SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-2262
COMMERCIAL ASSETS, INC.
(Exact name of registrant as specified in its charter)
Maryland 84-1240911
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3410 South Galena Street, Suite 210 80231
Denver, Colorado (Zip Code)
(Address of Principal Executive Offices)
(303) 614-9410
(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. Yes X No ___.
As of April 30, 1999, 10,392,529 shares of common stock were outstanding.
<PAGE>
COMMERCIAL ASSETS, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION:
Item 1. Condensed Consolidated Financial Statements:
Balance Sheets as of March 31, 1999 (Unaudited)
and December 31, 1998................................ 1
Statements of Income for the three months
ended March 31, 1999 and 1998 (Unaudited)............. 2
Statements of Cash Flows for the three months
ended March 31, 1999 and 1998 (Unaudited)............. 3
Notes to Financial Statements (Unaudited)............... 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......... 9
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K....................... 18
(i)
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<TABLE>
<CAPTION>
COMMERCIAL ASSETS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
March 31, December 31,
1999 1998
---- ----
(unaudited)
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 956 $ 3,292
Short-term investments 37,836 45,066
Real estate, net of accumulated depreciation of $139 and $50 21,206 12,628
Investments in participating mortgages 9,993 9,328
Investment in real estate joint venture 1,304 1,280
Investment in and note receivable from Westrec 4,011 4,011
CMBS bonds 1,682 1,739
Other assets, net 1,248 890
---------- ----------
Total Assets $ 78,236 $ 78,234
========== ==========
LIABILITIES
Accounts payable and accrued liabilities $ 1,225 $ 872
Management fees payable to related parties 122 108
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1,347 980
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STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01 per share, 25,000 shares authorized; no shares
issued or outstanding -- --
Common stock, par value $.01 per share, 75,000 shares authorized; 10,364 and
10,364 shares issued and outstanding, respectively 104 104
Additional paid-in capital 76,874 76,874
Retained earnings (dividends in excess of accumulated earnings) (89) 276
---------- ----------
76,889 77,254
---------- ----------
Total Liabilities and Stockholders' Equity $ 78,236 $ 78,234
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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<TABLE>
<CAPTION>
COMMERCIAL ASSETS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
Three Months
Ended March 31,
---------------
1999 1998
---- ----
RENTAL PROPERTY OPERATIONS
<S> <C> <C>
Income from participating mortgages and leases $ 587 $ --
Depreciation (89) --
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Income from property operations 498 --
-------- --------
Interest and other income 701 1,053
CMBS bonds revenue 38 40
General and administrative expenses (133) (86)
Management fees paid to manager (80) (5)
-------- --------
OPERATING INCOME 1,024 1,002
Acquisition fees paid to manager (42) --
-------- --------
NET INCOME $ 982 $ 1,002
======== ========
BASIC AND DILUTED EARNINGS PER SHARE $ 0.09 $ 0.10
======== ========
DIVIDENDS DECLARED PER SHARE $ 0.13 $ --
Weighted-Average Common Shares Outstanding 10,364 10,342
Weighted-Average Common Shares and Common Share Equivalents Outstanding
10,365 10,378
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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<TABLE>
<CAPTION>
COMMERCIAL ASSETS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months
Ended March 31,
---------------
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 982 $ 1,002
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation 89 --
Amortization of premium on short-term investments 47 --
Accrued income on participating mortgages (61) --
Increase in accounts payable and accrued liabilities 67 1,106
Decrease (increase) in other assets (365) 92
-------- --------
Net cash provided by operating activities 759 2,200
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of real estate (8,323) --
Collections on short-term investments 4,774 --
Proceeds from sale of short-term investments 2,414 --
Investments in participating mortgages, net (603) --
Investment in real estate joint venture (24) --
Capital replacements (44) --
Investment in Westrec -- (2,540)
Collections on CMBS bonds 58 60
-------- --------
Net cash used in investing activities (1,748) (2,480)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (1,347) --
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,336) (280)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,292 74,153
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 956 $ 73,873
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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COMMERCIAL ASSETS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A. Organization
Commercial Assets, Inc. ("CAX" and, together with its subsidiaries, the
"Company") is a Maryland corporation that has interests in manufactured home
communities and has elected to be taxed as a real estate investment trust
("REIT"). The Company's common stock, par value $.01, (the "Common Stock") is
listed on the American Stock Exchange under the symbol "CAX."
Prior to 1998, the Company owned subordinate classes of Commercial Mortgage
Backed Securities ("CMBS bonds"). In November 1997, the Company restructured its
subordinate CMBS bond portfolio by selling, redeeming or resecuritizing its
various CMBS bonds. The restructuring resulted in the Company receiving
$77,693,000 cash and retaining an equity interest in an owner trust arising from
a resecuritization transaction (see Note H). The Company has temporarily
invested the proceeds from such restructuring until invested in manufactured
home communities.
In the third quarter of 1998, the Company decided to invest in manufactured home
communities and as of March 31, 1999 has invested approximately $32 million in
interests in seven manufactured home communities and adjoining land with 930
developed homesites, 50 sites ready for homes and 1,180 sites available for
future development.
