's independent auditors and is available
to discuss with the auditors any other accounting and audit related matters
which may arise during the year. The Audit Committee met separately at one
formal meeting during 1996 which was attended by all of the members of the
Committee. The Compensation Committee reviews all transactions with the Manager
and the Property Manager and their affiliates, including the renewal of the
Management Agreement and the Property Management Agreements and the proposed
acquisition of the Manager and the Property Manager (see "Business -- Pending
Transaction"). The Compensation Committee met twice during 1996 to review the
preliminary terms of the proposed acquisition of the Manager and the Property
Manager (see "Business -- Pending Transaction").

Compliance with Section 16a of the Securities Exchange Act of 1934

Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than 10% of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
("SEC") and the American Stock Exchange. Officers, directors and greater than
10% stockholders are required by SEC regulation to furnish the Company with
copies of all Section (16a) reports they file.

Based solely on the Company's review of such reports received by it during
the fiscal year ended December 31, 1996, and written representations that no
other reports were required, the Company believes that each person who, at any
time during such fiscal year, was a director, officer, or beneficial owner of
more than 10% of the Company's Common Stock complied with all Section 16(a)
filing requirements during such year or prior fiscal years.
38
<PAGE>
CERTAIN TRANSACTIONS

The Company's Bylaws provide that the Board of Directors has the full
power to conduct, manage and direct the business and affairs of the Company. On
April 30, 1997, pursuant to the approval of the stockholders of the Company,
the Company acquired the entire interests in Pima Mortgage Limited Partnership
(the "Manager") and Pima Realty Advisors, Inc. (the "Property Manager"). The
owners of the Manager remain as Directors and executive officers of the
Company. The following description relates to the arrangement prior to May 1,
1997.

The Company was a party to a management agreement (the "Management
Agreement") with the Manager to manage the day-to-day operations of the
Company, subject to the supervision of the Company's Board of Directors. Jon A.
Grove, Frank S. Parise, Jr., and Joseph C. Chan served as directors or officers
of general partners of the Manager since its organization. See "Management --
Directors and Executive Officers of the Company."

The duties of the Manager under the Management Agreement included
formulating operating strategies; arranging for the acquisition of assets for
the Company; monitoring the performance of the Company's assets; and providing
certain administrative and overall managerial services necessary for the
operation of the Company. For performing these services, the Manager received an
annual base management fee in an amount equal to 3/8 of 1% per annum of the
Average Invested Assets of the Company (as defined in the Management Agreement),
which was paid monthly with adjustments made quarterly. The Manager also
performed certain analysis and other services in connection with the
administration of mortgage securities with respect to which the Company acquired
mortgage interests. For such services, the Company reimbursed the Manager for
the fees paid under the Subcontract Agreement described below and paid the
Manager an annual administration fee of $10,000 for each series of mortgage
interests acquired prior to 1991, $20,000 for the aggregate mortgage interests
acquired in 1991 and $20,000 for the aggregate mortgage interests acquired in
1992. In 1996, the Company paid the Manager management fees of approximately
$386,000 and administration fees of approximately $193,000. The payment of such
fees was unanimously approved by the Unaffiliated Directors.

In the event that the Management Agreement was terminated by the Company
or was 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 in the Management Agreement), the Manager
would 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 of
such termination (or failure to renew) 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 granted the Company a right of first refusal, for as long as
the Manager or an affiliate of the Manager acted 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.

The Company was a party to a property management agreement (collectively
the "Property Management Agreements") with the Property Manager for each of the
apartments acquired by the Company. The Property Manager is an affiliate of the
Manager. Each Property Management Agreement, which had a current term through
December 31, 1997, was approved by the Unaffiliated Directors. Under the
agreement, the Property Manager provided the customary property management
services at its cost without profit or distribution to its owners, subject to
the limitation of the prevailing management fee rates for similar properties in
the market. In 1996, the Company paid the Property Manager $466,000, which
amounted to 3.2% of the total rental and other income of the apartments.

Prior to June 1997, the Company owned certain mortgage interests with
respect to structured financing issued by American Southwest Holdings, Inc.
("ASH"). An affiliate of ASH performed the customary administration services
and received fees for such services of $12,500 per year for each series of
structured financing. The Company believed that the fees charged by ASH were
comparable to those
39
<PAGE>
charged by other companies performing similar services. Jon A. Grove, Chairman
of the Board, President and Chief Executive Officer of the Company, is Chairman
of the Board of Directors of ASH and its affiliates and owns 12.5% of the
voting stock of ASH. The Company has agreed to indemnify and hold harmless ASH
and certain affiliates from any action or claim brought or asserted by any
party by reason of any allegation that ASH or such affiliates is an affiliate
or is otherwise accountable or liable for the debts or obligations of the
Company or its affiliates.

PRINCIPAL AND SELLING STOCKHOLDERS

As of August 25, 1997, there were outstanding 4,812,192 shares of Common
Stock including 374,581 shares being issued. The following table sets forth the
beneficial ownership of Common Stock of the Company as of August 25, 1997, (i)
by each person known by the Company to own more than 5% of the outstanding
shares of Common Stock of the Company, (ii) by each director of the Company,
(iii) by all directors and executive officers of the Company as a group, and
(iv) by each of the selling stockholders. The number of shares also includes
(1) any shares of Common Stock owned of record by such person's minor children
and spouse and by other related individuals and entities over whose shares of
Common Stock such person has custody, voting control or the power of
disposition and (2) shares of Common Stock that such persons had the right to
acquire within 60 days by the exercise of stock options (excluding the SARs)
(see "Stock Option Plans"). Each director and executive officer of the Company
may be reached through the Company at 335 North Wilmot, Suite 250, Tucson,
Arizona 85711.

<TABLE>
<CAPTION>
Shares Beneficially
Shares Beneficially Owned Owned
Prior to Offering(1)(2) --------------------
-------------------------- After Offering(2)(5)
Number of Percent of Shares Being --------------------
Name and Beneficial Owner Shares Total Registered for Sale Number Percent
- ------------------------------------- ----------- ------------ --------------------- --------- --------
<S> <C> <C> <C> <C> <C>
Directors and Executive Officers
- ------------------------------------
Jon A. Grove ..................... 233,527 4.8% 95,336 138,191 2.8%
Joseph C. Chan ..................... 233,808 4.8 95,336 138,472 2.8%
Frank S. Parise, Jr. ............... 206,631 4.2 95,336 111,295 2.3%
Don W. Winton(4) .................. 145,207 3.0 145,207 0 0
Earl M. Baldwin .................. 3,477 (3) 0 3,477 (3)
Steven G. Davis ..................... 0 0 0 0 0
John J. Gisi ..................... 11,658 (3) 0 11,658 (3)
Raymond L. Horn .................. 5,988 (3) 0 5,988 (3)
Frederick C. Moor .................. 3,378 (3) 0 3,378 (3)
All directors and executive officers
as a group (12 persons) ......... 859,623 16.7 431,215 428,411 8.3%
Non-Management 5% Stockholders
- ------------------------------------
King William & Associates(6) ...... 531,269 11.0% 531,269 0 0
Other Selling Stockholders
- ------------------------------------
Shares issued on April 30, 1997:
Allen Lozier ..................... 58,685 1.2% 58,685 0 0
Estate of Durwood Alkire ......... 11,513 (3) 11,513 0 0
John & Mary Lou Area III ......... 4,004 (3) 4,004 0 0
Philip & Charles Wohlstetter ...... 1,544 (3) 1,544 0 0
Eleanor Bergman .................. 1,544 (3) 1,544 0 0
James Brockway ..................... 1,908 (3) 1,908 0 0
John Burgess ..................... 14,959 (3) 14,959 0 0
Grantor Trust of Former CHB
Partners ........................ 56,178 1.2% 56,178 0 0
William Coburn ..................... 5,374 (3) 5,374 0 0
Terrance Cosgrove .................. 4,138 (3) 4,138 0 0
George & Sandra Cozzetto ......... 2,852 (3) 2,852 0 0
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>

