UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended: September 30, 1997 Commission File Number: 1-9646
------------------
ASR Investments Corporation
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(Exact name of Registrant as specified in its Charter)
Maryland
---------------------------------------------
(State or other jurisdiction of incorporation or organization)
86-0587826
----------------------------
(I.R.S. Employer Identification No.)
335 N. Wilmot, Suite 250, Tucson, AZ 85711
------------------------------------------
(Address of principal executive offices)
(520) 748-2111
----------------------------------------
(Registrant's telephone number, including area code)
(Not applicable)
-------------------------------------
(Former Name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such
reports), and (2) has been subject to such filing
requirements for the past 90 days.
X Yes No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock (par value $.01) outstanding as of November 7, 1997:
4,990,057 shares.
<PAGE>
ASR INVESTMENTS CORPORATION
Consolidated Balance Sheets
September 30, 1997 and December 31, 1996
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Assets
Real estate investments, at cost:
Land $ 49,522 $ 15,514
Buildings and improvements 210,969 58,476
Construction in progress 14,694
Land held for development 925 925
Investments in joint ventures 2,811
Other real estate 841 1,022
--------- ---------
Total real estate investments 262,257 93,442
Accumulated depreciation (11,539) (7,504)
--------- ---------
Real estate investments, net of depreciation 250,718 85,938
Cash and cash equivalents 11,201 2,403
Mortgage assets 5,039
Restricted cash 7,731 2,930
Deferred loan fees 2,262 1,090
Goodwill 1,373
Other assets 2,020 396
--------- ---------
Total assets $ 275,305 $ 97,796
========= =========
Liabilities
Real estate notes payable $ 167,273 $ 48,855
Construction loan payable 255
Short-term borrowing 2,014
Construction costs payable 1,581
Security deposits and deferred rental income 2,131 644
Other liabilities 7,916 4,345
--------- ---------
Total liabilities 177,320 57,694
--------- ---------
Stockholders' Equity
Convertible LP Units (Note 3) 19,527
Common Stock, par value $.01 per share, 40,000,000 shares
authorized; 5,088,613 and 3,307,892 shares issued 50 33
Additional paid in capital 191,520 155,964
Deficit (109,767) (112,964)
Stock note receivable (317) (385)
Treasury stock - 184,742 and 160,742 shares (3,028) (2,546)
--------- ---------
Total stockholders' equity 97,985 40,102
--------- ---------
Total liabilities and stockholders' equity $ 275,305 $ 97,796
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
ASR INVESTMENTS CORPORATION
Consolidated Statements of Operations
For the Quarters and Nine Months Ended September 30, 1997
and 1996 (In thousands except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Quarters Nine Months
-------------------- --------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Real Estate Operations
Rental and other income $ 9,890 $ 3,660 $ 20,777 $ 10,941
-------- -------- -------- --------
Operating and maintenance expenses 3,559 1,452 7,549 4,007
Real estate taxes and insurance 1,024 350 2,173 1,069
Interest expense on real estate mortgages 3,058 1,079 6,435 3,269
Depreciation and amortization 1,999 706 4,031 2,074
-------- -------- -------- --------
Total operating expenses 9,640 3,587 20,188 10,419
-------- -------- -------- --------
Income from real estate 250 73 589 522
-------- -------- -------- --------
Gain on sale of real estate 474
--------
Mortgage Assets
Prospective yield income 604 588 2,174
Income from redemptions and sales 2,738 16,650 7,725
Interest expense (28) (25) (152)
-------- -------- --------
Income from mortgage assets 3,314 17,213 9,747
-------- -------- --------
Income Before Administrative Expenses
and Other Income (Expense) 250 3,387 18,276 10,269
Administrative expenses (616) (1,018) (2,560) (2,355)
Aquisition related expenses (404) (6,215) (404)