The Company's daily operations are performed by a manager pursuant to an
agreement currently in effect through December 31, 1999 ("the Management
Agreement"). Since November 1997, Asset Investors Corporation (together with its
subsidiaries, "Asset Investors") has been the manager. Asset Investors owns 27%
of the Company's Common Stock. For 1999, the Management Agreement has been
amended to provide that the Incentive Fee is based on Funds From Operations,
less an annual capital replacement reserve of at least $50 per developed
homesite. In general, Funds From Operations is equal to net income plus
depreciation, amortization and acquisition fees. No other change was made to the
Management Agreement other than its extension to December 31, 1999 (see Note J).
The Management Agreement is subject to the approval of a majority of the
Company's independent directors and can be terminated by either party, without
cause, with 60 days' notice. Since the Company has no employees, the officers of
Asset Investors are also officers of the Company.
B. Presentation of Financial Statements
The Condensed Consolidated Financial Statements of the Company have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. These Condensed Consolidated Financial
Statements reflect all adjustments, consisting of only normal recurring
accruals, which, in the opinion of management, are necessary to present fairly
the financial position and results of operations of the Company as of March 31,
1999, for the three months then ended, and for all prior periods presented.
These statements are condensed and do not include all the information required
by generally accepted accounting principles ("GAAP") in a full set of financial
statements. These statements should be read in conjunction with the Company's
Financial Statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1998.
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Certain reclassifications have been made in the Condensed Consolidated Financial
Statements to conform to the classifications currently used. The effect of such
reclassifications on amounts previously reported is immaterial.
C. Summary of Significant Accounting Policies
Principles of Consolidation
The Condensed Consolidated Financial Statements include the accounts of the
Company and its majority-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
Real Estate and Depreciation
Real estate is recorded at cost less accumulated depreciation. Depreciation is
computed using the straight line method over an estimated useful life of 25
years for land improvements and buildings. Significant renovations and
improvements, which improve or extend the useful life of the asset, are
capitalized and depreciated over the remaining estimated life. In addition, the
Company capitalizes direct and indirect costs (including interest, taxes and
other costs) in connection with the development of additional homesites within
its manufactured home communities. Maintenance, repairs and minor improvements
are expensed as incurred.
When conditions exist which indicate that the carrying amount of a property may
be impaired, the Company will evaluate the recoverability of its net investment
in the property by assessing current and future levels of income and cash flows.
As of March 31, 1999, there has been no impairment of the Company's investment
in real estate.
Revenue Recognition
Interest on participating mortgages is recorded based upon outstanding balances
and interest rates per the terms of the mortgages. In addition, the Company
evaluates the collectibility of any unpaid interest and provides reserves as
necessary. As of March 31, 1999, there is no reserve for uncollected interest on
the participating mortgages. Rent on ground leases is recognized when earned and
due from lessee.
Income Taxes
CAX intends to operate in a manner that will permit it to qualify for the income
tax treatment accorded to a REIT. If it so qualifies, CAX's REIT income, with
certain limited exceptions, will not be subject to federal or state income tax
at the corporate level. Accordingly, no provision for taxes has been made in the
financial statements. In order to maintain its status as a REIT, CAX is
required, among other things, to distribute annually to its stockholders at
least 95% of its REIT income and to meet certain asset, income and stock
ownership tests.
Earnings Per Share
Basic earnings per share for the three months ended March 31, 1999 and 1998 are
based upon the weighted-average number of shares of Common Stock outstanding
during each such period. Diluted earnings per share reflect the effect of any
dilutive, unexercised stock options in each such period.
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Statements of Cash Flows
For purposes of reporting cash flows, cash maintained in bank accounts, money
market funds and highly-liquid investments are considered to be cash and cash
equivalents. The Company paid no interest during the three months ended March
31, 1999 and 1998.
Non-cash investing activities for the three months ended March 31, 1999 and 1998
were as follows (in thousands):
1999 1998
---- ----
Accrued initial capital expenditures on real
estate purchases $ 300 $ --
D. Short-term Investments
During 1998, the Company acquired short-term investments consisting of
mortgage-backed bonds guaranteed by Federal Home Loan Mortgage Corporation and
Federal National Mortgage Association. These investments are classified as
available-for-sale, and the fair market value at March 31, 1999 approximates the
carrying value of $37,836,000.
E. Investments in Participating Mortgages
As of March 31, 1999, the Company has investments in participating mortgages
secured by three manufactured home communities and adjoining land. The notes
accrue interest at 15% per annum and pay interest at 9% per annum through August
1999, with the pay rate increasing 1% each year thereafter to a maximum of 12%
per annum. The loans mature in 2007 and 2008. The Company also receives
additional interest equal to 50% of the net profits and cash flows from the
properties. In addition, as of March 31, 1999, the Company has investments in
participating mortgages secured by individual homes and home sites within two
manufactured home communities. These mortgages accrue interest at 10% and pay
interest from the cash flows from the homesites. The Company also receives
additional interest equal to 50% of the net profits and cash flows from the
homesites. As of March 31, 1999, the Company had investments in participating
mortgages of $9,993,000 and income of $331,000 from these mortgages for the
three months ended March 31, 1999.
