SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-Q/A
(Amendment No. 1)
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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)
Delaware 84-1501789
(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 October 29, 1999, 10,368,029 shares of common stock were outstanding.
<PAGE>
COMMERCIAL ASSETS, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION:
Item 1. Condensed Consolidated Financial Statements:
Balance Sheets as of September 30, 1999 (unaudited) and
December 31, 1998........................................... 1
Statements of Income for the three and nine months ended
September 30, 1999 and 1998 (unaudited)..................... 2
Statements of Cash Flows for the nine months ended September
30, 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............... 12
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K.............................. 27
(i)
<PAGE>
<TABLE>
<CAPTION>
COMMERCIAL ASSETS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
September 30, December 31,
1999 1998
---- ----
(unaudited)
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 5,076 $ 3,292
Short-term investments 13,334 45,066
Real estate, net of accumulated depreciation of $836 and $50 63,253 12,628
Investments in participating mortgages 1,951 9,328
Investment in real estate joint venture 1,304 1,280
Investment in Asset Investors 1,417 --
Investment in and note receivable from Westrec 3,788 4,011
CMBS bonds 1,714 1,739
Other assets, net 4,116 890
---------- ----------
Total Assets $ 95,953 $ 78,234
========== ==========
LIABILITIES
Secured long-term notes payable $ 18,128 $ --
Secured short-term financing 212 --
Accounts payable and accrued liabilities 1,782 872
Management fees payable to related parties 184 108
---------- ----------
20,306 980
---------- ----------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 615 --
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; 10,393 and
10,364 shares issued; and 10,320 and 10,364 shares outstanding, respectively 104 104
Additional paid-in capital 77,018 76,874
Retained earnings (dividends in excess of accumulated earnings) (1,649) 276
Treasury stock, 73 and 0 shares at cost (441) --
---------- ----------
75,032 77,254
---------- ----------
Total Liabilities and Stockholders' Equity $ 95,953 $ 78,234
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
- 1 -
<PAGE>
<TABLE>
<CAPTION>
COMMERCIAL ASSETS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
Rental property operations
<S> <C> <C> <C> <C>
Rental and other property revenues $ 945 $ -- $ 1,382 $ --
Income from participating mortgages and leases 455 151 1,645 151
Property operating expenses (428) -- (602) --
Depreciation (465) (4) (786) (4)
-------- -------- -------- --------
Income from rental property operations 507 147 1,639 147
-------- -------- -------- --------
Interest and other income 349 1,012 1,570 3,107
Interest expense (61) -- (119) --
General and administrative expenses (131) (129) (404) (303)
Related-party management fees (181) (23) (375) (40)
Equity in earnings of Asset Investors 10 -- 15 --
CMBS bonds revenue 38 40 115 124
Related-party acquisition fees (3) (61) (197) (61)
Reincorporation expenses (120) -- (120) --
Costs related to abandonment of potential marina investments -- (500) -- (500)
-------- --------- -------- ---------
Net income $ 408 $ 486 $ 2,124 $ 2,474
========= ======== ========= ========
Basic and diluted earnings per share $ 0.04 $ 0.05 $ 0.20 $ 0.24
======== ======== ======== ========
Weighted average common shares outstanding 10,325 10,364 10,350 10,355
Weighted average common shares and common share equivalents
outstanding 10,325 10,373 10,350 10,378
Dividends paid per share $ 0.13 $ 0.13 $ 0.39 $ 0.26
======== ======== ======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
- 2 -
<PAGE>
<TABLE>
<CAPTION>
COMMERCIAL ASSETS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited) Nine Months Ended
September 30,
-------------
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 2,124 $ 2,474
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation and amortization 792 4
Amortization of premium on short-term investments 85 135
Amortization of discount on secured long-term notes payable 79 --
Accrued income on participating mortgages (423) (151)
Accrued income on CMBS bonds (53) --
Equity in earnings of Asset Investors (15) --
Increase in accounts payable and accrued liabilities 133 174
Increase in other assets (51) (157)
-------- --------
Net cash provided by operating activities 2,671 2,479
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of real estate (33,486) (1,368)
Purchases of Asset Investors' common stock (1,433) --
Deposits on potential real estate acquisitions (1,154) --
Collections on short-term investments 9,234 6,129
Notes receivable advances (612) --
Proceeds from sale of short-term investments 22,411 4,156
Acquisitions of short-term investments -- (70,151)
Investments in participating mortgages, net (1,178) (7,999)
Investment in real estate joint venture (24) --
Capital replacements (297) --
Investment in Westrec -- (2,249)
Collections on note receivable from Westrec 223 --
Dividends from Asset Investors 31 --
Collections on CMBS bonds 78 186
-------- --------
Net cash used in investing activities (6,207) (71,296)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from secured long-term notes payable 10,300 --
Dividends paid (4,049) (2,695)
Payment of loan costs (458) --
Purchase of treasury stock (441) --
Principal paydowns on secured short-term financing (3) --
Principle paydowns on secured long-term notes payable (29) --
-------- --------
Net cash provided by (used in) financing activities 5,320 (2,695)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,784 (71,512)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,292 74,153
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,076 $ 2,641
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
- 3 -
<PAGE>
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 Delaware corporation that has interests in manufactured home
communities and has elected to be taxed as a real estate investment trust
("REIT"). Prior to June 10, 1999, CAX was a Maryland corporation. Effective June
10, 1999, the Company's stockholders approved its reincorporation in Delaware.