Other income (expense), net 342 127 649 248
-------- -------- -------- --------
Net Income (Loss) ($ 24) $ 2,092 $ 10,150 $ 7,758
-------- -------- -------- --------
Net Income Per Share of Common
Stock and Common Stock Equivalents $ 0.00 $ 0.66 $ 2.28 $ 2.46
======== ======== ======== ========
Average Shares of Common Stock and
Common Stock Equivalents 5,448 3,155 4,447 3,155
======== ======== ======== ========
Dividends Declared Per Share $ 0.50 $ 0.50 $ 1.50 $ 1.50
======== ======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
ASR INVESTMENTS CORPORATION
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1997 and 1996
(In Thousands)
(Unaudited)
OPERATING ACTIVITIES 1997 1996
-------- --------
Net income $ 10,150 $ 7,758
Principal noncash charges
Depreciation and amortization 4,442 2,415
Aquisition related expenses 5,250
Gain on sale of real estate (474)
Increase in deferred compensation 1,271
Increase in stock appreciation rights 672 507
Increase in other assets (1,624) (182)
Increase in other liabilities 3,720 1,147
-------- --------
Cash Provided By Operations 23,407 11,645
-------- --------
INVESTING ACTIVITIES
Investment in apartments (22,528) (854)
Construction expenditures (6,209) (7,027)
Proceeds from sale of real estate 2,830
Investment in joint ventures 358 (28)
Purchase of land for development (60)
Other real estate assets 181 269
Restricted cash (4,801) (791)
Reduction in mortgage assets 5,039 6,350
-------- --------
Cash Used In Investing Activities (25,130) (2,141)
-------- --------
FINANCING ACTIVITIES
Issuance of real estate notes payable 10,410
Payment of loan costs (1,453) (71)
Proceeds from construction loan 12,595 247
Repayment of real estate notes (844) (316)
Short-term borrowing (2,014) (2,541)
Construction costs payable (1,581) 1,384
Stock options exercised 17 23
Payment of dividends (6,011) (4,734)
Payment of stock notes 68
Distributions on LP Units (942)
Other 276
-------- --------
Cash Provided By (Used In) Financing Activities 10,521 (6,008)
-------- --------
CASH
Increase during the period 8,798 3,496
Balance - beginning of period 2,403 2,421
-------- --------
Balance - end of period $ 11,201 $ 5,917
======== ========
Supplemental Disclosure of Cash Flow Information
Interest paid $ 7,024 $ 3,424
Interest capitalized 638 139
Stock issued for contract termination 5,250
Non-cash transactions associated with acquisitions:
Issuance of common stock 30,306
Issuance of convertible LP Units 19,527
Notes payable assumed 95,397
See Notes to Consolidated Financial Statements.
4
<PAGE>
ASR INVESTMENTS CORPORATION
Consolidated Statement of Stockholders' Equity
For the Nine Months Ended September 30, 1997
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Common
Additional Stock in
Number of Number of LP Par Paid-In Notes Treasury-
Shares LP Units Units Value Capital Deficit Receivable at Cost Total
--------- --------- --------- --------- --------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 3,308 $ 33 $ 155,964 ($112,964) ($ 385) ($ 2,546) $ 40,102
Net income 10,150 10,150
Dividends declared (6,953) 68 (6,885)
Stock issuance (repurchase) 1,781 971 $ 19,527 17 35556 (482) 54,618
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Balance, September 30, 1997 5,089 971 $ 19,527 $ 50 $ 191,520 ($109,767) ($ 317) ($ 3,028) $ 97,985
========= ========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE>
ASR INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarters and Nine Months Ended September 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 number of shares used for the basic EPS computation to 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 nine months ended September 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 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 nine months ended September 30, 1997 and 1996.
6
<PAGE>
ASR INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarters and Nine Months Ended September 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.