Shares Beneficially Owned Shares Beneficially
Prior to Offering(1)(2) Owned
-------------------------- -------------------
After
Offering(2)(5)
Number of Percent of Shares Being -------------------
Name and Beneficial Owner Shares Total Registered for Sale Number Percent
- ------------------------------------- ----------- ------------ --------------------- -------- --------
<S> <C> <C> <C> <C> <C>
Thomas Cutillo & Priscilla
Myrick ........................... 9,628 (3) 9,628 0 0
Don Davis Jr. ..................... 1,194 (3) 1,194 0 0
Joseph & Barbara Delaney ......... 16,833 (3) 16,833 0 0
Daniel Doernberg .................. 1,544 (3) 1,544 0 0
Mark Donahue ..................... 1,544 (3) 1,544 0 0
Ershings, Inc. .................. 3,223 (3) 3,223 0 0
James & Dorothy Frank Trust ...... 4,956 (3) 4,956 0 0
Capt. Fred Frink .................. 2,389 (3) 2,389 0 0
Edward & Betty Garman ............ 4,778 (3) 4,778 0 0
Anthony & Amalia Gatti ............ 1,568 (3) 1,568 0 0
Lewis Gridley ..................... 6,458 (3) 6,458 0 0
Jack & Eileen Hollandeer ......... 1,544 (3) 1,544 0 0
Hunt Engineering Co., Inc. ...... 4,102 (3) 4,102 0 0
Royce & Barbara Hunter ............ 6,511 (3) 6,511 0 0
1993 Martin & Sylvia Jacobs
Revocable Trust ............... 9,176 (3) 9,176 0 0
JMA Properties, Inc. ............ 2,784 (3) 2,784 0 0
Raymond Johnson .................. 1,220 (3) 1,220 0 0
Clark Kennedy ..................... 3,073 (3) 3,073 0 0
A. George Lozier .................. 4,720 (3) 4,720 0 0
Michael Mulroy II ............... 3,243 (3) 3,243 0 0
Robert & Susan Murnen ............ 11,161 (3) 11,161 0 0
Collins & Susan Oakley ............ 1,661 (3) 1,661 0 0
Raymond & Pamela Pinney ......... 2,601 (3) 2,601 0 0
Glen Poor ........................ 1,544 (3) 1,544 0 0
Robert Reynolds .................. 3,190 (3) 3,190 0 0
Carol Rezek ..................... 1,296 (3) 1,296 0 0
Estate of Norman D. Runions ...... 5,712 (3) 5,712 0 0
John Ryan ........................ 1,573 (3) 1,573 0 0
Bill S. Schnall .................. 1,587 (3) 1,587 0 0
Scriba Family Trust ............... 6,117 (3) 6,117 0 0
Sea Spray Investments LLC ......... 3,088 (3) 3,088 0 0
Lee & Linda Shultz ............... 6,294 (3) 6,294 0 0
John Sposare ..................... 4,778 (3) 4,778 0 0
Short Cressman Burgess Profit
Sharing Trust .................. 7,140 (3) 7,140 0 0
Jack & Maxine Sturza ............ 4,777 (3) 4,777 0 0
Robert Thurston .................. 2,389 (3) 2,389 0 0
Susan Thurston .................. 2,389 (3) 2,389 0 0
Robert & Betty Van Leer ......... 1,544 (3) 1,544 0 0
Manuel & Sahily Vellon ............ 1,544 (3) 1,544 0 0
Jack Wahlquist .................. 4,890 (3) 4,890 0 0
Rick Whitney ..................... 638 (3) 638 0 0
Living Trust of Patricia
Wolfstone ..................... 6,329 (3) 6,329 0 0
Wolfstone Family Trust ............ 1,568 (3) 1,568 0 0
Zalutsky & Klarquist PPC
Profit Sharing Plan ............ 5,201 (3) 5,201 0 0
George Zoffel ..................... 8,055 (3) 8,055 0 0
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
Shares Beneficially Owned Shares Beneficially
Prior to Offering(1)(2) Owned
-------------------------- -------------------
After
Offering(2)(5)
Number of Percent of Shares Being -------------------
Name and Beneficial Owner Shares Total Registered for Sale Number Percent
- ---------------------------------------- ----------- ------------ --------------------- -------- --------
<S> <C> <C> <C> <C> <C>
Shares to be issued(7):
3636 Colorado Inc. .................. 41,633 (3) 41,633 0 0
LFC 1989-1 Realty Partnership ......... 6,939 (3) 6,939 0 0
A&S Barber Family Limited
Partnership ........................ 1,534 (3) 1,534 0 0
ATC Consolidated Properties
Limited Partnership ............... 6,939 (3) 6,939 0 0
Austin Fairchild Management
Company ........................... 3,661 (3) 3,661 0 0
Dorothy Bart, TTEE .................. 1,534 (3) 1,534 0 0
Beaconsfield Investments
Limited Partnership ............... 3,090 (3) 3,090 0 0
Cinitel U.S, Properties, Inc. ......... 29,989 (3) 29,989 0 0
Issie Coop ........................... 1,071 (3) 1,071 0 0
Robert Deutsch ........................ 2,929 (3) 2,929 0 0
Elinor C. Gantz ..................... 6,138 (3) 6,138 0 0
Charles Greenhouse, M.D. ............ 2,929 (3) 2,929 0 0
Marilyn L. Hanna Trust ............... 3,069 (3) 3,069 0 0
Happy Texas Inc. ..................... 1,464 (3) 1,464 0 0
Harman Investments, LP ............... 12,276 (3) 12,276 0 0
Fred Howard ........................... 9,230 (3) 9,230 0 0
John Howard ........................... 9,230 (3) 9,230 0 0
Mary Elaine Isbell Trust Dtd.
3/9/84 .............................. 2,929 (3) 2,929 0 0
R.J. & J.D. Isbell Rev. Trust
Dtd. 8/17/78 ........................ 2,929 (3) 2,929 0 0
M.W. & S.G. Isbell TTEE FBO
Isbell Rev. Tr. Dtd. 9/14/83 ...... 2,929 (3) 2,929 0 0
David Jaffe ........................... 3,069 (3) 3,069 0 0
Jaffee Family Foundation ............ 11,716 (3) 11,716 0 0
Elliot S. Jaffe ..................... 15,345 (3) 15,345 0 0
Elliezra Jesselson 2/2/81 Trust ...... 2,929 (3) 2,929 0 0
Jonathan Jesselson 3/31/87 Trust 2,929 (3) 2,929 0 0
Micha Jesselson 6/3/86 Trust ......... 2,929 (3) 2,929 0 0
Nadav Jesselson 2/1/83 Trust ......... 2,929 (3) 2,929 0 0
Roni Jesselson 6/3/86 Trust ......... 2,929 (3) 2,929 0 0
Samuel Jesselson 3/12/84 Trust ...... 2,929 (3) 2,929 0 0
Yosepha Jesselson 1/10/89 Trust 2,929 (3) 2,929 0 0
J.L. Holdings Co. Ltd. ............... 2,232 (3) 2,232 0 0
J.N.T. Holdings Ltd. .................. 1,116 (3) 1,116 0 0
Vivian Leith ........................ 2,929 (3) 2,929 0 0
Lincor
V&A I Limited Partnership ......... 10,443 (3) 10,443 0 0
Richard Linhart ..................... 17,220 (3) 17,220 0 0
Dennis R. McDaniel .................. 19,517 (3) 19,517 0 0
Fred C. McDaniel ..................... 1,396 (3) 1,396 0 0
Lawrence A. McLernon .................. 11,996 (3) 11,996 0 0
Neil Margolis ........................ 1,833 (3) 1,833 0 0
MTP, Inc. ........................... 2,763 (3) 2,763 0 0
Merit Texas Assets, Inc. ............ 22,071 (3) 22,071 0 0
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
Shares Beneficially
Owned
Shares Beneficially Owned -------------------
Prior to Offering(1)(2) After
-------------------------- Offering(2)(5)
Number of Percent of Shares Being -------------------
Name and Beneficial Owner Shares Total Registered for Sale Number Percent
- -------------------------------------- ----------- ------------ --------------------- -------- --------
<S> <C> <C> <C> <C> <C>
Miamar Investments Limited
Partnership ..................... 1,243 (3) 1,243 0 0
M. Shier & Associates Limited ...... 2,232 (3) 2,232 0 0
Polly S. Pierson Living Trust ...... 1,534 (3) 1,534 0 0
Brittany Portnoy .................. 732 (3) 732 0 0
Danielle Portnoy .................. 732 (3) 732 0 0
David R. Roelke ..................... 2,169 (3) 2,169 0 0
Ronson Ventures Ltd. ............... 3,069 (3) 3,069 0 0
Michael J. Rosenthal ............... 7,322 (3) 7,322 0 0
Samuels Family Trust ............... 1,534 (3) 1,534 0 0
Camillo Santomero .................. 3,069 (3) 3,069 0 0
Estate of Carol Simon ............... 6,138 (3) 6,138 0 0
William E. Simon .................. 6,138 (3) 6,138 0 0
Martin Solomon ..................... 11,996 (3) 11,996 0 0
S.W. Properties Inc. ............... 4,393 (3) 4,393 0 0
Judith N. Taylor .................. 1,534 (3) 1,534 0 0
Ivan Toler ........................ 921 (3) 921 0 0
Henrik N. Vanderlip ............... 7,462 (3) 7,462 0 0
Michael Wahl ........................ 9,230 (3) 9,230 0 0
Zacharias Family Limited
Partnership ..................... 3,473 (3) 3,473 0 0
David L. Zacharias
Irrevocable Trust ............... 3,069 (3) 3,069 0 0
</TABLE>

- ------------
(1) Except as otherwise indicated, each person named in the table has sole
voting and investment power with respect to all Common Stock beneficially
owned by such person, subject to applicable community property law. Each
such person may be reached through the Company at 335 North Wilmot, Suite
250, Tucson, Arizona 85711.
(2) In calculating the percentage of ownership, the number of shares of Common
Stock that the identified person or group had the right to acquire within
60 days upon the exercise of stock options is deemed to be outstanding for
the purpose of computing the percentage of the shares of Common Stock
owned by such person, but such shares are not deemed to be outstanding for
the purpose of computing the percentage of the shares of Common Stock
owned by any other person.
(3) Less than 1% of the outstanding shares of Common Stock.
(4) The number of shares shown are owned directly by Mr. Winton and does not
include any of the shares owned by King Williams & Associates in which Mr.
Winton is a 15.4% general partner.
(5) Each of the Selling Stockholders is assumed to be selling all of the shares
of Common Stock registered for sale and will own no shares of Common Stock
after the offering other than those shares held by certain Selling
Stockholders as of August 25, 1997, that do not require further
registration for resale, as set forth under "Shares Beneficially Owned
After Offering." The Company has no assurance that the Selling
Stockholders will sell any of the securities.
(6) The address of King Williams & Associates is 3485 FM 1960 West, Suite 450,
Houston, TX 77060.
(7) These shares are to be issued in connection with the proposed acquisition
of three apartment communities from entities affiliated with MTP, Inc. The
proposed acquisition has been reported in the Company's Current Report on
Form 8-K filed with the Securities and Exchange Commission on August 28,
1997.
43
<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS

Qualification of the Company as a REIT

General

The Company has made an election to be treated as a REIT under the Code.
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.

Generally, the unremedied failure of the Company to qualify 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 rates, 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 limitation.

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, such as dividend or interest income or capital gain on the sale of
stocks or securities. Thus, only 5% of a REIT's income each year is
unrestricted. Such non-qualifying income may include third-party management
fees, income from certain services provided to tenants, or rents from personal
property. Finally, the 30% income limitation 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 "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 limitation.

The Company anticipates that its gross income will continue to consist
principally of 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
limitation, 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.
44
<PAGE>
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.
This requirement is intended to assure that the bulk of REIT investments are
either equity or mortgage interests in real property. 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 Real Estate Mortgage Investment Conduits ("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). The distribution requirement
does not compel the Company to distribute that portion, if any, of its cash
flow that exceeds the REIT taxable income.

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 predistribution 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 "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, 1996 of approximately $76 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
45
<PAGE>
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
Stock 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. Therefore, REIT dividends may not be
used to offset a stockholder's passive losses. With respect to any dividend
payable to stockholders of record as of a specified date prior to the end of
the year, that dividend is deemed to have been received by the stockholder on
December 31 if the dividend is paid in January of the following calendar year.

The Company's dividends are not 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
attributable to the Company's ownership of residual interests in a REMIC. See
"Excess Inclusion Rule" below.

The total dividends of $2.00 per share for 1996 consists of ordinary
income of $0.17, return of capital of $0.45 per share, and long-term capital
gain of $1.38.

Excess Inclusion Rule

Prior to June 1997, the Company owned residual interests in REMICs, which
may adversely affect the federal income taxation of the Company and of certain
stockholders to the extent those residual interests generated "excess inclusion
income." 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 is required to distribute at least 95 percent of its
taxable income, even if its taxable income is comprised exclusively of excess
inclusion income and the Company otherwise has a net operating loss.
46
<PAGE>
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.
Therefore, all or a portion of the dividends received by the stockholders may
be excess inclusion income. Excess inclusion income constitutes 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.
For 1996, the entire ordinary income portion ($0.17 per share) of the dividend
was excess inclusion income.

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. A portion of the Company's 1997 taxable income may be 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 the REIT is
domestically controlled, its stock is excluded from the definition of United
States real property interests, and sales of its stock by foreign investors
generally escape United States taxation.

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.

DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company currently consists of
40,000,000 shares of Common Stock, par value $.01 per share, of which 4,437,611
shares of Common Stock were issued and outstanding as of August 25, 1997. The
Company has outstanding LP Units convertible into 943,705 shares of
47
<PAGE>
Common Stock. See "Summary of the Heritage LP Partnership Agreement." In
addition, the Company has entered into agreements to issue 374,581 shares of
Common Stock and LP Units convertible into 27,721 shares of Common Stock.

Holders of the Company's Common Stock are entitled to one vote per share
on all matters on which stockholders are entitled to vote, including the
election of directors. The shares do not have cumulative voting rights.
Consequently, the holders of more than 50% of the outstanding shares of Common
Stock elect all of the directors. All shares of Common Stock are entitled to
share equally in such dividends as the Board of Directors may declare, in its
discretion, from sources legally available for such dividends. In the event of
liquidation of the Company, holders of Common Stock are entitled to share
equally in the assets available for distribution. Holders of Common Stock do
not have preemptive rights to subscribe for additional shares on a pro rata
basis if and when additional shares are offered for sale. No redemption rights
or sinking funds are available to holders of Common Stock.