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 resecuritized
its subordinate CMBS bond portfolio. The sale resulted in the Company receiving
$77,693,000 cash and retaining a residual interest in an owner trust arising
from the resecuritization transaction (see Note J). In the third quarter of
1998, the Company decided to invest in manufactured home communities and as of
September 30, 1999 has invested approximately $65 million in 11 manufactured
home communities and adjoining land with 1,770 developed homesites and 1,370
undeveloped homesites.
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 M).
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. Merger with Asset Investors
The Company and Asset Investors have agreed to merge, subject to approval by a
majority of the outstanding shares of both companies. Asset Investors will be
the surviving company and will issue 0.4075 shares of its common stock for each
outstanding share of the Company's Common Stock.
C. 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 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, results
of operations and cash flows of the Company as of September 30, 1999, for the
three and nine month periods 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 financial statements should be read in conjunction with the
- 4 -
<PAGE>
Company's Consolidated Financial Statements and notes thereto included in the
Company's Annual Report on Form 10-K/A (Amendment No. 1) for the year ended
December 31, 1998.
Certain reclassifications have been made in the 1998 Condensed Consolidated
Financial Statements to conform to the classifications used in the current year.
The effect of such reclassifications on amounts previously reported is
immaterial.
D. 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. The Company's
investment in Asset Investors is recorded under the equity method.
Rental Properties and Depreciation
Rental properties are recorded at cost less accumulated depreciation, unless
considered impaired. If events or circumstances indicate that the carrying
amount of a property may be impaired, the Company will make an assessment of its
recoverability by estimating the future undiscounted cash flows, excluding
interest charges, of the property. If the carrying amount exceeds the aggregate
future cash flows, the Company would recognize an impairment loss to the extent
the carrying amount exceeds the fair value of the property. As of September 30,
1999, management believes that no impairment losses exist based on periodic
reviews. No impairment losses were recognized in the three and nine months ended
September 30, 1999 and 1998.
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.
Investments in Participating Mortgages
The Company has loans secured by real estate which provide for an interest rate
return plus up to 50% of net profits, cash flows and sales proceeds from the
underlying real estate. The Company accounts for these investments as loans when
(a) the Company does not have an interest in the borrower and either (b) the
borrower has a substantial equity investment in the real estate collateral or
(c) the Company has recourse to other substantial tangible assets of the
borrower. As such, the Company records interest income based on the rate
provided for in the loan and records its share of any net profits or gains from
the sale of the underlying real estate when realized. If the above requirements
are not met, then the loan is accounted for as an equity investment in real
estate under the equity method of accounting.
Investment in Real Estate Joint Venture
An investment in a real estate joint venture in which the Company does not
control the joint venture's activities is accounted for under the equity method
of accounting.
- 5 -
<PAGE>
Investment in and Note Receivable from Westrec
The Company classifies its investment in and note receivable from Westrec as
available-for-sale and carries this at estimated fair value in the financial
statements. The Company believes that the contractual amounts provided for in
the note receivable and the agreement under which the Company can sell its
shares of Westrec common stock approximates fair value at September 30, 1999.
Revenue Recognition
The Company derives its income from the rental of homesites. The leases entered
into by residents for the rental of the site are generally for terms not longer
than one year and the rental revenues associated with the leases are recognized
when earned and due from residents.
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 September 30, 1999, there is no reserve for uncollected
interest on the participating mortgages. Rent on ground leases is recognized
when earned and due from the lessee.
Deferred Financing Costs
Fees and costs incurred in obtaining financing are capitalized. Such costs are
amortized over the terms of the related loan agreements and are charged to
interest expense.
Capitalized Interest
Interest is capitalized on development projects during periods of construction
or development.
Income Taxes
CAX has elected to be taxed as a REIT as defined under the Internal Revenue Code
of 1986, as amended (the "Code"). In order for CAX to qualify as a REIT, at
least 95% of its gross income in any year must be derived from qualifying
sources.
As a REIT, CAX generally will not be subject to federal income taxes at the
corporate level if it distributes at least 95% of its REIT taxable income to its
stockholders. REITs are also subject to a number of other organizational and
operational requirements. If CAX fails to qualify as a REIT in any taxable year,
its taxable income will be subject to federal income tax at regular corporate
rates (including any applicable alternative minimum tax). Even if CAX qualifies
as a REIT, it may be subject to certain state and local income taxes and to
federal income and excise taxes on its undistributed income.
- 6 -
<PAGE>
Earnings Per Share
Basic earnings per share for the three and nine months ended September 30, 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 dilutive, unexercised stock options of 9,000 and 23,000 shares for the
three and nine months ended September 30, 1998, respectively. There were no
dilutive, unexercised stock options for the three and nine months ended
September 30, 1999.
Treasury Stock
Treasury stock is recorded at cost. In addition, the Company purchased 114,000
shares of Asset Investors' common stock during the second quarter of 1999.
Because Asset Investors owns 27% of the Company's Common Stock, the Company is
deemed to have an interest in 48,000 shares of its Common Stock and has also
recorded this as treasury stock.
Statements of Cash Flows
For purposes of reporting cash flows, cash maintained in bank accounts, money
market funds and highly-liquid investments with an initial maturity of three
months or less are considered to be cash and cash equivalents. The Company made
interest payments of $230,000 and $0 during the nine months ended September 30,
1999 and 1998, respectively.