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 10-Q 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 18 apartment
communities (2,683 units) in operation and one community (Finisterra Apartments)
under construction. These communities are located in Arizona, Texas, and New
Mexico. The Company completed the construction of the Finisterra Apartments (356
units) in July 1997. The Company made the following acquisitions during 1997
(dollars in thousands):
First Second Third
Quarter Quarter Quarter
------- ------- -------
Number of communities acquired 1 17 4
Number of units acquired 266 3,043 1,102
Total purchase price $ 4,450 $118,782 $ 39,996
Total mortgage loans $ 3,700 $ 75,696 $ 26,411
Winton Acquisition - On April 30, 1997, the Company completed the
acquisition of 13 apartment communities containing 2,260 units located in
Houston and
7
<PAGE>
ASR INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarters and Nine Months Ended September 30, 1997 and 1996
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 682,098 shares of common stock, (iii)
issued limited partnership units ("LP Units") convertible to 943,701 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 of 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.
Merit Acquisition - On September 18, 1997, the Company acquired a
portfolio of three apartment communities (totaling 900 units) in Dallas, Texas,
for approximately $29,346,000. The Company (i) obtained or assumed mortgage
loans of approximately $18,511,000 with an average fixed interest rate of 7.57%,
(ii) issued 374,581 shares of common stock and 27,721 of convertible LP units,
and (iii) paid $2,400,000 in cash to the sellers. The Company plans to spend
$1,900,000 on numerous substantive improvements to the communities.
Individual Acquisitions - In March 1997, the Company acquired a
266-unit apartment community in northwest Houston, Texas for $4,450,000. The
Company planned to spend $700,000 on numerous substantive improvements to the
community. The Company obtained a first mortgage loan of $3,700,000 with a fixed
rate of 8.39%. The Company issued 86,500 shares of common stock for net proceeds
of $1,622,000 to provide for the cash used in the acquisition.
In April 1997, the Company acquired a 257-unit community in Houston,
Texas, for $6,000,000 and obtained a first mortgage loan for $4,400,000 with a
fixed interest rate
8
<PAGE>
ASR INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarters and Nine Months Ended September 30, 1997 and 1996
of 8.57%. The Company planned 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 a fixed interest rate of 8.67%. The Company
planned 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.
On September 30, 1997, the Company acquired a 202-unit apartment
community located in Kennewick, Washington, for $10,650,000. The Company (i)
assumed mortgage debt of $7,900,000 with an interest rate of 7.87%, (ii) issued
91,678 shares of the Company's common stock and (iii) paid $650,000 in cash to
the seller. As the community is relatively new, the Company does not plan to
incur major capital improvement expenditures.
On October 27, 1997, the Company acquired a 276-unit apartment
community in Kitsap County, Washington, for $13,249,000. The Company (i)
obtained or assumed mortgage loans of approximately $7,825,000 with an average
fixed interest rate of 8.47%, (ii) issued 86,184 shares of common stock and
(iii) paid $3,100,000 in cash to the seller. As the community is relatively new,
the Company does not plan to incur major capital improvement expenditures.
Development - In March 1996, the Company began construction of a
356-unit apartment community, Finisterra Apartments, in Tempe, Arizona. In June
1997, the construction was substantially completed at a total cost of
approximately $21,000,000.
Joint Ventures - Prior to May 1997, the Company owned six apartment
communities (1,441 units) through joint ventures in which the Company was a 15%
equity partner and the managing partner. On May 1, 1997, the Company acquired
the remaining interest in one joint venture, La Privada Apartments L.L.C., for
$8,233,000 and 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. 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.
9
<PAGE>
ASR INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarters and Nine Months Ended September 30, 1997 and 1996
With the above transactions, the Company currently owns 41 apartment
communities containing 7,725 units and an office building.
Proforma Data - The following selected unaudited pro forma results of
operations data for the quarter and nine months ended September 30, 1997 have
been prepared as if the above transactions had occurred at January 1, 1997. The
proforma data are provided for information purposes only and are not indicative
of the results that would have occurred or which may occur in the future (in
thousands, except per share amounts).