The Board of Directors is authorized, without action by the Company's
stockholders, to classify and reclassify any unissued shares of the Company's
authorized capital stock in a class or classes of preferred stock, preference
stock, special stock, or other stock and to divide and classify any class into
one or more series of such class, by determining, fixing, or altering, among
other things, the designations, powers, preferences, and rights of the shares
of each such class or series (including matters relating to voting, dividends,
conversion, and redemptions) and the qualifications, limitations, or
restrictions thereof. As a result, the Board may authorize and issue classes or
series of capital stock with voting, conversion, dividend, or other rights that
could adversely affect the powers and rights of the holders of Common Stock.
The issuance of any such classes or series of capital stock may have the effect
of delaying, deferring, or preventing a change in control of the Company. The
Company has no current plan to issue any additional classes or series of
capital stock.

Registration Agreements

The Company has entered into a registration agreement (the "Exchange Offer
Registration Agreement") for the benefit of each of the Winton Partners that
received shares of the Company's Common Stock in the Exchange Offer providing
certain registration rights with respect to the shares of the Company's Common
Stock issued in connection with the Exchange Offer related to the Winton
Acquisition. Pursuant to the terms of the Exchange Offer Registration
Agreement, the Company has filed a registration statement under the Securities
Act covering such shares of Common Stock for resale. The Company must use its
best efforts to keep such registration statement effective for a period of
three years after the closing of the Winton Acquisition. The Registration
Agreement also requires the Company, on one occasion, to file, and use its best
efforts to cause to become effective, an applicable registration statement,
upon the request of holders of at least $10.0 million of Common Stock subject
to registration, to register such shares of Common Stock in a firm underwriting
by underwriters of national reputation. In addition, if at any time the Company
proposes to file a registration statement under the Securities Act on Form S-1,
S-2, or S-3 (or other appropriate form), on its behalf or on behalf of any of
its security holders, the holders of shares of Common Stock received pursuant
to the Exchange Offer will be entitled to include their shares of Common Stock
in that registration statement. The right of the holders of shares of Common
Stock received pursuant to the Exchange Offer to have their shares registered
pursuant to the Exchange Offer Registration Agreement will be subject to
certain limitations, including the right of the Company to defer the filing of
a registration statement if the Company's Board of Directors determines, in its
good faith judgement, that the filing of such registration would be detrimental
to the Company and its stockholders or would interfere with any pending
material corporate transaction involving the Company.

The Company also entered into a registration agreement (the "Asset
Transfer Registration Agreement") with each of the Approving Winton
Partnerships on behalf of the Distributees under which the Distributees will
have certain registration rights with respect to the shares of Common Stock of
the Company into which the LP Units issued in connection with the Asset
Transfer related to the Winton Acquisition will be convertible at any time
following the first anniversary date of the closing of the Winton Acquisition.
Pursuant to the terms of the Registration Agreement, not later than nine months
after the
48
<PAGE>
closing of the Winston Acquisition, the Company must file a registration
statement under the Securities Act and any state securities laws covering such
shares of Common Stock for resale. The Company must use its best efforts to
cause such registration statement to become effective by the time that the LP
Units may be converted into shares of the Company's Common Stock and to keep
such registration statement available for a period of 10 years. The
Registration Agreement also requires the Company to file a registration
statement, upon the request of holders of at least $5.0 million of Common Stock
subject to registration, to register such shares of Common Stock in a firm
underwriting by underwriters of national reputation. The holders of such shares
of Common Stock will be entitled to require the Company to effect one such
registration. In addition, if at any time the Company proposes to file a
registration under the Securities Act on Form S-1, S-2, or S-3 (or other
appropriate form), on its behalf or on behalf of any of its security holders,
the holders of shares of Common Stock distributed pursuant to the Asset
Transfer will be entitled to include their shares of Common Stock in that
registration statement. The right of the holders of shares of Common Stock
received pursuant to the Asset Transfer to have their shares registered under
the Registration Agreement will be subject to certain limitations, including
the right of the Company to defer the filing of a registration statement if the
Company's Board of Directors determines, in its good faith judgment, that such
registration would be detrimental to the Company and its stockholders or would
interfere with any pending material corporate transaction involving the
Company.
49
<PAGE>
HERITAGE COMMUNITIES L.P.

Heritage Communities L.P. (the "Heritage LP") is a Delaware limited
partnership in which the Company and a wholly owned subsidiary of the Company
are the general partners and own a 50.4% interest. Heritage LP acquired
substantially all of the assets and properties of the Winton Partnerships
through a capital contribution by the Winton Partnerships to Heritage LP of
such assets and properties in exchange for cash and LP Units.

SUMMARY OF THE HERITAGE LP PARTNERSHIP AGREEMENT

The following is a summary of some of the more significant provisions of
the Partnership Agreement of Heritage L.P.

Distributions

The portion, if any, of Heritage LP's cash funds and other property, after
the payment of expenses and the making of all other expenditures that the
Company determines, in its sole discretion, to be in excess of Heritage LP's
working capital needs and such reserves as the Company deems appropriate for
the fixed and contingent obligations of Heritage LP ("Available Cash Flow"),
will be distributed quarterly. To the extent that Heritage LP has sufficient
Available Cash Flow, the holder of an LP Unit will receive distributions that
are intended to mirror the Company's dividends per share, which such holders
would have received as stockholders of the Company. To the extent that Heritage
LP's Available Cash Flow is insufficient to pay such amount, accounts for the
holders of LP Units will be credited for the unpaid distribution and with
interest on the unpaid distribution (the "Unpaid Balances"). Any Unpaid
Balances will be given priority for future distributions of Available Cash
Flow. In addition, until the tenth anniversary of the Partnership Agreement,
proceeds from the Heritage LP's capital transactions ("Capital Transaction
Proceeds"), if any, will also be applied to reduce any Unpaid Balances in the
distribution accounts of the holders of LP Units. To the extent that Heritage
LP's Available Cash Flow and Capital Transaction Proceeds exceed the Unpaid
Balances and the current distributions to holders of LP Units, all additional
amounts will be distributed to Heritage LP's general partners. In addition,
following the tenth anniversary of the Partnership Agreement, all Capital
Transaction Proceeds will be distributed to Heritage LP's general partners.
Consequently, regardless of the amount of Heritage LP's Available Cash Flow and
Capital Transaction Proceeds, the maximum amount of distributions payable to a
holder of an LP Unit (excluding interest on unpaid distributions) will not
exceed the dividends paid with respect to a share of the Company's Common
Stock.

Allocation of Profits and Losses

Heritage LP will maintains a capital account for each of its partners.
Heritage LP's items of income, gain, loss, and deduction will be 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 will be
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) thereafter, to the Company and Heritage SGP,
as general partners, on a pro rata basis. Notwithstanding (i) and (ii), the
Company and Heritage SGP will be allocated on a combined basis not less than
one percent of each item of Heritage LP's gain, loss, income, and deduction for
each year.

Net losses will be allocated to the partners in accordance with their
respective percentage interests in Heritage LP, except that net losses will not
be allocated to any limited partner to the extent that such allocation would
cause such limited partner to have an adjusted capital account deficit at the
end of such taxable year. All net losses in excess of such limitations will be
allocated to the Company and Heritage SGP, as general partners, on a pro rata
basis.
50
<PAGE>
Conversion of LP Units

At any time following the first anniversary of the Partnership Agreement,
the holders of LP Units may convert such LP Units into shares of the Company's
Common Stock. Any holder of an LP Unit who exercises his conversion right on or
prior to the tenth anniversary of the Partnership Agreement will be paid, at
the time of such conversion, any outstanding Unpaid Balances in the
distribution accounts attributable to such Units. However, after the tenth
anniversary of the Partnership Agreement, Heritage LP will not be required to
pay the holder of an LP Unit who converts such LP Unit into a share of the
Company's Common Stock the Unpaid Balances in the holder's distribution
accounts if the market value of a share of the Company's Common Stock received
upon conversion is equal to at least 110% of the sum of the initial capital
contribution and the Unpaid Balances with respect to such LP Unit. Moreover,
the Company's obligation to keep its registration statement filed with respect
to resales of shares of the Company's Common Stock received upon conversion
will expire after ten years. Consequently, Winton Partners who elect not to
participate in the Exchange Offer should be aware that the economic
consequences of conversion of an LP Unit will change following the tenth
anniversary of the Partnership Agreement.

Management

The Company has the exclusive discretion in the management and control of
the business and affairs of Heritage LP, except that the Company may delegate
any of its powers to Heritage SGP. The Partnership Agreement grants to the
Company broad authority in the exercise of the management and control of
Heritage LP. The general partners have complete power to do all things
necessary or incident to the management and conduct of the business of Heritage
LP.

Rights of Holders of LP Units

Holders of LP Units do not have the right to take part in the management
or control of the business or affairs of Heritage LP, to transact any business
for Heritage LP, or to sign for or bind Heritage LP. The limited partners of
Heritage LP, however, have the right to receive tax reports and certain other
financial information, the most recent annual, quarterly, and current reports
and proxy statements as provided to the Company's stockholders and, upon
request, copies of documents as filed by the Company with the Commission under
the Securities Exchange Act of 1934. Holders of LP Units also have the right to
inspect certain records of Heritage LP. Upon the requisite vote of the holders
of LP Units, such persons will have the right to amend the Partnership
Agreement, subject to certain limitations specified in the Partnership
Agreement, with the consent of the general partners. The exercise of the
foregoing right will require the affirmative vote of the owners of record of
more than 50 percent of the LP Units.

Limited Liability

No limited partner will be liable for Heritage LP's debts or other
obligations, except to the extent that Heritage LP withholds from or pays on
behalf of such limited partner any amount of federal, state, local, or foreign
taxes that the Company or Heritage SGP determines that Heritage LP is required
to withhold or pay with respect to any amount distributable or allocable to
such limited partner pursuant to the Partnership Agreement. The Partnership
Agreement requires the general partners to cause Heritage LP to operate in such
manner as they deem appropriate to avoid unlimited liability for the limited
partners.

Termination and Winding Up

Heritage LP will be dissolved upon the occurrence of any of the following
events: (i) the end of its term on December 31, 2086, (ii) the election of the
general partners, unless any original limited partner that holds an original LP
Unit objects in writing within 30 days of the notice of such election, (iii)
entry of a decree of judicial dissolution of Heritage LP, (iv) the sale or
other disposition of all or substantially all of Heritage LP's assets and
properties, (v) an event of withdrawal by a general partner as described in
Section 17-402 of the Delaware Limited Partnership Act, unless all of the
remaining partners agree in writing, within 90 days after such event of
withdrawal, to continue the business of Heritage LP and elect one or more
additional or successor general partners if necessary or desirable to do so, or
(vi) 120 days
51
<PAGE>
after the commencement of any proceeding against the last remaining general
partner seeking relief under certain statutes, including, among other things,
reorganization, liquidation, or dissolution unless all of the remaining
partners agree in writing, within 90 days after the occurrence of such event,
to continue the business of Heritage LP and to the appointment of a substitute
general partner.