Non-cash operating, investing and financing activities for the nine months ended
September 30, 1999 and 1998 were as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
------------- ------------
<S> <C> <C>
Accrued initial capital expenditures on real estate purchases $ 400 $ --
Issuance of Common Stock for services 144 150
Escrow of long-term debt proceeds 300 --
Acquisitions of real estate by:
Issuance of note payable 4,519 --
Assumption of debt and minority interest in subsidiaries 4,243 --
Cancellation of participating mortgages 8,978 --
</TABLE>
E. 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 September 30, 1999 approximates
the carrying value of $13,334,000. During the nine months ended September 30,
1999, the Company had $22,411,000 in proceeds from the sale of short-term
investments and realized no gain (loss) from such sales. The Company determined
its basis in the sold investments using the specific identification method.
- 7 -
<PAGE>
F. Real Estate
Real estate at September 30, 1999 and December 31, 1998 was (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Land $ 14,358 $ 3,798
Land improvements and buildings 49,731 8,880
---------- ----------
64,089 12,678
Less accumulated depreciation (836) (50)
---------- ----------
Real estate, net $ 63,253 $ 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
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 Company
may terminate the lease after five years by paying to the lessee 50% of the
amount by which the fair market value of the property exceeds the sum of the
Company's total purchase price plus any unpaid rents due from the lessee.
The other leased community involves two phases and has been leased to the same
third party for 50 years. Phase One has 221 developed homesites and 23
undeveloped homesites. Phase Two involves 746 undeveloped homesites. Initial
annual lease payments on Phase One are $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. The Company may terminate the lease in 2004 by
paying to the lessee 50% of the amount by which the fair market value of the
property exceeds the sum of the Company's total purchase price plus any unpaid
rents due from the lessee.
G. Investments in Participating Mortgages
In August 1998, the Company made investments in participating mortgages secured
by three manufactured home communities and adjoining land. The non-recourse
notes accrued interest at 15% per annum and paid 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 were scheduled to mature in 2007 and 2008.
The Company also received additional interest equal to 50% of the net profits
and cash flows from the properties. In August 1999, the Company purchased the
three communities and adjoining land by canceling the participating mortgages
and releasing additional collateral pledged on the mortgages.
The Company also has investments in participating mortgages secured by
individual homes and homesites within two manufactured home communities. These
non-recourse mortgages accrue interest at 10% and pay interest from the cash
flows from the homes and homesites. The Company also receives additional
- 8 -
<PAGE>
interest equal to 50% of the net profits and cash flows from the homes and
homesites.
As of September 30, 1999, the Company had investments in participating mortgages
of $1,951,000. The Company had income from participating mortgages of $193,000
and $868,000, respectively, for the three and nine months ended September 30,
1999, and $140,000 during the three and nine months ended September 30, 1998.
H. Investment in Real Estate Joint Venture
The Company has an interest 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
$300,000. 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 and nine months
ended September 30, 1999.
I. Investment in Asset Investors
During the nine months ended September 30, 1999, the Company purchased 114,000
shares (approximately 2%) of the common stock of Asset Investors. The Company
has recorded its investment in Asset Investors under the equity method because
Asset Investors manages the Company and owns approximately 27% of the Company's
Common Stock.
Summarized financial information of Asset Investors as reported by Asset
Investors is (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
Balance Sheets 1999 1998
------------------ ----------------
<S> <C> <C>
Real estate $ 109,543 $ 98,563
Investments in participating mortgages 20,622 27,604
Investment in Commercial Assets 19,741 20,706
Cash and cash equivalents 1,604 1,426
Other assets 8,068 9,927
---------- ----------
Total assets 159,578 158,226
Secured long-term notes payable 54,456 40,506
Secured short-term financing 1,000 10,500
Other liabilities 4,060 2,935
Minority interest 15,386 25,649
---------- ----------
Stockholders' equity $ 84,676 $ 78,636
========== ==========
</TABLE>
- 9 -
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Rental and other property revenues $ 3,822 $ 3,280 $ 11,075 $ 7,132
Income from participating mortgages 688 801 2,302 2,348
Property operating expenses (1,341) (1,212) (3,991) (2,812)
Depreciation (983) (874) (2,827) (1,762)
-------- --------- --------- --------
Income from rental property operations 2,186 1,995 6,559 4,906
-------- --------- --------- --------
Property management income, net 54 39 158 122
Management fees from Commercial Assets 134 65 418 75
Equity in earnings of Commercial Assets 154 154 714 688
Amortization of management contracts (689) (689) (2,067) (2,205)
General and administrative expenses (389) (373) (1,098) (1,031)
Interest and other income 124 75 227 677
Interest expense (955) (914) (2,853) (1,390)
Income from operations 619 352 2,058 1,842
Nonrecurring revenues (expenses), net 80 (2,092) 105 (2,092)
Minority interest (106) 372 (341) 54
-------- --------- --------- --------
Net income (loss) $ 593 $ (1,368) $ 1,822 $ (196)
======== ========= ========= ========
</TABLE>
J. CMBS Bonds
In November 1997, the Company sold its portfolio of CMBS bonds and retained a
residual interest in the owner trust used in the sale. Since the residual
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 value of $2,000,000. During the nine months ended
September 30, 1999 and 1998, the Company received $141,000 and $310,000,
respectively, of which $78,000 and $186,000, respectively, was recorded as a
reduction in the net book value of the retained residual interest. The net book
value at September 30, 1999 is $1,714,000 which the Company believes
approximates fair value. The Company had no sales of CMBS bonds during the three
and nine months ended September 30, 1999 and 1998.