Quarter Nine Months
------- -----------
Real estate revenues $ 11,980 $ 34,540
Real estate operating expenses:
Operating expenses (5,506) (15,824)
Depreciation (2,489) (7,330)
Interest (3,607) (10,282)
-------- --------
Income from real estate 378 1,104
Gain on sale of real estate -- 474
Income from mortgage assets -- 17,265
Acquisition related expenses -- (6,215)
Administrative expenses (616) (2,506)
Other income 267 342
-------- --------
Proforma Net Income $ 29 $ 10,464
======== ========
Pro Forma Net Income Per Share $ 0 $ 1.76
======== ========
3. HERITAGE COMMUNITIES L.P.
The Company formed Heritage Communities L.P. ("Heritage LP"), an
operating partnership, in 1997 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.
10
<PAGE>
ASR INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarters and Nine Months Ended September 30, 1997 and 1996
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
The LP Units are convertible to one share of the Company's Common Stock
after one year from the date of issuance. If an LP Unit is converted prior to
April 30, 2007, the holder will also be paid any unpaid balances in the holder's
distribution account. An LP Unit holder who exercises the conversion after April
30, 2007 will not be paid any unpaid balance in the holder's distribution
account if the market value of the Company's common stock is equal to at least
110% of the sum of the initial contribution and the unpaid balance.
Holders of LP Units do not have the right to take part in the
management or control of the business or affairs of Heritage L.P. Amendment of
the partnership agreement would require the consent of the general partners and
more than 50% of the LP Units. Heritage L.P. will be dissolved upon the
occurrence of certain specified and limited events or December 31, 2086.
Heritage LP issued 943,701 LP Units to the sellers of the Winton
Properties and 27,721 LP Units to the sellers of the three Dallas apartment
communities acquired in September. As of September 30, 1997, Heritage LP had
2,632,426 LP Units outstanding,
11
<PAGE>
ASR INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarters and Nine Months Ended September 30, 1997 and 1996
of which 1,661,004 Units (63.1%) were owned by the Company. Heritage LP declared
a distribution of $0.50 per Unit for each of the quarters ended June 30, 1997
and September 30, 1997. In October 1997, Heritage LP issued 226,411 LP Units to
the Company in connection with an acquisition.
4. MORTGAGE ASSETS
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. The Company received a total of $20,880,000
from the sale or redemption of mortgage assets and realized total redemption
income of $16,650,000 during 1997. During the first nine 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 first nine months of 1997, the Company obtained new mortgage
loans or assumed existing mortgage loans totalling $105,807,000 in connection
with its apartment acquisitions. At September 30, 1997, the total permanent
mortgage loans had a weighted average stated rate of 8.2%.
In addition, the Company has converted the construction loan
($12,850,000 outstanding at September 30, 1997) to a three-month loan that bears
interest at 2.5% over the one-month LIBOR. The Company is working on refinancing
it to a permanent loan at a lower interest rate.
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
12
<PAGE>
ASR INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarters and Nine Months Ended September 30, 1997 and 1996
Manager for 262,008 shares of common stock and terminated the management
agreements. The common stock issued was 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 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
$219,000 for 1997 and $430,000 for the first nine months of 1996. The Company
paid the Property Manager $190,000 for 1997 and $329,800, for the first nine
months of 1996.
13
<PAGE>
ASR INVESTMENTS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
For the Quarters and Nine Months Ended September 30, 1997 and 1996
General
ASR Investments Corporation (the "Company") is a real estate investment
trust engaged primarily in the acquisition and operation of apartment
communities in the southwestern United States. At December 31, 1996, the Company
owned directly 18 apartment communities (2,683 units) in operation and one
community (Finisterra Apartments) under construction. These communities are
located in Arizona, Texas, and New Mexico. The Company completed the
construction of the Finisterra Apartments (356 units) in July 1997 and made
substantial amounts of acquisitions in 1997. See Note 2 to consolidated
financial statements for certain detailed information on the acquisitions. Below
is a summary of the 1997 acquisitions (dollars in thousands):
First Second Third
Quarter Quarter Quarter
------- ------- -------
Number of communities acquired 1 17 4
Number of units acquired 266 3,043 1,102
Total purchase price $ 4,450 $118,782 $ 39,996
Total mortgage loans $ 3,700 $ 75,696 $ 26,411
Number of common stock issued 86,500 869,945 466,259
Number of convertible LP Units issued -- 943,701 27,721
In May 1997, the Company sold to its partner the Company's entire
interests in five joint ventures for total net proceeds of $2,062,000.