F. Real Estate
Real estate at March 31, 1999 and December 31, 1998 was (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---- ----
<S> <C> <C>
Land $ 5,024 $ 3,798
Land improvements and buildings 16,321 8,880
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21,345 12,678
Less accumulated depreciation (139) (50)
---------- ----------
Real estate, net $ 21,206 $ 12,628
========== ==========
</TABLE>
Land improvements and buildings consist primarily of infrastructure, roads,
landscaping, clubhouses, maintenance buildings and common amenities. Two
manufactured home communities have been leased to a third party. The first lease
involves a community acquired by the Company at a cost of $1.4 million and is
for a term of 50 years. The Company receives initial annual lease payments equal
to 9% of its cost. The annual lease payments increase by 4% per annum over the
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prior year's lease payments until the annual lease payment equals 13% of the
Company's cost. In addition, the Company receives additional rent equal to 50%
of the lessee's net cash flow from the property. In the event of a sale of the
property, the Company receives all proceeds until it has realized its total
purchase price of the property plus a 13% per annum rate of return. The Company
then receives 50% of any sales proceeds in excess of such amount.
The other leased community involves two phases and has been leased to the same
third party for 50 years. Phase One has 220 developed homesites and 24 sites
ready for homes. Phase Two involves 940 sites available for future development.
Initial annual lease payments on Phase One is $890,000, increasing by 4% per
annum. There are no lease payments on Phase Two until the sites are ready for
homes, at which time, the annual lease payments on Phase Two will be equal to
10% times the costs incurred in developing Phase Two. In addition, the lessee
pays to the Company additional rent equal to 50% of the lessee's net cash flow
from the property. In the event of a sale, the Company receives 50% of any sales
proceeds in excess of the Company's cost.
G. Investment in Real Estate Joint Venture
The Company has invested $1,280,000 in a joint venture involving the development
of 30 homesites. The Company receives a priority return from the venture until
the Company has received a per annum amount equal to 9% times $1,250,000. The
Company's subsequent annual priority return increases by 5% over the prior
year's amount. The other venturer then receives a similar percentage return on
its $300,000 investment in the venture. In the event the property is sold, the
Company receives all proceeds until it has received its investment plus 20% per
annum. The other venturer then receives all proceeds until it has received its
investment plus 20% per annum. Any excess sales proceeds are then shared
equally. The Company did not record any income from this real estate joint
venture during the three months ended March 31, 1999.
H. CMBS Bonds
In November 1997, the Company restructured its portfolio of CMBS bonds and
retained a $5,000,000 equity interest in the owner trust used in the
restructuring. Since the equity interest represents the first-loss class of the
portfolio and provides credit support for the senior debt securities, the
Company valued the equity interest at its then estimated fair market value of
$2,000,000. During the three months ended March 31, 1999 and 1998, the Company
received $96,000 and $100,000, respectively, of which $58,000 and $60,000,
respectively, was recorded as a reduction in the net book value of the retained
equity interest. The net book value at March 31, 1999 is $1,682,000 which the
Company believes approximates fair market value.
I. Investment in and Note Receivable from Westrec
Prior to deciding to acquire manufactured home communities, the Company
evaluated acquiring interests in marinas and, in connection with this, acquired
a 12% interest in Westrec Marina Management, Inc. ("Westrec") for approximately
$2,500,000 and made a loan to an affiliate of Westrec. In the third quarter of
1998, the Company decided to invest in manufactured home communities instead of
marinas. The Company has recorded its investment in and note receivable from
Westrec at the sum of the amount the Company can re-sell its interest in Westrec
plus the outstanding balance of the note receivable.
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J. Management Fees
The Company operates under a management agreement, pursuant to which the manager
advises the Company on its business and oversees its daily operations, subject
to the supervision of the Company's Board of Directors. Asset Investors has been
the manager since November 1997. The Management Agreement has been extended
through December 31, 1999 and provides that the manager receives a "Base Fee,"
an "Acquisition Fee" and an "Incentive Fee." The Base Fee is payable quarterly
in an amount equal to 1% per annum of the Company's average net book value of
real estate-related assets. The Acquisition Fee equals 0.5% of the cost of each
real estate-related asset acquired. Acquisition Fees are expensed because such
fees are paid to Asset Investors, owner of 27% of the Company's Common Stock.
These fees would be capitalized if they were paid to an unrelated third party.
For 1999, the Incentive Fee equals 20% of the amount by which the Company's
Funds From Operations, less an annual capital replacement reserve of at least
$50 per developed homesite, exceeds the amount calculated by multiplying the
Company's average net worth by a percentage equal to the Ten-Year United States
Treasury rate plus 1%. In general, Funds From Operations is equal to net income
plus depreciation, amortization and acquisition fees. During 1998, the Incentive
Fee was based on the Company's REIT taxable income instead of Funds From
Operations. Fees paid to the manager were (in thousands):
Three Months Ended
March 31,
---------------------------
1999 1998
------------ ----------
Base Fees $ 75 $ 5
Acquisition Fees 42 --
Incentive Fees 5 --
-------- ------
$ 122 $ 5
======== ======
K. Commitments
In connection with the acquisition of a manufactured home community, the Company
entered into an earn-out agreement with respect to 154 unoccupied homesites. The
Company will pay $17,000 to the former owner for each newly occupied homesite.