K. 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 for which the Company can re-sell its interest
in Westrec plus the outstanding balance of the note receivable.
- 10 -
<PAGE>
L. Secured Long-Term Notes Payable
The following table summarizes the Company's secured long-term notes payable (in
thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---- ----
Fixed rate, ranging from 6.70% to 7.10%, fully-amortizing,
<S> <C> <C>
nonrecourse notes maturing in 2019 $ 10,571 $ --
7.67% fixed rate, non-amortizing, nonrecourse note maturing in
2007 2,960 --
Recourse, fully-amortizing note discounted at 7.00%, maturing in
2002 4,597 --
--------- -------
$ 18,128 $ --
========= =======
</TABLE>
Real estate assets which secure the long-term notes payable had a net book value
of $38,241,000 at September 30, 1999. The Company has $505,000 in escrow for
real estate taxes and property improvements at September 30, 1999.
M. 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. Management fees during the three and nine months ended September 30,
1999 and 1998 were (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------- -----------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Base Fees $ 181 $ 23 $ 375 $ 40
Acquisition Fees 3 61 197 61
Incentive Fees -- -- -- --
-------- ------ -------- ------
$ 184 $ 84 $ 572 $ 101
======== ====== ======== ======
</TABLE>
- 11 -
<PAGE>
N. 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.
O. Operating Segments
The Company began investing in manufactured home communities in August 1998 and
management assesses the performance of the Company as one operating segment.
P. Common Stock and Dividends
During the three and nine months ended September 30, 1999, the Company paid
$0.13 and $0.39 per share dividends on Common Stock totaling $1,350,000 and
$4,049,000, respectively. Dividends paid during the same periods in 1998 were
$0.13 and $0.26 per share totaling $1,348,000 and $2,695,000, respectively.
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 and our other 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 these SEC filings, constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Forward-looking statements may include projections of our cash flow,
dividends and anticipated returns on real estate investments. 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. These 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 Delaware corporation, our predecessor, Commercial
Assets, Inc., a Maryland corporation and, where appropriate, our subsidiaries.
- 12 -
<PAGE>
Business
Company Background
We have been a Delaware corporation since June 10, 1999. Prior to this, we were
a Maryland corporation that was formed in August 1993. 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. under the symbol "CAX."
Prior to 1998, we owned subordinate classes of Commercial Mortgage Backed
Securities or "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.
In the third quarter of 1998, we decided to acquire interests in manufactured
home communities. As of September 30, 1999, we held interests as owner, ground
lessor or mortgage lender, including participating mortgages, in 11 manufactured
home communities with a total of 1,770 developed homesites (sites with homes in
place) and 1,370 undeveloped homesites. We expect to continue acquiring
interests in manufactured home communities.
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
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<PAGE>
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 benefits of an owner of real property, 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
Merger with Asset Investors
We have agreed to merge with Asset Investors. The merger agreement provides that
Asset Investors will issue 0.4075 shares of its common stock for each
outstanding share of our common stock. The merger is subject to approval by a
majority of the shares of both companies entitled to vote.
Growth and Operating Strategies
We measure our economic profitability based on Funds From Operations or "FFO",
less an annual capital replacement reserve of at least $50 per developed
homesite. This reserve is management's estimate based on its experience in
owning, operating and managing manufactured home communities. We believe that
the presentation of FFO when considered with the financial data determined in
accordance with generally accepted accounting principles, provides a useful
measure of our performance. However, FFO does not represent cash flow and is not
necessarily indicative of cash flow or liquidity available to us, nor should it
be considered as an alternative to net income as an indicator of operating
performance. The Board of Governors of the National Association of Real Estate
Investment Trusts, also known as NAREIT, defines FFO as net income or 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 beginning with the NAREIT definition and include adjustments
for:
o property acquisition fees that were expensed under generally accepted
accounting principles because the fees were paid to Asset Investors, an
affiliate; and
o nonrecurring costs related to discontinued classes of investments.
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<PAGE>
We believe that the presentation of FFO provides investors with measurements
which help facilitate an understanding of our ability to make required dividend
payments, capital expenditures and principal payments on our debt. Since FFO
excludes unusual and nonrecurring expenses as well as depreciation and other
real estate related expenses, FFO may be materially different from net income.
Therefore, FFO should not be considered as 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 operating performance or
liquidity. FFO is not necessarily indicative of cash available to fund our cash
needs, including our ability to make distributions. We use FFO in measuring our
operating performance because we believe that the items that result in a
difference between FFO and net income do not impact the ongoing operating
performance of a real estate company. Also, we believe that other real estate
companies, analysts and investors utilize FFO in analyzing the results of real
estate companies. Our basis of computing FFO is not necessarily comparable with
that of other REITs.
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 selectively acquiring manufactured home communities that have potential
long-term appreciation of value through, among other things, rent
increases, expense efficiencies and in-park homesite development;
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;
o improving the profitability of our communities through aggressive
management of occupancy, community development and maintenance and
expense controls;
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 ensuring the continued maintenance of our communities by providing a
minimum $50 per developed homesite per year for capital replacements;
o seeking to reduce our exposure to downturns in regional real estate
markets by diversifying our portfolio of communities since substantially
all of our properties are in Florida and Arizona; and
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
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<PAGE>
accretive to our stockholders. We plan on continuing this business plan during
1999 and 2000, and hope to have largely invested our capital in manufactured
home communities during this time period.