At September 30, 1997, the Company owned 40 apartment communities with
a total of 7,449 units and an office building.
In June 1997, the Company sold all its remaining mortgage assets for
$13,350,000 for a gain of $10,970,000. During 1997, the Company received
$22,277,000 from the sale or redemption of mortgage assets. The Company is
re-investing a majority of the proceeds in additional apartment communities. As
a result of the sale of all of its mortgage assets, the Company will not realize
any mortgage asset cash flows or income in future periods.
14
<PAGE>
ASR INVESTMENTS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
For the Quarters and Nine Months Ended September 30, 1997 and 1996
Results of Operations
Comparison of Quarters Ended September 30, 1997 and 1996
Real Estate Operations - Real estate operating income and expenses
increased substantially primarily due to acquisitions made in 1997. Below are
the operating results of the new communities for the period owned by the Company
during the third quarter of 1997 (in thousands):
Rental and other income $6,222
Property management income 68
------
Total real estate revenues 6,290
------
Operating & maintenance expenses 2,080
Property management expenses 61
Real estate taxes & insurance expenses 678
Interest expense 1,940
Depreciation expense 1,291
------
Total real estate operating expenses 6,050
------
Income from real estate $ 240
======
On the "same store" basis (i.e., for properties owned by the Company
during the third quarter of 1996), the Company realized a 0.1% increase in net
operating income ("NOI"). Below are the rates of increase or decrease in the
components of the NOI:
Oper. & Taxes
Rental Maint. Insurance
Income Expense Expense NOI
------ ------- ------- ---
Total (1.0%) (2.3%) (1.2%) 0.1%
Tucson (7.5%) (3.9%) 9.4% (12.9%)
Phoenix 11.0% 0.0% 12.5% 21.7%
Houston 3.6% (3.9%) (4.9%) 14.3%
Albuquerque (1.8%) 6.0% (8.2%) (4.8%)
The operating results of the Company's portfolio for the third quarters
generally are lower than the other quarters because (i) the Tucson, Phoenix and
Albuquerque markets are slower in the summer months and (ii) the Company has two
communities in
15
<PAGE>
ASR INVESTMENTS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
For the Quarters and Nine Months Ended September 30, 1997 and 1996
Pullman, Washington that have significantly lower occupancy rates in the summer
months because they are occupied primarily by college students.
Mortgage Assets - There was no income from mortgage assets in the third
quarter of 1997 as the Company sold the entire mortgage asset portfolio in June
1997.
Administrative Expenses, Acquisition Related Expenses and Other Income
Administrative expenses decreased by $402,000 primarily as a result of an
expense accrual of $507,000 made in the third quarter 1996 for stock
appreciation rights while no similar expense was made in the same quarter of
1997. Acquisition related expenses decreased by $404,000 (related to the
acquisition of the Winton properties) as there were no acquisition related
expenses recorded in the 1997 quarter. Other income increased by $215,000 due to
higher interest income earned on the proceeds from the sale of the mortgage
assets.
Common Stock and Common Stock Equivalents - The average shares of
common stock and common stock equivalents outstanding increased due to the
issuance of the common stock and convertible LP Units in connection with
apartment acquisitions and the acquisition of the management companies (see Note
6 to consolidated financial statements).