The earn-out agreement terminates in 2048.
The Company has agreed to acquire from time to time ground leases related to
individual homesites. The purchase price for each lease will be equal to the
base annual rent provided for in each such ground lease divided by 9%. The
Company is not required to acquire such leases in groups of less than 10 leases.
The maximum number of leases the Company might purchase is approximately 500 for
total consideration of approximately $20 million.
L. Operating Segments
The Company has recently begun investing in manufactured home communities and
management assesses the performance of the Company as one operating segment.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Introduction
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements in certain circumstances. Certain information
included in this report, our Quarterly Report to Stockholders and our filings
with the Securities Exchange Commission under the Securities Act of 1933, as
amended, and the Securities Exchange Act of 1934, as amended, as well as
information communicated orally or in writing between the dates of such SEC
filings, constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements may include
projections of our cash flow, dividends and anticipated returns on real estate
investments. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, performance
or achievements to be materially different from any future results, performance
or achievements expressed or implied by the forward-looking statements. Such
factors include: general economic and business conditions; interest rate
changes; financing and refinancing risks; risks inherent in owning real estate
or debt secured by real estate; future development rate of homesites;
competition; the availability of real estate assets at prices which meet our
investment criteria; our ability to reduce expense levels, implement rent
increases, use leverage and other risks set forth in our SEC filings.
In this report, the words "the Company," "we," "our" and "us" refer to
Commercial Assets, Inc., a Maryland corporation and, where appropriate, our
subsidiaries.
Business
Company Background
We are a Maryland corporation formed in August 1993, and we have elected to be
treated for United States federal income tax purposes as a real estate
investment trust or "REIT". We are engaged in the ownership, acquisition,
development and expansion of manufactured home communities. Initially, we were a
wholly-owned subsidiary of Asset Investors Corporation. Asset Investors
contributed $75 million to our initial capital and in October 1993, Asset
Investors distributed 70% of our common stock to Asset Investors' stockholders.
Asset Investors currently owns 27% of our outstanding common stock and provides
management services to us. Our shares of common stock are listed on the American
Stock Exchange, Inc. ("AMEX") under the symbol "CAX."
Prior to 1998, we owned subordinate classes of Commercial Mortgage Backed
Securities ("CMBS bonds"). CMBS bonds generally are debt instruments that are
backed by mortgage loans on commercial real estate. The principal and interest
payments on the underlying mortgage assets are allocated among the several
classes or "tranches" of a series of CMBS bonds. Our subordinate tranches of
CMBS bonds included "first-loss" tranches, which bore the most risk in the event
of a default on the underlying mortgages and provided credit support for the
more senior tranches. In 1997, we decided to redeploy our assets into other
types of real estate investments in order to reduce the risk of our portfolio.
We restructured our CMBS bonds in November 1997 by selling, redeeming and
resecuritizing our various CMBS bonds from which we received $77.7 million in
cash and retained a small residual interest in two CMBS bonds. During most of
1998, we invested our funds in short-term investments pending our decision as to
the type of real estate assets in which we would invest.
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In the third quarter of 1998, we decided to acquire interests in manufactured
home communities. As of March 31, 1999, we held interests as owner, ground
lessor or mortgage lender (including participating mortgages) in seven
manufactured home communities with a total of 930 developed homesites (sites
with homes in place), 50 sites ready for homes and 1,180 sites available for
future development. We expect to continue acquiring interests in manufactured
home communities during 1999.
Industry Background
A manufactured home community is a residential subdivision designed and improved
with sites for the placement of manufactured homes and related improvements and
amenities. Manufactured homes are detached, single-family homes which are
produced off-site by manufacturers and installed on sites within the community.
Manufactured homes are available in a variety of designs and floor plans,
offering many amenities and custom options.
Modern manufactured home communities are similar to typical residential
subdivisions containing centralized entrances, paved streets, curbs and gutters
and parkways. The communities frequently provide a clubhouse for social
activities and recreation and other amenities, which may include golf courses,
swimming pools, shuffleboard courts and laundry facilities. Utilities are
provided by or arranged for by the owner of the community. Community lifestyles,
primarily promoted by resident managers, include a wide variety of social
activities that promote a sense of neighborhood. The communities provide an
attractive and affordable housing alternative for retirees, empty nesters and
start-up or single-parent families. Manufactured home communities are primarily
characterized as "all age" communities and "adult" communities. Adult
communities typically require that at least 80% of the tenants must be at least
55 years old, and in all age communities there is no age restriction on tenants.
The owner of a home in our communities leases from us the site on which the home
is located. Typically, the leases are on a month-to-month or year-to-year basis,
renewable upon the consent of both parties or, in some instances, as provided by
statute. In some circumstances, we offer a 99-year lease to tenants in order to
enable the tenant to have some of the benefits an owner of real property enjoys,
including creditor protection laws in some states. These leases can be
cancelled, depending on state law, for non-payment of rent, violation of
community rules and regulations or other specified defaults. Generally, rental
rate increases are made on an annual basis. The size of these rental rate
increases depends upon the policies that are in place at each community. Rental
increases may be based on fixed dollar amounts, percentage amounts, inflation
indexes, or they may depend entirely on local market conditions. We own
interests in the underlying land, utility connections, streets, lighting,
driveways, common area amenities and other capital improvements and are
responsible for enforcement of community guidelines and maintenance. Each
homeowner within the manufactured home communities is responsible for the
maintenance of his or her home and leased site, including lawn care in some
communities.