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:
o the increasing acceptability of and demand for manufactured homes, as
shown by the growth in the number of individuals living in manufactured
homes; and
o 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 September 30, 1999, we have invested approximately $65 million to acquire
interests in 11 manufactured home communities that are located in Arizona,
Florida and California. These communities have a total of 1,770 developed
homesites (sites with homes in place) and 1,370 undeveloped homesites.
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
o the replacement cost of the property.
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<PAGE>
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.
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. Following our investment of $50 million, the two
companies will make a determination with respect to each acquisition on a
case-by-case basis. 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 referred to as "OP Units" or Asset
Investors' common stock. As of September 30, 1999, we have invested
approximately $65 million in manufactured home communities and, therefore, we
and Asset Investors will make a determination with respect to each acquisitions
on a case-by-case basis.
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 and nine months ended September 30, 1999 and 1998, we paid the
following fees to our manager (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------- -----------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Base Fees $ 181 $ 23 $ 375 $ 40
Acquisition Fees 3 61 197 61
Incentive Fees -- -- -- --
-------- ------ -------- ------
$ 184 $ 84 $ 572 $ 101
======== ====== ======== ======
</TABLE>
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<PAGE>
Prior to 1999, the Incentive Fee was based on REIT income instead of FFO. The
Incentive Fee for 1999 is calculated the same way as in 1998 except that our
FFO, less an annual capital replacement reserve of at least $50 per developed
homesite, replaces REIT income in the calculation because we believe this is a
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 September 30, 1999 are located:
<TABLE>
<CAPTION>
Number of Homesites
Number of ------------------------------------------
Communities Developed Undeveloped
------------------ ---------------- ------ ------------------
<S> <C> <C> <C>
Arizona 6 925 310
Florida 4 842 1,037
California 1 -- 30
--- ----- -------
Total 11 1,767 1,377
=== ===== =======
</TABLE>
The following table sets forth information regarding each manufactured home
community in which we own an interest:
<TABLE>
<CAPTION>
Average
Monthly
Developed Rent Undeveloped
Community Location Homesites Occupancy per Site Homesites
- --------------------------------------------------------------------------------------------------------------------
Owned Communities
<S> <C> <C> <C> <C> <C>
Casa Encanta Mesa, AZ 106 96% $345 -- (2)
Cypress Greens (1) Lakeland, FL 86 100 190 21
Desert Harbor Apache Junction, AZ 103 100 202 104
Fiesta Village Mesa, AZ 170 95 272 206 (2)
La Casa Blanca Apache Junction, AZ 198 100 151 --
Lakeshore Villas Tampa, FL 290 96 323 --
Rancho Mirage Apache Junction, AZ 312 100 175 --
Riverside (1) Ruskin, FL 221 99 403 769
Royal Palm Haines City, FL 233 98 216 217
Southern Palms Mesa, AZ 36 97 208 -- (2)
--------------------------------------------------------------
Subtotal 1,755 98 253 1,317
--------------------------------------------------------------
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<PAGE>
Participating Mortgage and Joint
Venture Communities
Savanna Club (3) Port St. Lucie, FL 12 100 163 25
Sun Lake (3) Grand Island, FL -- -- -- 5
Cannery Village Newport Beach, CA -- -- -- 30
--------------------------------------------------------------
Subtotal 12 100 163 60
==============================================================
Total Communities 1,767 98% $252 1,377
==============================================================
<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.
(3) We own individual homes and homesites within this community.
</FN>
</TABLE>
10% Owned Properties. At September 30, 1999, we owned two manufactured home
communities which each exceeded 10% of our total assets. The first property,
known as Riverside Club, is located in the Tampa, Florida region and was
purchased in November 1998. The property has 220 developed homesites which are
100% occupied, 24 sites ready for homes and approximately 940 sites available
for future development. The property offers residents a range of amenities
including:
o a 9-hole golf course,
o swimming pool,
o tennis courts,
o clubhouse, and
o marina.
The developed homesites are leased to the owner of the home located on each
homesite. The leases are annual leases and can be renewed by the tenant provided
that he or she complies with the rules and regulations of the property and pays
the required rent. At September 30, 1999, the average monthly rent for a
homesite was approximately $400. We can increase rent based on either (a) rents
charged by comparable properties in the surrounding area or (b) increases in our
costs associated with the property. The cost of the property has been allocated
as follows:
o $3,558,000 to land and
o $7,820,000 to buildings and land improvements.
We depreciate buildings and land improvements over 25 years using the straight
line method. For federal income tax purposes, we depreciate buildings over 40
years and land improvements over 15 years using the straight line method for
both categories. At September 30, 1999, our net book value in this property was
$11,137,000 which is approximately the same as our basis in the property for
federal income taxes. Annual real estate taxes for this property are
approximately $180,000 at a 2.5% realty tax rate. Estimated realty taxes on
future improvements are expected to have a similar tax rate.
Effective November 1998, we leased this property for 50 years to a third party,
Riverside Golf Course Community, L.L.C. The lease provides for an initial annual
rent payment of $890,000, increasing by 4% per annum. As additional homesites
are developed, the annual lease payment increases by an amount equal to 10% of
the costs incurred in developing the homesites. In addition, we receive
additional rent equal to 50% of the lessee's net cash flow from the property and
50% of any sales proceeds in excess of our historical cost of the property and
subsequent improvements.