In the event of Heritage LP's dissolution, (a) Heritage LP's affairs will
be terminated and wound up, (b) an accounting will be made, (c) Heritage LP's
liabilities (including any amounts owed to the partners) will be paid or
adequately provided for, and (d) Heritage LP's remaining assets will be
distributed to the partners as provided for in the Partnership Agreement.

Books and Records

The Partnership Agreement requires the general partners to make available
to each limited partner, within 90 days following the close of Heritage LP's
fiscal year on December 31, annual information necessary for tax purposes.

The Partnership Agreement requires the general partners to maintain a list
of the names and last known business addresses of all partners at Heritage LP's
principal office and to make such list available for review by any limited
partner or such partner's representative at reasonable times. The Partnership
Agreement also requires the general partners to maintain at the Heritage LP's
principal office certain financial statements, a copy of the Certificate of
Limited Partnership for Heritage LP and executed copies of any powers of
attorney used by Heritage LP to file such certificate, a copy of the
Partnership Agreement, certain federal, state, and local income tax records,
and a description, including the amount, of the contributions by each partner
and the date on which each person became a partner, any of which documents may
be inspected by partners at any reasonable time and upon adequate notice.

Power of Attorney

Each limited partner irrevocably designates the Company and Heritage SGP
as such limited partner's agent, with full power of substitution, to execute,
acknowledge, and file of record the Partnership Agreement, certificates of
limited partnership, and any and all other instruments that the general
partners deem necessary or appropriate to qualify and continue Heritage LP as a
limited partnership and also all conveyances and other instruments as the
general partners deem necessary or appropriate to reflect the dissolution and
termination of Heritage LP. In addition, the general partners have been
designated as the agent of each limited partner to execute, acknowledge, and
deliver all conveyance and other instruments that the general partners deem
appropriate, in accordance with the Partnership Agreement, to effect the
transfer of partnership interests, including assignments on the default of any
limited partner, to admit, substitute, or delete partners, to sell, exchange,
or dispose of assets or properties of Heritage LP, to borrow money and
otherwise enter into financing transactions, and to execute all amendments
and/or restatements of the Partnership Agreement. Such power will be deemed to
be coupled with an interest and will survive the death of the limited partner.

PLAN OF DISTRIBUTION

The Company is registering hereby, or has registered under another
Registration Statement to which this Prospectus relates, a total of 1,687,318
shares of currently outstanding Common Stock, all of which shares may be sold
from time to time by the Selling Stockholders. The Company has granted
registration rights to certain of the Selling Stockholders, which the
Registration Statement of which this Prospectus forms a part is intended to
satisfy. Each Selling Stockholder may use this Prospectus as updated from time
to time to offer the shares of Common Stock for sale in transactions in which
the Selling Stockholder is or may be deemed to be an underwriter within the
meaning of the Securities Act. The Company will not receive any proceeds from
the sale of any shares of Common Stock by the Selling Stockholders. The Company
will not pay any compensation to an NASD member in connection with this
offering. Brokerage commissions, if any, attributable to the sale of the shares
of Common Stock offered hereby will be borne by the holders thereof.

Each currently outstanding share of Common Stock being registered for
resale hereby may be sold by the holder thereof in transactions that are exempt
from registration under the Securities Act or as long
52
<PAGE>
as the Registration Statement of which this Prospectus forms a part is
effective under the Securities Act, and as long as there is a qualification in
effect under, or an available exemption from, any applicable state securities
law with respect to the resale of such shares. The Selling Stockholders, in
addition to selling pursuant to the Registration Statement of which this
Prospectus is a part, also may sell under Rule 144 as promulgated under the
Securities Act, if applicable. See "Description of Securities -- Shares
Eligible for Future Sale."

The Selling Stockholders also may pledge the shares of Common Stock being
registered for resale hereby to NASD broker/dealers (each a "Pledgee") pursuant
to the margin provisions of each Selling Stockholder's customer agreements with
such Pledgees. Upon default by a Selling Stockholder, the Pledgee may offer and
sell shares of Common Stock from time to time as described above.

LEGAL OPINIONS

The validity of the Common Stock offered hereby will be passed upon for
the Company and the Selling Stockholders by O'Connor, Cavanagh, Anderson,
Killingsworth & Beshears, a professional association, Phoenix, Arizona.

EXPERTS

The consolidated financial statements of the Company at December 31, 1995
and December 31, 1996 and for each of the three fiscal years in the period
ended December 31, 1996, included in this Prospectus and Registration Statement
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their report appearing herein, and have been so included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing. The following historical summary of revenues and certain operating
expenses have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their reports which are incorporated herein by reference, and have
been so incorporated in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing: (i) the Combined Historical
Summary of Revenues and Certain Operating Expenses of the Winton Properties for
the year ended December 31, 1996, the Historical Summary of Revenues and
Certain Operating Expenses of La Privada Apartments for the year ended December
31, 1996, and the Historical Summary of Revenues and Certain Operating Expenses
of London Park Apartments for the year ended December 31, 1996, incorporated in
this Registration Statement by reference from the Company's Current Report on
Form 8-K/A filed by the Company on June 16, 1997, and (ii) the Combined
Historical Summary of Revenues and Certain Operating Expenses of the MTP
Properties for the year ended December 31, 1996, incorporated in this
Registration Statement by reference from the Company's Current Report on Form
8-K filed by the Company on August 28, 1997.
53
<PAGE>
ASR INVESTMENTS CORPORATION

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
ASR INVESTMENTS CORPORATION
Independent Auditors' Report ............................................. F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996 ............... F-3
Consolidated Statements of Operations for the years ended
December 31, 1994, 1995 and 1996 .......................................... F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995 and 1996 .......................................... F-5
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1994, 1995 and 1996 .......................................... F-6
Notes to Consolidated Financial Statements ................................. F-7
Unaudited Consolidated Balance Sheets as of June 30, 1997 .................. F-17
Unaudited Consolidated Statements of Operations for the six months ended
June 30, 1997 and 1996 ................................................... F-18
Unaudited Consolidated Statements of Cash Flows for the six months ended
June 30, 1997 and 1996 ................................................... F-19
Unaudited Consolidated Statements of Stockholders' Equity for the six months
ended June 30, 1997 ...................................................... F-20
Notes to Consolidated Financial Statements for the six months ended
June 30, 1997 and 1996 ................................................... F-21
</TABLE>
F-1
<PAGE>
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, 1995 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1996. The financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the 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,
1995 and 1996, and the results of its operations and cash flows for each of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.

DELOITTE & TOUCHE LLP

Tucson, Arizona
March 18, 1997
F-2
<PAGE>
ASR INVESTMENTS CORPORATION
Consolidated Balance Sheets
December 31, 1995 and 1996
(Dollars in Thousands)

<TABLE>
<CAPTION>
1995 1996
------------- -------------
<S> <C> <C>
Assets
Real estate investments
Apartments, net of depreciation ........................ $ 71,338 $ 70,506
Investments in joint ventures ........................... 3,043 2,811
Construction in progress .............................. 14,694
Land held for development .............................. 3,928 925
Other real estate ....................................... 1,201 1,022
---------- ----------
Total real estate investments ..................... 79,510 89,958
Mortgage assets .......................................... 11,877 5,039
Cash ................................................... 2,421 2,403
Other assets ............................................. 361 396
---------- ----------
Total assets ....................................... $ 94,169 $ 97,796
========== ==========
Liabilities
Real estate notes payable ................................. $ 49,212 $ 49,110
Short-term borrowing .................................... 4,495 2,014
Construction costs payable .............................. 1,581
Other liabilities ....................................... 3,067 4,989
---------- ----------
Total liabilities .................................... 56,774 57,694
---------- ----------
Committments and Contingencies (Note 2, 3 and 4)
Stockholders' Equity
Common Stock, par value $.01 per share, 40,000,000 shares
authorized; 3,303,226 and 3,307,892 shares issued ...... 33 33
Additional paid in capital .............................. 155,822 155,964
Deficit ................................................... (115,497) (112,964)
Stock note receivable .................................... (652) (385)
Treasury stock -- 148,731 and 160,742 shares ............ (2,311) (2,546)
---------- ----------
Total stockholders' equity ........................... 37,395 40,102
---------- ----------
Total liabilities and stockholders' equity ............ $ 94,169 $ 97,796
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
ASR INVESTMENTS CORPORATION
Consolidated Statements of Operations
For the Years Ended December 31, 1994, 1995 and 1996
(In thousands except per share amounts)

<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- -----------
<S> <C> <C> <C>
Real Estate Operations
Rental and other income ........................... $12,528 $14,034 $ 14,581
--------
Operating and maintenance expenses .................. 4,255 5,259 5,404
Real estate taxes and insurance ..................... 1,242 1,460 1,451
Interest expense on real estate mortgages ......... 3,941 4,387 4,348
Depreciation and amortization ..................... 1,995 2,692 2,819
-------- -------- --------
Total operating expenses ..................... 11,433 13,798 14,022
-------- -------- --------
Income from real estate ........................... 1,095 236 559
-------- -------- --------
Mortgage Assets (Note 4)
Prospective yield income ........................ 6,433 3,884 2,630
Income from redemptions and sales ............... 4,263 5,302 9,461
Interest expense ................................. (2,596) (347) (181)
-------- -------- --------
Income from mortgage assets ..................... 8,100 8,839 11,910
-------- -------- --------
Income Before Administrative Expenses and Other Income
(Expense) .......................................... 9,195 9,075 12,469
Administrative expenses (Note 8) .................. (2,216) (2,983) (3,203)
Other income (expense), net ..................... 723 462 (425)
-------- -------- --------
Net Income .......................................... $ 7,702 $ 6,554 $ 8,841
======== ======== ========
Net Income Per Share of Common Stock and Common Stock
Equivalents ....................................... $ 2.48 $ 2.09 $ 2.80
======== ======== ========
Average Shares of Common Stock and Common Stock
Equivalents ....................................... 3,100 3,141 3,153
======== ======== ========
Dividends Declared Per Share ........................ $ 0.50 $ 2.00 $ 2.00
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
ASR INVESTMENTS CORPORATION
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1994, 1995 and 1996
(In Thousands)
<TABLE>
<CAPTION>
1994 1995 1996
------------ ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income .......................................... $ 7,702 $ 6,554 $ 8,841
Principal noncash charges (credits)
Depreciation and amortization ..................... 2,083 3,028 3,271
Reversal of yield maintenance accrual ............ (2,420)
Increase in accrual .............................. 324 705 856
--------- -------- ---------
Cash Provided By Operations ........................... 10,109 7,867 12,968
--------- -------- ---------
INVESTING ACTIVITIES
Investment in apartments .............................. (67,247) (7,644) (2,142)
Investment in joint ventures ........................ (1,364) (1,895) (65)
Construction expenditures ........................... (11,753)
Purchase of land for development ..................... (3,928)
Other real estate assets .............................. (1,331) 3,985 179
Reduction in mortgage assets ........................ 18,916 7,088 6,838
Decrease in other assets .............................. 1,330 234 27
--------- -------- ---------
Cash Used In Investing Activities ..................... (49,696) (2,160) (6,916)
--------- -------- ---------
FINANCING ACTIVITIES
Issuance of real estate notes payable ............... 52,178 6,895
Payment of loan costs ................................. (1,342)
Proceeds from construction loan ..................... 255
Repayment of notes payable
Real estate notes ................................. (1,485) (7,955) (357)
Notes secured by mortgage assets .................. (15,640) (4,002)
Short-term borrowing ................................. 4,495 (2,481)
Construction costs payable ........................... 1,581
Stock issuance ....................................... 45 85
Payment of dividends ................................. (1,550) (6,304) (6,308)
Increase (decrease) in other liabilities ............ 1,148 (589) 1,155
--------- -------- ---------
Cash (Used In) Provided by Financing Activities ...... 33,309 (7,415) (6,070)
--------- -------- ---------
Cash
(Decrease) during the period ..................... (6,278) (1,708) (18)
Balance -- beginning of period ..................... 10,407 4,129 2,421
--------- -------- ---------
Balance -- end of period ........................... $ 4,129 $ 2,421 $ 2,403
========= ======== =========
Supplemental Disclosure of Cash Flow Information
Interest Paid ....................................... $ 7,367 $ 5,033 $ 4,525
========= ======== =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
ASR INVESTMENTS CORPORATION
Consolidated Statement of Stockholders' Equity
For the Years Ended December 31, 1994, 1995 and 1996
(In Thousands)
<TABLE>
<CAPTION>
Common
Additional Stock in
Number of Par Paid-In Notes Treasury-
Shares Value Capital Deficit Receivable at Cost Total
----------- ------- ------------ -------------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994 ......... 3,249 $32 $155,126 ($ 121,899) ($ 2,311) $ 30,948
Net income ........................ 7,702 7,702
Dividends declared ............... (1,550) (1,550)
----- ---- --------- ---------- ------ -------- --------
Balance, December 31, 1994 ...... 3,249 32 155,126 (115,747) (2,311) 37,100
Net income ........................ 6,554 6,554
Dividends declared ............... (6,304) (6,304)
Stock issuance .................. 54 1 696 ($ 652) 45
------ ---- --------- ---------- ------ -------- --------
Balance, December 31, 1995 ...... 3,303 33 155,822 (115,497) (652) (2,311) 37,395
Net income ........................ 8,841 8,841
Dividends declared ............... (6,308) (6,308)
Stock issuance (repurchase) ...... 5 53 267 (235) 85
Other ........................... 89 89
------ ---- --------- ---------- ------ -------- --------
Balance, December 31, 1996 ...... 3,308 $33 $155,964 ($ 112,964) ($ 385) ($ 2,546) $ 40,102
====== ==== ========= ========== ====== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
ASR INVESTMENTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1994, 1995 and 1996