The ownership of manufactured home communities, once fully occupied, tends to be
a stable, predictable asset class. The cost and effort involved in relocating a
home to another manufactured home community generally encourages the owner of
the home to resell it within the community.
Recent Developments
Manufactured Home Community Acquisitions
In March 1999, we acquired a manufactured home community that has 290 developed
homesites which are 96% occupied for $8,000,000 cash and $300,000 of estimated
initial capital expenditures. As of March 31, 1999, we have interests in seven
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manufactured home communities with a total of 930 developed homesites, 50 sites
ready for homes, 1,180 sites available for future development. We expect to
acquire additional manufactured home communities during 1999.
Growth and Operating Strategies
We measure our economic profitability based on Funds From Operations ("FFO"),
less an annual capital replacement reserve of at least $50 per developed
homesite. We believe that FFO, less a reserve, provides investors with an
understanding of our ability to incur and service debt and to make capital
expenditures. The Board of Governors of the National Association of Real Estate
Investment Trusts (also known as NAREIT) defines FFO as net income (loss),
computed in accordance with generally accepted accounting principles, excluding
gains and losses from debt restructuring and sales of property, plus real estate
related depreciation and amortization (excluding amortization of financing
costs), and after adjustments for unconsolidated partnerships and joint
ventures. We calculate FFO in a manner consistent with NAREIT's definition. In
our calculation we include adjustments for fees incurred in connection with
property acquisitions.
FFO should not be considered an alternative to net income or net cash flows from
operating activities, as calculated in accordance with generally accepted
accounting principles, as an indication of our performance or as a measure of
liquidity. FFO is not necessarily indicative of cash available to fund future
cash needs.
Our primary objective is to maximize stockholder value by increasing the amount
and predictability of our FFO on a per share basis, less a reserve for capital
replacements. We seek to achieve this objective primarily by:
o improving net operating income from our existing portfolio of
manufactured home communities; and
o acquiring additional communities at values that are accretive on a per
share basis.
Management has adopted specific policies to accomplish our objective of
increasing the amount and predictability of our FFO on a per share basis, less a
reserve for capital replacements. These policies include:
o reducing our exposure to downturns in regional real estate markets by
obtaining a geographically diverse portfolio of communities;
o ensuring the continued maintenance of our communities by providing a
minimum $50 per homesite per year for capital replacements;
o using debt leverage to increase our financial returns;
o reducing our exposure to interest rate fluctuations by utilizing
long-term, fixed-rate, fully-amortizing debt instead of higher cost,
short term debt;
o selectively acquiring manufactured home communities that have potential
long-term appreciation of value through, among other things, rent
increases, expense efficiencies and in-part homesite development;
o improving the profitability of our communities through aggressive
management of occupancy, community development and maintenance and
expense controls;
o developing and maintaining resident satisfaction and a reputation for
quality communities through maintenance of the physical condition of
our communities and providing activities that improve the community
lifestyle; and
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o recruiting and retaining capable community management personnel.
Future Acquisitions
In 1998, when we decided to enter the manufactured home community business, we
began to implement a business plan which called for the investment of our
capital in the acquisition of manufactured home communities. We have focused on
identifying acquisition opportunities that we believe provide returns that are
accretive to our stockholders. We plan on continuing this business plan during
1999, and hope to have largely invested our capital in manufactured home
communities during this year.
Our acquisition of interests in manufactured home communities takes many forms.
In many cases we acquire fee title to the community. When a community has a
significant number of unleased homesites, we seek a stable return from the
community during the development and lease-up phase while also seeking to
participate in future increased earnings after development is completed and the
sites are leased. We seek to accomplish this goal by making loans to development
companies in return for participating mortgages that are non-recourse to the
borrowers and secured by the property. In general, our participating mortgages
earn interest at fixed rates and, in addition, participate in the profits or
revenues from the community. This profit participation right generally entitles
us to 50% of the net income and cash flow generated by the community. As an
alternative, we sometimes enter into ground leases with development companies
having similar terms to our participating mortgages.
We believe that acquisition opportunities for manufactured home communities are
attractive at this time because of the increasing acceptability of and demand
for manufactured homes and the continued constraints on development of new
manufactured home communities. We are actively seeking to acquire additional
communities and are currently engaged in various stages of negotiations relating
to the possible acquisition of a number of communities. The acquisition of
interests in additional communities could also result in our becoming
increasingly leveraged as we incur debt in connection with these transactions.
As of March 31, 1999, we have invested approximately $32 million to acquire
interests in seven manufactured home communities that are located in Arizona,
Florida and California. These communities have a total of 930 developed
homesites (sites with homes in place), 50 sites ready for homes and 1,180 sites
available for future development.