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<PAGE>
In September 1999, we borrowed $5,500,000 in the form of a non-recourse, fully
amortizing mortgage secured by 221 developed and 23 undeveloped homesites
located at this property. This indebtedness has a 6.7% interest rate and is
repayable in 240 equal monthly installments of principal and interest through
October 2019. The current principal amount of the mortgage indebtedness at
September 30, 1999 is $135,000. The mortgage indebtedness may not be prepaid for
the first five years. During years 6-10, the mortgage indebtedness may be
prepaid in full, but we will be required to pay an amount sufficient to allow
the lender to realize a 6.7% return for the remainder of the term of the
mortgage indebtedness based on the difference between 6.7% and the then interest
rate on a U.S. Treasury Note or Bond for a similar period of time. The mortgage
indebtedness may be prepaid in full during years 11-20 provided we pay a
prepayment penalty based on the outstanding principal of the mortgage
indebtedness as follows:
Prepayment
Year(s) Penalty Percentage
------- ------------------
11-12 5%
13 4%
14 3%
15 2%
16-20 1%
See financial statements included elsewhere in our Quarterly Report on Form 10-Q
for additional information about our indebtedness.
We intend to further develop this property over the next five to ten years. The
development is expected to include development of the sites ready for homes and
the sites available for future development plus the completion of the golf
course into an 18-hole course. The estimated cost to fully develop the property
is $8 million. We expect to finance the development with our existing cash and
short-term investments, proceeds from secured long-term notes payable on our
various properties and cash flow from our operations.
The other property which exceeded 10% of our total assets is known as Rancho
Mirage and is located in the Phoenix, Arizona region. This property was
purchased in May 1999 and has 312 developed homesites which are 100% occupied.
The property offers residents a range of amenities including:
o a 6-hole pitch-and-putt golf course;
o swimming pool;
o tennis courts; and
o clubhouse.
The developed homesites are leased to the owner of the home located on each
homesite. The leases are annual leases and can be renewed by the tenant provided
that he or she complies with the rules and regulations of the property and pays
the required rent. At September 30, 1999, the average monthly rent for a
homesite was approximately $175. We can increase rent based on rents charged by
comparable properties in the surrounding area. The cost of the property has been
allocated as follows:
o $930,000 to land and
o $10,897,000 to buildings and land improvements.
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<PAGE>
We depreciate buildings and land improvements over 25 years using the straight
line method. For federal income tax purposes, we depreciate buildings over 40
years and land improvements over 15 years using the straight line method for
both categories. At September 30, 1999, our net book value in this property was
$11,682,000 which is approximately the same as our basis in the property for
federal income taxes. Annual real estate taxes for this property are
approximately $30,000 at a 0.6% realty tax rate. Estimated realty taxes on
future improvements are expected to have a similar tax rate. We do not intend to
further develop this property in the future.
Other Owned Properties. At September 30, 1999, we owned eight additional
manufactured home communities containing 1,222 developed homesites and 548
undeveloped homesites. These properties contain, on average, 153 developed
homesites, with the largest property containing 290 developed homesites. These
properties offer residents a range of amenities, including swimming pools,
clubhouses and tennis courts.
At September 30, 1999, three of these properties are encumbered by mortgage
indebtedness totaling $12,628,000. These properties represent 46% of our
developed homesites. The three properties securing our mortgage indebtedness
have a combined net book value of $27,104,000 and the indebtedness has a
weighted average interest rate of 7.2%. The current principal amount of our
mortgage indebtedness is $955,000. See our financial statements included
elsewhere in our Quarterly Report on Form 10-Q for additional information about
our indebtedness.
Taxation of the Company
We have elected to be taxed as a REIT under the Internal Revenue Code of 1986,
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 Internal
Revenue Code, such as specifications relating to actual operating results,
distribution levels and diversity of stock ownership. In addition, our ability
to qualify as a REIT depends in part upon the actions of third parties over
which we have no control, or only limited influence. For instance, our
qualification depends upon the conduct of certain entities with which we have a
direct or indirect relationship, in our capacity as a lender, lessor, or holder
of non-controlling equity interests.
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"
which would otherwise occur 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.
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<PAGE>
RESULTS OF OPERATIONS FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Comparison of Three and Nine Months Ended September 30, 1999 to Three and Nine
Months Ended September 30, 1998
Rental Property Operations
Income from rental property operations totaled $507,000 and $1,639,000 during
the three and nine months ended September 30, 1999 compared to $147,000 and
$147,000 during the same periods in 1998. Our first investment in manufactured
home communities was in August 1998. As of September 30, 1999, we had invested
approximately $65 million in 11 communities.
Interest and Other Income
Interest and other income during the three and nine months ended September 30,
1999 was $349,000 and $1,570,000 compared to $1,012,000 and $3,107,000 for the
same periods in 1998, respectively. 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 5.0% and 5.4% during the nine months ended September 30, 1999 and
1998.
Interest Expense
Interest expense was $61,000 and $119,000 for the three and nine months ended
September 30, 1999 due to long-term notes payable secured by our communities. We
had no interest expense during the same periods in 1998 as we did not have any
debt on manufactured home communities until May 1999. We anticipate borrowing
additional amounts in the future in the form of secured long-term notes payable.