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
communities in the Southwestern United States. At December 31, 1996, the
Company owned 25 apartment communities (including six owned through joint
ventures) located in Arizona, Texas and New Mexico. In addition, the Company
continues to hold mortgage assets and use the cash flows for apartment
acquisitions, operations, payment of dividends 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 are accounted on the equity method
as the Company does not own a controlling interest. All significant
intercompany balances and transactions have been eliminated in the consolidated
financial statements.

Common Stock -- On July 7, 1995, the Company effected a reverse stock
split under which one new share of common stock was issued in exchange for five
shares of outstanding stock. Accordingly, the consolidated financial statements
reflect the reverse stock split and the number of common stock issued and the
per share amounts have been adjusted for the reverse stock split for all years.

Real Estate Assets and Depreciation -- Real estate is recorded at cost.
Depreciation is computed on a declining balance 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.

Revenue Recognition -- Rental income is recorded when due from tenants and
is recognized monthly as it is earned, which is generally on a straight line
basis.

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 flows 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
financings under specified limited conditions; in such event, the mortgage
instruments are sold and the net proceeds after the redemption of the
structured financing are remitted to the Company. Redemption transactions occur
from time to time as specified conditions are met rather than on a monthly or
quarterly basis; therefore, the amount of net proceeds and the income from the
redemption transactions fluctuates significantly between periods.

Presentation and Income Recognition. Mortgage assets are stated at their
net investment amounts. Income is recognized using the prospective yield method
prescribed by EITF 89-4. Under this method, an effective yield is calculated at
the beginning of an accounting period using the then net carrying value of the
asset and the estimated future net cash flow assuming no early redemption. The
estimated future net cash flow is calculated using variable interest rates and
current projected mortgage prepayment rates for the underlying mortgages. The
calculated yield is used to accrue income for the 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. Income from early redemption is
recognized when the transaction is completed.

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 to its stockholders at least 95% of the
higher of (i) its annual taxable income after the use of net operating loss
carryforward or (ii) its annual excess inclusion income. Accordingly, no
provision has been made for income taxes in the accompanying consolidated
financial statements.
F-7
<PAGE>
ASR INVESTMENTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1994, 1995 and 1996 -- (Continued)

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.

Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect some of
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.

Stock Compensation -- In October 1995, the Financial Accounting Standards
Board issued FASB No. 123, "Accounting for Stock-Based Compensation." This
statement encourages, but does not require, companies to adopt a new accounting
method for stock-based compensation awards. Companies that do not adopt the new
accounting method are required to provide the disclosures required by the
Statement for any awards made in 1995 and after. After December 15, 1994, the
Company has not made any awards that would have been treated differently in the
determination of net income under FASB No. 123 and accordingly, pro forma
presentation is not required.

Accounting for the Impairment of Long-Lived Assets -- The Company has
adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets,"
which requires that long-lived assets be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of the
asset may not be recoverable. If the sum of the expected future cash flows
(undiscounted and without interest charges) from an asset to be held and used
is less than the carrying amount of the asset, an impairment loss must be
recorded for the difference between the carrying amount and the fair value.
SFAS No. 121 had no impact on the Company's consolidated financial statements.

New Accounting Standard -- In June 1996, the Financial Accounting
Standards Board issued FASB No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities", which requires an entity
to recognize the financial and servicing assets it controls and liabilities it
has incurred and to derecognize when controls has been surrendered in
accordance with the criteria provided in the Statements. The new statement is
applicable prospectively to transactions occurring after 1996. Based on current
circumstances, the Company believes the application of the new rules will not
have a material impact on the financial statements.

Reclassification -- Certain reclassifications have been made to conform
the prior years with the current year presentation.

2. REAL ESTATE INVESTMENTS

Wholly Owned Apartments

In January 1994, the Company acquired its initial portfolio of seventeen
apartment communities (2,461 units) located in Tucson, Arizona, Houston, Texas,
and Albuquerque, New Mexico. In February 1995, the Company acquired a 222-unit
apartment community in Mesa, Arizona. At December 31, 1996 and 1995, investment
in apartments consisted of the following (in thousands):
<TABLE>
<CAPTION>
1995 1996
---------- -----------
<S> <C> <C>
Land ....................................... $15,514 $ 15,514
Building and improvements .................. 57,214 58,476
Accumulated depreciation ..................... (4,687) (7,504)
Restricted cash and deferred loan fees ...... 3,297 4,020
-------- --------
Apartments, net .............................. $71,338 $ 70,506
======== ========
</TABLE>
F-8
<PAGE>
ASR INVESTMENTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1994, 1995 and 1996 -- (Continued)

Investments in Joint Ventures

The Company has acquired six apartment communities (1,441 units) in
Phoenix and Tucson, Arizona through joint ventures with a pension plan
affiliate of Citicorp. The Company is a 15% equity partner and the managing
partner or managing member of the joint ventures. The Company is entitled to
receive between 15% and 51% of the total profits and cash flows depending on
the financial performance of the joint ventures. The condensed combined
financial statements for the joint ventures are as follows (in thousands):

Condensed Combined Balance Sheets
<TABLE>
<CAPTION>
December 31,
--------------------
1995 1996
--------- --------
<S> <C> <C>
Real estate, at cost net of depreciation ...... $54,489 $53,590
Cash and other assets ........................ 2,133 1,693
-------- --------
Total Assets ........................... $56,622 $55,283
======== ========
Notes payable ................................. $35,754 $35,833
Other liabilities .............................. 575 731
-------- --------
Total Liabilities ........................ 36,329 36,564
-------- --------
Equity
The Company .............................. 3,043 2,811
Joint Venture Partner .................... 17,250 15,908
-------- --------
Total Equity ................................. 20,293 18,719
-------- --------
Total Liabilities and Equity .................. $56,622 $55,283
======== ========
</TABLE>

Condensed Combined Statement of Operations
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1994 1995 1996
-------- ----------- -----------
<S> <C> <C> <C>
Revenues ............... $1,263 $ 7,014 $ 9,138
Operating expenses ...... (551) (3,110) (3,688)
Interest expense ......... (373) (2,338) (2,879)
Depreciation ............ (283) (1,437) (1,979)
------ -------- --------
Net Income ............... $ 56 $ 129 $ 592
====== ======== ========
Allocation of Net Income
The Company ......... $ 9 $ 19 $ 89
Joint Venture Partner $ 47 $ 110 $ 503
</TABLE>

In November 1996, the partner in the six joint ventures initiated the
"buy-sell" provision in the joint venture agreements. The Company elected to
acquire the 85% interest in one joint venture from its partner and to sell to
its partner the Company's 15% interest in the other five joint ventures. The
purchase would increase the Company's investment in wholly owned apartments by
approximately $25,500,000 and real estate notes payable by $19,000,000. The
sale of the interests in the five joint ventures would result in net proceeds
of approximately $2,000,000 and would not have a significant impact on income.
The transactions are scheduled to be completed in April 1997.

Construction In Progress

In March 1996, the Company began construction of a 356-unit apartment
community, Finisterra Apartments in Tempe, Arizona. The total cost is estimated
be approximately $21,000,000. As of December 31, 1996, the Company had invested
$14,694,000 of its own cash and began the lease up phase in
F-9
<PAGE>

ASR INVESTMENTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1994, 1995 and 1996 -- (Continued)

December 1996. The Company has obtained a $15,350,000 construction loan of
which $255,000 was outstanding at December 31, 1996. In February 1997, the
Company received funding of $9,860,000 from the loan.

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, the local housing market and the
supply of and demand for new apartment communities.

3. PENDING ACQUISITION

In November 1996, the Company entered into an agreement to acquire up to
13 apartment communities and one office building as well as the related
property management company. The apartment communities contain a total of 2,260
units and the office building totals approximately 73,000 square feet. The
Company will pay up to $3,100,000 in cash, issue approximately 1,623,000 shares
of common stock and assume or refinance existing first mortgage loans of
approximately $49.3 million. The Company will also issue approximately 70,300
shares of common stock for the property management company and the owner of the
management company will become an executive officer and appointed to the Board
of Directors of the Company.

Of the 13 apartment communities, six (937 units) are located in Houston,
Texas, five (989 units) are located in Dallas, Texas and two (334 units) are
located in Pullman, Washington. The office building is located in Seattle,
Washington.

As a part of the above transaction, the Company also concurrently entered
into an agreement to acquire the entire ownership interests of Pima Mortgage
L.P. (the "Manager") and Pima Realty Advisors, Inc. (the "Property Manager")
for 262,000 shares of common stock. As a result of the acquisition, the Company
will become a self-administered and self-managed REIT. The owners of the
Manager will continue to be executive officers and members of the Board of
Directors of the Company. See Note 8 for information on the current arrangement
with the Manager and the Property Manager.