Comparison of Nine Months Ended September 30, 1997 and 1996
Real Estate Operations - Real estate operating income and expenses
increased substantially primarily due to acquisitions made in 1997. Below are
the operating results of the new communities for the period owned by the Company
during the first nine months of 1997 (in thousands):
Rental and other income $9,802
------
Operating & maintenance expenses 3,333
Property management expenses 124
Real estate taxes & insurance expenses 1,129
Interest expense 3,081
Depreciation expense 1,953
------
Total real estate operating expenses 9,620
------
Income from real estate $ 182
======
16
<PAGE>
ASR INVESTMENTS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
For the Quarters and Nine Months Ended September 30, 1997 and 1996
On the "same store" basis (i.e., for properties owned by the Company
during the first nine months of 1996), the Company realized a 0.1% increase in
net operating income ("NOI"). Below are the rates of increase or decrease in the
components of the NOI:
Oper. & Taxes
Rental Maint. Insurance
Income Expense Expense NOI
------ ------- ------- ---
Total 1.0% 2.1% (2.3%) 0.1%
Tucson (3.2%) (2.4%) 0.7% (4.2%)
Phoenix 6.3% 3.3% (0.2%) 8.5%
Houston 6.1% 4.0% (7.4%) 12.6%
Albuquerque (3.6%) 9.5% 12.0% (10.7%)
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. Income from the
joint ventures for the 1996 quarter was $23,000.
Mortgage Assets - Decreases in income from mortgage assets and related
interest expense were due to the sale of the entire mortgage asset portfolio in
June 1997.
Administrative Expenses, Acquisition Related Expenses and Other Income
Administrative expenses increased by $205,000 for the nine months ended
September 30, 1997 primarily as a result of an increase in expense accruals for
stock appreciation rights of $165,000 due to an increase in the Company's common
stock price. Acquisition related expenses increased by $5,811,000 as a result of
the acquisition of the Company's Manager and Property Manager and the payment of
certain bonuses in connection with the acquisition of the Winton properties (see
Note 6 to the consolidated financial statements). Other income increased by
$401,000 due to interest earned on the proceeds from the sale of the mortgage
assets in 1997.
Funds From Operations
Funds from operations ("FFO") is one of the common measures of
performance in the equity REIT industry. 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. The Company has made
17
<PAGE>
ASR INVESTMENTS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
For the Quarters and Nine Months Ended September 30, 1997 and 1996
the following adjustments in calculating its 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; (ii)
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. FFO also should not be considered as an alternative to cash flow
from operating activities determined in accordance with generally accepted
accounting principles because (i) FFO excludes income from sales and redemptions
of mortgage assets that are included in cash flow through operating activities,
(ii) FFO is adjusted to exclude certain non-recurring charges, and (iii) 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.
As described in Note 2 to the consolidated financial statements, the
Company has made numerous acquisitions in 1997. The Company has also presented
the proforma FFO data assuming that all of the acquisitions were completed as of
the beginning of the period. 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. Actual and proforma FFO data, as modified, for
the quarter and nine months ended September 30, 1997, are as follows (in
thousands except per share amounts):
18
<PAGE>
ASR INVESTMENTS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
For the Quarters and Nine Months Ended September 30, 1997 and 1996
Quarter:
Actual Pro Forma
-------- --------
Net Income (loss) $ (24) $ 29
Depreciation and amortization 2,017 2,507
Certain non-recurring charges (*) 30 30
Dividend equivalent rights 170 170
-------- --------
Funds from operations $ 2,193 $ 2,736
======== ========
Average shares of common stock and
common stock equivalents 5,448 5,961
Effect of assumed exercise of stock options 188 188
-------- --------
Assumed number of shares 5,636 6,149
======== ========
FFO per share $ 0.39 $ 0.45
======== ========
Nine Months:
Actual Pro Forma
-------- --------
Net Income $ 10,150 $ 10,464
Depreciation and amortization 4,174 7,456
Certain non-recurring charges (*) 7,043 7,043
Dividend equivalent rights 510 510
Income from redemptions and sales of
mortgage assets (16,650) (16,650)
Gain on sale of real estate (474) (474)
-------- --------
Funds from operations $ 4,753 $ 8,349
======== ========
Average shares of common stock and
common stock equivalents 4,447 5,961
Effect of assumed exercise of stock options 188 188
-------- --------
Assumed number of shares 4,635 6,149
======== ========
FFO per share $ 1.03 $ 1.36
======== ========
(*) - Non-recurring charges relate to stock appreciation rights for
certain employees, acquisition-related expenses and contract termination
expense.