General and Administrative Expenses
Our general and administrative expenses were $131,000 and $404,000 for the three
and nine months ended September 30, 1999 compared to $129,000 and $303,000 for
the same periods in 1998. These expenses increased for the nine months ended
September 30, 1999 compared to the 1998 period primarily due to increased costs
related to shareholder relations and due diligence costs on potential
acquisitions that were not completed.
Management Fees
During the three and nine months ended September 30, 1999, our management fees
were $181,000 and $375,000 compared to $23,000 and $40,000 during the same
periods in 1998. The increase in management fees is primarily due to our
investments in manufactured home communities during this period. Such fees are
not paid on cash and short-term investments, which is what we primarily held
during the 1998 periods.
CMBS Bonds
Income from CMBS bonds during the three and nine months ended September 30, 1999
was $38,000 and $115,000 and is comparable to the same periods in 1998. This
income is from our retained residual interest in two CMBS bonds.
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<PAGE>
Acquisition Fees
During the three and nine months ended September 30, 1999, we expensed
acquisition fees paid to Asset Investors of $3,000 and $197,000 compared to
$61,000 and $61,000 during the same periods in 1998. The change in fees is a
result of the amount we invested in manufactured home communities during these
periods. These fees would be capitalized if they had been paid to an unrelated
third party. Because they are paid to Asset Investors, an affiliate, these fees
are expensed under generally accepted accounting principles.
Reincorporation Costs
In 1999, we reincorporated in Delaware from Maryland. We incurred $120,000 of
nonrecurring costs in connection with the reincorporation.
Costs Related to Abandonment of Potential Marina Investments
During the third quarter of 1998, we decided that we would no longer seek to
acquire interests in marinas and expensed $500,000 for costs related to the
abandonment of potential marina investments.
Dividend Distributions
During the three and nine months ended September 30, 1999, we paid dividends
totaling $1,350,000 or $0.13 per share, and $4,049,000 or $0.39 per share,
compared to $1,348,000 or $0.13 per share, and $2,695,000 or $0.26 per share,
for the same periods in 1998. We did not pay dividends during the first quarter
of 1998.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, we had cash and cash equivalents of $5,076,000 and
short-term investments of $13,334,000. 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 nine months ended September 30, 1999, the net cash provided by
operating activities was $2,671,000 compared to $2,479,000 during the same
period in 1998. The increase during the first nine months of 1999 was primarily
due to investments in manufactured home communities. Higher income from rental
property operations before depreciation was only partially offset by lower
interest and other income on funds used for such investments.
Net cash used in investing activities was $6,207,000 during the nine months
ended September 30, 1999 compared to uses of $71,296,000 during the same period
in 1998. The net cash used in the 1999 period was primarily due to 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 purchase of short-term investments.
Net cash provided by financing activities was $5,320,000 during the nine months
ended September 30, 1999 compared to uses of $2,695,000 during the same period
in 1998. The net cash provided in the 1999 period was primarily due to
$10,300,000 in proceeds from long-term borrowings, net of dividends paid of
$4,049,000. The net cash used in the 1998 period was due to dividends paid. The
increase in dividends between the periods occurred primarily because we did not
- 23 -
<PAGE>
pay a quarterly dividend during the first quarter of 1998.
We had long-term debt of $17,039,000 at September 30, 1999 and expect to meet
our long-term liquidity requirements in excess of 12 months through our cash and
short-term investment balances, 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 the
presentation of FFO when considered with the financial data determined in
accordance with generally accepted accounting principles, provides a useful
measure of our performance. However, FFO does not represent cash flow and is not
necessarily indicative of cash flow or liquidity available to us, nor should it
be considered as an alternative to net income as an indicator of operating
performance. The Board of Governors of NAREIT defines FFO as net income or 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 beginning with the NAREIT definition and include adjustments
for:
o property acquisition fees that were expensed under generally accepted
accounting principles because the fees were paid to Asset Investors, an
affiliate; and
o nonrecurring costs related to the abandonment of potential marina
investments.
We believe that the presentation of FFO provides investors with measurements
which help facilitate an understanding of our ability to make required dividend
payments, capital expenditures and principal payments on our debt. Since FFO
excludes unusual and nonrecurring expenses as well as depreciation and other
real estate related expenses, FFO may be materially different from net income.
Therefore, FFO should not be considered as 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 operating performance or
liquidity. FFO is not necessarily indicative of cash available to fund our cash
needs, including our ability to make distributions. We use FFO in measuring our
operating performance because we believe that the items that result in a
difference between FFO and net income do not impact the ongoing operating
performance of a real estate company. Also, we believe that other real estate
companies, analysts and investors utilize FFO in analyzing the results of real
estate companies. Our basis of computing FFO is not necessarily comparable with
that of other REITs.
- 24 -
<PAGE>
For the three and nine months ended September 30, 1999 and 1998, our FFO was (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------- -----------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net income $ 408 $ 486 $ 2,124 $ 2,474
Real estate depreciation 465 4 786 4
Real estate acquisition fees 3 61 197 61
Costs related to abandonment of potential
marina investments -- 500 -- 500
Equity in Asset Investors' adjustments
for FFO 29 -- 43 --
------- ------- ------- -------
Funds From Operations (FFO) $ 905 $ 1,051 $ 3,150 $ 3,039
======= ======= ======= =======
Weighted average common shares outstanding 10,325 10,364 10,350 10,355
======= ======= ======= =======
</TABLE>
For the nine months ended September 30, 1999 and 1998, net cash flows were as
follows (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
Cash provided by operating activities $ 2,671 $ 2,479
Cash used in investing activities (6,207) (71,296)
Cash provided by (used in) financing activities 5,320 (2,695)
</TABLE>
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 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
- 25 -
<PAGE>
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 have received oral representations
from our third party vendors indicating that they are substantially Year 2000
compliant.