The sellers have approved the sale subject to ASR obtaining the approval
of its stockholders. The issuance of ASR common stock for the transaction and
the acquisition of the Manager and Property Manager are subject to approval by
the stockholders of the Company. The Company has distributed proxy materials
for a special meeting of the stockholders to be held in April 1997. Assuming
the stockholders approve the transaction, closing is anticipated to occur soon
thereafter.

4. MORTGAGE ASSETS

Income

For 1995 and 1996, the average carrying value of the mortgage assets was
$14,827,000 and $8,118,000, respectively, and the average prospective yield was
35% and 28%, respectively. At December 31, 1996 and 1995, the prospective yield
was 38% and 29%.

During 1996, the Company sold or exercised its redemption rights on nine
mortgage assets for net proceeds of $13,625,000 and income of $9,461,000.
During 1995, the Company exercised its redemption rights on five mortgage
assets for net proceeds of $6,348,000 and income of $2,882,000. Using proceeds
from one of the redemptions, in 1995, the Company prepaid its notes payable
secured by mortgage assets and recorded income of $2,420,000 for the reversal
of the excess yield maintenance accrual on such notes payable. The income was
included in the 1995 income from redemptions and sales of mortgage assets.
During 1994, the Company exercised its redemption rights on four mortgage
assets for net proceeds of $11,227,000 and income of $4,263,000. In January
1997, the Company exercised the redemption rights on three mortgage assets and
realized total net proceeds of $6,800,000 and income of $5,320,000.

The cash flows and prospective yield income are affected primarily by
mortgage prepayment rates and short-term interest rates. Higher mortgage
prepayment rates or higher short-term rates reduce the
F-10
<PAGE>
ASR INVESTMENTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1994, 1995 and 1996 -- (Continued)

income and total cash flows over the life of the mortgage assets. Income from
mortgage asset redemptions is affected by the timing of meeting the specified
conditions for redemptions and the value of the underlying mortgage
instruments. As a result, mortgage asset redemptions do not occur on a regular
basis and the income can fluctuate significantly between periods. In addition,
redemption of mortgage assets reduces the prospective yield income in future
periods.

Hedging transactions

In 1992, the Company executed short sales of Eurodollar Futures Contracts
on the International Monetary Market exchange to hedge against the interest
rate impact on mortgage asset cash flows in 1995. The effect of the Futures
Contracts was to "fix" the interest rate on $190,000,000 of the structured
financing at approximately 6.75% for 1995. In 1994, the Company closed out its
Futures Contract position and realized a gain of $1,152,000 which was recorded
as a reduction in the carrying value of the mortgage assets. Because of (1) the
decline in importance of mortgage assets as a result of the Company's emphasis
on investments in apartments and (2) the decline in the amount of variable rate
structured financing underlying the mortgage assets, the Company no longer
plans to invest in similar hedging transactions and had no such investments at
December 31, 1996 and 1995.

5. NOTES PAYABLE

Real estate notes payable

The apartment communities acquired in January 1994 were financed by first
mortgage loans totaling $45,700,000 and seller carryback notes 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, 1995 and
1996. The wholly owned 222-unit community in Mesa, Arizona, which was purchased
in February 1995, was financed by a $3,770,000 first mortgage loan bearing
interest at 225 basis points over three-month LIBOR. In July 1996, the loan was
refinanced by a $3,800,000 first mortgage loan bearing 8.05% interest rate and
a ten year term. Amortization of deferred loan costs was $88,000, $120,000 and
$155,000 for 1994, 1995 and 1996.

The seller carryback notes were unsecured, bore a fixed interest rate of
7.5% and were to be amortized over a three-year period ending February 1, 1997
with monthly principal and interest payments of $202,000. As provided for by
the note agreements, the Company repaid the notes in 1995 at a discount of
$311,000 which was recorded as a credit to income.

The scheduled maturities of the real estate notes payable are as follows
(in thousands):
<TABLE>
<S> <C>
1997 ............ $ 2,646
1998 ............ 513
1999 ............ 558
2000 ............ 608
2001 ............ 661
2002-2006 ...... 44,124
--------
Total ......... $49,110
========
</TABLE>

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.
The interest rate at December 31, 1996 was 9.25%. At December 31, 1996, the
amount outstanding was $255,000 and is included in the real estate notes
payable amount on the financial statements. In February 1997, the Company
received funding of $9,860,000 from the loan.
F-11
<PAGE>
ASR INVESTMENTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1994, 1995 and 1996 -- (Continued)

Short-term Borrowing -- At December 31, 1995 and 1996, the Company had
short-term borrowing of $4,495,000 and $2,014,000. These borrowings were
secured by mortgage assets with a total carrying value of $6,639,000 and
$3,084,000, respectively. The interest rate averaged 6.35% and 6.55% during
1995 and 1996 and was at 6.69% and 6.88% at December 31, 1995 and 1996.

6. 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 140,000 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.

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 309,800 shares of common stock and 90,200
shares of stock appreciation rights ("SARs") with an exercise price of $8.60
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. Upon exercise of the options, the Company can elect to
distribute cash in lieu of shares. The options and SARs will expire in December
1998. As of December 31, 1996, all of the options and SARs are exercisable and
none of them have been exercised. In February 1997, two partners of the Manager
exercised their share of SARs (30,067 per partner) and the Company paid
approximately $881,000 in total for the excess of the market price over the
exercise price.

In 1995, certain holders exercised options to purchase 50,496 shares by
giving full recourse notes totaling $652,000 to the Company. In 1996, one
holder exercised additional options of 2,667 shares by giving a full recourse
note totaling $30,000 to the Company. The notes are secured by the shares of
common stock issued and bear interest at the prime rate plus 1%. The notes are
due on December 31, 1998 and can be repaid by giving the Company shares of
common stock owned by the optionholders based on the then market price on the
common stock. During 1996, two optionholders paid off their notes of $297,000
using 12,011 of common stock and cash of $61,842. Notes outstanding at December
31, 1996 totaled $385,000.

During 1996, the Company granted to three employees 165,000 SARs that
expire December 16, 1998, in lieu of a salary or bonus compensation plan. The
employee receives payments equal to the product of the per share dividend
amount times the number of SARs outstanding. At December 31, 1996, 165,000
stock appreciation rights were outstanding under this compensation plan. During
1996, as a result of the increase in the Company's common stock price, the
Company recorded an accrual for the SARs of approximately $750,000 which is
included in administration expenses. In February 1997, the three employees
exercised 71,666 shares of the SARs and repaid Company advances of $92,000.
F-12
<PAGE>
ASR INVESTMENTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1994, 1995 and 1996 -- (Continued)

Information on all stock options and stock appreciation rights granted is
summarized below:

<TABLE>
<CAPTION>
Weighted
Number of Option Price Average
Shares Per Share Exercise Price
----------- --------------- ---------------
<S> <C> <C> <C>
Stock Options:
Outstanding at December 31, 1994 ............ 412,240 $ 8.13-$20.90 $10.02
Options exercised ........................... (54,496) $11.25-$13.13 $12.80
--------
Outstanding at December 31, 1995 ............ 357,744 $ 8.13-$20.90 $ 9.60
Options exercised ........................... (4,666) $11.25 $11.25
--------
Outstanding and exercisable at
December 31, 1996 ........................ 353,078 $ 8.13-$20.90 $ 9.60
========
Options at December 31, 1996 consisted of
the following:
1991 options granted ..................... 24,420 $20.00-$20.90 $20.07
1990, 1992-1994 options granted ......... 328,658 $ 8.13-$13.13 $ 8.80
--------
Outstanding at December, 31 1996 ............ 353,078 $ 8.13-$20.90 $ 9.60
--------
Stock Appreciation Rights:
Outstanding at December 31, 1994 ............ 90,200 $ 8.60 $ 8.60
SARs granted .............................. 0
--------
Outstanding at December 31, 1995 ............ 90,200 $ 8.60 $ 8.60
SARs granted .............................. 165,000 $16.50-$16.63 $16.55
--------
Outstanding at December 31, 1996 ............ 255,200 $ 8.60-$16.50 $13.74
========
SARs exercisable at December 31, 1996 ...... 200,200 $ 8.60-$16.50 $ 9.91
========
</TABLE>

At December 31, 1996, the weighted average contractual life of the above
stock options and stock appreciation rights was 2.4 and 2.0 years,
respectively.

7. Fair Value of Financial Instruments

The following disclosure of the estimated fair value of financial
instruments is made in accordance with the 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.

Basis of Estimates

Mortgage Assets. The fair value of mortgage assets is generally dependent
on interest rate and other economic factors, including (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 the Company's
mortgage assets is very illiquid and traded prices are determined on a
privately negotiated basis. Thus, except for three mortgage assets on which the
Company has exercised the redemption rights in January 1997 for total net gains
of $5,320,000, the Company uses their carrying values as the estimated fair
values.

Management believes, however, that it is meaningful to provide the
following present value of the estimated cash flows using the interest rates
and mortgage prepayment rates as of December 31, 1996. The estimates without
redemptions assume that the mortgage assets are held until the stated maturity
(with the exception of the three mortgage assets on which the Company exercised
the redemption rights in
F-13
<PAGE>
ASR INVESTMENTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1994, 1995 and 1996 -- (Continued)

January 1997 for net gains of approximately $5,320,000). The estimates with
redemptions assume that the Company would exercise the redemption rights at the
earliest dates and sell the mortgage instruments at the estimated market prices
as of December 31, 1996. (Dollars in thousands.)

<TABLE>
<CAPTION>
Discount Without With
Rate Redemptions Redemptions
- ------------- ------------- ------------
<S> <C> <C>
10% ...... $ 13,657 $ 26,938
20% ...... 11,754 22,447
30% ...... 10,757 19,151
40% ...... 10,074 16,703
50% ...... 9,558 14,861
</TABLE>

Real Estate Notes Payable. The Company has used the carrying value of real
estate notes payable as their fair value. At December 31, 1996, the interest
rates on the Company's notes payable approximated the market rates for debt
instruments with similar terms and maturities.

Short-term borrowing. The Company has used the carrying value of
short-term borrowing as its fair value as the interest rates are adjusted
monthly and the maturity terms are less than one year.

Estimated Fair Values (in thousands):
<TABLE>
<CAPTION>
Carrying Estimated
Amount Fair Value
---------- -----------
<S> <C> <C>
Mortgage assets ............... $ 5,039 $10,359
Real estate notes payable ...... 49,110 49,110
Short-term borrowing ............ 2,014 2,014
</TABLE>

8. 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, 1997. 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 before deduction for reserves and depreciation. The management fees for
1994, 1995 and 1996 were $544,000, $374,000 and $386,000, 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.
There were no such excess operating expenses in 1994, 1995 and 1996.
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 the management fees relating to the invested assets purchased prior to
the termination date, for a three-year period as if the agreement had remained
in effect.

Under the agreement, 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, $216,000 for 1995, and $193,000 for 1996.

As discussed in Note 6, the Company and the Manager agreed to eliminate
the incentive fee provision in the management agreement beginning with 1994.
The Company granted to the owners of the Manager options and stock appreciation
rights ("SARs") that provide for dividend equivalent payments based on the per
share amounts of dividends paid on the common stock. In 1994, 1995 and 1996,
the dividend equivalent payments were $200,000, $800,000 and $800,000 which are
included in administrative
F-14
<PAGE>
ASR INVESTMENTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1994, 1995 and 1996 -- (Continued)

expenses. As a result of the increase in the common stock price, the Company
recorded an accrual for the SARs of $324,000 in 1994, $705,000 in 1995 and
$101,000 in 1996, which amounts are included in administrative expenses.