When evaluating potential acquisitions, we consider such factors as:
o the location and type of property;
o the value of the homes located on the leased land;
o the improvements, such as golf courses and swimming pools, at the
property;
o the current and projected cash flow of the property and our ability to
increase cash flow;
o the potential for capital appreciation of the property;
o the terms of tenant leases, including the potential for rent increases;
o the tax and regulatory environment of the community in which the
property is located;
o the potential for expansion of the physical layout of the property and
the number of sites;
o the occupancy and demand by residents for properties of a similar type
in the vicinity;
o the credit of the residents in a community;
o the prospects for liquidity through sale, financing or refinancing of
the property;
o the competition from existing manufactured home communities;
o the potential for the construction of new communities in the area; and
- 12 -
<PAGE>
o the replacement cost of the property.
Expansion of Existing Communities
We will seek to increase the number of homesites and the amount of earnings
generated from our existing portfolio of manufactured home communities through
marketing campaigns aimed at increasing occupancy. We will also seek expansion
through future acquisitions and expanding the number of sites available to be
leased to residents if justified by local market conditions and permitted by
zoning and other applicable laws. As of March 31, 1999, we held interests in six
communities with 50 sites ready for homes and 1,180 sites available for future
development.
Manager
Our daily operations are performed by a manager pursuant to a management
agreement currently in effect through December 31, 1999. The manager also
identifies and performs due diligence on potential manufactured home community
investments for us. Since November 1997, Asset Investors has been our manager.
In addition to being our manager and a principal stockholder, Asset Investors
separately owns, acquires, develops and manages manufactured home communities,
including providing property management services on our communities.
Consequently, we and Asset Investors are involved in the same industry. The two
companies have agreed that we shall invest at least $50 million in manufactured
home communities before Asset Investors makes any additional acquisitions of
manufactured home communities. Asset Investors may acquire communities if a
material portion of the purchase price is paid for in units of limited
partnership in Asset Investors Operating Partnership ("OP Units") or Asset
Investors' common stock. As of March 31, 1999, we have invested approximately
$32 million in manufactured home communities. Following our investment of $50
million, the two companies will coordinate their efforts to acquire manufactured
home communities.
The management agreement was approved by our independent directors and may be
terminated by either party with or without cause at any time upon 60 days'
written notice. The manager provides all personnel and related overhead
necessary to conduct our regular business, and in return, the manager is paid
the following fees:
o Acquisition Fees equal to 0.5% of the cost of each real estate-related
asset acquired by us;
o Base Fees equal to 1% per year of the net book value of our real estate-
related assets;
o Incentive Fees equal to 20% of the amount by which our FFO, less an
annual capital replacement reserve of at least $50 per developed
homesite, exceeds (a) our average net worth, multiplied by (b) 1% over
the ten year United States Treasury rate.
During the three months ended March 31, 1999 and 1998, we paid the following
fees to our manager (in thousands):
1999 1998
------- --------
Base Fees $ 75 $ 5
Acquisition Fees 42 --
Incentive Fees 5 --
------ -----
$ 122 $ 5
====== =====
Prior to 1999, the Incentive Fee was based on REIT income instead of FFO. The
Incentive Fee for 1999 is based on FFO, less an annual capital replacement
reserve of at least $50 per developed homesite, because we believe this is a
- 13 -
<PAGE>
better measure of our economic profitability and, therefore, is a more
appropriate incentive for Asset Investors even if increased management fees
result.
We indemnify the manager and its affiliates with respect to all expenses,
losses, damages, liabilities, demands, charges or claims of any nature in
respect of acts or omissions of the manager made in good faith and in accordance
with the standards set forth in the management agreement.
Properties
The manufactured home communities in which we have interests are primarily
located in Arizona and Florida. We hold interests in these communities as owner,
ground lessor or mortgage lender (including participating mortgages). The
following table sets forth the states in which the communities in which we held
an interest on March 31, 1999 are located:
<TABLE>
<CAPTION>
Number of Sites
-----------------------------------------------------------------
Available for
Number of Future
Communities Developed Ready for Homes Development
------------------ ----------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Arizona 3 337 -- 206
Florida 3 595 46 942
California 1 -- -- 30
--- ----- ----- ------
Total 7 932 46 1,178
=== ===== ===== ======
</TABLE>
The following table sets forth information regarding each manufactured home
community in which we own an interest:
<TABLE>
<CAPTION>
Average
Monthly
Developed Rent Sites Ready Sites Available
Community Location Homesites Occupancy per Site for Homes for Development
------------------------------------------------------------------------------------------------------------------
Owned Communities
<S> <C> <C> <C> <C> <C> <C>
Cypress Greens (1)Lakeland, FL 85 100% $192 22 --
Lakeshore Villas Tampa, FL 290 96 324 -- --
Riverside (1) Ruskin, FL 220 99 403 24 942
--------------------------------------------------------------------
Subtotal 595 98 334 46 942
--------------------------------------------------------------------
Participating Mortgage and Joint
Venture Communities
Fiesta Village Mesa, AZ 175 98 273 -- 206 (2)
Casa Encanta Mesa, AZ 111 87 350 -- -- (2)
Southern Palms Mesa, AZ 51 100 203 -- -- (2)
Cannery Village Newport Beach, CA -- -- -- -- 30
--------------------------------------------------------------------
Subtotal 337 95 288 -- 236
====================================================================
Total Communities 932 97% $317 46 1,178
====================================================================
<FN>
1 We have leased this community to a third party under a long-term lease
in which we receive a base rent plus 50% of any profits from the community.