19
<PAGE>
ASR INVESTMENTS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
For the Quarters and Nine Months Ended September 30, 1997 and 1996
The operating results of the Company's portfolio for the third quarters
generally are lower than the other quarters because (i) the Tucson, Phoenix and
Albuquerque markets are slower in the summer months and (ii) the Company has two
communities in Pullman, Washington that have significantly lower occupancy rates
in the summer months because they are occupied primarily by college students.
The Company expects its FFO to increase as (i) the Finisterra Apartments
achieved stabilization (90% occupancy rate) in August, (ii) it invests the
remaining proceeds from the sale of the mortgage assets and (iii) it completes
substantial capital improvements to certain communities acquired in 1997. The
above FFO data 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.
Liquidity, Capital Resources and Commitments
Comparison of Nine Months Ended September 30, 1997 and 1996 - Cash
provided by operations for the nine months ended September 30, 1997 was
$23,407,000 compared with $11,645,000 for the same period in 1996. The increase
was primarily a result of (i) higher net income, (ii) higher non-cash charges
relating to depreciation and contract termination expense ($5,250,000), and
(iii) higher expense accruals.
Cash used in investing activities for the nine months ended September
30, 1997 was $25,130,000 compared with $2,141,000 for the same period in 1996.
The increase in cash usage of $22,989,000 reflects (i) an increase of
$21,674,000 in investments in apartments primarily and an increase of $4,010,000
in restricted cash as a result of the acquisitions made in 1997, while making no
acquisitions in 1996, (ii) a decrease of $1,311,000 from the reduction in
mortgage assets as the Company sold its remaining portfolio in June 1997, and
(iii) a decrease of $88,000 in cash provided by other real estate assets. The
increase in cash usage was mitigated by (i) $3,216,000 from joint venture
distributions and proceeds resulting from the sale of the Company's interest in
such joint ventures and (ii) a decrease of $878,000 in construction expenditures
for the Finisterra Apartments community and land held for development.
Cash provided by financing activities for the nine months ended
September 30, 1997 was $10,521,000 compared with cash used in financing
activities of $6,008,000 for the same period in 1996. The increase of
$16,529,000 reflects (i) an increase in the issuance of real estate notes
payable of $10,410,000 related to the acquisitions made in
20
<PAGE>
ASR INVESTMENTS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
For the Quarters and Nine Months Ended September 30, 1997 and 1996
1997, with no similar purchases in 1996, (ii) an increase of $12,348,000 in
proceeds from the Finisterra Apartment's construction loan, (iii) a decrease of
$527,000 in repayments of short-term borrowing, and (iv) a net increase of
$338,000 from the payment of stock notes, the exercise of stock options, and
other financing activities. The increase was mitigated by (i) an increase of
$1,277,000 in payments of dividends due to the stock issuance in 1997, (iv) an
increase in distributions on LP Units of $942,000 as the LP Units did not exist
in 1996, (iii) a decrease in the accrued construction cost payable of $2,965,000
for the Finisterra Apartments community, (iv) an increase of $1,382,000 in loan
fees related to the acquisitions in 1997, and (v) an increase in payments on
real estate loans of $528,000.
Financing and Capital Transactions - During 1997, the Company used (i)
the proceeds from the sale and redemption of mortgage assets, (ii) mortgage debt
financing, (iii) issuance of the Company's common stock, and (iv) the issuance
of convertible LP Units of Heritage Communities L.P. to acquire apartment
communities. In that connection, the Company (i) obtained or assumed mortgage
loans of $105,807,000, (ii) issued a total of 1,508,888 shares of common stock,
and (iii) issued a total of 971,422 convertible LP Units of Heritage Communities
L.P. In addition, the Company issued 262,008 shares of common stock to acquire
the entire interests in the Pima Entities and 70,284 shares of common stock to
acquire the property management company for the Winton properties.