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 the limitation
of the prevailing management fee rates for similar properties in the market.
The costs are allocated to the Company monthly based on the ratio of the number
of units owned by the Company relative to the total apartment units managed by
the Property Manager. The costs allocated to the Company for 1994, 1995 and
1996 were $184,000, $417,000 and $466,000 respectively (net of an allocated
credit of $246,000 applicable only in 1994), which were equal to approximately
1.4%, 3.0% and 3.2% of rental and other income.

As discussed in Note 3, the Company has entered into an agreement to
acquire the entire ownership interest of the Manager and the Property Manager
for 262,000 shares of common stock. As a result of the acquisition, the Company
will become a self-administered and self-managed REIT. The owners of the
Manager would continue to be executive officers and members of the Board of
Directors of the Company.

9. TAXABLE INCOME (LOSS)

As of December 31, 1996, the Company had an estimated net operating loss
("NOL") carryforward of $75,904,000 which can be used to offset taxable income
other than excess inclusion income through 2009 (1999 for state taxes). The
1994, 1995 and 1996 dividends consist of the following:

<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Ordinary Income ............ 90.0% 14.5% 8.5%
Long Term Capital Gain ...... -- -- 69.0%
Return of Capital ......... 10.0% 85.5% 22.5%
</TABLE>

In 1994, 1995, and 1996, 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 (including NOL
carryforward) and deductions from other sources. Under the current tax law for
REITs, excess inclusion income is required to be distributed as dividends.
Substantially, all of the ordinary income for these years is excess inclusion
income.

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) reserves taken on mortgage assets in prior years
which were not allowed for income taxes, (2) differences in income recognition
methods on mortgage assets and (3) excess inclusion income for tax purposes.
These timing differences will reverse in future years.

Taxable income for 1996 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.
F-15
<PAGE>
ASR INVESTMENTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1994, 1995 and 1996 -- (Continued)

10. QUARTERLY FINANCIAL DATA (unaudited)
(Dollars in Thousands Except Per Share Amounts)

<TABLE>
<CAPTION>
Net Income
Total ----------------------- Dividend
Income Amount Per share Per share
--------- --------- ----------- ----------
<S> <C> <C> <C> <C>
1994
----
First ...... $ 5,263 $ 1,218 $ 0.56 $ --
Second ...... 7,369 2,698 0.85 --
Third ...... 6,228 2,074 0.65 --
Fourth ...... 5,087 1,712 0.55 0.50

1995
----
First ...... $ 7,983 $ 3,359 $ 1.08 $ 0.50
Second ...... 6,410 2,015 0.65 0.50
Third ...... 4,798 570 0.18 0.50
Fourth ...... 4,491 610 0.18 0.50

1996
----
First ...... $ 6,429 $ 2,340 $ .74 $ 0.50
Second ...... 7,529 3,326 1.05 0.50
Third ...... 7,129 2,092 .66 0.50
Fourth ...... 5,585 1,083 .35 0.50
</TABLE>
F-16
<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.
F-17
<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.
F-18
<PAGE>
ASR INVESTMENTS CORPORATION

Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 1997 and 1996
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
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
</TABLE>
See Notes to Consolidated Financial Statements.
F-19
<PAGE>
ASR INVESTMENTS CORPORATION

Consolidated Statement of Stockholders' Equity
For the Six Months Ended June 30, 1997
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Number of Number of LP Par
Shares LP Units Units Value
----------- ----------- ---------- -------
<S> <C> <C> <C> <C>
Balance, December 31,
1996 .................. 3,308 $ 33
Net income ...............
Dividends declared ......
Stock issuance
(repurchase) ............ 1,314 944 $ 18,910 12
----- --- --------- -----
Balance, June 30, 1997 4,622 944 $ 18,910 $ 45
----- --- --------- -----

<CAPTION>
Common
Additional Stock in
Paid-In Notes Treasury --
Capital Deficit Receivable at Cost Total
------------ -------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31,
1996 .................. $ 155,964 ($ 112,964) ($ 385) ($ 2,546) $ 40,102
Net income ............... 10,174 10,174
Dividends declared ...... (4,263) (4,263)
Stock issuance
(repurchase) ............ 24,849 (481) 43,290
---------- ---------- ------- --------- --------
Balance, June 30, 1997 $ 180,813 ($ 107,053) ($ 385) ($ 3,027) $ 89,303
---------- ---------- ------- --------- --------
</TABLE>
See Notes to Consolidated Financial Statements.
F-20
<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 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.

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
F-21
<PAGE>
ASR INVESTMENTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarters and Six Months Ended June 30, 1997 and 1996
--(Continued)

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 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.
F-22
<PAGE>
ASR INVESTMENTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarters and Six Months Ended June 30, 1997 and 1996
--(Continued)

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).

<TABLE>
<S> <C>
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
========
</TABLE>

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) 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.
F-23
<PAGE>
ASR INVESTMENTS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarters and Six Months Ended June 30, 1997 and 1996
--(Continued)

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.

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%.

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 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.
F-24
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------- --------------------------------------------------
- -------------------------------------------------- --------------------------------------------------
<S> <C>

No person has been authorized to give any
information or to make any representations other
than those contained in this Prospectus, and, if
given or made, such information or representations
must not be relied upon as having been authorized.
This Prospectus does not constitute an offer to
sell or the solicitation of an offer to buy any 1,687,318 Shares
securities other than the securities to which it
relates or any offer to sell or the solicitation
of an offer to buy such securities in any
circumstances in which such offer or solicitation ASR INVESTMENTS
is unlawful. Neither the delivery of this CORPORATION
Prospectus nor any sale made hereunder shall,
under no circumstances, create any implication
that there has been no change in the affairs of
the Company since the date hereof or that Common Stock
information contained herein is correct as of any (par value $.01 per share)
time subsequent to its date.

----------------

TABLE OF CONTENTS

Page
-----
Available Information .................. 2
Incorporation of Certain Information by
Reference ........................... 2
Prospectus Summary ..................... 3 -------------
Risk Factors ........................... 10
Use of Proceeds ........................... 16
Capitalization ........................... 16
Price Range of Common Stock ............... 16
Selected Financial Information ............ 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ........................... 18
Business and Properties .................. 25 -------------
Management .............................. 32
Certain Transactions ..................... 39
Principal and Selling Stockholders ...... 40
Federal Income Tax Considerations ...... 44
Description of Capital Stock ............ 47
Heritage Communities L.P. ............... 50
Summary of the Heritage LP , 1997
Partnership Agreement ............... 50
Plan of Distribution ..................... 52
Legal Opinions ........................... 53
Experts ................................. 53
Index to Financial Statements ............ F-1
- -------------------------------------------------- --------------------------------------------------
- -------------------------------------------------- --------------------------------------------------
</TABLE>
<PAGE>
INFORMATION NOT REQUIRED IN PROSPECTUS

Item 14. Other Expenses of Issuance and Distribution

The following table sets forth the expenses payable by the Registrant in
connection with the offering described in the Registration Statement. All of
the amounts shown are estimates except for the registration fees:

<TABLE>
<CAPTION>
Amount to
be Paid
-----------
<S> <C>
Registration Fee ..................... $ 2,561.06
Accountants' Fees and Expenses ...... 10,000.00
Legal Fees and Expenses ............... 40,000.00
Printing and Engraving Expenses ...... 25,000.00
Miscellaneous Fees .................. 1,000.00
-----------
Total .......................................... $78,561.06
===========
</TABLE>

Item 15. Indemnification of Directors and Officers

The Company's Amended and Restated Articles of Incorporation provide for
indemnification of directors and officers of the Company to the fullest extent
permitted by Maryland law.

Section 2-418 of the General Corporation Law of the State of Maryland
generally permits indemnification of any director or officer made a party to
any proceeding by reason of service in that capacity unless it is provided
that: (i) the act or omission of the director or officer was material to the
cause of action adjudicated in the proceeding and was committed in bad faith or
was the result of active and deliberate dishonesty; (ii) the director or
officer actually received an improper personal benefit in money, property, or
services; or (iii) in the case of criminal proceedings, the director or officer
had reasonable cause to believe that the act or omission was unlawful.
Indemnification may be made against judgments, penalties, fines, settlements,
and reasonable expenses actually incurred by the director or officer in
connection with the proceeding; provided, however, that if the proceeding is
one by of in the right of the corporation, indemnification may not be made with
respect to any proceeding in which the director or officer has been adjudged to
be liable to the corporation. In addition, a director or officer may not be
indemnified with respect to any proceeding charging improper personal benefit
to the director or officer in which the director or officer was adjudged to be
liable on the basis that personal benefit was improperly received. The
termination of any proceeding by judgment, order, or settlement does not create
a presumption that the director or officer did not meet the requisite standard
of conduct required for indemnification to be permitted. The termination of any
proceeding by conviction, upon a plea of nolo contendere or its equivalent, or
an entry of an order of probation prior to judgment, creates a rebuttable
presumption that the director or officer did not meet the requisite standard of
conduct required for indemnification to be permitted.

Section 2-418 of the General Corporation Law of the State of Maryland
further provides that indemnification thereunder may not be made by the Company
unless authorized after a determination has been made that such indemnification
is proper, with that determination to be made (a) by the Board of Directors by
majority vote of a quorum consisting of directors not, at the time, parties to
the proceeding, or, if such a quorum cannot be obtained, then by a majority
vote of a committee of the Board of Directors consisting of two or more
directors not, at the time, parties to such proceeding and designated to act in
the matter, (b) by special legal counsel selected by the Board of Directors or
a committee of the Board of Directors as set forth in subparagraph (a) or, if
the requisite quorum of the Board of Directors cannot be obtained therefor and
the committee cannot be established, by a majority vote of the full Board of
Directors, including those directors who are parties to such proceeding, or (c)
by the stockholders.

Section 2-418 of the General Corporation Law of the State of Maryland
requires indemnification of any director or officer who has been successful, on
the merits or otherwise, in the defense of any proceeding against reasonable
expense incurred by the director or officer in connection with the proceeding.
A court of appropriate jurisdiction, upon application of a director or officer
and such notice as
II-1
<PAGE>
the court shall require, may order indemnification (1) if the court determines
that a director or officer is entitled to reimbursement as a result of a
successful defense on the merits or otherwise, in which case the director shall
be entitled to recover the expenses of securing such reimbursement, or (2) if
the court determines that the director or officer is fairly and reasonably
entitled to indemnification in view of all the relevant circumstances, whether
or not the director or officer has met the requisite standards of conduct or
has been adjudged liable with respect to any proceeding charging improper
personal benefit to the director or officer, in which case the court may order
such indemnification as the court shall deem proper; provided, however,
indemnification with respect to (i) any proceeding by or in the right of the
corporation or (ii) any proceeding in which the director or officer has been
adjudged liable with respect to a charge of improper personal benefit, shall be
limited to expenses.