2 We intend to redevelop the Fiesta Village, Casa Encanta, and Southern
Palms communities along with adjoining vacant land. The combined
redevelopment will result in the additional 206 spaces.
</FN>
</TABLE>
- 14 -
<PAGE>
Taxation of the Company
We have elected to be taxed as a REIT under the Internal Revenue Code of 1986,
as amended (the "Code"), and we intend to operate in a manner which will allow
us to avail ourselves of the beneficial tax provisions applicable to REITs. Our
qualification as a REIT depends on our ability to meet various requirements
imposed by the Code, such as specifications relating to actual operating
results, distribution levels and diversity of stock ownership.
If we qualify for taxation as a REIT, we will generally not be subject to
Federal corporate income tax on our net income that is currently distributed to
stockholders. This treatment substantially eliminates the "double taxation" (at
the corporate and stockholder levels) that generally results from investment in
a corporation. If we fail to qualify as a REIT in any taxable year, we will be
subject to Federal income tax at regular corporate rates on our taxable income
(including any applicable alternative minimum tax). Even if we qualify as a
REIT, we may be subject to certain state and local income and other taxes and to
Federal income and excise taxes on our undistributed income.
RESULTS OF OPERATIONS FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
Comparison of Three Months Ended March 31, 1999 to Three Months Ended March 31,
1998
Rental Property
Income from rental properties totaled $498,000 during the three months ended
March 31, 1999. There were no such activities during the same period in 1998 as
our first acquisition of interests in manufactured home communities was in
August 1998. As of March 31, 1999, we had invested approximately $32 million in
seven communities.
Interest and Other Income
Interest and other income during the three months ended March 31, 1999 was
$701,000 compared to $1,053,000 for the same period in 1998. The decrease is due
to a reduction in cash and short-term investments used to fund investments in
manufactured home communities beginning in August 1998. The average interest
rate earned on these funds was 4.9% and 5.4% during the three months ended March
31, 1999 and 1998, respectively.
CMBS Bonds
Income from CMBS bonds during the three months ended March 31, 1999 was $38,00
and is comparable to the same period in 1998. This income is from our retained
equity interest in two CMBS bonds.
General and Administrative Expenses
Our general and administrative expenses were $133,000 and $86,000 for the three
months ended March 31, 1999 and 1998, respectively. These expenses increased for
the period in 1999 compared to 1998 primarily due to increased costs related to
shareholder relations and due diligence costs on potential acquisitions that
were not completed.
- 15 -
<PAGE>
Management Fees
During the three months ended March 31, 1999, our management fees were $122,000,
consisting of Base Fees of $75,000, Acquisition Fees of $42,000 and Incentive
Fees of $5,000. During the three months ended March 31, 1998, we incurred Base
Fees of $5,000 on the retained equity interest from the CMBS bond
resecuritization and had no Acquisition Fees or Incentive Fees. The increase in
management fees is because such fees are not paid on cash and short-term
investments, which is what we held during the 1998 period.
Dividend Distributions
During the three months ended March 31, 1999, we declared regular dividends of
$.13 per share totaling $1,347,000. No dividends were declared during the same
period in 1998.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, we had cash and cash equivalents of $956,000 and
short-term investments of $37,836,000. Our principal activities that demand
liquidity include our normal operating activities, payments of principal and
interest on outstanding debt, acquisitions of or additional investments in
properties and payments of dividends to stockholders.
During the three months ended March 31, 1999, the net cash provided by operating
activities was $759,000 compared to $2,200,000 during the same period in 1998.
The decrease was primarily a result of changes in accounts payable and accrued
liabilities balances during the 1998 period.
Net cash used in investing activities was $1,748,000 during the three months
ended March 31, 1999 compared to uses of $2,480,000 during the same period in
1998. The net cash used in the 1999 period was primarily due to the $8.3 million
acquisitions of interests in manufactured home communities, net of sales of
short-term investments used to fund such acquisitions, whereas the funds used in
the 1998 period were for the investment in Westrec Marina Management, Inc.
Net cash used in financing activities was $1,347,000 in the three months ended
March 31, 1999 due to the payment of dividends in the first quarter of 1999. No
dividends were paid during the first quarter of 1998.
We expect to meet our long-term liquidity requirements through our cash
balances, short-term investments, long-term, secured borrowings, cash generated
by operations and issuance of equity securities.
FUNDS FROM OPERATIONS
We measure our economic profitability based on FFO, less an annual capital
replacement reserve of at least $50 per developed homesite. We believe that FFO,
less a reserve, provides investors with an understanding of our ability to incur
and service debt and make capital expenditures. The Board of Governors of NAREIT
defines FFO as net income (loss), computed in accordance with generally accepted
accounting principles, excluding gains and losses from debt restructuring and
sales of property, plus real estate related depreciation and amortization
(excluding amortization of financing costs), and after adjustments for
unconsolidated partnerships and joint ventures. We calculate FFO in a manner
consistent with NAREIT's definition. In our calculation we include adjustments
for fees incurred in connection with property acquisitions.