With the above acquisitions, the total monthly principal and interest
payments on the real estate mortgage loans are approximately $1,330,000, and the
monthly deposits to loan escrow accounts for property taxes, insurance and
capital replacements are approximately $530,000. The Company estimates that it
will spend approximately $783,000 during the remainder of 1997 in capital
replacement and improvement expenditures.
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 (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 became employees of the Company as of May l,
1997.
21
<PAGE>
Cash Balances - At September 30, 1997, the Company had cash of
$11,201,000. The Company intends to use such funds for acquiring apartment
communities, making capital improvements on existing apartment communities,
paying dividends and other corporate uses.
Other Information
Apartment leases generally are for terms of six to 12 months.
Management believes that such short-term leases lessen the impact of inflation
as a result of the ability to adjust rental rates to market levels as leases
expire.
22
<PAGE>
ASR INVESTMENTS CORPORATION
QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended September 30, 1997
PART II
OTHER INFORMATION
Item 1. Legal Proceedings - None
------------------------
Item 2. Changes in Securities - Not applicable
--------------------------------------
Item 3. Defaults Upon Senior Securities - Not applicable
------------------------------------------------
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
(a) The Annual Meeting of Stockholders of the Company was held on
August 20, 1997 at 9:00 a.m., at the Williams Center Courtyard Marriot, 201 S.
Williams Blvd., Tucson, Arizona. There were 4,437,611 shares outstanding on the
date of record for the annual meeting.
(b) The Board of Directors as listed in the June 20, 1997 proxy
statement were duly elected to serve until the next annual meeting or until
their successors are duly elected and ratified. The votes are as follows:
FOR AGAINST
--- -------
Earl M. Baldwin 4,025,069 41,326
Joseph C. Chan 4,024,234 42,161
Stephen G. Davis 4,012,932 53,463
John J. Gisi 4,025,869 40,526
Jon A. Grove 4,024,069 42,326
Raymond L. Horn 4,025,529 40,866
Frederick C. Moor 4,025,349 41,046
Frank S. Parise, Jr 4,025,069 40,906
Don W. Winton 4,027,129 39,326
(c) The appointment of Deloitte & Touche LLP as the Company's
independent accountants for the fiscal year ending December 31, 1997 was
ratified. The votes were as follows:
23
<PAGE>
FOR AGAINST ABSTAIN
--- ------- -------
4,030,196 11,615 24,584
(d) The Company's Articles of Incorporation was amended to change the
name of the Company to Heritage Residential Corporation. The votes were as
follows:
FOR AGAINST ABSTAIN
--- ------- -------
3,958,303 69,940 38,152
Item 5. Other Information - Not applicable
----------------------------------
Item 6 Exhibits and Reports on Form 8-K -
----------------------------------
(a) Exhibits - 27.1 Financial Data Schedule (For SEC use only)
(b) Reports on Form 8-K:
A report on Form 8-K, dated August 25, 1997, was filed on August 28,
1997, reporting the Company entering into agreements to acquire three apartment
communities (totaling 900 units) in Dallas Texas.
A report on Form 8-K, dated September 18, 1997, was filed on September
29, 1997, announcing the completion of the acquisition described in the Form 8-K
filed by the Company on August 28, 1997.
A report on Form 8-K, dated September 30, 1997, was filed on October
15, 1997, announcing the acquisition of a 202-unit apartment community located
in Kennewick, Washington.
* * * * * * * * * * * * * * * *
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ASR INVESTMENTS CORPORATION
/s/ Mary C. Clements /s/ Joseph C. Chan
- ---------------------------- ----------------------------------------
Mary C. Clements Joseph C. Chan
Controller Executive Vice President,
November 12, 1997 Chief Operating Officer,
Chief Financial and Accounting Officer
November 12, 1997
25
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