Item 16. Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
- -------- ------------------------------------------------------------------------------------------
<S> <C>
2(a) Master Combination and Contribution Agreement dated as of November 8, 1996 between
ASR Investments Corporation, Don W. Winton, certain limited partnerships in which Mr.
Winton is the general partner, Winton & Associates, Inc., Heritage Communities L.P.,
Heritage Residential Group, Inc., Heritage SGP Corporation, Pima Mortgage Limited
Partnership, Pima Realty Advisors, Inc., Jon A. Grove, Joseph C. Chan, and Frank S.
Parise, Jr.(8)
2(b) Addendum to the Master Combination and Contribution Agreement dated as of April 30,
1997 between ASR Investments Corporation, Don W. Winton, certain limited partnerships
for which Mr. Winton is the general partner, Winton & Associates, Inc., Heritage
Communities L.P., Heritage Residential Group, Inc., Heritage SGP Corporation, Pima
Mortgage Limited Partnership, Pima Realty Advisors, Inc., Jon A. Grove, Joseph C. Chan,
and Frank S. Parise, Jr.(8)
2(c) Agreement and Plan of Reorganization dated as of November 8, 1996 between ASR
Investments Corporation, Heritage Residential Group, Inc., Winton & Associates, Inc., and
Don W. Winton.(8)
2(d) Agreement and Plan of Reorganization dated as of November 8, 1996 between ASR
Investments Corporation, Heritage Residential Group, Inc., Pima Realty Advisors, Inc.,
Pima Mortgage Limited Partnership, JG Mortgage Advisors, Inc., JC Mortgage Advisors,
Inc., FP Mortgage Advisors, Inc., Jon A. Grove, Joseph C. Chan, and Frank S. Parise,
Jr.(8)
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)
3(d) Second Amended and Restated Articles of Incorporation of the Registrant(9)
3(e) Amended Bylaws of the Registrant(9)
4 Specimen Certificate representing $.01 par value Common Stock(1)
5 Opinion of O'Connor, Cavanagh, Anderson, Killingsworth & Beshears, P.A.
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) Dividend Reinvestment and Stock Purchase Plan(3)
10(h) Agreement for Purchase and Sale of Apartments ("Purchase Agreement") dated July 15,
1993 by and between Buyer and Seller.(6)
10(i) First Amendment to Purchase Agreement dated August 18, 1993, by and between Buyer
and Seller.(6)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
- -------- -----------------------------------------------------------------------------------------
<S> <C>
10(j) Second Amendment to Purchase Agreement dated September 21, 1993 by and between
Buyer and Seller.(6)
10(k) Third Amendment to Purchase Agreement dated October 27, 1993 by and between Buyer
and Seller.(6)
10(l) 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(m) Second Articles of Amendment to the First Amended and Restated Articles of
Incorporation of the Registrant.(7)
10(n) Third Articles of Amendment to the First Amended and Restated Articles of Incorporation
of the Registrant.(7)
10(o) First Amendment to the Bylaws of the Registrant.(7)
10(p) 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.
10(q) Registration Agreement dated as of April 30, 1997 between ASR Investments Corporation
and Don W. Winton on behalf of certain partners in certain limited partnerships in which
Mr. Winton is the general partner.(8)
10(r) Registration Agreement dated as of April 30, 1997 between ASR Investments Corporation,
Heritage Communities L.P. and certain limited partnerships in which Don W. Winton is the
general partner.(8)
10(s) Employment Agreement dated as of April 30, 1997 between ASR Investments Corporation
and Don W. Winton.(8)
10(t) Employment Agreement dated as of April 30, 1997 between ASR Investments Corporation
and Jon A. Grove.(8)
10(u) Employment Agreement dated as of April 30, 1997 between ASR Investments Corporation
and Joseph C. Chan.(8)
10(v) Employment Agreement dated as of April 30, 1997 between ASR Investments Corporation
and Frank S. Parise, Jr.(8)
23 Consent of Deloitte & Touche LLP.
</TABLE>

- ------------
(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.

(Footnotes continued on next page.)
II-3
<PAGE>
(Footnotes continued from previous page.)

(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.
(7) Incorporated herein by reference to Registrant's Form 10-K for the year
ended December 31, 1995 as filed with the Commission on or about April 1,
1996.
(8) Incorporated herein by reference to Registrant's Report on Form 8-K filed
with the Commission on or about May 15, 1997.
(9) Incorporated herein by reference to Registrant's Registration Statement on
Form S-4 (333-30077) filed on June 26, 1997 and declared effective on July
17, 1997.

Item 17. Undertakings

The undersigned Registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:

(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;

(ii) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
20 percent change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective
registration statement.

(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement, provided, however, that clauses (1)(i) and
(1)(ii) do not apply if the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic
reports filed by the Registrant pursuant to Section 13 or Section
15(d) of the Securities Exchange Act of 1934 that are incorporated by
reference into the Registration Statement.

(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.

(3) To Remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.

The undersigned registrant hereby undertakes that, for purposes of
derterming any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new Registration Statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
The undersigned Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new Registration Statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registration pursuant to the provisions described under Item 15 above, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer
or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
II-5
<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Tucson, on the 28th day of August, 1997.

ASR INVESTMENTS CORPORATION

By: /s/ JON A. GROVE
----------------------------------------
Jon A. Grove
Chairman of the Board, President, and
Chief Executive Officer
II-6
<PAGE>
POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature
appears below constitutes and appoints jointly and severally, Jon A. Grove and
Joseph C. Chan and each of them, as his true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitition, for him and in his
name, place and stead, in any and all capacities, to sign any and all
amendments (including pre-effective and post-effective amendments) to this
Registration Statement, and to sign any Registration Statement and amendments
thereto for the same offering pursuant to Rule 462(b) under the Securities Act
of 1933, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Secuities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
which said attorneys-in-fact and agents, or any of them, or their or his
substitute or substitutes, may lawfully do, or cause to be done by virtue
hereof.

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated:

<TABLE>
<CAPTION>
Signature Position Date
- ------------------------------- --------------------------------------- ----------------
<S> <C> <C>
/s/ JON A. GROVE Chairman of the Board, President, and August 28, 1997
- --------------------------- Chief Executive Officer (Principal
Jon A. Grove Executive Officer)

/s/ FRANK S. PARISE, JR. Vice Chairman, Executive Vice August 28, 1997
- --------------------------- President, Chief Administrative
Frank S. Parise, Jr. Officer and Director

/s/ JOSEPH C. CHAN Executive Vice President, Chief August 28, 1997
- --------------------------- Operations Officer, Chief Financial
Joseph C. Chan Officer, Secretary, Treasurer and
Director (Principal Financial and
Accounting Officer)

/s/ DON W. WINTON Executive Vice President and Director August 28, 1997
- ---------------------------
Don W. Winton

/s/ EARL M. BALDWIN Director August 28, 1997
- ---------------------------
Earl M. Baldwin

/s/ STEVEN G. DAVIS Director August 28, 1997
- ---------------------------
Steven G. Davis

/s/ JOHN J. GISI Director August 28, 1997
- ---------------------------
John J. Gisi

/s/ RAYMOND L. HORN Director August 28, 1997
- ---------------------------
Raymond L. Horn

/s/ FREDERICK C. MOOR Director August 28, 1997
- ---------------------------
Frederick C. Moor
</TABLE>
II-7

August 29, 1997

ASR Investments Corporation
335 North Wilmot, Suite 250
Tucson, AZ 85711

Re: Registration Statement on Form S-3
ASR Investments Corporation

Ladies and Gentlemen:

We have acted as legal counsel to ASR Investments Corporation
(the "Company"), in connection with the preparation of the Company's
Registration Statement on Form S-3 (the "Registration Statement"), to be filed
with the Securities and Exchange Commission (the "Commission") on or about
August 27, 1997 under the Securities Act of 1933, as amended (the "Securities
Act"), covering an aggregate of 374,581 shares of the Company's common stock,
par value $.01 per share (the "Common Stock"), that may be sold from time to
time by certain of the Company's stockholders (the "Selling Stockholders") (all
such shares of Common Stock collectively called the "Shares"). Pursuant to Rule
429 under the Securities Act, the prospectus contained in the Registration
Statement also relates to an aggregate of 1,312,737 shares of the Registrant's
Common Stock registered on Form S-3, Registration No. 333-28241, which was
declared effective on June 5, 1997.

With respect to the opinion set forth below, we have examined
originals, certified copies, or copies otherwise identified to our satisfaction
as being true copies, of the Registration Statement and such other corporate
records of the Company, agreements and other instruments, and certificates of
public officials and officers of the Company as we have deemed necessary as a
basis for the opinions hereinafter expressed. As to various questions of fact
material to such opinions, we have, where relevant facts were not independently
established, relied upon statements of officers of the Company.

Subject to the assumptions that (i) the documents and
signatures examined by us are genuine and authentic, and (ii) the persons
executing the documents examined by us have the legal capacity to execute such
documents, and subject to such further limitations and qualifications set forth
below, it is our opinion that when (a) the Registration Statement as then
amended shall have been declared effective by the Commission, and (b) the Shares
have been
<PAGE>
ASR Investments Corporation
August 27, 1997
Page 2

sold by the Selling Stockholders as described in the Registration Statement, the
Shares will be validly issued, fully paid, and non-assessable.

For purposes of our opinion, we have assumed (i) the payment
by the Selling Stockholders (or the prior holders thereof) of the full and
sufficient consideration due from them to the Company for such Shares, and (ii)
the Shares have been duly issued, executed, and authenticated by the Company.
For purposes of our opinion, we also have assumed that the Company has paid all
taxes, penalties and interest which are due and owing to the State of Arizona.

We express no opinion as to the applicability or effect of any
laws, orders or judgments of any state or other jurisdiction other than federal
securities laws and the substantive laws of the State of Arizona. Further, our
opinion is based solely upon existing laws, rules and regulations, and we
undertake no obligation to advise you of any changes that may be brought to our
attention after the date hereof.

We hereby expressly consent to any reference to our firm in
the Registration Statement, the inclusion of this opinion as an exhibit to the
Registration Statement, and to the filing of this opinion with any other
appropriate governmental agency.

Very truly yours,

/s/ O'Connor, Cavanagh, Anderson,
Killingsworth & Beshears

RSK/rr
PSS19B01

INDEPENDENT AUDITOR'S CONSENT

We consent to the use in this Registration Statement of ASR Investments
Corporation on Form S-3 of our report dated March 18, 1997 on the financial
statements of ASR Investments Corporation for each of the three years in the
period ended December 31, 1996 appearing in the Prospectus, which is a part of
this Registration Statement. We also consent to the incorporation by reference
in this Registration Statement of ASR Investments Corporation on Form S-3 of:
(a) our report dated April 25, 1997 on the Winton Properties combined historical
summary of revenues and certain operating expenses for the year ended December
31, 1996; (b) our report dated May 23, 1997 on La Privada Apartments' historical
summary of revenues and certain operating expenses for the year ended December
31, 1996; (c) our report dated May 29, 1997 on London Park Apartments'
historical summary of revenues and certain operating expenses for the year ended
December 31, 1996; and (d) our report dated August 27, 1997 on the MTP
Properties' combined historical summary of revenues and certain operating
expenses for the year ended December 31, 1996.

We also consent to the reference to us under the heading "Experts" in such
Prospectus.

DELOITTE & TOUCHE LLP
Tucson, Arizona
August 27, 1997