- 16 -
<PAGE>
FFO should not be considered an alternative to net income or net cash flows from
operating activities, as calculated in accordance with generally accepted
accounting principles, as an indication of our performance or as a measure of
liquidity. FFO is not necessarily indicative of cash available to fund future
cash needs.
For the three months ended March 31, 1999 and 1998, our FFO was (in thousands):
1999 1998
-------- --------
Net income $ 982 $ 1,002
Real estate depreciation 89 --
Acquisition fees 42 --
Amortization of CMBS bonds 58 60
-------- --------
Funds From Operations (FFO) $ 1,171 $ 1,062
======== ========
Weighted average common shares outstanding 10,364 10,342
======== ========
YEAR 2000 COMPLIANCE
Year 2000 issues have arisen because many existing computer programs and
chip-based embedded technology systems use only the last two digits to refer to
a year, and therefore do not properly recognize a year that begins with "20"
instead of the familiar "19." If not corrected, many computer applications could
fail or create erroneous results. The following disclosure provides information
regarding the current status of our Year 2000 compliance program.
Our critical hardware and software systems are currently Year 2000 compliant.
Upon failure of any system, data included in critical software (such as
rent-rolls and certain record-keeping systems) could be transferred to
alternative commercially available software at a reasonable cost and within a
reasonable time period. Consequently, we would be able to continue our business
operations without any material interruption or material effect on our business,
results of operations or financial condition. In addition, we anticipate that
any hardware or software that we acquire (including upgrades to existing
systems) between now and December 31, 1999 will be Year 2000 compliant.
Disruptions in the economy generally resulting from Year 2000 issues could also
materially adversely affect us. Moreover, because a large number of our tenants
may be dependent on social security payments to pay their rents, a failure of
the Social Security Administration to cause their systems to be Year 2000
compliant may result in a material adverse effect on our operations. The Social
Security Administration has announced that they will have their systems Year
2000 compliant before January 1, 2000.
We believe that the cost of modification or replacement of our less essential
accounting and reporting software and hardware that is not currently compliant
with Year 2000 requirements, if any, will not be material to our financial
position or results of operations.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our principal exposure to market risk is through our various debt instruments
and borrowings. The following is a list of these debt instruments and borrowing
arrangements.
- 17 -
<PAGE>
We invest funds primarily in government securities and other short-term
investments with interest rates of approximately 0.25% above the London
Interbank Offered Rate ("LIBOR"). Accordingly, changes in interest rates could
affect the returns from such investments. We intend to invest funds in
manufactured home communities during 1999, however, the timing and amount of
such investments will depend on a number of factors. See "Item 2. - Business -
Growth and Operating Strategies - Future Acquisitions."
We do not currently have any notes payable but expect to borrow amounts in
connection with acquisitions of communities. We intend to borrow non-recourse,
secured, fixed rate, fully amortizing debt in connection with such acquisitions.
Accordingly, such debt would not cause us significant exposure to changing
interest rates.
PART II
OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit No. Description
3.1 Amended and Restated Charter of Commercial Assets, Inc. (the
"Registrant"), (incorporated herein by reference to Exhibit
3.1 to the Amendment No. 1 to the Registrant's Registration
Statement on Form 10 (as amended, the "Form 10") of the
Registrant, Commission File No. 1-22262, filed on August 31,
1993).
3.2 By-laws of the Registrant, (incorporated herein by reference
to Exhibit 3.2 to Amendment No. 1 to the Form 10 of the
Registrant, Commission File No. 1-22262, filed on August 31,
1993)
3.3 Amendment to the By-laws of the Registrant dated as of January
14, 1997 (incorporated herein by reference to Exhibit 3.3 to
the Registrant's Annual Report on Form 10-K for the year ended
December, 31, 1996, Commission File No. 1-22262, filed on
March 24, 1997).
27 Financial Data Schedule.
(b) Reports on Form 8-K:
No Current Reports on Form 8-K were filed by the Registrant
during the period covered by this Quarterly Report on Form
10-Q.
- 18 -
<PAGE>
SIGNATURE
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.
COMMERCIAL ASSETS, INC.
(Registrant)
Date: May 7, 1999 By /s/ David M. Becker
------------------------
David M. Becker
Chief Financial Officer
- 19 -
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 956
<SECURITIES> 37836
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 39415
<PP&E> 21345
<DEPRECIATION> (139)
<TOTAL-ASSETS> 78236
<CURRENT-LIABILITIES> 1347
<BONDS> 0
0
0
<COMMON> 104
<OTHER-SE> 76785
<TOTAL-LIABILITY-AND-EQUITY> 78236
<SALES> 0
<TOTAL-REVENUES> 1326
<CGS> 0
<TOTAL-COSTS> 89
<OTHER-EXPENSES> 255
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 982
<INCOME-TAX> 0
<INCOME-CONTINUING> 982
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 982
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
</TABLE>