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.
Our worst case scenario would be in the event that the U.S. Social Security
Administration were unable to process their payments to our tenants, in which
case large numbers of our tenants may be unable to pay their rent when due. If
this were to occur, we may be unable to continue to service our debt as it
becomes due and foreclosure proceedings on our affected properties could be
commenced by our lenders. We have no contingency plan with respect to potential
Year 2000 related problems. We note, however, that on December 28, 1998,
President Clinton publicly announced that the U.S. Social Security
Administration would be fully Year 2000 compliant before the end of 1999.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our principal exposure to market risk is through our short-term investments and
our various debt instruments and borrowings. The following is a list of these
short-term investments, debt instruments and borrowing arrangements.
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 or "LIBOR". Accordingly, changes in interest rates could
affect the returns from such investments. If LIBOR decreased immediately by 1%,
our annual net income would decrease by $133,000, based on the amount of
short-term investments at September 30, 1999. Because we intend to re-deploy our
short-term investments by acquiring manufactured home communities during 1999
and 2000, however, our primary objective with respect to our short-term
investments is to minimize the risk that the principal amount of these
investments could decrease. Therefore, we have short-term investments whose
principal amount is expected to be less affected by changes in interest rates
than other potential investments. 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 have $10.6 million of fixed rate, non-recourse, secured long-term notes
payable that mature in 2019. We do not have significant exposure to changing
interest rates on these notes as the rates are fixed and the notes are fully
amortizing.
We have a $4.6 million fixed rate, recourse, secured long-term note payable that
is repayable in three annual installments. The implied interest rate on this
note is 7.0%. We do not have significant exposure to changing interest rates on
this note as the rate is fixed and the note is fully amortizing. In the future,
we intend to borrow additional non-recourse, secured, fixed rate, fully
amortizing debt in connection with the refinancing of the existing note payable.
While changes in interest rates would affect the cost of funds borrowed in the
future to refinance the existing debt, we believe that the effect, if any, of
near-term changes in interest rates on our financial position, results of
operations or cash flows would not be material as the existing debt is fixed
rate until June 2002.
- 26 -
<PAGE>
We have a $3.0 million, 7.67%, nonrecourse, partially amortizing, secured
long-term note payable that matures in 2007. We do not have significant exposure
to changing interest rates on this note as the rate is fixed and the balance due
at maturity is only $2.6 million.
We intend to borrow additional non-recourse, secured, fixed rate, fully
amortizing debt in connection with acquisitions of communities. Accordingly,
changes in interest rates will affect the cost of future borrowings incurred in
connection with future acquisitions.
PART II
OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit No. Description
2.1 Agreement and Plan of Merger, dated as of March 12, 1999,
between Commercial Assets, Inc., a Maryland corporation and
Commercial Assets, Inc., a Delaware corporation (incorporated
herein by reference to Exhibit 2.1 to the Registrant's Current
Report on Form 8-K, dated June 10, 1999, Commission File No.
1-2262, filed on June 10, 1999).
3.1 Amended and Restated Certificate of Incorporation of Commercial
Assets, Inc. (the "Registrant"), (incorporated herein by
reference to Exhibit 3.1 to the Registrant's Current Report on
Form 8-K, dated June 10, 1999, Commission File No. 1-2262, filed
on June 10, 1999).
3.2 Amended and Restated By-laws of Commercial Assets, Inc.
(incorporated herein by reference to Exhibit 3.2 to the
Registrant's Current Report on Form 8-K, dated June 10, 1999,
Commission File No. 1-2262, filed on June 10, 1999).
27 Financial Data Schedule
(b) Reports on Form 8-K:
The following Current Reports on Form 8-K were filed by the
Registrant during the period covered by this Quarterly Report on
Form 10-Q:
Current Report on Form 8-K dated August 13, 1999, reporting our
acquisition of manufactured home community assets which
included: Statement of Excess of Revenues Over Specific
Operating Expenses of the Fiesta Village Manufactured Home
Communities for the year ended December 31, 1998 (audited) and
the period from January 1, 1999 to June 30, 1999 (unaudited).
Current Report on Form 8-K dated August 31, 1999 reporting the
proposed merger with Asset Investors Corporation.
- 27 -
<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: March 8, 2000 By /s/ David M. Becker
------------------------
David M. Becker
Chief Financial Officer
- 28 -
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000910675
<NAME> COMMERCIAL ASSETS, INC.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 5,076
<SECURITIES> 13,334
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 19,630
<PP&E> 64,089
<DEPRECIATION> (836)
<TOTAL-ASSETS> 95,953
<CURRENT-LIABILITIES> 1,966
<BONDS> 18,340
0
0
<COMMON> 104
<OTHER-SE> 74,928
<TOTAL-LIABILITY-AND-EQUITY> 95,953
<SALES> 0
<TOTAL-REVENUES> 4,727
<CGS> 0
<TOTAL-COSTS> 1,388
<OTHER-EXPENSES> 1,096
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 119
<INCOME-PRETAX> 2,124
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,124
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,124
<EPS-BASIC> 0.20
<EPS-DILUTED> 0.20
</TABLE>
